Checking Back in with Taleb

Good Evening: U.S. stocks today recovered almost half the losses they suffered yesterday. Credit for today’s light volume comeback goes to the combined effects of a recovery in Asian equities (China’s CSI 300 was up 1%), some analyst upgrades in the tech sector, and earnings beats by some retailers. What the future holds for U.S. equities is anyone’s guess, but many will be looking to the charts for clues. If the averages really are set to correct, then the S&P 500 should run into stiff resistance between 990 and 1000 during the next day or two. A close above 1000 will probably reset the clock on any near term correction, but should the widely watched benchmark continue to close below the 4 digit mark, then a test of the 950 level is likely imminent. A break of 950 will set up tests of support between 900 and 875. Below those levels will put the cat once more among the pigeons, but it’s too soon to speculate about a resumption of the primary bear market. As for reasons why such a possibility is not out of the question, perhaps it will help to check back with Nassim Taleb to get his latest views.

Since it was angst about Chinese equities and the implied lower demand for commodities by that nation that helped pressure stocks during the previous two sessions, an overnight rally in China helped stabilize stock prices around the world. Accordingly, our index futures were already in positive territory this morning when Home Depot and Target reported better than expected earnings (Saks reported a narrower than expected loss, though TJX disappointed). These retailers recorded punk top line sales, but both managed to cut costs and manage inventories well enough in Q2 to outstrip analyst expectations. Analysts were also responsible for a pop in technology stocks, with the most noteworthy upgrade coming for the entire mobile handset sector. Thus inspired, the NASDAQ then led the indexes higher for most of Tuesday’s trading, though it was interesting to see Google sit out the festivities. One day does not make a trend, but a leader like GOOG should not be a wallflower.

Stocks opened to the upside and were 0.5% higher during the first hour of trading. The economic data seemed to have little impact on today’s events, with PPI and housing starts coming in well below expectations. Perhaps there was some confusion as to whether falling producer prices were either good news or bad at this point in the cycle, and the same could also be said about the housing data (see below). While overall starts fell short of the mark (and remain far, far below peak levels), the glass half full contingent pointed to rising single family starts for the 5th consecutive month as unalloyed good news. Though I’m glad folks are gainfully employed while erecting these structures, the last thing an oversupplied housing market needs is more homes.

If any of the foregoing bothered equity investors, they didn’t show it. Stocks rallied 1% to 1.5% by mid day before settling in to a dull and narrow range. The averages went out near their highs, with the Dow (+0.9%) lagging, while the 1.7% gain in the Dow Transports led the way. Treasurys also played their “counter-trend Tuesday” role in giving up about half of yesterday’s gains. Yields rose between 2 and 5 bps. The dollar followed suit in falling after two days of gains, while commodities made it a clean sweep by rising. A 3.7% rise in crude oil set the pace as the CRB index rose 1% today.

Nassim N. Taleb needs no introductions to regular readers of these commentaries. I’ve read both his books, and recounted at length some of the interesting views he espoused at Barry Ritholtz’s conference back in June. I missed his appearance on CNBC last week, but a video and a capsulated version of his comments from that interview can be found below. I will let Mr. Taleb speak for himself, though I will say that sound-bite T.V. is not the best format for his powerful intellect. He is at his best when he writes about a topic, or when he is allowed to discuss it at length. Being wedged in between commercial breaks on Squawk Box does him little justice.

Though he revisits many of the topics he discussed back in June (like swapping debt for equity to aid the deleveraging process), he raised a few eyebrows when the subject turned to Fed Chairman Bernanke. Mr. Taleb is stoutly opposed to Bernanke’s reappointment, saying Bernanke, Geithner, and Summers have been part of the problem — so why reward them? When pressed for just who he would support to replace Mr. Bernanke, Taleb offered up Paul Volcker. I would love to see Volcker back at the helm, but he’s been marginalized inside the administration by Mr. Summers. Besides, like my favorite choice for the job (Jim Grant), Mr. Volcker would probably turn the offer down. Given how our politicians and the voters who elect them have little stomach for making hard choices, the job is almost impossible to do well these days. Any warm body can print money; the hard part is dealing with the consequences.

— Jack McHugh

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