Market Outlook| July 19, 2010

“You may be deceived if you trust too much, but you will live in torment if you do not trust enough.” - Frank Crane

A sense of stability is barely forming from overly pessimistic ranges in global markets. Clearly, tangible upside factors may not glare brightly. Interestingly, key asset prices are not showcasing a defined trend, while US broad indexes attempt to dig out of annual lows. Now this situation should test nerves, confidence, and patience for various participants in days ahead. One noticeable minor trend is the decline of the dollar in the past two months. In fact, DXY (Dollar Index) declined significantly, despite growing belief of the weakening Euro. Perhaps, these short-term patterns should not take away from recent dollar strength. Similarly, interest rates have dipped lower below a critical 3% yet again. Basically, a four plus month decline in rates begs the question of whether or not we are due for a trend shift. Or, at least, some time is needed to digest the effects of the financial reform.

Beyond market sentiment, economic factors, such as labor conditions, reinforce the damages left over from 2008. This time, it may not be enough to only seek ideas in commodities and emerging markets when constructing a portfolio. Clearly, real estate woes and credit issues linger at full volume and might partially explain the short spurted market movement amidst jittery investors. In other words, lots of inspiration is needed to entice long-term investors in traditional US markets.
Meanwhile, trading, based on sensitive headlines, is becoming common and heavily acceptable as the norm for actively involved traders. Also, managers continue to heavily depend on technical signals and shorter-term focused tools. Some wonder if that herd-like mentality of using similar tools leads to undesired returns. However, reliance on popular methods cannot be neglected, given its influence on overall psychology.

To perhaps reiterate the obvious, it was in the spring of 2000 in which the stock market signaled for shrewd observers the importance of increasing foreign exposure and the need to diversify into Gold and Crude. Now, a decade removed, having international exposure is not only viable in China, India, or Brazil. Rather, several areas exist in emerging countries, especially for those looking for low correlation to US markets. For example, BCH (Banco de Chile) is nearly trading at annual highs. Similarly, CorpBanca (BCA) is up nearly 48%, since a sharp spike that began on May 25, 2010. In fact, index tracking Chilean market bottomed in 2008, at the height of US credit worries, and now continues to trend higher.

On one hand, liquidity worries drove capital back to US stocks and treasuries. However, for those taking a less defensive posture, opportunities exist in select regions. The balancing act between liquidity and high growth-rate opportunity is worth noting in investor behavior.

Levels:

S&P 500 [1064.88] had choppy action between 1060 and 1120, which is another signal of range-bound unresolved trend.

Crude [$76.01] remains in a neutral range between $74 and $78, which is in between 50- and 200-day moving averages.

Gold [$1189.25] has been declining in the past few weeks, yet holding above $1180, which seems opportune for a short-term recovery.

DXY– US Dollar Index [82.48] is approaching a key technical level of above 80. That is around the 200-day moving average.

US 10 Year Treasury Yields [2.92%] continue to maintain a defined downtrend with no early signs of a recovery.

Article Quotes:

“China’s steelmakers are certainly being squeezed. Measures to cool property markets have caused prices for construction steel to fall by 17% since mid-April. The price of hot-rolled coil steel used to make cars and domestic appliances has seen a similar decline. Meanwhile, the price of the iron ore the steelmakers import as their core ingredient rose by nearly 50% in the first half of the year, squeezing margins. So steel mills could be running down their iron-ore stocks, because they see demand falling and because they suspect that ore prices will fall later this year. Spot prices at Chinese ports have fallen in recent weeks, suggesting that destocking has begun.” (Economist, July 15, 2010)

"For Germany, bailing out its neighbors to save the euro is proving a price worth paying. Rising share prices and foreign sales at Bayerische Motoren Werke AG and Siemens AG show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece... As exporters benefit from the lower labor costs and currency stability fostered by the euro's 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index is the 16-nation bloc's best performing major benchmark this year. That's reinforcing Germany's status as a pillar of euro stability rather than a weak link as European policy makers scramble to stop the region lurching back into recession." (Bloomberg, July 14, 2010)





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