November 3, 2014

BOJ stimulus news saves the market

To me, Bank of Japan's (BOJ) surprise announcement of more stimulus Friday smacks of desperation.

There are several reasons to believe the market's "risk on" mentality is being exaggerated today.

1. The BOJ move may fail in the face of failing Abenomics and flailing economic-growth prospects.

2. The BOJ move may fail in the face of a deepening and entrenched deflationary psychology.

3. The BOJ move -- causing an erosion in the value of the Japanese yen -- may fail in the face of weakening growth in its major export markets, China and Europe.

It is my view that, were it not for the BOJ announcement and allocation shift, the markets would have lost ground today. After all:

1. September retail sales in Germany disappointed.

2. September U.S. income and spending numbers were weaker than expectations.

3. Most important, employment costs (announced Friday) accelerated to a rise of 2.2%, as compared with only 2% growth in the previous quarter and under 2% in the first. Moreover, the month-over-month change in employment costs came to a rise of 0.7%, the swiftest climb in over six years.

We are experiencing another global liquidity high but, arguably, on fundamentals the market is overpriced now.