Market Outlook | December 21, 2009

“What you risk reveals what you value.” - Jeanette Winterson

For all the outcry of financial negligence of the past few years, the key risk might have shifted towards political and legal mismanagement. That’s an issue resurfacing in policymaking as more banks fail and confidence restoration remains a sensitive topic. As the year and decade near a close, a new wave of worries and rejuvenated thoughts await. The stock market peak in 2000 marked a decade long change that materialized and that was led by natural resources, regulatory restructuring, and the usual boom and bust cycles. Similar feelings were revisited again in mid 2007, which ignited the credit downturn. Interestingly, investor hunger for new themes and multi-year cycles should not be ignored. Yet, sorting out these trends is a challenge these days, given low volume and sideway markets.

That said, some are eagerly waiting on legislative results as the main trigger for idea generation. Another school of thought is to diligently seek innovative areas for potential winners within a 5 to 10 year timeframe. In some ways, both approaches provide decent odds of producing outperformers assuming a normal environment. Now, psychologically, some investors are less tolerant of higher risk bets as a result of an ongoing rollercoaster. However, markets find a way to rebound, and that lesson was revisited earlier this spring.

The past few weeks have witnessed three key points: bubble talks from emerging market leaders, legislative discussions, and improving economic conditions. These topics are most likely in the minds of money and business managers, especially for the first quarter. On a relative basis, weak credit conditions in Europe and overvalued possibilities in Asia combine to create a favorable demand for profitable, US companies. In Europe, results of high risks taken this decade are materializing. In turn, this is causing financial fallouts and policy worries, as seen in Spain and Greece. In China, asset bubbles are being discussed, but substantive facts have yet to influence market behavior. One thing is clear: the low interest rate environment continues to fuel risky assets, especially capital inflow into Asia. For instance, Asian economies witnessed an inflow of $241 billion from March to September of 2009 (Nomura Holdings).

From a global investor’s mindset, corporate bonds and stocks have offered fruitful outcomes, since March of 2009. On that note, the low rate environment has contributed to that trend, and reversal is not quite clear. In fact, recently, the Federal Reserve reaffirmed that policy stance. Therefore, these inter-connected relationships are heavily dependent on a low interest rate policy. Recently, US Dollar recovery and a steady rise in Treasury Yields are temporary hints for a changing macroeconomic environment. A sober view suggests that self-control and patience will be critical, despite urges to make interest rate speculation.

Currently Offered:

Basic fundamentals indicate further consolidation, resulting in increases in merger and acquisition opportunities, especially following a year that saw a 28% decline in a number of deals. This set up indicates that small improvements in credit conditions can spur further M&A, especially in Healthcare and Technology. Again, identifying leaders in this transitional period can offer few, actionable entry points. Stocks in large cap technology, such as IBM, Apple, and Google, present relatively healthy earnings. Similarly, Oracles strong earnings pointed out positive developments in technology, especially a rise in enterprise spending. In the same way, Cable and Telecom companies are worth a closer look for long-term participants.


Happy Holidays!




Article Quotes:

• "’Soybean prices rose to a two-week high on increasing demand by Chinese importers and U.S. processors. U.S. exporters sold 290,000 metric tons to China for delivery before Sept. 1,’ the Department of Agriculture said... Cumulative U.S. sales to all customers from Sept. 1 to Dec. 3 are up 56 percent from a year earlier... 'Demand is very strong, and exports to China are phenomenal,' said Dale Durchholz, the senior market analyst at AgriVisor LLC... 'Processors are running near 100% of capacity to produce animal feed for overseas buyers,’ he said." (Bloomberg, December 15, 2009)

• “At some point, domestic Chinese overcapacity, still worsening as utilization rates stagnate and capital spending continues, risks beginning to drive down world prices for export goods. That would lead to factory closures overseas in countries unable to compete, followed by unemployment there and social unrest - precisely the phenomena that Beijing is seeking to avoid at home. Central economists in China recognize the overcapacity dangers but even as they named various industrial sectors that will be excluded from further capital investment and construction, they do not control all the spending. That is because local and provincial governments have incentives to promote such projects without reference to national policy goals, indeed to prevent implementation of national policies unfriendly to their regions.” ( Asian Times, December 18, 2009)


Levels:

S&P 500 [1102.47] is trading within a 20-day average range. Again, a defined sideway pattern between 1090 and1115.

Crude [$73.36] commodities are seeing buying interest around $72 after several weeks of a downturn. Next key level stands near $76.

Gold [$1104] is retracing from annual highs back to below a 50-day moving average of $1107. This simply states a natural retracement, following an explosive rally. It is setting up for a short-term recovery near $1100. Investors will closely watch buyer interest around that range to determine the strength of Gold’s uptrend.

DXY– US Dollar Index [77.75] has had nearly a 5% appreciation since the start of December. A key trend reversal and bottoming process are developing. However, further confirmation is required into 2010.

US 10 Year Treasury Yields [3.53%] is struggling to hold above $3.50 for a significant period. However, the gap between 10 and 2 year yields continues to widen, suggesting a strong economic recovery.

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