Get a Quick Fix on Markets

Here is a quick overview on how I get a quick fix on the markets.  You can, of course, spend all day following the gyrations of markets, tune into the never-ending flow of prognosticators expounding on the past and offering predictions of where we are headed, and even spend every waking hour reading provocative pieces intended to get your attention.

This isn't about this.  It is about spending 15 minutes in the morning getting a feel for where the market is and why it has performed as it has.  I believe this is the best way to understand markets.  But don't get too comfortable.  As Nassim Taleb has pointed out, humans are very adept at creating narratives explaining why markets have performed as they have BUT ARE POOR PREDICTORS OF WHERE WE ARE HEADED!  The housing crisis leading to the debacle of 2008 is a good example.  In hindsight, it is easy to explain what happened.  But how many people got rich predicting it?

Markets are affected by different things at different times.  This is one of the reasons it is difficult to outperform markets and why indexing is the best approach for many people.  Thus, the economic data points I follow today will be different from what I am following a year from now.  One of the tricks is to hone in on what is affecting the market at any particular time.

Here is what I do each morning.  I first go to www.marketwatch.com and look at the following:

Note here that I have clicked on the "RATES" column.  From this column, I record the rate on the "U.S. 10yr," which is a benchmark for the U.S. bond market, and the rate for the "German 10y."  I then calculate the difference, known as the spread.  Here that spread is 2.14 - .69 = 1.45.  So, by investing in the U.S. 10-year Treasury note versus the 10-year German Bund, the global investor achieves a gain in yield of 1.45%.

Eyeball the other yields in the table, and you quickly see the superiority of the U.S. yield.  This simple exercise tells you a lot about why the pronosticators over the past few years have been dead wrong about interest rates.  Instead of going up, they have dropped and stayed low!

On my pad where I record data each morning, I can quickly flip back and see that this spread was 1.66 (or, as bond market people say -  166 basis points) back on 7/26/2015.  Thus, the spread is narrowing. Worth keeping an eye on.

Next, I click on the FX (foreign exchange ) column to get:

From this column, I record the value of the Euro 1.11 and the value of "WSJ $ IDX" at 88.75.  Currencies are a key to understanding global economics.  When a currency cheapens versus other currencies,it lowers the prices of the goods it sells on world markets. It is like two gas stations next to each other.  As you would expect, they typically have pretty much identical prices.  If one comes out and significantly lowers its price, the other will suffer a dramatic loss in sales.

Recently, China shocked the investment world by devaluing its currency.  Not surprisingly, investment market held its breath, concerned about a currency war breaking out.

In looking at the Euro, it is also worth noting that expectations play an important role in determining whether to buy the 10-year Treasury or the German Bund.  Investors need to  assess the spread and the likely future course of the currencies.  At the margin, the spread and the expected currency movements should make investors view the two bonds the same.

Again, flipping back, I find that on 9/26/2015 the Euro was at 1.08 and the WSJ$IDX at 88.59.  Global investors in the 10-year Treasury did well.  They got an attractive spread and an appreciation in the U.S. dollar. I ncidently, the dollar would be expected to appreciate in a scenario where the Fed is getting closer to raising short-term interest rates.

Next, I click the "FUTURES" column and record "Crude Oil" and Gold.

I also mentally note the DJIA and S&P futures markets to get a sense on how the market is likely to open.

Finally, I click on the "ASIA" column and record the overnight performance of the Shanghai stock market = 3160/-.21%.  On 9/26/15, this index stood at 3992.ooch!  This is a good example of an economic data item I wasn't following closely a few months ago but now am.

All of this takes longer to explain than to get the data.  Once you get it into a routine, you can easily record the data in 15 minutes or less; and I believe it will give you a bit of a fix on what is driving markets.  Also, you can add other items to your liking.

To get a further feel for the market day, I like to also go to CNBC and read the headlines of what they see as market relevant stories:

As you can tell at a glance, the big deal today is the employment report.  Markets will spend the day assessing the report and its impact on when the Fed is likely to raise rates. etc.

ENJOY YOUR HOLIDAY!