Looking for the Next Catalysts

As the
markets are digesting their most recent gains off of the April lows, we are
looking at potential catalysts – some obvious, some less so – which will allow
the markets to break out of their recent trading ranges.

A few items
come to mind. While some are impossible to time – a Hedge fund blow up,
terrorist activity, Avian flu outbreak outside of Asia, significant Iraqi
developments – others are potentially more “game-able.” We’ll
concentrate on those catalysts where we at least have a fair chance of
potentially forecasting market-moving outcomes:

· Non-Farm
Payrolls
: The most significant
economic report of the week, if not month. While most investors took solace in
April’s NFP Report, we are in a distinct minority who view April data as an
outlier. This is primarily due to the BLS’ Birth/Death adjustment. April 2004
saw a similarly disproportionate impact. As such, a weaker than expected
release may force investors to reconsider their expectations of an ongoing Goldilocks
economy
; A sell off may test resolve and help form the next substantial
bottom;

· Oil
relief?
: Last year, we noted
that our upside target for Oil was $57-59; After reaching that level, Oil
pulled back towards $47, where support was plentiful. We now expect a move back to the old highs – and beyond – towards
$60-62; We do not believe that rising stocks of sour crude with its lower
gasoline yields and environmental issues will provide much in the way of relief
to Summer drivers;

· Housing
bubble bursting
: We remain in
the distinct minority in believing that housing is not a bubble – at least, not
yet, anyway, by a technical definition of what a bubble actually is. That
doesn’t mean a bubble can’t or won’t form, it simply suggests that this is not
an immediate danger to the market anytime soon. (More on this issue tomorrow).

· Microsoft
EU problem
: While the DoJ has let Microsoft off the hook, their
European equivalent never seems to let an opportunity go by to administer a spanking
to Gates & Co. Given the company’s weighting in SPX, Dow and NDX, a
severe punishment, while a low probability event, could have a significant
impact;

· Euro
Weakness
: The French “Non” vote will pressure the Euro versus the
Dollar. Given that the weak dollar hasn’t done diddley for US exports, we are
clueless as to the impact that this development will have. Color us confused at
best.

Our
expectations remain for a tradable low in June.

We advise using pullbacks
to s l o w l y build long positions in higher Beta sectors:
Tech, Energy, Semis.

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UPDATE: May 31, 2005 9:31pm
On the way home tonite, I got to thinking about the next Fed meeting at the end of June . . .  Any signal from the Central Bank that the tightening cycle is about to pause potentially launches a moonshot.   
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Discussions found on the web:
  1. stats commented on May 31

    i have a similar view that the april nfp was perhaps a bit off. but i think the use of birth/deaths of business which is not a seasonally adjusted number but it comparing it to the seasonally adjusted number headline number is wrong. this is apples being compared to watermelons, since the bls birth/death number is comparable only to the non seasonally adjusted payrolls number which happens to be in the >1.6mill jobs, not the seaonally adjusted +200k number.

  2. doldrums commented on May 31

    i have a scenario for you
    what about the summer doldrums which will hit us, once we pass friday? europe will go on a long vacation and hope the no votes will be a bad memory. the jobs number will be strong to confound all the critics, the stock market will be in chop mode, volatility will die?

  3. joe commented on May 31

    what does higher beta sector mean?

  4. spencer commented on May 31

    Tech & semis are high beta — but energy is low beta.
    Right?

    Joe — beta is a measure of how well a stock responds to a market move. If the market moves 10% — up or down — a high beta stock will move more then 10% and a low beta stock will move less then 10%. If you have to be in the market, in a bull market you want to be high beta stocks and in a bear market you want to be in low beta stocks.

  5. Barry Ritholtz commented on May 31

    To answer stats — note that the monthly gains are determined by taking the differences of the total number of people employed ona monthly basis;

    The March April (prelim) data was 133.019 million employed in March; April was 133.293 million for a difference of 274k (See this for more details: http://www.bls.gov/news.release/empsit.nr0.htm)

    The point is we are dealing with very large numbers, and while 250k may not sound like a lot, it has a disproportionate impact; See April 2004 for a similar adjustment

  6. Mark commented on May 31

    The summer months have in fact been historically dull, with the Dow being up 8 of the last 15 years, and on average the index has lost a little over 1% in the June through August period

    Mark
    BlogginWallStreet.com
    MarketSpectator.com

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