Tuesday, August 30, 2011


The question I ask myself: Self, Friday created today; what does today create?

The most asked question on Friday and today: "Why the sudden strength over the past few days?"

I believe it has little to do with a stabilizing Europe or improving U.S. economic data (especially as neither are actually happening). Rather, it is more likely a function of the asset reallocation out of fixed income into equities.

These programs have little interest in last week's prices or last month's prices -- they are machine-based.

Nothing more, nothing less.

Weakness in the Dallas Fed manufacturing confirms those readings in other regions (including Richmond, Philadelphia and New York).

At -11.4, it was nearly 3 points below expectations and marked the fourth or fifth consecutive monthly crop.

New orders, production backlog and unemployment indicators all dropped.

I would guess that the proximate cause of today’s rally could importantly be the ECB release that the central bank purchased less than 7 billion euros of bonds last week (vs. 14 billion euros a week earlier).

The interpretation being that ECB could keep Spanish and Italian 10-year yields below 5% with less purchases.

The July income was in line, but spending was much better than consensus expectation (+0.5% vs. +0.8%E).

With the deflator up 0.4%, real income dropped slightly, and real spending rose by 0.4%. Savings rate fell slightly.

Ergo, more screwflation of the average Joe.

Again, this is July data and the world stood still in August.

“It’s tough to make predictions especially about the future.”

-- Yogi Berra