Saturday, September 11, 2010

Capital Flow Reversing From Bond To Stock Equity Market

The stock equity market maintains an uptrend for two weeks since recent bottom. There is no exceptional good news behind the rally. However, it is observed that the bond market is inversely correlated to stock equity market recently. And it appears that the bond yield may have reached the bottom. Investors seeking safety in bond market may be hesitating at this point. Risk appetite of liquidity has increased.

It is interesting to note that the wealth effect of bond and stock equity appreciation are different. Bond value appreciation does not generate wealth among the participants since the underlying collateral remains unchanged in value. On the contrary, stock equity market is not a zero sum game because wealth is created or destroyed with appreciation or depreciation of the collateral.

Greenspan, on Meet the Press on August 1st, said, "As I've always believed, we underestimate the impact of stock prices on economic activity. Asset prices are having a profoundly important effect. What created the extent of the contraction globally was the loss of $37 trillion in market value. It collapsed the value of collateral in the system and it disabled finance. We've come back a little more than halfway, and it's had a very positive effect. I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about."

Short term stock trading is very speculative and it is inappropriate to approach from the perspective of financial investment. It is cautiously optimistic on stock equity market movement with long term optimistic outlook. Currently the speculative trading portfolio is neutral on leveraged ETF holdings and bullish on stock holdings. Given the market volatility in recent months, priority is to preserve capital and less aggressive in holding positions for potential gains.

No comments:

Post a Comment