Market Outlook | July 12, 2010

“If you wait for opportunities to occur, you will be one of the crowd.” - Edward de Bono

A mixed, but early, recovery clue:

A positive short week, as those who played the odds took advantage of severely beaten up markets and eventually witnessed an inevitable recovery. Bold speculators would have benefited from a weekly gain of nearly 5% for broad indexes. Now, a uniform confirmation of improving economy is not easily visible at this point. At the same time, dominant themes in the post crisis mentality include higher demand for transparency and avoiding less liquid assets. Of course, as lingering skepticism fades, newer opportunities should emerge, especially at the early stages of the third quarter. In the weeks ahead, perhaps most managers will consider to lighten up on hedging related holdings. Generally, less pessimism gives boost for additional momentum. Importantly, an acceptable catalyst is desperately needed to calm those watching from the sidelines.

Understanding previous weakness:

The danger of mass thinking can lead to building an investment framework that is biased by short-term sentiment. Specifically, there is an ongoing view that volatility continues to rise in the months ahead. Meanwhile, staying defensive and positioning in less risky assets is painted as the acceptable norm by experts. Conversely, some wonder the probabilities of repeating similar downtrend in the second quarter, which saw extreme negativity. In other words, the fear-driven spring months appear to have factored in lots of worst case scenarios. Perhaps, earlier results were justifiable, given the debacle of sovereign debt and the collapse of Euro, which reinforced ongoing vulnerability. In fact, further expert discussion of depression and market collapse appear to have long-established that bad news is not “new” information. At least the surprise element has faded into a consensus belief.

Aggressive, but hopeful, short-term:

In the US, low interests rates have failed to entice business activity so far. At this point, this concept of lower borrowing rates for the purpose of increased credit is losing confidence. This became noticeable when the US 10 Year Treasury failed below 3%, and mortgage rates are lower than historical averages. Basically, those closely observing economic numbers continue to point out the difficulty of finding growth in various banking segments. Yet, the sudden improvement of credit, combined with the relative attractiveness of US markets, and favorable risk/reward in stock market pricing can converge to create a meaningful upside move. To reach this rosy trend, the Federal Reserve and other regulators would need to show sustainable and business friendly policies that materialize into the private sector. That, in turn, produces lending into the private sector, which gradually translates to some economic strength. For now, patience is required to navigate this turning point.

Levels:

S&P 500 [1077.96] is showcasing buyers’ interest around 1060 after dipping below annual lows of 1010. Next key target is around 1100 and 1120.

Crude [$76.09] closed slightly above its 15, 20, and 50-day moving averages, which all stand near $75. This solidifies the ongoing range bound pattern.

Gold [$1208.75] maintains its uptrend, especially reaccelerated in early February. Again, 1200 marks an intriguing entry point for those with a bullish view. Multiple days of declines are consolidating at current ranges.

DXY– US Dollar Index [83.94] faces minor pullbacks in recent weeks, following an uninterrupted run for the majority of the year.

US 10 Year Treasury Yields [3.05%] are slowly recovering after a jittery 3-month period of declines. At this point, recovery, back to a psychologically valuable 3%, is not convincing of a trend of rising rates.


Article Quotes:

"China's home prices are set to fall as much as 20% in a 'healthy' correction, said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. China's property boom is 'cash-driven' rather than 'leverage-fuelled,' which means there's only a low chance of the type of forced selling that exacerbated the U.S. housing market collapse, he said... That view contrasts with Harvard University's Kenneth Rogoff's prediction yesterday of a 'collapse' in China's property market that will hit the nation's banking system. Property prices in 70 Chinese cities rose 12.4% in May, the second-fastest pace on record, heightening concern a bubble is forming in the nation's housing market." (Bloomberg, July 6, 2010)

“The bottom line is clear: there exists, at present, a gigantic net flow of funds into the liabilities of the governments of advanced countries. Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries.” (Financial Times, July 6, 2010)





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