Recap 9-12-12: Local Top This Week?


The market now appears to broadly agree that additional QE won’t do much good. For example, according to a CNBC poll, 77% of surveyed money managers expect another round of QE is coming, but only 36% think it will help lower the unemployment rate. This is broadly supported by anecdotal observations of recent broker research.

This is significant, because it suggests market participants aren’t buying with expectations to hold, but rather buying because they expect others to buy. In other words, there may be a preponderance of momentum chasers in the market heading into the FOMC meeting. If true, this also suggests that there is likely to be a spate of profit taking following the FOMC, regardless of what they announce.

In general, markets have gone quite a ways in reducing risk premium. The term premium in equity implied volatility, for example, has dropped sharply. The 3m measure of the Vix closed at the lowest level since March 26th today, and the spread over the VIX has contracted to levels normally associated with risk off scenarios.

And finally, note that on a trailing basis, the S&P PE ratio has been declining for over a decade. Regular readers know that the view here is that this is driven by demographic trends that are likely to continue for another decade or so. In any case, on a historical basis, the PE ratio has been capped by a downward trend line over this time, a line that was broken only in 2009 as a result of distortions following the financial collapse. Now, it’s not clear if people use technical analysis on PE ratios. But be aware that we’re pretty much at that trendline here:


  • The German Constitutional Court dismissed motions that sought to block the ESM. They ruled that Germany’s 190bn euro contribution cannot be increased without legislative approval. The ESM should be officially activated by October 8th.
  • Rajoy: "It is completely outruled that we would ask for a bailout for the whole country".
  • Texas Instruments lowered expectations citing weak demand as most areas are tracking below expectations.
  • Apple announced the iPhone 5 as expected. JPM estimates it will account for 50bps of GDP.

Upcoming Data:

  • Thu: US PPI, Jobless Claims, FOMC
  • Fri: EU CPI, Employment, US CPI, Retail Sales