Market Outlook | February 16, 2010

“When people have lost their money, they strike out unthinkingly, like a wounded snake, at whoever is most prominent in the line of vision.” - Theodore Roosevelt (US President 1901-1909)

Market Feel:

Investors await sensitive changes in regulatory and interest rate policies. These issues are highly discussed, hard to assess, and clearly too difficult to predict. At this point, a recovering business environment appears to be in the best interest of all parties involved, especially with upcoming US elections this fall. Establishing new laws in market related matters are challenging the minds and fortitude of policymakers. Meanwhile, financial markets are in some neural state of confusion. At least, a much needed breather is taking place. Yet growing anxiousness is highlighted by credit concerns in Europe and policymakers bubble-like behaviors in China. That said, these worries in Europe are not overly surprising but are mostly an extension of the credit crisis that was triggered in mid-2007 and new occurrence.

Liquid and Relatively Attractive:

Depreciation of the US Dollar in the past few years should not be confused with the currency’s global prominence. The US Dollar remains liquid in international trades and pegged to the currencies of 89 countries. Importantly, the Dollar did not lose significant market share to the Euro, as commonly stated in previous years. In fact, foreign reserves held by foreign governments exceeded $7 trillion in 2008, and, overall, reserve portfolios have remained stable since 2000 (Federal Reserve of New York, January 2010).

Digesting the points above may partially explain a major theme of a stronger Dollar so far this year. This appreciation can be mostly attributed to risk aversion, or a simple recovery, from deeply oversold levels. Nonetheless, investors, who placed their bets on Dollar recovery, would’ve enjoyed early fruitful returns. In terms of liquidity, just like its currency, the US offers a relatively advanced, well tested, and attractive capital markets. Again, it’s important not to confuse, the lingering economic and deficit concerns along with the stability of financial system. On that note, with commodities declining, euro-zone weakening, and emerging markets cooling, one has to wonder about the opportunities presented from these results. Perhaps, these issues can make US stocks and Dollar attractive from a longer-term perspective. Since November 25, 2009, DXY (US Dollar Index) is up over 8%, as Gold prices dropped nearly 11% in the same timeframe. This is early to call: however, a shift might take place in overall sentiment and a behavior change from the previous decade.

Short-week Ahead:

Optimists will look for entry points here, given the oversold conditions. In other words, odds for a near-term turnaround are slightly favorable. Industry groups, such as solar panel, biotech, and communications are poised for market leadership. This presents relative attractiveness to “idea driven” sectors, as financials attempt to reform business conducts and profit taking in commodities. Finally, if global markets stop moving in tandem, specific sections will become instrumental. At this stage of the cycle, finding distinguished companies with growth potential is not easily discoverable, but the higher reward potential can entice the interest of participants.

Article Quotes:

“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837, the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since.” (Business Insider, February 10, 2010)

“Since the second world war, businesses have increasingly used retained earnings, third-party insurance and pension funds to promise future benefits to employees. To fund these, large pools of financial assets have accumulated in collective savings institutions run by self-selected investment professionals with little experience of private business and non-traded assets. This paved the way for private equity managers, who plunged into debt up to the hilt and earned egregious personal rewards. Their model relies on short-term financial engineering and ‘exit strategies’, not sustainable profits.” (Financial Times, February 14, 2010)

Levels:

S&P 500 [1075.51] remains strong, especially around 1060 where buyers showed interest in the past few days.

Crude [$74.13] prices are trading between its 50- and 200-day moving averages. Next key level is around levels last seen in mid-December.

Gold [1082] is attempting to bottom, as recovery attempts will be tested. Near-term traders are closely watching if prices stay above 1080.

DXY– US Dollar Index [79.98] is approaching new multi-month highs and hinting a turnaround. Investors eagerly await confirmation on recent moves and the sustainability of a recovering Dollar.

US 10 Year Treasury Yields [3.69%] is narrowly hovering between 3.60% and 3.70% in recent weeks.



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