The Speculator's Arithmetic

Sometimes to make sense of the stock market, it’s helpful to consider how powerful various forces are in terms of their influence.  Ranking these forces, both on an absolute basis and against each other, helps me get my bearings and sort out the noise.

We all played this game as kids, sometimes for hours as on end…

Kid 1:  “If I had a power, it would be super-strength so I could take on everybody.”

Kid 2:  “Yeah, but I would have the power of flight so I would be able to fly over your head and you couldn’t even catch me!”

Kid 3:  “Fine, you guys, but I would have invisibility, so I could sneak past both of you…and also watch ladies get dressed.”

You get the idea…and yes, Kid 3 is probably all grown up and doing time somewhere.  We’ve learned quite a bit in the last few weeks about which forces or powers are trumping the others and moving the markets.  In my estimation, the ranking goes something like this, from least to most powerful:

1.  Regulatory Risk:  When the Goldman fraud charges surfaced, the market used it as an excuse to sell off.  Semis, oils, retailers, industrials – all came down hard on that Friday morning.  This force and type of news flow is weak, however, as two trading days later, the market regained its footing, even though Goldman and the rest of the big banks haven’t.

2.  Jobs:  Remember what the latest jobless or continuing claims stat was?  Me neither, although as recently as the 1st quarter we were still obsessing over them.  Either we’ve come to grips with the jobless recovery or we’re willing to allow the jobs indicators to lag a bit longer.  Oh, and the sandwich board guy got hired, as symbolic as anything I can think of, though obviously not very empirical.

3.  European Debt Follies:  This one went from being a non-event to a genuine cause for consternation in the last few days.  Even though the ratings agencies are simply making the downgrade announcements that we all knew were inevitable, US stock market players are now becoming aware of the contagion possibility.

4.  Consumers:  This one’s interesting – evidence is pouring in that the consumer is sick and tired of being sick and tired and the market loves it.  Home improvement retailers, Harley-Davidson ($HOG), airlines, and even specialty retailers are all telling us on their conference calls that people are buying stuff again.  The railroads aren’t lying en masse about the increasing traffic flow of goods from the Atlantic to the Pacific.  While the bears are claiming that we are defaulting on mortgages just so we can hit the mall, we know this is a nonsensical explanation.

5.  Earnings:  Look, Akamai ($AKAM) isn’t blowing away numbers and staging 20% one-day rallies because they’re cost cutting.  Rather, they are in the middle of a massive growth segment – enabling companies to stream content to consumers around the world at lightning fast speeds.    Corporate profits are picking up and this, above all other forces, is influencing the market’s direction and the breadth of this rally – the internals just cannot be hated on.

The speculator’s arithmetic then, in terms of the forces at work on this tape, goes as follows:

Earnings + Consumers > Euro Debt +Jobs +Regulatory Risk

So, as data and information comes out on any of these items, I am factoring it in based on that ranking of possible influence on my holdings.

Not quite child’s play, but better than flailing about at every piece of intel thrown at me.

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