Five Things You Need to Know: Trade Deficit Narrows on Food Inflation and Consumer Cutbacks; Risk Appetites Increase on Stock, Bond Selloff; You're Going the Wrong Way!; Nasdaq-100 Reversal; The Belmont Stakes: A Story About Risk
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Trade Deficit Narrows on Food Inflation and Consumer Cutbacks
Hey, this sounds like good news! The trade deficit narrowed more than expected in April, shrinking 6.2% to $58.5 billion from March's revised $62.39 billion the Commerce Department reported.
- Adjusted for changes in prices the U.S. trade deficit dropped in April to $54.9 billion, the lowest since September 2004, from $59.6 billion, Bloomberg said.
- The Commerce Department reported that imports fell 3.6 billion.
- Consumer goods imports were down 3.8%.
- There was also a 0.6 billion reduction in capital equipment imports.
- Meanwhile, exports rose to a record, Bloomberg noted, to $129.5 billion.
- Exports were largely led by a $724 million increase in food, feed and beverages.
- So, to sum up, consumers cutting back and purchasing fewer goods combined with food inflation to produce a narrower trade deficit and record exports. Sweet.
Click to Enlarge
2. Risk Appetites Increase on Stock, Bond Selloff
Apparently, despite the stock and bond selloff yesterday risk appetites actually increased.
- An article on Bloomberg about the carry trade noted that the U.S. stock and bond selloff yesterday initially pressured the New Zealand and Australian currencies, but both later surged against the yen as investors flocked back to the carry trade.
- New Zealand's dollar, known as the kiwi, bought 91.46 yen at 3:08 p.m. in Wellington, from as low as 90.53 and 91.66 yen in Asia yesterday, Bloomberg said.
- The kiwi also rebounded against the U.S. dollar, buying 75.42 U.S. cents, from 74.84 earlier and 75.53 cents yesterday.
- The Australian dollar traded at 102.30 yen, from 102.69 yen late in Asia yesterday, Bloomberg said, and increased to 84.36 U.S. cents, from as low as 83.88 cents and 84.64 at the Asian close yesterday.
- The two currencies have led gains versus the yen in the past 12 months, making them a favorite target of the carry trade where investors borrow yen and invest in the higher yielding currencies.
- Joanne Masters, currency strategist at Macquarie Bank Ltd. in Sydney, told Bloomberg, "It's a reassertion of risk appetite despite the fact Asian equities are down. Currency markets are shrugging off the wobbles in equity markets and reductions in risk appetite.''
3. You're Going the Wrong Way!
"While offering most investors the best odds of long-term gains, traditional index mutual-funds are increasingly under siege, warned a panel of industry veterans," according to a story this morning on Marketwatch.
- John Bogle, founder of the Vanguard Group, Steven Schoenfeld, chief investment officer of global quantitative management at Northern Trust Corp. and Bob Wade, a vice president at Wilshire Associates, each gave their take on the state of index investing at a panel discussion yesterday.
- The picture wasn't pretty.
- "We're at an inflection point," Schoenfeld said. "We're moving towards a trend of a broader, deeper investment in global markets."
- He cited a rise in actively managed products designed to mimic many "hedge fund strategies."
- John Bogle, the former Vanguard chairman, added that while index mutual-funds had been around for several years, a turning point took hold of retail markets in the late 1990s as retail investors started noticeably moving into index funds.
- Here's the thing, though. As investors rushed to embrace indexing strategies in the late 1990s to chase the large cap boom, the shift in outperformance to small caps was just beginning.
- Consequently, it proved to be just the right move at just the wrong time.
- Between 1995 and 2000, just as investors were flocking to index funds with a natural bent toward large cap stocks due to their capitalization-weighted composition, the S&P 500 gained 219%, compared to 131% for the S&P 500 Equal-Weighted Index and a "paltry" 101% for the Russell 2000.
- From 2000 to present the S&P 500 gained just 1.46%, compared to a return of 77% for the S&P 500 Equal-Weighted Index and 64% for the Russell 2000.
