Monday, May 9, 2016

Liquidity Trumps Fundamentals

In the battle between ample liquidity and weak fundamentals, you are seeing what wins out.  Liquidity.  There is too much cheap money sloshing around so it needs to find a home.  The lowest yield in 2008 for the 10 year when you were in the midst of the financial panic was 2.04%.  The S&P at that time was under 900.  With an economy that is stronger than in 2008, you have 10 year yields at 1.76% with an S&P over 2050.
The liquidity tells you S&P should be over 2000.  The fundamentals tell you it should be under 1500.  Liquidity wins.

Something is extremely wrong with this picture.  You have bond yields that are completely distorted by central bank easy money QE programs that try to goose the economy by not only manipulating the short end but also the long end of the yield curve.  And when the market gets even a sniff of a normalization in interest rates, it panics knowing that this drugged out overstimulated zombie economy can't withstand higher interest rates.

So you have a market that loves to see subpar jobs numbers, as long as they are not so bad that they signal recession.  We got that last Friday, and the market rallied all day after the initial panic selling on the weaker number.  They want more Fed goodies and ZIRP forever and more QEs.

Now what is the plan in this choppy market?  We just haven't gone down enough after such a huge 2 month rally to entice me to buy.  At the same time, so many are cautious and pessimistic that it makes me wary of a short squeeze coming out of the blue.  So all I can do is just watch and wait for an easier trade.  Probably the easiest trade is to just buy bonds and wait for a big move lower in equities sometime before Brexit vote in June.  But even that isn't a great trade, considering how much we've rallied since the FOMC 2 weeks ago.  Tough market.

No comments: