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Retrospective Numbers
09-Jul-2006

It's almost the fundamental truth of economics that markets provide better signals than historical numbers as to the likely balance between supply and demand, prices and activity.

Yet, over and over again one sees a day like Friday, where on the basis of one economic number --  a seasonally adjusted retrospective inflation number for April --  the idea that has the stock market in its grip is that interest runs rampant.  At the same time, the long bond closes at 106.10, a 15-day high, within a third of a point of its April month-end close,  up half a point on the day. Oil is down a buck at $74.09, and the Goldman July commodities index futures are down 1.5 % at 485.

There are two things one can do on a day like this for stock market investors and traders -- throw up the hands in disgust, or take out a pencil and envelope and calculate what happens after such days . Is there something that the stock market knows about inflation that somehow the bond market which invariably sells at a yield almost 100% 1-to-1 with the future expected inflation indexes is missing? Or is there an opportunity here to take account of a mismatch. The dilemma calls into the fray, the difference between a qualitative and quantitative analysis, the importance of ever changing cycles, the interactions between markets, and markets versus history as a benchmark among other important areas .

P.S. A hand study of the most similar of 15 most similar observations going back eight years shows the effect on S&P, bonds and crude one week later as up 1%, 0.5% and 1% respectively, with variability about two times the mean.

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