ARE THERE OTHER POLLYS IN THE MARKETS?

Earlier in the week I used the word “Pollyannaish” to describe my 2016 economic outlook, an outlook predicated upon the initial release of fourth quarter GDP. This outlook is perhaps in stark contrast to the outlook that is becoming the primary market narrative which is bad “stuff” is about to happen globally.
Morgan Stanly published a report yesterday stating if one eliminates oil from the economic and earning landscape, the economy is actually performing “well”. Specifically, industrial production is no longer contracting, neither are earnings. In fact Morgan Stanly wrote ex oil, profits are up 5% in the US and 4% in Europe.
The Bank also stated the US consumer is “healthy” with after tax income adjusted for inflation is rising at 3.5%, the greatest pace since 2006, a point that I made Monday.
Late yesterday afternoon a FOMC voting member made similar remarks.
As written above, there may be a massive disconnect in the narrative versus reality.
What can change this perception? A stronger than expected labor report, as been the case since September? However, if the jobs report is too strong will this again alter the monetary time table thus sending equities into a further tail spin?
As noted an infinite number of times, equity trading is dominated by high frequency trading…aka computer or algorithmic trading. Virtually all trading on the NYSE is done by computers. Eighty five percent of total trading is done by computers, trading based upon cross correlations and the like.
What I find frightening, according to the SEC 96% of all orders entered are never executed thus creating an “environment that may be prone to manipulation,” quoting a SEC official.
If the jobs data is too strong will there be a selloff under the simple premise higher potential interest rates lower the value of projected cashflows. But, will not cashflows increase given greater employment?
Speaking of cross correlations, equities plunged yesterday as crude continued to its decline. There was no data or headlines acting as a catalyst for yesterday’s drop.
I ask however, is not the implosion in energy infrastructure spending ultimately bullish for the energy sector given that supplies will ultimately decrease? Over $365 billion in spending cuts outside of OPEC has occurred in the last 15 months, the greatest amount on record.
It is highly unlikely a similar reduction in capital expenditures will occur again in 2016. As noted above, these massive reductions are a major reason for the decline in industrial production and the negative economic narrative. If these spending cuts are not repeated and if everything else remains constant, will growth not accelerate?
Maybe such analysis is meaningless in today’s age of computer based trading where the immediate is extrapolated into forever and to hell with any type of investment thesis or rationale.
Last night the foreign markets were down. London was down 0.34%, Paris up 0.02% and Frankfurt down 0.68%. China was down 0.38%Japan down 3.15%, and Hang Sang down 2.34%.
The Dow should open moderately higher ahead of a labor report, earnings from more than two dozen S & P 500 companies and a rebound in oil. As noted several times the correlation between oil and the markets is the greatest since at least 2011. Bloomberg reports that 80% of companies have exceeded estimates. The 10-year is off 9/32 to yield 1.87%.