While the Apple (AAPL) World Wide Developers Conference was a well-orchestrated and quite amusing performance, it was as intended, a method by which Apple could present its new operating system to developers. To the extent that new whiz bang consumer products were not introduced, it may have disappointed some market watchers, but in the final analysis had little impact on the stock. In classic Apple style, management kept to their script and will unveil new products as we get closer to the fall.
ISM Error Results in Upward Revision
Overall, the markets traded in a tight range, using the day to consolidate recent gains. I expect that it will continue to churn today as well. Tomorrow we get a preview of Friday’s labor report when Automatic Data Processing (ADP) provides its own employment report. Today’s market moving news will come from the release of May automobile sales and factory orders. Yesterday the Institute for Supply Management or ISM had to revise its previously reported data because it used the wrong seasonal adjustment factor, which ISM blamed on software error. Software error? Somebody screwed up. The upward revision in those figures turned the market from early losses to gains but at the closing bell the markets were mixed with little change.
The lesson we should take away, something that investors and economists already know but unfortunately most traders and bears are ignorant to, is to ignore single economic data points. The reasons are manifold – one data point does not make a trend; one data point is more subject to revisions; and, one data point cannot be looked at in isolation as it needs to be put into the greater context of multiple variables.
Carry Trade Explained
Yesterday, I discussed the absolute differential in government bond yields for countries with large established economies. Not only does that differential attract buyers to US Government Treasury issues but it also sets up a popular hedge fund strategy, the carry trade. The carry trade, using my data from yesterday would have a hedge fund selling short Japanese JGBs at 0.57% and buying US Treasuries for a 2.47% yield over the same 10-year period. In doing so, the hedge fund will earn 1.90% annually less the cost of reversing in the short JGBs, a minor cost. Given the ability to lever government securities at high levels, the return on capital is much greater than 1.90%.
While the market appears to be skewed slightly to the downside at the open, we could be in for a repeat of Monday’s session – a lower open and then a reversal higher resulting in a flattish sort of day. It is days like these where you get a good opportunity to take a hard look at your portfolio to make some adjustments for the coming weeks and months.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL — although positions can change at any time.
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