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Wednesday, November 26, 2014

Following the Market

Birdwatching is like market watching
I'm an indexer and dividend investor.  As such, you might think I don't follow the markets closely.  That would be wrong.  Like active stock pickers and market timers, I like to try to understand what is going on and. yes, even guess (knowing that it is a guess is, I believe, a quantum jump in investment sophistication that many ego maniacs in the markets can't make) where the market is headed.

As an economist, I like to keep the market tracking process efficient.

Over the years, I have come to understand that the market is driven by broad themes over various time periods; and understanding these themes is important.  For example, in the mid-70s and early 80s, it was all about energy because of OPEC.  Being underweighted or overweighted, energy drove relative performance.  In the late 1990s and early 2000s, of course, it was all about internet-related stocks both on the way up and the way down.  In 2008, you needed to get the impact of the housing crisis on financial services and, especially, the banking sector right.

Today, I look at relative yields, the dollar, oil prices, and the price of gold.  In particular, I go to


and record the difference between the U.S. 10-year and the German 10-year.  Here you see that difference at 2.24 - .70 =  +1.54%  (154 basis points).  Eyeballing the other rates shows the advantage of the U.S. 10-year Note as well.
Source: Marketwatch

But for foreign investors, the currency conversion is also important.  Click the FX link, and you find a broad FX index, WSJ$IDX, and the Euro.  I record each of these first thing each morning.  To the extent that foreign investors invest in the U.S.10-year and yields drop and the dollar strengthens, it is a very good investment compared to investing in their home country.

This hasn't gone unnoticed by market observers as an important  influence that has kept U.S. interest rates low despite an aggressive Fed policy and an expanding U.S. economy.

As an aside, I once knew a man who explicitly  sat down and waded through numerous investment publications whenever he felt he didn't understand the markets.  This is the process that many needed to go through earlier this year as their confident predictions of a sharp rise in interest rates didn't just materialize but actually moved in the other direction.  This would have led to an understanding of relative yields and the influence of global yields on U.S. yields.

I also click on "Futures" and get the price of oil and the price of gold.  Each has had, and will have in the future, a major role in moving markets.

The whole process of collecting this data takes just a few minutes and is, I believe, useful in understanding broader markets.  For example, dividend-paying stocks should continue to at least hang in and provide decent performance as long as their yields stay above the yield on the 10-year UST and global yields remain low.

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