MARKET COMMENT

January 22, 2007




“Rainy Days and Mondays Always Get Me Down”


If I’ve said it once, I’ll say it again, “I hate January markets!” But you know that already. Like you, I read market summaries searching for meaning and direction. I was struck by the similarity of the two quotes below.

"As long as pullbacks do not generate accelerating downside pressure, the pattern of selective strength and nominal overall progress can continue,"
Philip Roth, Miller Tabak & Co.

“As long as the roots are not severed, all is well and all will be well in the garden…there will be growth in the spring.”
Chauncey Gardner, Being There

Seriously, I don’t mean to disrespect Mr. Roth, he may be right—then too, so might Chauncey. Sometimes there just isn’t anything brilliant to say other than the obvious which is, when markets are overextended in December you can expect some sloppiness or a correction in January.

The mantra that Wall Street pundits were pushing at the start of the month “sell energy, buy tech” has been quashed almost as quickly as the ink dried. The culprit remains perceived lousy earnings and outlooks from sector leaders. The leader downward remains tech’s industrial subsector—semi’s.



















Well that’s the tech picture for you. How about some other sectors?



























It’s a big world and other areas are doing relatively better.

























We’ve been following the activities of the Fed and Treasury [as well as other central banks where we can] in terms of adding to the liquidity glut that’s supporting bubbles in stocks, then real estate and now stocks again. The “carry trade” in Japan continues to allow institutions to borrow at rates next to zero and buy 10 year US Treasury Bonds at 4.75% locking in the spread. This will only stop when the Japanese central banks raise rates and so far it seems reluctant. Meanwhile, back in the US the government is adding billions to their primary dealer network thru repurchase agreements and other short-term borrowings. This is “hot money” and it seeks out beta [volatility] like a heat seeking missile [think program trading]. Here’s some current data.








So, today alone, some $10 billion added to the markets. Also interesting is that most funds are being lent below the Fed Funds rate. It’s good to be a primary dealer don’t you think?

There were two articles I read today that discussed the global liquidity glut which ties-in to the previous tables of US Fed and Treasury activities. One was in today’s WSJ [subscription required] which was an interview done in July 2006 with recently deceased Nobel Prize winning economist Milton Friedman. The interesting segment is as follows:
Do you still think it would be a good idea to have a computer run monetary policy?
Friedman: Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.
In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge. We have seen that in the history of our own Federal Reserve System. Surely a computer would have produced far better results during the 1930s and during both world wars.
That raises a question about the desirability of our present monetary system. It is one in which a group of unelected people have enormous power, power which can lead to a great depression or which can lead to a great inflation. Is it wise to have that power in those hands?
An alternative would be to eliminate the Federal Reserve System; to reduce the monetary activities of the federal government to the provision of high-powered money, that is, currency and bank reserves, and to constitutionalize, as it were, what is to be done with high-powered money. My preference is simply to hold it constant and let financial developments produce the growth in the quantity of money in the form of bank deposits, a process that has been going on for many decades. But that is, of course, politically impossible.

And, then there’s this essay which hopefully will download for you which deals with “too much money and not enough oil”. I was much impressed by the clarity of this piece.

Okay, this is plenty of information to digest in one day.

The bottom line is that so far January, in plain street language, sucks. Can I be more direct? We’ll see if all those funds being injected to “Da Boyz” pay off with stocks getting bid higher. But then maybe they’ll turn the tables and short the markets. They wouldn’t be playing the game by the “wink-wink” rules then would they?

Like last week, patience will be required.

Have a pleasant evening.


Disclaimer: Among other issues, the ETF Digest maintains positions in: IGV, FDN, IGN, IBB, SPY, RYH, GLD, ILF, EWM, FXI, EFA, INP, EWA and EWM.