Sunday, May 26, 2013

"My Cousin Vinny", U.S. Jobs, Recent Market Moves and More

On May 14, hedge fund manager David Tepper (Appaloosa Management) presented a positive market view on CNBC and referenced a line from the 1992 movie “My Cousin Vinny” when he emphasized “the evidence is overwhelming” that the U.S. economy is improving and reduced stimulus by the U.S. Federal Reserve should be good news for investors. His comments triggered a sharp positive move in equity markets.

Last Wednesday, Federal Reserve Chairman Ben Bernanke’s testimony to Congress included “the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work.” 

Bernanke’s comments triggered a strong move up the U.S. equity market(under the assumption that stimulus efforts will continue) followed by a quick reversal and decline for the day. Several sources cited that this type of price move was similar to March 24, 2000 (dotcom bubble) and October 11, 2007 (credit bubble) where the S&P 500 hit new highs then declined by more than 1%. James Mackintosh (Financial Times) suggested, “we probably do not need to be braced for another crash just yet. True, equities are expensive compared with long-term profits... Still, a real crash is hard to imagine when central banks are in effect underwriting markets....Barring any further bad news, a 5-10 % fall looks like a short-term buying opportunity.” Also on Wednesday, Japan’s Nikkei 225 equity index, which had risen about 50 % since the beginning of 2013, dropped 7.3% for the day
  • Regarding Tepper’s comments – he is widely followed and his comments have moved markets in the past. Investors should note that similar to other top-tier money managers, if markets move against him, he would likely take defensive action. 
  • Regarding Bernanke’s comments – the slow pace of job market improvement, along with limited Congressional action to address the problem, is increasingly a concern of both Main Street (where the pain is) and Wall Street (where the money is).
  • Regarding market moves in the U.S., Japan and elsewhere – the strong positive moves in global equities have surprised many market participants. As summer vacation season approaches, investors may be more interested in protecting profits, rather than pursuing new investment ideas.

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