September 1st, 2013
by Jeff Miller, A Dash of Insight
Markets hate uncertainty, and last week delivered a super-sized portion! Do not expect much clarity in the week ahead.
Last week I predicted that fear might beget more fear. Starting with Secretary of State Kerry's Monday press conference the markets moved lower. Tuesday trading exacerbated the effect, and the market did not recover. Rarely has one of my weekly previews been so accurate, so quickly, and for the right reason.
It is a classic case of confusing fear and risk, something I tried to clarify in this post. The fear part is pretty obvious, as we saw frightened individual investors stampeding out of stocks, especially the broad market ETFs. Steven Russolillo reports the story, noting that it is the largest monthly outflow in five years. In sharp contrast, the objective risk measures that we document each week (see below) have moved only slightly higher. For a market-based analysis of Syria, check out Scott Grannis, who asks, How Scary is Syria?
Bespoke offers their own risk indicator – a CDS index – in their post, Credit Markets Not Too Worried.
Dimensions of the Syria Issue
This is a fascinating case study, with big stakes on many fronts. President Obama's decision to seek Congressional approval for action caused me to scrap my theme for today's post and to reconsider my own plan for the week. Here is a good analysis of the probable factors at work.
- Citizen. As citizens, we should all be interested and informed. If you feel the need to catch up, do not be embarrassed about enjoying your summer vacation. Here is a good source to catch up.
- Analyst of Presidential Power. This one has not gotten much mention so far. Every schoolboy knows that Congress has the power to declare war. Most college students know that modern wars never had a declaration. Some of them had rather vague Congressional authorizations. Check out the Tonkin Gulf Resolution, which provided some justification for the Vietnam War. If President Obama seems to be ceding power to Congress, it will represent a major shift.
- Political junkies. This is a field day for political pundits and especially for Obama opponents. He can be criticized for moving too quickly or too slowly. He was attacked via Twitter (just what we need – debating points in 140 characters) for acting without Congressional support. He is already being attacked for soliciting it.
- US role and moral responsibility. There is widespread agreement about using weapons of mass destruction, especially against civilians. Identifying the culprits and finding a course of action is much more challenging. In particular, what should the US role be? What allied or UN support is required? What level of reaction is appropriate?
- Investor analysis. Next to the other major dimensions, the investing question seems less significant and a bit tawdry. So be it. Each of us must separate our role as citizen from our role as investor, finding the right answer for each. Oil markets and stocks seem to be reflecting – at least partially – something much more significant than a one-time US strike against Syria. The uncertainty involves possible involvement by Iran (against Israel?) or China. While these possibilities may be unlikely, they are prominently mentioned. This theme of fear and uncertainty will continue, since Congress will not return from recess until September 9th. Even then there is a good chance that Congress will reject action.
Other Uncertainties Loom
Syria is not the only question for the markets. There is an autumn of uncertainty, as noted by Joe Weisenthal. We can expect a lot of discussion about end-of-year positioning for investors. As usual, the cloudier the crystal ball, the more fun it is for the pundits!
I have some thoughts about post Labor Day positioning, and my suggestions for the best sources. I'll report in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.
My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topicthe week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!