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Morning Notes For July 12th 2010 at Trader’s Narrative

Morning Notes For July 12th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. Please provide some feedback in the comments:

  • BP took one step back Saturday in order to take two steps forward in its struggle to tame the gushing Macondo oil well at the bottom of the Gulf of Mexico, removing a cap that was catching some of the oil in the hopes of replacing it with one that would capture most or all of the leaking crude. – WP
  • The global economy has exited recession and returned to growth, with emerging market economies outperforming their developed counterparts. However, many analysts worry that the waning of stimulus effects and other weakening growth drivers could keep growth below potential this year. In July 2010, the IMF revised up its forecast of global growth to 4.6% in 2010 from the 4.2% it expected in April, reflecting upward revisions in the U.S., Japan and many emerging market economies. The revisions reflected stronger-than-expected growth in H1 2010, but the institution noted that “downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area.” As such, it left its forecast for 2011 unchanged at 4.3%. – RGE Monitor
  • China import/export numbers - China’s June exports rose better-than-expected at 43.9% year-over-year

China Export Trade YoY% (10 Years)
china export yoy change Jul 2010

  • Wall St firms are picking up the hiring pace, anticipating a strong rebound – NYT
  • White House considering a review of the business regulations that corporate leaders have complained inhibit job creation (WSJ)
  • Obama – taxes + labor laws more important for the outlook than stimulus vs. austerity debate – Washington Post argues that it is the maze of new labor regulations and all the tax uncertainty that has caused business decision making to freeze – Washington Post
  • Mark Cuban is making another run at buying a baseball team, joining a group of bidders eying the Texas Rangers – NY Post
  • The WSJ says correlation between the S&P 500 and its component stocks has spiked to the highest level since the 1987 crash. This is worrisome, because it effectively means the market has settled on no safe sector or company. When the index drops, it all drops. Some analysts worry this means the market is particularly vulnerable, the paper says. – FTN Financial

sector correlation to SP500 Jul 2010

Coincidentally, I recently ran sector correlations to the S&P 500 (GICS sectors, weekly frequency, rolling 120 periods) and the tentative conclusion I reached is that higher correlations alone indicate little/nothing about equity direction. Note the high correlations starting in 1995-1996, the beginning of a fantastic bull market. While this is a slightly different analysis than what WSJ did, the spirit of the investigation is the same.

High correlations have obvious implications for diversification, but note the divergence at the onset and throughout troubled times in the market (primarily in the early 90’s, early 2000’s, less so in 2008). Keep in mind, this is looking at correlations among sectors within US equities, not correlations among various asset classes. One of the many lessons of 2008 is that many supposed non-correlated asset classes behave very much like equities, particularly in times of stress.

That’s enough for now, but I would love to discuss more with anyone interested. Let me know if you want the data.

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