Originally posted at Briefing.com
In the history of comedy routines, Abbott & Costello's "Who's on First?" routine ranks among the best. Why? Well, he's in left field but forget about him for now.
The reason the "Who's on First?" routine is comic genius lies in the comedians' delivery of a script that was so brilliantly written. In the sketch, Abbott tells Costello the lineup for the St. Louis Wolves, using strange names that Costello just can't grasp as being the players' names. While Abbott knows exactly what he is talking about, Costello remains totally confused by what he is hearing.
It's hard not to blame the guy. When he simply asks what the players' names are, he is told Who's on first, What's on second, I Don't Know is on third, the left fielder is Why, the center fielder is Because, the pitcher's name is Tomorrow, the catcher is Today, and the shortstop is I Don't Give A Darn.
Frankly, I can relate to Costello these days. The capital markets are acting a bit screwy, and while there is always a confident-sounding explanation at the ready for why things are lining up the way that they are, it all still sounds a bit confusing.
It's What We Do
Your author has been following and writing about the capital markets daily for more than 18 years now. A lot — a whole lot — has happened in that time.
This period, though, feels like no other, because so many major asset classes and markets around the globe seem to be lurching from one day to the next for reasons that are as clear and as confusing as Abbott's rendering of the St. Louis Wolves' lineup.
For instance, you might hear that the stock market went up along with interest rates one day, because those rising rates were an expression of investors' belief that the economy is getting better, and hence, earnings prospects would be improving. The next day, if the stock market went down while interest rates went up, you'd hear that the stock market was spooked by rising interest rates.
[Listen to: Jared Dillian: Markets Better Off by Automating the Fed]
To be sure, market analysts have an explanation for everything. It's what we do.
We are loathe to say "I don't know." Sometimes, though, the easiest and most honest explanation is "I don't know." Third base!
Having said that, I'm baffled by what I am seeing, primarily because it is possible to put a defensible bullish or bearish spin on a lineup of factors that are playing in the capital markets.
A Look at the Lineup
—Who's on first? Oil Prices
I'm told oil prices have gone up as much as 40% since their March lows because oil inventories were at an 80-year high. The thinking behind that perverse supply-demand dynamic is that it suggested producers would be cutting back on production, so traders were frontrunning the prospect of lower inventories and higher prices in the future.
Now I hear oil prices are struggling to move higher because of the concern that the higher price of oil will lead producers to crank up production again, which will drive inventories up and prices down.
—What's on second? Market rates
I have been informed that the steepening yield curve reflects a reflation trade. That is, traders are pricing in the prospect of faster growth and higher inflation down the road.
At the same time, I hear that the fed funds futures market keeps pushing back its expectation for the timing of the first rate hike from the Federal Reserve, which reportedly reflects a belief that the economy and inflation are not expected to pick up fast enough to warrant a rate hike until December or even sometime in 2016 at the earliest.
—Third base? The transports
I have heard that the drop in fuel prices and the inevitable pickup in the U.S. economy are clear positives for the transports, yet the Dow Jones Transportation Average, which is viewed as a leading indicator, is underperforming the S&P 500 so far this year by approximately 800 basis points.
—The left fielder? The euro
I heard that the European Central Bank's quantitative easing program would likely drive the euro to parity against the dollar, and yet the euro has moved away from parity, not toward it, since the program began.
—The center fielder? Earnings
It was my understanding that earnings and earnings revision trends drive the stock market. Granted first quarter earnings are on pace to increase 3.0%, yet earnings growth estimates for the second quarter, third quarter, and fourth quarter have all come down since March 1 (see below), such that the calendar 2015 estimated growth rate has slipped to 0.5%.
The S&P 500 is reportedly up 2.9% year-to-date partly on the assumption that earnings revisions will skew higher as the remainder of the year unfolds.
Source: S&P Capital IQ
—The pitcher's name? The consumer
It was seen as a sure thing that higher employment levels and low gas prices would induce a strong pickup in consumer spending that would turbo-charge the U.S. economy. Once revisions are accounted for, it will likely be shown that the U.S. economy contracted in the first quarter; moreover, what we have seen to this point is the personal savings rate increase to 5.3% from 4.4% in November 2014.
[See: Economy Tied in a Spending Knot]
The Atlanta Fed's GDPNow model forecast for second quarter real GDP growth stands at just 0.7%.
—The catcher? The dollar
Ah, the dollar. The U.S. Dollar Index spiked 26% between its June 2014 low and its March 2015 high. That move was explained as a good thing since it was a reflection of the U.S. economy's stronger growth prospects, which would be apt to invite higher interest rates and more foreign buying interest on the interest rate differential trade. The dollar's strength was to be cheered as a vote of confidence in the U.S.
Today the U.S. Dollar Index is weakening reportedly because the U.S. economy isn't doing as well as had been thought... BUT... that's not a bad thing, because the weaker dollar is advantageous for U.S. multinationals and will help eradicate disinflation by inviting higher import prices.
In brief, when the dollar is rising, it's a good thing, and when the dollar is falling, it's a good thing.
—The shortstop? Greece
Market participants reportedly either give a darn or don't give a darn about Greece defaulting on its debt and/or exiting the eurozone. It usually depends on which way the S&P futures are trading before the stock market opens.
[Hear: Geopolitical Update With Stratfor’s Reva Bhalla: Greece Faces Real Crisis in July]
What It All Means
You might have noticed that there is no right fielder. That's only because Abbott & Costello didn't mention one in their routine.
It wouldn't be a stretch, though, to name a right fielder and a few other utility players to boot. China, housing, high-yield debt, valuation, and biotech are all available to play. Strong bullish cases and bearish cases can be made for each of them.
I suppose that is the essence of why the capital markets are acting a bit screwy right now. There aren't any clear answers when we might be on the cusp of a seminal shift in the Federal Reserve's monetary policy.
Accordingly, the trading action is confusing.
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I sense there are a lot of people out there who want to sound like Abbott when in fact they feel more like Costello. That sense of things is embedded in the roller-coaster action of the capital markets. In any event, I'd be very interested to hear what you are thinking, so please email me with your thoughts.
Maybe my confusion isn't confusion at all. Maybe the most clear-sighted view of the capital markets right now is to say they are confused.
I don't know. Third base!
