Stormy Weather Ahead?... Don't Be Surprised.

 A ‘perfect storm’ is the scenario in which a weather phenomenon happens when multiple large and extremely powerful pressure systems collide, head on, at the same time.  This collision effects the regular juxtaposition of the normal and mildly destructive movements of each system.  For the perfect storm scenario to create these massive, annihilating pressure systems, the opposing weather fronts need to be very, very strong systems when they collide, or one will simply overtake the other.  These giant opposing weather systems create the explosion of pressure that gives us tornadoes that lift FEMA trailers across the Arkansas state line, winter blizzards that are claimed to skew jobs reports and coastal floods that happen on Lake Michigan that threaten to take over Lake Shore Drive.

Financial perfect storms are anything but perfect.  They are rarely noticed until they hit in full force, decimating the financial landscape of which they happen to reign on. 

I woke up and checked the news on Friday morning (Feb 4th) and noticed that the headlines were dancing with the report that the unemployment rate dropping to 9.0%.  I thought to myself… ‘Wow!  That must mean that we added something like 500,000 jobs in January.’  How wrong I was.  Instead, we added a less than impressive for the amount of stimulus-shimulus we are throwing around, 36,000 jobs in January— continuing the anemic jobless, screw the middle class, smoke-and-mirrors recovery.
 
And, as if the overall patheticness of the jobs data didn’t surprise me enough, I watched the bond market tear through some very reliable upper-end (yield) resistance levels.
 
I’ll be 100% honest—I have been very surprised by some of the data that has hit the market over the last 6 months, though I cannot say I am impressed. 

That’s just how I feel—surprised. 

Sometimes surprises end up being quick and short lived, falling apart and leaving you unimpressed.  For an example, I dated this girl after college that I met at a bar (she was kinda sloppy when phone numbers were exchanged—before Twitter and all) and I was surprised by how together she was on our first few dates.  Sadly, on date number three she drank a few too many bottles (there had to be multiple bottles) of coconut rum, danced on the bar with her hoo-ha exposed and vomited uncontrollably in the cab on the ride home.  In this situation I was surprised initially but ended up being unimpressed (not to mention that I had to pay the cab fare that night and buy new shoes!).

On the flip side, sometimes surprises end up being very impressive over time.  look at NFL running back Arian Foster-- dude was undrafted and led the league in rushing this last year.  Surprising?-- Yes.  Impressive-- You bet he is!

I know that hammered chicks and gridiron superstars are not market changing events but the premise is the same when looking at the markets.

I am surprised that labor markets are claiming a recovery when there is still no actual job creation (McDonald's and seasonal jobs at Gap Kids do not count).  I am surprised that everyone is surprised by strong Q4 retail sales numbers when the cost of goods for consumers has fallen 30-50% in the last few Christmases (people will buy if the price is cheap enough... is this sustainable?).  I am surprised that investors think there is no risk in the equity market because they believe the Feds will continuously pump out QE stimuluses for eternity.  I am surprised that investors are welcoming rampant increases in food and energy costs and seeing no downside to profits from companies that have to pass on costs to consumers who will be shelling out all their disposable income for gas and $18 tomatoes.  I am surprised that no one sees rising mortgage rates as a further drag on the housing market. 

As you can see, I am very surprised, but not exactly impressed.
Following a chart of the bond fund TLT (which might as well mean Trash, Luck or Treasure depending on how you see the market) we are trading at very strong held technical support at $88 - $90 that has held since 2008.  TLT has only traded at this range a few times in the last few years and each time purchasing would have rewarded you with some substantial profits.  In June of 08 it bottomed sub $90 to shoot up to over $120 when the markets melted after the Lehman debacle.  Early June of 09 saw a sub $90 trade bounce to $99 in a short time, and just last year TLT went from sub $90 to $109 in Aug, trading above $100 until the end of October.  She moves in mysterious ways!  Lower resistance holds stronger at around $83.

My date dancing on the bar to Avril Lavigne while showing off her goods was kinda hot, but TLT under $90 is just plain sexy!

I am most surprised that bonds have been trashed harder than Charlie Sheen (issues, issues, hookers, issues, issues, drugs, issues, issues...) despite all the surprising, but not impressive market data. 

Is there a financial ‘perfect storm’ brewing?

I am definitely seeing storm clouds forming despite the weather forecast of sunny investment bliss that sees nothing but sunshine and cookies for the foreseeable future rest of eternity.

I’ll tell you one thing—when (not if) this storm hits, it won’t surprise me…

R&R Feb 6, 2011