March 30, 2016

Bad Forecast

There’s a mistake in last week’s Market Structure Map. We never made it to Boston!

The forecasters missed it and snow walloped us with a ferocity that shut Denver International Airport by air and land and we were stranded for nine hours before daring “impassable” Pena Boulevard and four-wheeling home.  We felt like Loggins and Messina: Please come to Boston in the springtime and she (Mother Nature) just said no.

Speaking of ferocity, yesterday Janet Yellen yelled the dollar down a percentage point. One would expect to see in response stronger equity indexes (SPY rose the inverse of the dollar’s move) and emerging markets (EEM up 1.4%), gold bear bets crushed (DUST dropped 16%), gold bull bets up (GDX up 5.7%), growth stocks up (IWM up 2.8%) and VIX volatility trades taking a beating (VXX off 5.7%, UVXY off 10.7%).  The only thing that didn’t rise that should have is oil – but all the leveraged oil exchange-traded products, which dominated equity volumes Jan 7-Mar 11, have vanished from the most active stocks. Oil trading-stocks like MRO and WLL did jump.

Save for the two stocks – which are influenced heavily by arbitrage – these are all derivatives. ETFs are proxies for assets – instruments derived from but not comprised of stocks. Assets didn’t change hands, just paper. We could call ETFs stock currencies. They are flexible, mutable simulations of investment behavior.

Similarly, monetary policy has become a flexible, mutable simulation of economic behavior. The supply of dollars didn’t alter. Currency relative-values are metered through futures contracts, which are derivatives. Futures on bucks devalued, so relative dollar-value dropped.  Economic growth or contraction was not changed by Yellen’s speech.  You can’t talk tires and trucks and jobs into existence.

Compare to stocks. What’s changed since Jan 20 or Feb 10? Money simulating investment behavior through ETFs and options and futures were a whistling inhalation that then reversed and exhaled and the bellows of derivatives blew and a fiery market manifested, charging up about 12%.

If anything, fuel for the market has diminished. The Atlanta Fed’s model for first-quarter economic growth is at 0.6%, less than half a revised 1.4% for Q4 (compared to the first read of 0.9% that’s a 56% revision, worse than a coin flip or a weather forecast). Earnings expectations are meager.

But the strong dollar is crushing others. Brazil is on the brink of collapse. China could run out of cash in a year. It’s convenient to cast blame for money manipulation but dollars are the reserve currency, the Big Kahuna. The Fed has thrown the world akimbo and infected equities with its policy susurrations.

Economies and markets work when currencies don’t move and supply and demand do. Instead the rest of us humans not in charge of monetary policy are like kids stuck in a room with a bipolar parent off the meds. After all, functionally the Fed tightened policy last week by reducing excess reserves and borrowing from banks through reverse-repurchase agreements. Which is it, Ms. Yellen?

For public companies, yesterday’s trading is an archetype of the modern era.  Our growth clients with higher Risk Management (derivatives) sharply outperformed the market. Tech soared (lumped with growth and a recent laggard). But utilities jumped too.

It’s not rational. The whole market depends on derivatives. The ultimate planetary derivative is money – currency. Central banks have taken to manipulating it in unfathomable ways to create the appearance of things they desire.

I don’t know how it ends but from a structural standpoint in the stock market, the influence of derivatives has reached a fever pitch. It happened in real estate too.

Share this article:
Facebook
Twitter
LinkedIn

More posts

dreamstime l 67819586
February 28, 2024

Two things exploded in 2023.  Trading in options contracts and illegal US immigration. No, I’m not suggesting they’re correlated!  I note it bemusedly. But I...

dreamstime l 20057394
February 21, 2024

Last week, markets were abuzz over the zero that lifted LYFT.  For those who were vacationing or living hermetically and missed it, Lyft reported financial...

dreamstime m 206876446
February 14, 2024

I’ve got my Valentine, for which I’m grateful every day.  Whether the market finds love after yesterday’s blood remains to be seen. Back when the...

dreamstime m 212403964
February 7, 2024

On Nov 15, 2021, NVDA closed at $345.30 on a hundred million shares of volume. Without context, that information is interesting but unhelpful.  I’d note...

dreamstime l 24803177
January 31, 2024

Consumers are confident. I’m not sure they have all the data. It’s a lesson for public companies. In case you missed it, The Conference Board’s...

dreamstime l 56087804
January 24, 2024

If I said the name “Sherlock Holmes” to you, what’s your snap response? Probably, “Elementary, my dear Watson.” I have long favored a line by...