Yachtsman Market Update

Wednesday, March 26, 2008

Traders are positioning in front of the all important GDP number tomorrow morning as the growth and inflation bogies take center stage. The weak Durable Goods report, coupled with the lowest Consumer Confidence numbers in years yesterday, give rise to the ongoing concerns regarding “stagflation” (no growth and rising inflation) that caused the recessionary environment that choked off stock market performance in the 1970’s.

The consensus calls for 0.6% economic growth as measured by the GDP. The real time concern is a negative number would create the first half of the two consecutive quarters  of negative GDP growth required for the classic definition of an economic recession. As the stock market volume remains painfully low, no big bets are being made in front of the critical growth number as traders balance out their sheets with small buys and sells.

Friday brings the second half of the stagflation equation with the Fed’s favorite inflation read via the PCE Deflator. While the Fed’s implicit inflation target of 2% was exceeded last month, a substantial increase above the consensus 2.1% this month would add to the concern that the Fed may pause their rate cutting program designed to stimulate a slowing economy at the expense of fighting inflation. This is the ongoing balancing act that faces the Bernanke Fed and investors as well.

The decline in oil supply reserves ignited a rally in crude which once again caused a rally in the oil related sectors including the drillers, oil service and even the refiners. I’m also expecting a surprise tomorrow morning in natural gas and have positioned by adding long exposure for a more bullish response to natural gas prices. The crude-nat. gas spread has widened again as nat. gas prices have pulled back below $10. With crude now returning to $105+ any draw down in natural gas supplies should reignite its price action. Also keep in mind that the agriculture and infrastructure sectors have moved in delayed time in response to rising crude. A tradable rally in these sectors could be expected as long as the growth and inflation readings do not overtake the conversation latter in the week. 

As I said at the outset to this week, the data comes fast and furious through Friday and any indication of slower than unexpected economic growth or rising infationary pressure will dominate the trading action and drive already historically low sentiment readings even lower. At some point these sentiment readings will work in our long-side favor to ignite a sustainable rally and induce massive rounds of short-covering. But these basic fundamental economic data points will have to support that a more bullish scenario before traders will even consider acting aggressively upon this contraian sentiment indicator.

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