Weekly Recap & Outlook – 10.04.13

Tower Private Advisors

Below

  • Government shutdown? Yawn
  • Except for the DJIA, U.S. markets finish the week unchanged

Capital Markets Recap

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Top Stories

No one needs to be told what the top story is. The consensus is that, clearly, this will all blow over. The budget stuff is just a sideshow. The really important issue is when the U.S. reaches its borrowing limit later in the month. Ignore talk of default; it’s virtually unthinkable, but in the event it happened and you owned way out-of-the-money put options on the S&P 500, you could say goodbye to your day job and retire to Napa Valley. There was a time when the risk of default seemed real; Google searches on the word (and “debt ceiling”) peaked in June 2011. Today, as you can see, below, search levels are far lower (you can access this very search by clicking here.) This low level of interest, however, does suggest that markets could get beat up pretty good if the debate heats up. As others have pointed out, however, we seem to be suffering from crisis fatigue.

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Here is the so-called Fear Index, the implied volatility of option contracts, over the same time period. It mirrors the chart above. At its current, subdued level, it’s more appropriately called an apathy index.

VIX

Here is a collection of headlines related to the shutdown and debt ceiling:

  • U.S. government settles in for what could be a long shutdown
  • Boehner vows he won’t let U.S. default
  • Obama calls off Asian trip to deal with budget deadlock
  • Business fears potential U.S. default more than shutdown
  • World economy is threatened by U.S. shutdown, Draghi warns

…and this beautiful juxtaposition of headlines:

  • Most advisors urge holding on to stocks despite turmoil
  • Advisers assure clients U.S. won’t default on debt
  • Survey: Americans don’t know whom to trust for financial advice

This Week

Naturally, as a result of the government shutdown, several of the statistical reporting agencies were not. The most awaited report of the was to have been today’s Nonfarm Payrolls report, which would have given us the number of jobs added and the all important Unemployment Rate. The closest thing we got to that report was Wednesday’s ADP Employment report. That report suggested that 166,000 jobs were created instead of the 180,000 anticipated. In addition, August’s 179,000 was revised down to 159,000. Some chalked Thursday’s rough sledding in markets to that report, but there are too many moving parts to be able to ascribe reasons for millions of transactions to one happening.

It is uncertain when the data will be released when the government reopens for business, but the Payrolls report is likely to remain one of the most important reports for the next several years. That’s because the current Fed has pegged future rate hikes to an “unemployment rate considerably below 6.5%.” The delay in releasing the Payrolls report is significant for at least one reason, it delays even further the Fed’s tapering program, whereby the Fed would begin to reduce its monthly bond purchasing program. That’s because the October 29-30 meeting is not scheduled to have press conference, since it’s assumed that any tapering would need to be accompanied by more than a press release. Then, at the time of the Fed’s December meeting, the Fed will already have closed its books on the year, likely putting a taper announcement into 2014. In 2014, the Beard, as I’ve heard him called, will ride off into the sunset onto Wall Street and Janet Yellen, presumably, will take the reigns of the Fed. She’s one of the Fed doves, as the ones willing to flirt with a little inflation are called; hawks being the other fowl.

I think I marked the highwater mark in bond prices by stating my position on interest rates–they’re not going higher anytime soon–in a May ObviousInsights post. I stand by that position and contend that it’s still accurate with interest rates still very low. PIMCO produced a couple of reports this week, one by Bill Gross, the other by Tony Crescenzi, both available clicking on the names of the authors. I commend them to you not just because they support my thinking, but they’re both well done. The Tony Crescenzi piece, in particular, describes the Fed situation quite well.

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Not all economic data was stifled, however, as several, like the ADP report mentioned above, are produced by non-Federal government agencies. Initial Jobless Claims, for example, is produced by state agencies and just rolled up into a national release. It showed a slight increase in first-time filings, but the four-week moving average maintained its downward bias. Both ISM Manufacturing and the Services surveys were released. The former showed a stronger-than-expected uptick, while the latter showed a considerable drop, sending mixed signals about the economy.

Next Week

Who knows

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

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