Market Outlook | July 5, 2010

“One's first step in wisdom is to question everything - and one's last is to come to terms with everything.” Georg Christoph Lichtenberg (1742 - 1799)

Confidence Severely Tested:

This current environment proves the difficulty of getting over the crisis of 2008. First of all, policymakers are revisiting discussions for new regulation as clearly stated in headlines and casual daily discussions. Secondly, the European default worries reignite, which leads to additional political concerns. Of course, these issues are based on the core principles of governing future risks. In addition, key pundits published a negative outlook with chatter of a possible depression and eroding confidence. These points eventually sparked some frenzy. Finally, US mid-term elections set the stage for a vicious battle ahead especially with a weak economy and vexed crowd seeking changes. Basically, the emotional and practical view strongly confirms weak global markets. Interestingly, answers are hard to come by and the reward might be in asking the right question. Perhaps, investors and policymakers can adapt this approach into making decisions at a period where trust is severely tested.

Puzzle Continues:

For money managers, a thematic game plan is not easy to construct when interest rates head lower along with asset prices. In short, the ongoing puzzle continues. From a directional perspective, the speculative thrill has dramatically declined across global sectors and asset classes. Instead, a natural response can drive participants to employ the “wait and see” approach. For a while, 1040 on S&P 500 index marked a hopeful reentry point. This was a barometer for an optimist willing to purchase shares at discounts prices. Meanwhile, the S&P 500 Index witnessed a weekly decline of 8.3%. That partially sets the tone for hesitancy and a more conservative mindset. However, odds might suggest that taking chances for a recovery is not that unfavorable at start of this month. In addition, quarterly adjustments contribute to some market movement and a better read is needed as things settle down.

Looking ahead:

Finding positive catalysts is not easily identifiable over the holiday weekend. Yet the oversold and overly negative environment sets up eventful weeks ahead. Similarly, so far the consensus bet of higher rates are wrong, as rates on US 10 Year Yields dipped below 3%. It was only six months ago, where the general belief revolved around higher rates. Another lesson that reminds us that popularity does not translate to reality. At the same time, as the spring downtrend extends to mid-summer, one should be careful to not dwell on a sentiment of defeat. Once again, seeking out neglected ideas makes sense for some, especially when pessimism reaches extreme ranges. Interestingly, stocks that have showed consistent uptrend since the early 1980’s are very rare and hard to find. A long-term chart showcases the multi-decade strength of K (Kellogg) and ECL (Ecolab). Amazingly, both companies demonstrate that food and healthcare related areas found ways to survive various bubbles and downturns. Perhaps, this is a minor clue into sustainable ideas and sums up current conditions.


Levels:

S&P 500 [1022.58] is nearly down 17% since topping on April 26, 2010. The recent downtrend confirms the well established selling pressure. Interestingly, the sharp fall below 1060 triggered weak technical signals.

Crude [$72.14] is revisiting a narrow trading range below $75 and above $70. Investors wait for a sign of a major trend shift at these inflection points.

Gold [$1201] prices witnessed minor declines last few days the commodity is positive above 1200, which will retest further buyer interest. The uptrend is well established and relative weakness of other asset classes.

DXY– US Dollar Index [84.42] Stabilizing around $84, which is few points removed from annual highs.

US 10 Year Treasury Yields [2.97%] in the last 3 months, yields have gone from 4% to below 3%. That said, a mean reversion trade suggests a recovery back to 3.20% as the 20 day moving average stands at 3.14%.

Article quotes:

“The auto dealers won their exemption the old-fashioned way, by lobbying the hell out of Congress. But the fact that they succeeded where bigger, more powerful companies didn’t reveals something important about the politics of influence on Capitol Hill: lobbying isn’t just about money. The companies that lobbied most successfully around the financial-reform bill didn’t necessarily pay the most. Instead, they were able to bring grassroots pressure to bear on individual congressmen and to present themselves as remote from Wall Street.” ( New Yorker, July 5, 2010)

“Chinese authorities have this year been trying to cool the economy as it expanded at an 11.9 percent annual pace in the first quarter, and to reduce property-market speculation. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion). The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month.” (Bloomberg, July 5, 2010)





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