Thursday, July 14, 2005

S&P allures?

It was less than 2 weeks back that the markets were fretting about slowing growth in the world, and bond yields had gone below 3.95%. I was then thinking about going into high yield funds. Now, the mood seems upbeat - definitely since the London blasts!! Bond yields are back above 4.1%, and no one expects Fed to pause next time. Most of the companies that have reported numbers have beaten estimates - looks like both Apple and AMD will open up tomorrow after their results after the close today..

Amongst all the madness, there are finally just two drivers of a stock : Earnings revisions and price momentum. That is, the stock should beat consensus EPS numbers consistenly, or it should have wind behind its back. If both happen, we have a winner. If none happen, the stock won't work over the long term. If either one happens, a decision needs to be made.. Does this apply to the broader stock market?

What is the market telling us currently? Is it dangerously complacent, or we are living in one of those times when historical precedents lose their wisdom. Like after 1971, when US went off the gold standard and money supply increased in the system. Now we might be having a similar situation, with easier cross-border capital flows.

Vega Asset Management lost roughly $700 million in June - because the traders there bet on rising US treasury yields. Seems like everyone is being challenged mentally.

Does oil hold as much influence as it did in 1970's? The current rally in oil prices in not OPEC driven, it is market driven. So high oil prices are a result of economic growth in the world - if expectations of growth increase, oil prices would rise, which would temper those growth projections, which should cause oil prices to fall down. But oil has settled at higher and higher prices, which would indicate that markets are able to absorb higher oil prices now, while maintaining the growth..

Inflation numbers are out tomorrow. They should tell something...

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