Market Thoughts | December 7, 2009

“It is the province of knowledge to speak, and it is the privilege of wisdom to listen.” Oliver Wendell Holmes (1809 - 1894)

The Current Landscape:

To argue against an existing trend can be a dangerous game. However, there are moments that require investors to delicately pick their spots in making directional and theme based bets. Importantly, it helps to take note of subtle hints.

With few trading days left this year, satisfied market participants appear to gladly throw in the towel. Temporarily, financial markets are providing some clues of pending unrest. It’s not surprising for those that have awaited a much needed breather. At the same time, remaining skeptical or being contrarian might not be the best way to approach portfolio management. Therefore, we look to macroeconomic indicators for a better market feel. As a start, Friday’s action featured various headline materials, highlighted by improving economic data. In addition, decline in Gold, rise in US Dollar, and spike in long-term rates catch the attention of analysts that are seeking evidence for trend reversal. So far this year, claiming a trend shift sounds like a broken record, and some are tuning out this possibility. Nevertheless, inflection points occur slowly after series of events and false alarms.

Golden Moments:

Simply put, Gold is in a well defined uptrend. This is visible from a cycle view, and this is supported by multi-year, fundamental strength. Yet recently, escalated Gold price levels were hitting the radar of close observers as the odds for a downturn increased. As witnessed last Friday, the commodity desperately required a rude awakening to calm buyer demand frenzy. As market behaviors teach us, it takes a while for a story to convince additional global buyers. This fall, arguments for higher Gold prices became more convincing and slightly less doubted. The past few days, Gold buyers were seeking a hedge or at least taking profits, which seemed feasible in the past week. To sharply rise from $1000 to $1212 in less than 50 days served as an impressive move that required caution.

For professionals, it seemed only prudent to scale back, especially in the wake of Dubai’s overdue glitch. In other words, Gold price behavior reflects and coincides with optimism in emerging markets. Of course, for investors, it was tough to neglect the strength of the the commodity after a break above $1000 that enabled buyers to declare yet another milestone. Perhaps, every run needs to surpass a psychological level to define a victory. For some commodity optimists, it was a rewarding call that produced outperforming returns and a chance to graciously exit or temporarily hedge.

A Point of View:

With the S&P up 22% year to date, it can be interrupted as a good year. Another view points out that the S&P decade performance is disappointing. Maybe, this explains why some investors lost their desire to invest solely in stocks, following the technology bubble of 2000. Looking back, we can recognize a decade that witnessed various changes in market dynamics. Clearly, increasing risk appetite has favored commodities, emerging markets, and fixed income. Keeping this in mind, the magnitude of the next correction will be watched attentively for long and short-term implications.


Article Quotes:

• “In the most recent April-to-November period, Fed credit outstanding grew by 6.8%. This is well above the median for the 1989 through 2009 time span (with 1999 and 2008 set at zero) of 2.5%. Nevertheless, this relatively high rate of growth in the Fed's balance sheet in the 2009 interval is hardly unprecedented. In fact, in four prior years - 1990, 1992, 1993 and 2001 - the April-to-November rate of growth in the Fed's balance sheet exceeded the 2009 growth of 6.8%. And in 1991, the Fed's balance sheet grew by 6.6%, close to the 2009 growth rate.” (Paul Kasriel – December 3, 2009)

• "Initial public offerings in emerging nations are returning about 15 times more than IPOs in developed countries even as companies from China to Brazil flood the market with more shares than ever. Listings... helped raise $39 billion in emerging markets during the three months ending... That outstrips the amount sold in IPOs from 23 industrialized nations by $21.3 billion, the biggest gap since at least 2000." (Bloomberg – November 30, 2009)

Levels:

S&P 500 [1105] Multi-week trading range forms between 1090-1110. Technicals suggest minor pullbacks near 1077, which are the 50 day moving average.

Crude [$75.47] Attempting to stay above $75 after failing to hold around $80. At this stage, further correction ahead follows a strong recovery since May 2009.

Gold [$1190] Early peak at $1212, following a sharp rally. Next, key levels stand at $1150, and it’s nearly 9% removed from its 50 day moving average.

DXY– US Dollar Index [75.81] Showcasing signals of a bottom throughout November. Sharp rally from annual lows suggest early stability and a pause from ongoing downtrend, setting up for an explosive move, given the extremely oversold ranges.

US 10 Year Treasury Yields [3.47%] Once again, for the fourth time this year, rates have held above 3.20%. In this recent move, yields briefly touched 3.15% and snapped back, suggesting a strong market demand.


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