Posted By: Matthias Paul Kuhlmey
Being a regular business traveler, the concept of flying still is amazing. This statement is based on two considerations: 1) one is actually flying, and 2) we give up control and most often enjoy the “ride,” as suggested by pilots. The perception of pilots has not changed since the inception of flight – they are heroic in nature and control something that very few of us understand conceptually or practically. We trust the 100% completion of their job, not worrying about weather conditions or equipment. We trust that experience and the careful monitoring of complex instruments will guide us safely to our destination. In fact, we would not accept anything less – for example, an announcement prior to take-off, suggesting only a 99% chance of a successful flight, would leave passengers rather unsettled.
There is another, entirely different, perspective on the concept of flight: birds flying. Gliding, presumably enjoying aerodynamics, “closed eyes,” feeling the “ride,” without worry about consequences, air traffic, air traffic controls, etc. It will be good at the end of the day – and realistically how many times have we heard about flying accidents of birds? With the exception of the concept literally colliding with the real world, as the story about the emergency landing of U.S. Airways flight 1549 on the Hudson River on January 15, 2009 suggests – the engines of the plane failed after a collision with a flock of birds.
The FED, according to the minutes of the meeting on December 14, 2011, continues to be very concerned about restrained growth related to three main aspects of the economy: “(1) the depressed housing market, (2) employer’s continued reluctance to add to payrolls, and (3) ongoing efforts by some households and businesses to delever.” According to an article in today’s Financial Times (http://www.ft.com/cms/s/0/9a510cea-1e86-11e0-87d2-00144feab49a.html#ixzz1Avaxd2rt), estimates of homes with loans in delinquency or that are at some stage of foreclosure are as high as 8 million. Equally worrisome is negative equity, where the mortgage exceeds the value of the home. An estimated 5.5 million U.S. households are tied to mortgages that are at least 20% higher than the current home value. These ideas and the fact that consumption has been a major driver of U.S. growth over the past decade (and longer) are not encouraging signs.
To “complicate” things further, the Investment Company Institute (ICI) reported yesterday that domestic equity funds had estimated outflows of USD 4.23 billion for the week ending January 5, 2011. Flow estimates are derived from data covering more than 95 percent of industry assets. The technical picture of the market is also not very encouraging. According to Strategas, market sentiment appears quite extended – both the AAII and Investors Intelligence bullish surveys are near 5-year highs. Additionally, there are signs of complacency in the options market – equity put/call ratios are running very low and the VIX is very low at 17. In addition, historically, February has not been a good month for equities.
We have to do what we were trained to do: read our instruments, keep our eyes open, monitor the skies, and achieve a 100% success rate to constantly re-earn our clients trust – anything less would be a shame. Expect a bumpy ride to come to these markets, sooner rather than later. The captain has turned on the seat-belt sign.
