Market Outlook | December 28, 2009

“The main purpose of the stock market is to make fools of as many men as possible.” - Bernard Baruch

Weekly Results:

S&P 500 1,126.48 [+2.77%], NASDAQ 2,285.69 [+4.85%], Russell 2000 634.07 [+4.94%], and Emerging Markets 40.94 [+1.11%]

For the most part, few things are expected by those reflecting and observing current conditions. Improving economic conditions will be closely watched. Continuation of this year’s rally presents a greater curiosity for investors. Finally, government policy and market stability can provide comfort for additional market participation.

When dissecting one’s global view, it’s easy to get distracted and worrisome about issues that are highlighted on front pages of newspapers. However, simplifying investment methods might be easier than predicating headline results. In simple terms, figuring out themes is a key, initial step. Most of 2009 has taught us about the power of sustainable trends, despite a period where the focus of investors turned towards short-term trading in the prior year. Secondly, isolating factors that lead to surprises can be worthwhile, since markets tend to react that way. Again, if bullishness in Gold and Emerging Markets reaches unanimous levels, perhaps one should ask few questions, especially since both areas have witnessed a decade-long upside run. Similarly, rising inflation and lower rate policy are convenient and popular ideas. At times, popularity can be a misleading forecasting tool. For the year ahead, themes of interest include food and agriculture, cheaply valued media, telecommunication, biotech, and infrastructure. The faith of commercial real estate and stabilization in banks are showing weakness. However, for those seeking gutsy plays, finding bargains in beaten up financials may present exceptional risk and reward.

Meanwhile, active shareholders will project and evaluate their desire to get involved. Gauging sentiment is very tricky, but a good read in consensus can determine the key elements of surprise. On one hand, scoreboard observers can feel compelled to step in based on 2009 returns. On the other hand, the scars of crisis from 2008 may continue the skepticism and force some to stay cautious. Nonetheless, the cycle established in March of 2008 is prevailing at marking a new cycle. The market feel is biased towards the upside, especially with S&P 500 hovering above 1100. Interestingly, volatility remains low for now, and an election year can provide for an eventful autumn.

Positive market returns are expected by most pundits. These are mostly the outperformance in emerging markets and reiteration of the Federal Reserve policy of lower rates. However, in the 12 months ahead, one must wonder about the potential of an unexpected series of events. It’s the old adage that you can expect one or two “marvelous” entry points per year to capture a rewarding outcome. Again, the timing is delicate, and this opportunity knocks in a subtle matter. For the journey ahead, performance chasing is a normal behavior. Additionally, it has paid well to bet heavy at key inflection points.

Recently, the US 10 Year Treasury Yield has risen significantly, along with the US Dollar. This begs the question of early hints for rising rates, which is assumed to be a shift in risk appetite. At the same time, rising Yields suggest cheaper bonds, which can be attractive for foreign purchasers in pending auctions. Strength in the Dollar showcases a speculative reaction of improving economic data points. In upcoming weeks, these trends will be tested.

Happy New Year!


Article Quotes:

“But, although, China's breakneck expansion looks likely to continue for some time yet, there are concerns over the country's path. Some economists compare China's position – with the authorities combining low interest rates with high government investment and rising asset prices – to Japan in the late-1980s, warning that it, too, could fall victim to a crash. Some worry about the country's demography. The one-child policy means that in the coming years its population is likely to age extremely quickly, increasing the pressure on its public finances and dampening its long-term growth prospects.” (Telegraph, December 26, 2009)


“The percentage of prime borrowers, whose loans were 60 or more days past due, doubled from the July-to-September period a year earlier. And more than half of all homeowners, whose payments had been lowered through modification plans, defaulted again. The report, which covers about 34 million loans or about 65% of all U.S. mortgages, underscores the obstacles to strengthening the nation's rickety housing market. Stubborn unemployment is making it tough for millions of homeowners to pay their debts. In addition, many people, whose monthly installments have been lowered, still are unable to keep up with their payments. Of the mortgages serviced by national banks and thrifts, only 87.2% were current and performing. It was the sixth straight quarter that the quality of those home loan portfolios had slipped.” (LA Times, December 22, 2009)

Levels:

S&P 500 [1126.48] is finishing the year on a strong note, while making annual highs. Buyer interest is at 1095, which showcases a bullish bias.

Crude [$78.05] is building a positive momentum at $72 and $76. After a late October peak, the commodity is showing stabilization by short-term recovery.

Gold [$1085] remains in a consolidation mode. A break below 1100 and 50-day moving average signals some technical concern as to the continuation of a multi-year run. However, $1050 can present an attractive entry point for bulls, which is worth watching in the early part of 2010.

DXY– US Dollar Index [77.81] had an explosive one-month rally that’s due for a pause. A very early indicator of a trend shift, but long-term downtrend, has yet to show meaningful reversal.

US 10 Year Treasury Yields [3.79%], like the Dollar, had a strong recovery in the past few weeks. In the fall, Yields bottomed around 3.20% twice before reaching current levels.


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