Mid-Weekly Recap & Outlook – 12.18.13

Tower Private Advisors

Below

  • Very abbreviated post
  • What is it about sharks?
  • The taper begins

What is it about sharks?

The Economist magazine–or newspaper as the Brits call it–seems to have a thing for sharks. Of course, it’s not like the images aren’t evocative. Who could forget Roy Scheider in the Jaws movies.

Here was a cover image from June 2010, when the world was worried about a double-dip recession in the U.S. (Notice the map in the reflection of the shark’s fin.)

2013 0604 Fear Returns...double dip recession

Then there was this dandy on the August 6, 2011, issue.

The Economist - Time for a double dip - 080611

The point of this exercise isn’t to just point out the tendency of The Economist to feature sharks along with scary headlines. In fact, magazines are notorious for pointing out issues when they–like waves–are beginning to or cresting–it’s well documented; just google “magazine cover story phenomenon.” The chart below shows the time when these cover stories were featured relative to an index of economic optimism. Both times was when economic optimism was at or near a nadir.

econsurpecon

So, it was with great interest that I noticed the November 9, 2013, issue of The Economist, which is shown below. Notice the shark imagery below the balloon. And notice the headline, “The perils of falling inflation.”

economist

It isn’t coincidental that deflation worries are increasingly getting air time. In fact, it’s the very notion that magazine covers reflect the zeitgeist, as opposed to looking into the future, that makes them useful contrary indicators. So, based on the magazine’s history–and cover stories, in general–we should expect to see inflation some time soon.

The big news of the week–much awaited, in fact–was the statement released from the last two day’s Federal Reserve meeting. In short, the Fed will begin the tapering process–tapering down the quantitative easing program–by reducing monthly bond purchases by $10 billion.

A study in expectations

The image below is a study in expectations. For some time now, the Fed and its mouthpieces in the Wall Street Journal and elsewhere have been getting markets ready for the taper announcement. One WSJ article had gone so far as to say the market was ready for the news. Well, the chart below says differently, although the WSJ may been referring to the bond market, in which case, it was spot on.

expectaiotn

This chart shows today’s trading in the 30-year Treasury and the S&P 500. I had regretted indicating when the Fed’s announcement was made, but the S&P 500 was kind enough to point to it…14:00, right when the news came out. Both markets had been trading roughly in line with the dashed yellow line, and, predictably, both freaked out at 2:00 (14:00). It didn’t take long for the long bond to return to where it had traded in the morning. Not to use a cliche, but literally, at the end of the day the announcement was totally priced in to bonds.

It was a different story for stocks. Clearly, the stock market was expecting something worse, perhaps a bigger taper or a more austere statement–the word cloud of which is below–regardless, the announcement was not priced in. Indeed, what shows up in the word cloud below appears all very benign.

Fed stmt

That’s it, folks. I’ll be back with another post before the new year. In the meantime, here is wishing you and yours a very happy Christmas. Thanks to both of you for reading.

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

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2 Responses to “Mid-Weekly Recap & Outlook – 12.18.13”

  1. Randy Roberts says:

    As one of your three (or did you say 2?) readers I want you to know how much I enjoy and count on your sometimes weekly messages …. depending on your kids activities.
    Obvious Insights has made a huge impact on me …life changing actually. I have learned so much about the relationship between, ummm…things. Just this issue about Magazine covers and sharks and bonds and inflation and you name it. Wonderful stuff. Have made tons of money from your recommendations …more than I know what to do with. Who needs the WSJ or Barrons or even the Economist when you can get the OI and for free (so far … you may charge after this). And your insightful humor helps us wade through the heavy boring stuff. Keep up the good work.
    Thanks and have a joy filled Christmas.

  2. Tom Breading says:

    I have enjoyed your very informative information through the years.
    You and family have a very Merry Christmas and a Happy New Year.
    Tom. B.

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