Update on Morning Routine

Source: Capital Pixel

I'm primarily an indexer and passive dividend stock investor.  Thus, I don't hunger after economic data during the course of the market day or breathlessly wait for the next pundit coming up on CNBC.  But I do like to feel like I know what is going on in the market and  like I understand the major influences.  To that end, I begin my day gathering data.

I go to MarketWatch and begin at the data source shown:

Source: MarketWatch

I first record the yield on the 10-year Treasury Note (1.79) and the German 10-year Bund yield (.32) and then calculate the difference.  That difference, as shown, is now 1.47%.  So, even though the U.S. rate is anemic, it is considerably higher than the German rate as well as most of the other yields shown in the table.  Other things equal, U.S. rates are enticing to many in the global markets.

Next I click "FX" and record  "WSJ $ Idx, a basket of currencies, as well as the euro.  Both of these have moved higher.  On January 14, for example, the WSJ Idx and the euro stood at 84.02 and 1.18, respectively.  Today they are at 85.40 and 1.12, respectively.  The bottom line is U.S. Notes and Bonds look very attractive to global investors both on a yield level basis and dollar appreciation basis.  This was the major factor confounding prognosticators in their prediction that rates would rise in 2014!

I next click "Futures" and record both the price of oil and gold.  In reading Barron's "Roundtable," I have gotten chuckles, as I'm sure some of you have, over the hand-wringing by participants of the failure to foresee the collapse in oil prices.  Some of the participants seem to question the whole pundit/prediction exercise!

One final data point I started picking up recently was the yield on the S&P 500 which, itself, has gone above the yield on the 10-year Treasury.  I get it by going to Yahoo! Finance and looking at the yield on SPY, the ETF tracking the S&P 500:

Source: Yahoo

As shown, the yield is 1.87%.

All of this takes less than 10 minutes in the morning and gives me a good feel for how markets are behaving.

A couple of years from now, I will surely be tracking different indicators.  That's the nature of markets - what is important at various times changes.  There was a time when the P/E ratio on internet stocks was a driving factor.  At another time, it was the rate on adjustable rate mortgages.  Today it happens to be the spread between U.S. interest rates and global rates along with the value of the dollar.

Since some of you may go to the MarketWatch site, it is a good time to tout the "RetireMentors" which can be found by clicking the "retirement" link at the top of the homepage.  IMHO, this is the best ongoing collection of articles online for people interested in retirement.

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

Marketwatch

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.