- Now, as investors are apparently rushing into more actively managed strategies the tide in performance may again be shifting.
- Over the past three months the S&P 500 has gained 6.2%, compared to 5.7% for the S&P 500 Equal-Weighted Index and 4.3% for the Russell 2000.
"How do they know which way we're going?"
4. Nasdaq-100 Reversal
We'll be brief. An indicator we use to judge whether supply or demand is in control reversed down with yesterday's action.
- The Nasdaq-100 Bullish Percent, a point and figure indicator that we use to tell us whether supply or demand is in control, reversed from positive to negative with yesterday's action in the markets.
- The chart below, courtesy of StockCharts.com, shows this indicator now in a column of Os, which means risk has increased for Nasdaq-100 stocks, and that supply is in control of that area of the market.
- For more on what this indicator means and how to read point and figure charts, check out these articles:
Point & Figure Basics Part I
Point & Figure Basics Part II
Point & Figure Basics Part III
Point & Figure Basics Part IV
5. The Belmont Stakes: A Story About Risk
With the Belmont Stakes set for tomorrow, I was reminded of something that happened a few years ago when Smarty Jones arrived in New York having won the Kentucky Derby and Preakness to pursue a potential Triple Crown in the Belmont. "That's his Triple Crown." "His Triple Crown? But he hasn't WON the Triple Crown yet." "But you said!" "Said what?" "But I don't want him to have a funny hat, I want him to have a Triple Crown hat," he whispered. I cursed myself for bursting his Triple Crown balloon. Just then his expression suddenly shifted from dejection to excitement. "Can I still vote on him to win?"
The week before the race, on a lazy Sunday afternoon my then-eight-year-old son proudly presented me with a book he had just written. "Look," he said, "I wrote a book about Smarty Jones with pictures and everything!" Sure enough, he had put together a 15-page book recounting the story of Smarty Jones, from his birth in Pennsylvania, to his winning run in the Kentucky Derby, to his record-setting margin of victory in the Preakness, to… "Wait a minute," I said. "What's with this picture you drew on the back page of Smarty Jones with that crown on his head?"
"You said he did!"
"No, I said he MIGHT win the Triple Crown, not that he WON the Triple Crown."
He looked down at the floor, half-heartedly kicked at it with his shoe and said quietly, "Oh."
"Hey look, it's not the end of the world," I said, trying to console him. "So you got a little ahead of yourself. Tell you what, if he doesn't win the Triple Crown we can change the crown you drew to a funny hat or something."
"Vote on him?"
"Yeah, go to the track and vote money for him to win."
"You mean bet," I said.
"We can, but we won't make very much money if he wins," I explained. "It really won't be worth it."
"How much will we get?"
"Well, if we bet $2 we might get back $2 and 10 cents."
"I'm afraid so."
"What if we do the vote - I mean the bet - with the other horses?"
"Well if Smarty wins, even the trifecta likely won't pay enough to make the bet worthwhile because everybody else will have bet money on it too."
He seemed to turn over the notion of the trifecta in his head for quite a long time, and I imagined that like me he was sorting through the combinations, trying to figure out how in the world to make a 2-5 favorite pay anything, really, how to turn a molehill into a mountain.
After a while he asked me, "Dad, do you hope Smarty wins?"
I thought about it for a moment.
"I do with my heart, but not with my money," I said.
He looked puzzled. "What do you mean?"
"I mean I hope Smarty wins, but I won't bet on him to win."
"I hope he wins too," he said. Unlike me, he really meant it.
2007 Belmont Stakes Winner: Imawildandcrazyguy
"That's his Triple Crown."
"His Triple Crown? But he hasn't WON the Triple Crown yet."
"But you said!"
"But I don't want him to have a funny hat, I want him to have a Triple Crown hat," he whispered. I cursed myself for bursting his Triple Crown balloon. Just then his expression suddenly shifted from dejection to excitement. "Can I still vote on him to win?"
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