PIIGS Are Not Pigs

Feb. 02, 2011 1:24 AM ETDIA, SPY, QQQ, IEF6 Comments
Michael Ashton profile picture
Michael Ashton

Illiquid conditions can also cause melt-ups. I didn’t anticipate that would happen, because frankly the conditions for a melt-up in stocks are really not in place: energy prices high, geopolitical uncertainty and volatility, and valuation levels that are already elevated.

But melt-up we did. Stocks soared despite signs that populist unrest has spread to Jordan (where Prime Minister Rifai resigned) and Syria (where opposition groups called for protests this weekend). “Buy on the sound of cannons”?!? The ISM Manufacturing number was stronger-than-expected, but not particularly surprising considering that Chicago had also been quite robust Monday.

The Wall Street Journal had warned (“Cost Inflation Puts a Wrench Into the Works“) that the “Prices Paid” subindex could be the “sting in [the] tail” of the ISM report, and the Prices Paid did indeed rise to 81.5, a post-2008 high. However, it is a poorly-kept secret that “Prices Paid” moves in close tandem with energy prices, especially for big moves, (see Chart, ) so this is anything but a shock.

ISM Prices Index tracks oil price changes pretty well.

ISM, while encouraging, is certainly not a sufficient reason by itself for equities to launch x% higher – although I ought also admit that this market hasn’t needed much reason at all to do so for the last few months. As I mentioned Monday, it is simply incorrect to report, as the Bloomberg headline did, “Manufacturing in U.S. Grows at Fastest Pace Since ’04 as Recovery Quickens.” The level of ISM has little to do with the absolute rate of growth. It has everything to do with the relative rate of growth. Things were down so long, even sideways would look like up, and a modest improvement feels great to a purchasing manager. Earnings surprises in the latest quarter were at a lower-than-usual rate – that does not

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Michael Ashton profile picture
Michael Ashton has been a recognized leader in developing the U.S. inflation derivatives market. He traded the first interbank U.S. CPI swaps in 2003 and, as a dealer, was a primary liquidity-provider in that market for two large banks. He represented about one-third of interbank swaps volume during his tenures at those firms. He invented and was the sole market-maker for the CME CPI Futures contract. He has written and spoken extensively about the use of inflation-indexed products for hedging real exposures, and has written more broadly in a commentary format about the rates markets and macroeconomy. Mr. Ashton is currently the managing principal at Enduring Investments LLC. His comments on this site and others are not posted in that role, and no opinions of his should be construed to be recommendations of or to reflect the views of his employer. He recently published "What's Wrong With Money? The Biggest Bubble of All."

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