Market Outlook | October 18, 2010

“Patience is bitter, but its fruit is sweet.” - Jean-Jacques Rousseau

Slowly Recovering

Despite a sluggish and slow recovery, the last few weeks continue to demonstrate optimism. That positive feel is a result of recent stock market price appreciation. For some, it is hard to grasp that a recovery is fully justified, especially with susceptible financial services. Money managers that are watching recent market actions are gaining an early wave of confidence while finding a compelling reason to dive in. Meanwhile, those keeping tab on negative news are highlighting currency wars, deeply wounded real estate environments, and unclear labor improvement. Yet, select pundits argue that low interest rates policies inevitably produce higher asset prices. Perhaps the Federal Reserve officials are too focused on short-term solutions, but the long-term challenge remains unknown. Interestingly, a majority of investors were sold the story of rising rates and inflation at the start of the year. Both indicators went against expectations so far. However, discussions of rising rates are back on the radar, and this set up attracts contrarians for weeks ahead. Meanwhile, inflation concerns were mostly subdued, but those worries from before can be quickly revisited in the mindset of investors.

A Tricky View

From a political point of view, one can argue that key participants are waiting for shifts in November’s elections. The perception can turn positive, especially after two years of harsh reality of limited capital access and a highly visible weakness in the real economy. Generally, seasonal and political changes grab the headlines of an already recovering market. At this point, the S&P 500 Index is up over 13% since late August 2010. It’s merely psychology that shapes investor behaviors. That, combined with a breath of new leadership, can trigger the confidence of key decision makers, who are hoping to hear business friendly promises from various messengers.

Specific Ideas

Investors seeking unique ideas will have to look beyond traditional Large Cap companies. For a reliable business idea, one might want to take a look at Copart (CPRT). This company offers an auction market for used cars via auction-like sales technology. Currently, the stock is trading near its 15-week average of $34.22 per share, which suggests that it is not relatively overpriced. In addition, the company’s ability to profit from used cars sales contributes to fundamental strength. Secondly, beginning next month, retail season discussions will obviously resurface among investors and consumers. Gap, Inc. (GPS) appears to offer an attractive entry point, following its first store in China while beefing up its ecommerce capabilities. Finally, internet advertising is a solid business, and the competition is increasing as it becomes a maturing business. ValueClick (VLCK) continues to showcase improving profit with no debt, and that should hit the radar of long-term investors.

Article Quotes:

“Corporate pension plans loaded up on stocks in the booming 1990s and had almost 70% of their money in them by the mid-2000s, a pattern similar to individuals. ….The reduction in stock exposure at corporate plans means many companies are likely to face the need to contribute more to their pension plans in future years. Today's low interest rates are a disaster for pension plans, for two reasons. First, they squeeze returns in funds increasingly dependent on bonds. Second, for corporate plans, they boost pension liabilities. That happens because, mathematically, falling interest rates raise the present-day cost of future liabilities. Higher liabilities make the funding gaps bigger.” (Wall Street Journal, October 18, 2010)

“Today, the yield on commodities far outstrips the yield on US Treasuries. Holding gold would have yielded 34% in less than a year, holding a Treasury note would have yielded a nominal 1%. Likewise, holding wheat futures contract or storing wheat would have yielded 84% in less than one year….While we worry about food price inflation, the Fed with its obsession on core inflation dismisses any talk of inflation. Fed governors should do their family grocery shopping and then talk. They should talk to ordinary Americans and see what they say about food prices after each visit to the supermarket.” (Asia Times, October 13, 2010)

Levels:

S&P 500 Index [1176.19] – Few points removed from April highs of 1219.80. In the past two months, the index showcased resurgence after bottoming near 1060.

Crude [$81.25] – A narrow range between $75 and $80, which suggests desperately awaiting a catalyst for a major shift. Basically, the 200-day and 50-day moving averages stand near $77, which paints the picture of non-trending pattern.

Gold [$1367.50] – As highly publicized, the commodity reached new highs last week yet again. Seasonally, a favorable period combined with brewing momentum, along with currency concerns several factors add up to this.

DXY – US Dollar Index [77.04] – Attempting to bottom as the index flirts with annual lows. Given the recent bleeding, the currency is poised for at least a short-term recovery. In addition, any positive news can create a sensitive upside response.

US 10 Year Treasury Yields [2.55%] – The current fed policy contributes to further declines in yields. However, some early signs of a turnaround, especially at 2.35%, in the past few trading days.





Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.