Friday, January 7, 2011

Segmented Economic Recovery, Asset Value Inflation; Sluggish Job Growth

Equity stock market begins with a good start for the year. Market is consolidating at current level for the sizable gain in the last quarter. Trading volume increases as investors return from holiday.

It is officially announced that the recession has ended in last year. Those investors waiting for the double dip has already returned to the market in October last year providing strong support for the market. Commodities also see a significant gain since investors are chasing after various kind of assets with the exception of real estate. The latter was once very popular among household investors who switched to the money and bond market after the financial crisis but recently turned to the equity stock market.

Economy is back to normal as people are back to normal life after the shock. However the job market does not recover because corporations use the opportunity for downsizing to improve efficiency as well as profitability. Although consumer demand for goods and services rises back to previous level, the demand for labour force does not rise accordingly due to various factors such as office and factory automation, off-shore outsourcing, etc. This creates a structural loophole in the job market. The financial crisis serves as a trigger to hasten the change and it is a path of no return.

It is the objective of Federal Reserve to implement "Quantitative Easing" to hold up asset value so that the wealth effect will encourage consumers to spend to support the economy. It works as planned except that job growth is disproportional to economic activity growth. This problem may not be adequately solved by fiscal measures but rather government policy.

"It's a Terrible Recovery": Dan Greenhaus Explains Why The Economy Feels So Bad One more factoid from Greenhaus' report that helps explain why most Americans don't "feel" like we're in a recovery (much less an expansion): The top 20% of U.S. earners account for about 40% of all consumer spending and own about 85% of the U.S. equity market.

Investing Dying as Computer Trading, ETFs & Dark Pools Proliferate "The capital raising stock market of the past hundred years has morphed in just the last 10 years into a casino," said Sal Arnuk of Themis Trading and a market infrastructure expert who advised the SEC after last year's so-called Flash Crash. "Who is doing the fundamental work analyzing stocks? In the end, we've greatly increased systemic risk."

How to beat the market? Only stay a day at a time It's one of the truisms of financial planning: trying to perfectly time the market is a fool's errand. For long-term gains, the advice goes, you should buy index funds and hold them indefinitely. It helped that the stock market hasn't been kind to most investors over the past 11 years.

Factory outlook bright after 17 months of growth Manufacturing activity has expanded in every month since the recession ended a year and a half ago. The big difference now is that the growth is being driven by higher sales and more confident consumers-- not just businesses rebuilding the stockpiles that they slashed during the recession. "You're in a situation where a virtuous cycle is beginning to materialize," said Eric Green, chief economist at TD Securities.

The Rally Isn't Over But Most of the Money Has Been Made, Says Greenhaus History suggests most of the gains made after a bear market bottom come quickly, he says, meaning those who missed the big rally from the March 2009 lows have missed the bulk of the move. "There's a pretty clear relationship between getting in early and achieving most of the gains," Greenhaus tells Aaron in this interview. "You can still achieve gains... but the rate at which those gains accumulate and compound pales in comparison to the initial spike."


As market is consolidating, buy and hold strategy may not be most effective. Short term market outlook is optimistic because market participants have rising risk appetite as a result of flooding capital liquidity and greed from wealth effect. However investors do not have strong confidence in the market rally and impatient for profit taking. Therefore there is sometimes wild oscillation in market movement. Hedge funds are finding opportunities by exploiting the herding behaviour of individual investors who finally returned to the equity stock market after the financial crisis.

There are opportunities in the equity stock market as participants are returning will optimisim. The speculative trading portfolio will follow closely the market cycle and trades will be executed on speculation of market participants activities.

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