Saturday, August 4, 2012

3 Sigma Week

This has been no ordinary couple of weeks...we had dollar swing from a monthly buy to monthly sell. And both signals first generated failures and then massive swing on the other side to trap last move riders. Dollar in all has moved about >5% in  last couple of weeks, that's a massive violence for worlds reserve currency.
Italian indices swung about 10% in two days, DAX & CAC about 6%, and you can keep going on. Unprecedented level of confusion reigns market, no body believes we are going higher, but there is no continued selling to take it lower either. One has to understand that markets are all about "flow" and not about "stock".
Now imagine a situation where Pension Funds and corporate PF's realize that all the fixed income securities they roll will yield much lesser (2 years, 5 years, 10 years, 30 years...u name it) , almost a drop of >50% in yields ---> drop in income for any fixed benefit plan. Now these guys are the basic seeder of capital because they represent savings of private sector. Big promises and under-achieving (under provisioning for PF liabilities) has been widely accepted corporate norms.

Imagine a trickle starts to flow towards high risk  equities and high risk bonds..WHY? I dont know, may be div yield , valuation, growth potential, "demographic dividend" (don't snigger:) ) or may be capital appreciation potential is higher in under-supplied asset class(equities & corp bonds) than in oversupplied asset class (govt. bonds getting rolled over) from simple stock and flow perspective.
Chart above is of Emerging Market Bond Index, strongly trending chart.

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