Oil shocks and war - This could be different

UBS provides an interesting chart on the impact of war on oil prices. As expected, there will be a positive price shock, but it usually returns to normal after 4-5 months. Call this a fear factor. There will be some hoarding at the beginning of the war to protect inventories. Once the worst is over and the disruption is viewed as manageable, the price increase will be reversed. Yet, you cannot extrapolate from this evidence that the current situation will be normal. First, there is no reason to expect a return to normalcy. We only know that after the fact. Second, a disruption ot the Middle East is different from a war in other regions. If infrastructure is lost due to the destruction of refining capacity, there cannot be a quick adjustment. Oil can be pumped, but without refining, a "soft target" there will not be any easy way to create the end product needed by consumers. Capital expenditure for refining is costly and long-term, unlike the sinking of a tanker or the closing of a strait. The focus for any oil shock should be centered on what is happening to infrastructure. 

 

Retail investors love hard to value stiocks

 

How do retail investors behave? I wish I knew. It seems that they have an increasing impact on some markets, but where is the focus? A paper titled "The Retail Habitat" seeks to answer this question and finds that retail investors prefer to trade hard-to-value stocks. Stocks with a lot of retail trading have more intangible capital, longer-duration cash flows, and are more likely to be mispriced. So why do retail investors focus on the harder-to-value names? The authors do not fully explore this critical issue. They just identify the stocks that seem to have more retail focus. I would suggets that that retail traders focus on big bets, the lottery tickets. The lottery ticket names, of course, will be stocks that can possibly produce large gains.

Asset allocation is always about the stock-bond correlation

The primary asset allocation decision is based on the relationship between stocks and bonds. If the correlation is negative, there is a significant benefit to holding bonds. If the correlation is rising and positive, the bond diversification benefit is limited, and it is time to consider other alternatives. The trend is not favorable to bonds. The long-term trend is higher, though the recent trend has returned to negative territory.

Meaaurement uncertainty is real

 

Macro investors have to deal with measurement error within government data. This is the second year in which we have seen major revisions to labor data. Last year, a major seasonal adjustment affected employment numbers. This year, there has been a significant change due to benchmark revisions. The two charts below provide evidence of what has happened to the labor data. The first chart shows that nonfarm payrolls have been revised down by approximately 1 million jobs. In the second chart, you can see the monthly change.

This new data provides further evidence of the K-shaped economy. Some of the revisions are based on demographics, so they do not translate into higher unemployment, but they do create a more confusing picture of the macroeconomic environment, which will impact bond returns in particular. 

I use macro signals to improve my trend- and price-based signals, but when macro data are noisier, the value added by macro analysis diminishes.