Market Outlook | June 28, 2010

“The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” - Ronald Reagan (1911 - 2004)

For the most part, optimism and confidence have stayed mostly quiet. Yet, evidence of a convincing improvement in the economic trends is not easy to spot, given weak housing data. Naturally, the lack of confirmation leads to frustration for some, especially for those seeking for attractive buy points. Meanwhile, partakers are gearing up for end of month readjustments, which featured key index rebalancing and reassessment on the impact of banking policies. From a scoreboard watcher’s perspective, broad US indexes remain down for the year (S&P 500 -3.4%), and sentiment is mostly negative, which coincides with a heavy spring/early summer sell-off. For the most part, positive catalysts are desperately needed to reconfirm a beginning of a new uptrend. In fact, the lingering effects of bubble discussions might contribute to less than desired willingness to buy above 1100 on the S&P 500 Index.

For awhile, resource-based countries, sectors, and companies have benefited and led a sustainable uptrend last decade. In this current transition mode, commodities are not as cheap as before and confidence is constrained. In addition, China-related indexes topped in 2007 and have failed to recover to new highs and showcase a waning momentum. Similarly, the Brazilian stock market has underperformed US markets, especially since December 2009. These points are showcased by strength in Gold, relative strength in US Dollar, and further buying of US treasuries. Putting all of that together confirms the defensive posture of money managers and increasing difficulty of finding differentiated and trending ideas. Plus, the low interest rate environment has not fully translated to credit expansion as desired and promised by some policymakers. Interestingly, Financials and Consumer related areas seem to struggle to attract capital. Now, a contrarian view would suggest these interest sensitive themes offer shorter-term opportunities and higher risk for speculative traders.


In terms of idea selection, certainly, there is gravitation towards more liquid and large cap companies. However, few ideas resurface in select themes for longer-term investors. For example, security and protection services company ID (L-1 Identity Solutions) presents a favorable growth rate in a niche technology group. Conversely, momentum driven stocks in basic materials, such as BLL (Ball Corp), run the risk of sharp sell-offs. In this case, the stock has grown sevenfold and is a bit pricey, compared to other alternatives. In both cases, the challenge is for managers to diligently seek quality ideas, while grasping timely big picture themes.
Levels:

S&P 500 [1076.76] is establishing a narrow range between 1060 and 1100. Investors are less reluctant to find reasons above or below these ranges.

Crude [$78.86] prices, in the past seven months, have stabilized and bounced back around $70. However, buying interest above $80 a barrel seems less enthusiastic. Thus, that raises questions about overall fundamental strength.

Gold [$1254] is very close to yearly highs, as the multi-month strength continues to take hold. At this point, the selling pressure has yet to materialize.

DXY– US Dollar Index [85.31] is consolidating after a strong, multi-month run. Index has retraced closer to its 50-day moving average and appears like a healthy pullback.

US 10 Year Treasury Yields [3.10%] is flirting near recent lows as the downtrend remains intact. Yields closed near annual lows, which can set up a sharp near-term turnaround.

Article Quotes:

“Another reason why debt matters has to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.” (Economist, June 24 2010)

“Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense skepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. ‘We're heading towards a double-dip recession,’ said Chris Whalen, a former Fed official and now head of Institutional Risk Analytics. ‘The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognize that money velocity has slowed, and we are going into deflation. The only default option left is to crank up the printing presses again.’" (Telegraph, June 24, 2010)


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