Weekly Result:
S&P 500 1,091.38 -.19%
DJIA 10,318.16 +.46%
NASDAQ 2,146.04 -1.0%
Russell 2000 584.68 -.27%
MSCI Emerging Markets 40.77 -.19%
Setting the stage:
Numbers circling around investors heads include the S&P 500 index ability to hold above 1100 and the possibility of above 20% year-to-date returns. For some, Thanksgiving marks the beginning of the holiday season and the end of significant risk taking. So far, risky assets have been encouraged globally as a result of central bank decisions. Now, managing the current uptrend is not only an issue of portfolio management but an area relating to foreign policy. Recently, regulators of emerging markets continue to see asset appreciation as a potential bubble. The market environment since March has been rewarding for participating investors. That said, policymakers are a bit confused and not sure how to respond to recent rise in stocks and Gold prices. Yet again, the Federal Reserve’s message of low rates is a powerful influence. Clearly, a shift where saving money in banks does not present desired returns. A quick glance at money market rates tells this story and helps explain the growing issuance of corporate bonds.
In looking ahead, any changes in the Feds tone or alteration from current language set the stage for a pivotal turning point. Maybe then can a much anticipated trend reversal drive down markets with a correction greater than 10%. At this point, that’s pure speculation as it has yet to take place. Last week, the Federal Reserve acknowledged some of the concerning economic factors such as commercial property. Now, perhaps this weakness is the justification to an ongoing low rate policy. Observers are left to scrutinize the motivation behind this policy and gauge some guesses to future consequence. A delicate matter that requires a resolution in the early part of 2010. On the other hand, lack of confidence in the Federal Reserve is growing as congress attempts to redefine roles of a central bank.
Revisiting Bubble Talk
It was over two years ago, where asset bubble became more pronounced. Then and now, the three major drivers of asset bubbles include Credit, Crude and China. Clearly, credit was first to crack and led to the financial crisis of 2008. China and Crude related areas witnessed an inevitable corrections but snapped back on market stability. Today, long-term holders are having a flashback to 2007 both in enjoying rewards and fearing elevation. Ironically, nervousness increases when ones ideas materialize at a faster pace than expected. However, the same logic does not apply in bottoms such as March of 2009. Slowly, the S&P 500 is climbing back but would need to rally over 45 % from current levels to reach all-time highs of October 11, 2007. Uniform rising and sinking is an intriguing theme that continues to linger. In other words, there are various financial instruments but mostly comes down to making directional bets. In the past two years, around the holiday season investors were facing a similar challenge. Again, Gold and S&P appear to move in tandem while the Dollar and rates move lower. Generally, a money manager was forced to get the broad directional call versus identifying a differentiated fundamental view.
An interesting period where the importance of cycles, remind us of the commodity uptrend has taken place many years. Over a 10 year run in Gold has produced a return of 350% and ninth consecutive year of positive annual returns. Clearly, the past and present justify the thought process that motivate many to buy more metals. Keeping that in mind, the Federal Reserve hinted of reaching stability by closely watching the US dollar. That said, few bears argue the markets is overvalued by simply comparing 1982 vs. today’s P/E ratio. Others base their views based on political leadership, interest rates, dollar policy , and various unsolved international relations. When all said and done, we’re adjusting to a new era.
Happy Thanksgiving !
Article Quotes:
“During the month of October, the Federal Government spent $2.30 for every dollar of revenue it took in. Given the fact that this is the fifth time this year that the ratio has exceeded two, one might think that this type of deficit spending is commonplace. However, going back to 1970, October was only the 13th month that the ratio ever exceeded two. Prior to 2008, the ratio exceeded two on average once every 6.5 years. In the last two years, the ratio has exceeded two on average once every three months.” (Bespoke, November 18, 2009)
"China is among the emerging markets facing risks of property and commodity market bubbles, central bank adviser Fan Gang said, joining officials from the region in expressing concern about surging asset prices. 'The real risk is really asset bubbles,' Fan, who heads the National Institute of Economic Research, said... A 'Chinese asset bubble would be something very dangerous, that would cause the overheating' elsewhere as well, he said. Low interest rates sustained by the Federal Reserve, a weakening dollar and capital inflows to emerging markets have added to the dangers, Fan said. (Bloomberg, November 18, 2009)
Levels:
S&P 500 [1091.39] Fractionally lower relative to last week. Holding above 1100 can set the mindset and mark a key resistance level.
Crude [$76.72] Pausing after a peak in mid October. The commodity is trading within a narrow range between 76-80. This explains a 20 day moving average of $78.53. Committed buyers are staying patient but any fuzzy news flow is setting up to cause a sensitive reaction. Too early to call tops at this stage
Gold [$1140] Making new intra-day and weekly highs. A continuation of an explosive autumn run. At this stage, the risk is building for latecomers but this trend is a powerful force. In other words, sharp sell-offs have resulted in additional buyers.
DXY– US Dollar Index [75.61] Attempting to bottom but a clear downtrend in place. Failed to hold 76 and bottom pickers are a little edgy. More of a bottoming confirmation is needed to attract believers of a trend reversal.
US 10 Year Treasury Yields [3.35%] Developing downtrend after peaking at 4% in earlier this June. Among, chartists 3.20% is the next most watched level. A break below that can spark discussions of rates below 3%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
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