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Volatile volatility


I was struck by the phrase “volatility itself has been volatile” in the FT article this morning. It pretty much sums up both the confusion and concerns in the market about whether risky assets are at an inflection point or taking a breather before embarking on another leg up.

The central bank meetings this week certainly aren’t helping, but the FOMC, the ECB or the BOE aren’t likely to do anything that’s going to signal a shift in policy. FOMC should keep the phrase “extended period,” while ECB isn’t likely to given any new insights on the euro or interest rates. The BOE could add more fuel to its quantatitive easing program, but that would hardly be earth-shattering news given its losing streak on growth.

There is the U.S. employment report later in the week, but no one is expecting a turnaround there either. In fact, most have their eyes on the magic 10, as in 10% unemployment that seems simply inevitable given the lousy job market.

Still, the VIX – the fear gauge that measures equity market volatility – is, well, looking pretty volatile.

Not looking hot on the jobs front

Data just out shows the pace of joblessness picked up in September, snapping what had been a steady improvement from “really terrible” to “at least it’s not as terrible as the prior month.” The drop in non-farm payrolls was even worse than Goldman Sach’s downwardly revised -250K forecast, coming in at -263K. But also take a look at July: revised to -304 from -276k. August was revised to -201K from -216K.

The unemployment rate ticked up an expected 0.1 ppt to 9.8%.

Also average hours worked in a week slipped further to 33.0 from 33.1. I guess employers are cutting hours as well as jobs. Not exactly confidence inspiring for the nation’s shoppers.

A rally to remember

Deutsche Bank has published some interesting research putting the recent equity market rally over the past six months in historical context, showing that the only comparable six-month gains occured during the 1930s.
During the last six months the S&P 500 has risen 51 percent, while BBB corporate bond spreads have rallied 228 basis points, both one in 200 events, according to Deutsche

The analysts also make some good points on current equity market valuations:

The interesting point to note is that on a Shiller P/E valuation method (ie using real adjusted 10-year rolling average earnings to adjust for the business cycle), the 1933 rallies started with a P/E of between 5-8 and ended the 6-month period between 12-14. This rally started with a Shiller P/E ratio of 12 (the highest in the study) and we now stand at around 18.

ADP still showing steep job losses

The ADP national employment report showed job losses still huge in August, though better than July and the smallest decline it’s recorded since September 2008.

Though it came in worse than expected, markets aren’t doing a whole lot with the data, with Treasuries hovering around the unchanged mark and stocks down only slightly.

Irrational exuberance in high yield

It’s shouldn’t be surprising that investors are feeling giddy. The world financial system didn’t collapse, big banks are making hand over fist and stock markets, well, stock markets have been on fire (today excluded). But a V-shape economic recovery in the U.S? Really?

Well that’s what the riskiest portion of the high-yield corporate debt market is pricing in. Bank of America analysts say they’ve never seen anything quite like the rebound in CCC-rated corporate debt – the lowest of the low when it comes to credit quality.  The CCC index is nearly at 70 points, 10 points above its normal level seen in 1990-91 and 2001-02 and well above the sub-40 trough seen at the peak of the credit crisis.

Markets knocking the stuffing out of the optimists

Treasurys are up after a stellar auction of $19 billion reopened 10-year notes, stocks are floundering as investors worry about the economy and earnings season. More and more it feels like the pessimists have decisively turned the tide.

David Gaffen over at the Reuters Global Investing blog, sums it up best:

Earnings are expected to fall about 36% once again, and investors in recent weeks have finally cottoned to the idea that vaulting over low bars really isn’t much to get optimistic about. If the market is truly going to turn higher, it will depend on the quality of earnings, and there, some aren’t so optimistic. Mike Lewitt, president of Harch Capital Management, said, “I don’t think there’s a lot of revenue growth, just shrinkage – basically everybody is shrinking across the board and that’s what we’re seeing.”

It’s not over till it’s over

Over at The Big Picture, Jack McHugh makes some interesting comparisons between the calm seen in the markets now as banks and investors wrap and the quarter and a year ago. His takeaway though is don’t expect a repeat of last year’s second half meltdown.

…A venerable investment bank had disappeared, stocks had set a major low in March before rallying smartly, the VIX had fallen by more than 50% off its March peak, and both Wall Street executives and Washington policy makers were claiming, “the worst is now behind us” Though it seems like a lifetime ago, the moment in time to which I refer is the end of 2Q 2008, but it could just as easily be Q2 2009. During May and June of last year, I wrote ceaselessly that the financial crisis was not “contained” and that the worst was still ahead of us….

Global market cross-currents, Fed in focus

With the big event for the week – the outcome of the Federal Reserve’s Federal Open Market Committee – not due until Wednesday, global markets are left to focus on number of cross currents that are weighing on the stocks and oil and bolstering government bonds and the dollar.

The World Bank, which warned that the prospects for global economy continued to be “unusually uncertain,” downwardly revised its 2009 outlooks for Japan,  the Euro Zone, and the United States. The organization expects global output to shrink by 2.9% this year , worse than an initial estimate of 1.7%.

Wall Streets waits for Godot

Stocks, for little over a week, have been stuck in neutral.

On June 4, the Dow Jones closed at 8,750. And with a little less then two hours to go in the current trading week, the Dow was trading at 8,759. Come on, we can do it. All we need is to drop another 9 points.

That said, it’s not as if there’s been no news over the past 8 days. Last Friday we had the mixed bag unemployment report. On Tuesday, Treasury announced that 10 banks would be able to payback $68 billion in federal bailout money. And today came news that consumer confidence rose to its highest level in nine months.