Time to Buy? Yes, But Not To Hold

The market is looking up this morning, with investors poised to scoop up stocks that were pummeled in last week’s downdraft. Britain's FTSE 100 index was 1.7 percent higher at 4,905.16 and Germany's DAX was up 1.6 percent at 5,909.57. France's CAC-40 gained 2.2 percent to 3,405.98. Asian markets closed higher, too as buyers stepped in to take advantage of the lower valuations.
But while the prospects for a short term bounce look good, fundamentals are another matter altogether. True, the Institute for Supply Management (ISM) reported on manufacturing activity for the month of June Thursday. The Purchasing Managers Index, at 56.2%, marked the 11th month of expansion, and the reading implies economic expansion of 14 straight months. But that just about marks the end of the good news. While anything in excess of 50% signifies an expansion in the economy, the print was nonetheless considerably weaker than May’s 59.7%. And the pre-holiday data showed unequivocal signs of a sharp slowdown in housing: U.S. Census Bureau report of a 30% decline in new house sales in May was a shocker for many, (although others had anticipated the worst and who sold off home builders' stocks over the past two months by 20% to 50% the CME lumber contract (LB) by nearly 43% in the same time period). As for employment, while the unemployment rate was reported decreased, to 9.5% in June, from 9.7% in May, nonfarm payrolls noted a net loss of 125K jobs, as temporary census workers completed their work and were let go. True, employment is a lagging indicator, but the simple fact is that it is hard to kick start an economy that kind of unemployment level. Reflecting that, consumer sentiment fell through the floor in June, with the Conference Board's Index falling nearly 10 points to 52.9. Also weighing the market down were reports of a slowdown in motor vehicle sales, from 8.9 million in May to 8.4 million in June, a 1.4% decline in Factory Orders and a surge in Weekly Jobless Claims to over 470,000.
Meanwhile the Fed continues to print money as if it was confetti – a prescription for recovery that even arch-Keynesians in the Socialist Republic of Great Britain have been obliged to recant. And while the Federal Reserve may be temporarily losing the race to the bottom with the European Central Bank, it can’t be too much longer before the majority of investors wise up to the idea that the only fair price for any fiat currency is parity. There is no “safe haven” in a currency whose central bank is on a “quantitative easing” binge that should be familiar territory to any self-respecting Banana Republic.
The bottom line: by all means play the bounce, but only for the very short term, and be prepared to head for the hills at the first sign of trouble. Longer term, i.e. over the next couple of years, the balance of opportunities are to the short side in both US and European equities.

[Disclosure: Systematic Strategies LLC is a high frequency hedge fund is market neutral, and holds no positions overnight].