We figured if The President goes there it must be nice.
Reality often dashes great expectations but not so with Martha’s Vineyard where we marked our wedding anniversary. From Aquinnah’s white cliffs to windy Katama Beach, through Oak Bluffs (on bikes) to the shingled elegance of Edgartown, the island off Cape Cod is a winsome retreat.
Speaking of retreat, my dad, a Korean Police Action era (the US Congress last declared war in 1943, on Romania. Seriously.) veteran, told me his military commanders never used the word retreat, choosing instead “advance to the rear!”
Is the stock market poised for an advance to the rear? Gains yesterday notwithstanding, our measures of market sentiment reflected in the ten-point ModernIR Behavioral Index dipped to negative this week for the first time since mid-August. Risk is a chrysalis formed in shadows, studied by some with interest but generally underappreciated.
It happened in 2006 in housing, when trader John Paulson recognized it and put on his famous and very big short. Most missed the chrysalis hanging rather elegantly in the mushrooming rafters of the hot residential sector.
It happened in the 17th century Dutch tulip bubble, an archetype for manic markets. Yet then tulips and buyers didn’t suddenly explode but just the money behind both, as ships from the New World laden with silver and gold flooded Flanders mints with material for coin. Inflation is always and everywhere a monetary phenomenon.
It’s hard to say if mania is here hanging pupa-esque on the cornices of the capital markets. Most say no though wariness abounds. Mergers are brisk and venture capital has again propagated a Silicon Valley awash in money-losing firms with eye-popping values. Corporate buybacks will surpass $1 trillion in total for 2013-2014, capital raking out shares from markets like leaves falling from turning September trees.
Yet the number of public companies in the National Market System, you may be surprised to learn, is roughly static since the 2009 rebound, at 3,700. We hear about a rash of IPOs and indeed the Jobs Act kilned a boom in small IPOs. Yet the rate of consolidation has kept equal pace even as markets have soared and the Dow Jones Industrial Average and S&P 500 have set repeated records.
We are observing monetary events in these telltale seismic readings. Rule of thumb: Appreciation fueled by changes to the money supply is a chrysalis for risk.
Which brings us to the week of Sept 15. As money drew near it like an aircraft on final approach, financial ground trembled. Trading at the Chicago Mercantile Exchange in FX futures broke a record Sept 5 last set May 5, 2010, the day before the Flash Crash. ICE, the owner of the NYSE, set equity-index futures trading records. The US dollar has posted a sort of drag-racing speed record for appreciation seen only ahead of the May 2010 Flash Crash. A rising dollar often deflates risk assets.
These events were a vanguard. As NIRI IR Fundamentals (we’re sponsors) concludes today in Boston, the Fed Open Market Committee is deliberating about interest rates and financial-asset support called quantitative easing set to conclude in October. VIX volatility derivatives expire later today as Janet Yellen steps to the mic. Thursday, key index futures expire as Scots vote on independence. Friday is quad witching when options and futures on stocks and indexes (and ETFs) lapse, and S&P and Nasdaq, providers whose families of indices combined number nearly 850,000 products globally, rebalance in equities.
If investors are wary of stocks, we’ll see evidence near Sept 23 when any imbalance in the wake of this monster week materializes. It’s risk in embryo that could become beating wings in equities tomorrow or next month or next year. With risk, you don’t know.
The well-informed investor-relations officer realizes the world isn’t a CNBC of fundamentals but a macro model of risk and reward. Keep your management team informed. It lifts the height of the IR chair.