Recap 11-2-12: Hypotheses for Today’s Price Action

Commentary:

Price action was very odd today, as the dollar strengthened against every major asset class, despite a better than expected payrolls report. The knee jerk assumption would be that this brings closer to the present the timing for a withdrawal of Fed stimulus, but the price action in fixed income does not support such a view.

Another idea that floated around was that as a result of the loss of stock certificates at the DTCC HQ, people are worried about possibly losing some of their positions. But this hypothesis also doesn’t hold water, because on top of the fact that everything is backed up electronically, the fixed income universe is larger than the equities universe, and bond prices were broadly stable today.

A more plausible explanation is that as the market odds of an Obama win increases as we get close to the election date, we are seeing a wave of selling to take advantage of current lower capital gains rates. There is no data to support this view other than the upcoming election date, but given the lack of alternative explanations, this will have to do. (A simple scatter chart plot of S&P500 stocks’ 5 yr returns vs 5 day returns yielded an essentially random plot) Wash sale rules for US assets mean that US taxpayers must wait at least 30 days from the date of the last sale before they can re-buy the asset. As a result, if this hypothesis is accurate, and the money comes back, we are likely to see money going back into assets in about a month.

Notable:

  • US Payrolls improved to 171k in Oct vs 125k exp and 114k prev, although it was revised up 34k. Unemployment increased to 7.9% as exp vs 7.8% prev
  • Average Hourly earnings growth declined to 1.6% YoY vs 1.7% exp and 1.8% prev. Hours Worked also declined to 34.4 vs 34.5 exp and prev
  • Canada increased just 1.8k vs 10k exp and 52.1k prev. Unemployment was stable at 7.4% as exp, as the participation rate was stable.
  • Italy Mfg PMI stable at 45.5 as exp vs 45.7 prev
  • The Congressional Research Service published a report showing no correlation between top tax rates and economic growth, but was forced to withdraw it after pressure from Senate Republicans. Note, however, that the author contributes money to the Democratic campaign. Main Points:
  1. The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth.

  2. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution

Upcoming Data:

  • Mon: China HSBC Services PMI, UK Services PMI, ISM Non-Mfg PMI, RBA
  • Tues: Italy Services PMI, US Election
  • Wed: Swiss CPI, Japan Current Account, Australia Employment, Japan Eco Watchers Survey
  • Thu: BoE, ECB, US Jobless Claims, China CPI
  • Fri: China IP, Retail Sales, US UMichigan Consumer Confidence
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