Market Outlook | September 13, 2010

“The paradox of reality is that no image is as compelling as the one which exists only in the mind's eye.” - Shana Alexander

Risk aversion in early days of September should not serve as a shock to most. Clearly, in this jittery period, this early fall is bound to see various mixed feelings when it comes to confidence. That’s been the general market feel at a quick glance. Those chasing strong performance appear stuck, given the limited, relative opportunities. In other words, this might explain the rush to own Gold and instruments linked to fixed income. A Bloomberg article puts the herding mentality in perspective: “Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000..." Basically, recent outperformance of “safer assets” demonstrates the lack of willingness to wait for hopeful returns and less enthusiasm in making bets in innovation ideas. Instead, the attention has increasingly shifted towards Federal Reserve polices and other legislative implications. Importantly, the low interest rate environment is a dominant theme and increased borrowing by US and European companies. That said, the current climate presents unique features, and veterans in financial services will have to make adjustments to adapt. And that’s yet another challenge in this puzzle.

In the past few weeks, the collective investor mindset signals complacency and less eagerness to speculate. The S&P 500 Index is slowly climbing back to erase negative returns for 2010, and strength in the US Dollar significantly evaporated this summer. Both indicators point out the neutral-like market reaction, but they also warn of potential surprises ahead. Meanwhile, some money managers will take this time to wait and seek value at a cheaper cost. Clearly, seasonal changes and mid-term elections are one of the few things that create some hopes for sentiment shift. Meanwhile, for lawmakers, there are plenty of issues to address, from tax implication to further reforms in financial regulations. The suspense mostly resides in the government’s ability to solve issues tied to debt management. For investors, forecasting various possibilities for the ever-so-growing rules and regulations can be a daunting task. The points above add some color to the decreasing market activity and less upbeat feel for risk-taking.

Food related themes showcase some bright spots. In general, a neutral to down market has not stopped some US restaurants. For example, PF Chang’s (PFCB) is up 234% since 2008, at the lowest point of markets. Similarly, Panera Bread (PNRA) is up 189% since January 2008, and it is one of the few companies that kept a solid uptrend since the broad market crisis. Interestingly, the success for Panera is due to low debt, and it showcases that markets find a way to reward quality companies regardless of macroeconomic worries. Similarly, stocks in technology, such as Skyworks (SWKS) and Broadcom (BRCM) are trading near multi-month highs and showcasing sustainable upside moves. At least, this is a positive reflection in rebuilding confidence for those looking to make long-term picks.

Article Quotes:

“Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation’s 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private-sector workers.” (Financial Times, September 9, 2010)

“The ethical implications of an increasingly stressed global food chain are complex. For example, a number of countries, such as China, South Korea, and Saudi Arabia, have been actively buying up significant tracts of foreign farmland ….Farmland investments in Africa, Asia and Latin America are estimated already to be the equivalent of half the size of Italy. Armajaro, the hedge fund, recently put itself under the spotlight by cornering a significant slice of the world's cocoa market with a purchase of 240,000 tonnes of the physical commodity - the biggest such trade in 14 years.” (Telegraph, September 11, 2010)

Levels:

S&P 500 Index [1109.55] – Approaching a key 1120 level, which has been a near-term hurdle that’s difficult to overcome. The index closed at the higher end of key range between 1040 and 1020. Also, with S&P 500 a few points below the 200-day moving average of 1115.63; it can create some response from short-term traders.

Crude [$76.45] – Attempting to bottom for the third time since spring’s sharp correction. Interestingly, buyer showcased interest when Crude prices reached or fell below $72.

Gold [$1246.50] – Early signs of stalling in the short-term after yet another explosive run since July 2010. June 28th highs of 1261 are a key target to confirm the ongoing strength. Interestingly, long-term investors may continue to be comfortable anywhere above 1200.

DXY– US Dollar Index [82.69] – Maintaining dull-like pattern in the past several weeks. After a mid-summer depreciation, the US Dollar Index is lacking major movement.

US 10 Year Treasury Yields [2.79%] – After reaching annual lows of 2.41%, rates showed an explosive and noticeable mean-reversion in the past few days. Perhaps, the late August decline in rates was an overreaction and defined a clue to where rates might hold.

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