Brian Pretti's Blog

Over the last six decades, US corporate profits as a percentage of GDP have consistently bottomed in the 4.5-5.5% range in each inevitable recession. There are no exceptions – nine out of nine. We now stand near 11%. Will the next recession cycle, whenever it arrives, be different?

A few weeks back I penned a discussion regarding a number of noticeable technical divergences we’re seeing the in current market environment. How these resolve will be important over the short term.

Personally, I think even attempting to call a top on this character of an equity market is an exercise in the self-infliction of pain for now. It has been a long time since I’ve seen this type of speculation, but it’s been never since I’ve seen this type of monetary largesse.

It is interesting to note that the FOMC commentary with the no taper decision began by citing “tightening financial conditions”. At the time, the stock market was near an all-time high, certainly not a “tight” financial condition.

In one sense, the Fed created an ice age for US interest rates by lowering the Fed Funds rate essentially to zero and by printing money to buy US Treasury and mortgage backed securities, putting further downward pressure on longer term interest rates.

As in blackjack, when the bulk of the face cards have been played, the odds of “winning” with successive hands decreases. Ed Thorp would suggest we reduce position (bet) sizing. Of course one way to bring more players and new capital to the table is to increase the payout rate.

In Tibet, the Sherpa’s call it Chomolungma. In China it is referred to as Zhumulangma. In Nepal it is sometimes called Sagarmatha. You know it as Mount Everest. For many years I’ve been enamored of recantations of Everest summit attempts.

For Three Stooges aficionados (this is where Gen X’ers and Gen Y’s can tune out if they so choose), you’ll remember that every time the Stooges physically bunched up a bit too much in one of their routines, Moe Howard would yell out, “spread out!”

To suggest we have encountered heightened volatility in the bond market as of late is quite the understatement. Although Treasury yields had been increasing in front of the mid-June Bernanke speech, they have continued to run to the upside post the commentary without a whole lot of retracement up to this point.

You may have noticed that recently released NYSE margin debt data showed us a month over month decline. Taken as a singular data point, pretty darn meaningless. But set against the context of QE III and the current 2009 equity market cycle to date, its worthy of at least recognition and discussion.