Morning Reading – Friday, February 4, 2011

The Big Picture: NFP Day: The Most Over-Analyzed, Over-Emphasized, Least-Understood Data Point

The most over-analyzed, over-emphasized, least-understood data point of the month comes out today. I guess we could probably add “over-traded” to that list.

Why do am I critical of how we discuss this point?

The Big Picture: Intelligence Guidance: The Situation in Egypt

When protests started in Egypt last week, mainstream news outlets cried “democracy!” and compared the situation in Egypt to the Berlin Wall and Tienanmen Square. Meanwhile, STRATFOR (an intelligence company I’ve followed for years) spoke of a different possibility. At the time it may have been counter-intuitive for most institutions to draw parallels to 1979 Iran, but my friend and the company’s founder George Friedman produced an internal document that raised that possibility. Days later, news outlets began asking questions about groups like the Muslim Brotherhood, and realizing there could be other forces behind the unrest than simple calls for Western-style democracy.

The Big Picture: It’s not just commodities that will drive inflation

While there has been a deserved large focus on commodity prices and its impact on consumer price inflation, another factor for the CPI is about to turn upward too. That is the housing component. Owners Equivalent Rent makes up 24% of headline CPI and about 40% of core CPI. Using the comments from the two largest apartment REITs as anecdotal evidence, rents are moving higher.

The Big Picture: Bernanke, still not worried about inflation

On the part I was most looking forward to, his comments on inflation, he said “we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast growing emerging market economies, coupled, in some cases, with constraints on supply.” Notice he attributes none of the rise to his policy and he then sums up with this, “Nevertheless, overall inflation remains quite low” and then he goes on to cite benign 2010 inflation readings and emphasizes core as “a better predictor of where overall inflation is headed.” Looking at 2010 CPI stats is classic rear view mirror economic analysis and it seems that the Fed won’t worry until higher CPI readings are plastered on their foreheads.

Calculated Risk: Norris: From 1983, Hope for Jobs in 2011

In January 1983 … the unemployment rate fell to 10.4 percent from 10.8 percent. It was the first such decline in five years, but few thought it significant.

“The A.F.L.-C.I.O.,” The Washington Post reported, “said yesterday that there was no real improvement in unemployment last month because the decline was caused primarily by people dropping out of the labor force, rather than finding jobs.”

… the rate at the end of 1983 turned out to be 8.3 percent.

FT Alphaville: S&P: yeah, housing is still terrible

S&P has updated its pessimistic outlook for the housing market this year to reflect the recent, expectations-beating data on new and pending home sales — and remains unimpressed.

The Slope of Hope: AAII Sentiment Survey – Week Ending 2/1 (by Runedge)

The divergence continues yet again. The most recent AAII investor survey is out and has reversed its bullish although more neutral position of last week. Bulls rose to 51.5%, from 42.0% last week. Bears dropped to 26.9% from 34.3% the prior week. There are now two bulls for every one bear out there. Below are two charts showing the comparison with the SPX.

The Slope of Hope: How To Spot And Trade Negative Divergence

The key points in this chart are that of the Negative RS (Relative Strength) Divergence, the Pink Bear channel, the green uptrend line and the 50 day average.

Look at the RS divergence showing up in this chart (the indicator at the top) what exactly does this mean? In short it means that under the hood of that bright shinny car on the show room floor the engine isn’t firing on all cylinders.

This entry was posted on Friday, February 4th, 2011 at 7:27 am and is filed under Daily Reading. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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