Market Outlook| September 27, 2010

“Faith and doubt both are needed - not as antagonists, but working side by side to take us around the unknown curve.” (Lillian Smith 1897-1966)

Optimists are witnessing a strong month of September, given that we’ve taken a pause from major worrisome news. A weekly gain of 2.05% in the S&P 500 index serves as a warning for pessimists and a mild barometer of faith for sideline observers. At the same time, the Federal Reserve policy did not alter trends in interest rates and the US Dollar. Similarly, no major attitude changes in Gold, as it remains near all-time highs, and volatility is relatively calm. The challenge ahead is to look beyond recent relationships in macro indicators and accept potential surprises, especially in commodities and currencies.

Market observers are accustomed to pointing to fundamentals or trends in momentum when making calculated assessments. However, in this new cycle, anticipating decisions by policymakers extends beyond traditional analysis. For example, these issues are in the minds of investors: Bank of Japan’s intervention, trade discussions between US and China, and the ongoing capital flow to emerging markets. In other words, the idea of globalization is being reexamined, and the marketplace continues to evolve, while attracting a new breed of investors. However, political debates of crisis and tax management are inevitable and very difficult to ignore. Similarly, Brazil and China will face critical decisions in handling and sustaining recent growth. At some point, the overall consensus will have to accept these issues as regular business concerns in upcoming years

The current administration is providing some hints and making changes in anticipation of mid-term elections. Specifically, the recent changes of economic advisors suggests a search for balanced and new ideas. Similarly, there is a growing view that business leaders would perceive a balanced Congress as a positive catalyst. Through this maze, there are signs of US economic stability in labor and manufacturing. These slight improvements, especially in economic numbers, might not be too visible in mainstream headlines. As confidence is restored, investors might appreciate that this is not 2008. (Notes from September 2008 attached below) As in, it was only two falls ago, where “panic” became the sole and dominate word in financial services. As investors slowly put things into perspective, this might provide further boost to this fragile optimism. Yet the response to the recent crisis has contributed to a heavy rotation into Gold and Fixed Income products. Now, in looking ahead, some wonder if this current trend of risk aversion continues to hold. Maybe, here is another hint in terms of investor mindset: "International investors frustrated with some of the lowest yields on record for U.S. housing bonds are turning to Canada for higher returns. Canada Housing Trust sold C$6.25 billion ($6.1bn) of five-year bonds last week to yield 24.5 bps more than benchmark rates.” (Bloomberg, September 20, 2010)



Levels:

S&P 500 Index [1148.67] – Clearly, at 1040, buyers mostly find markets undervalued. Meanwhile, at 1140, there are growing questions of legitimacy of overall strength. Any pullbacks that show strong support at 1120 can set up a positive seasonal run.

Crude [$76.49] – Interestingly, only a few points removed from its 50-day moving average. That showcases the lack of trend in oil in recent weeks. Furthermore, the 200-day moving average stands at 77.68, stating the current pause in the fundamentals and sentiment of the commodity.

Gold [$1297] – The momentum continues its uptrend and closing near all-time highs. A 22% appreciation since February 5th lows .

DXY – US Dollar Index [79.39] – After a short-lived strength, the index is below a key $80 level. Near-term worries, combined with multi-year trends, reconfirm further weakness. Combining low rate and strengthening Gold create a hurdle for a recovery. Next key level is near annual lows of $76.60.

US 10 Year Treasury Yields [2.60%] – Attempting to stabilize and remains fragile, especially with few percentage points removed from annual lows. Like the Dollar, the threat of new is in the minds of traders and chartists.

Article Quotes:

"Leveraged-loan returns rose to their highest level of the year this week as Brickman Group Holdings Inc. took advantage of investor demand and marketed a loan without financial-maintenance requirements... Investors in search of extra yield have turned to high- risk, high-return loans, driving supply to more than double this year and allowing companies to bring so-called covenant-lite deals to market. Those loans are devoid of restrictions such as a mandate on maximum leverage, or debt to earnings before interest, taxes, depreciation, and amortization." (Bloomberg, September 24, 2010)

“While monthly data may be mixed, the trend data are consistently positive. Private job growth has been less than hoped for but positive nonetheless. Private payrolls increased 630,000 since January 1. In the first half of the year, private labor income increased in all components: hours worked, employment and wages. Hours worked have risen more rapidly than employment, which is typical for the early stages of an economic recovery. In fact, we are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries….. While we are not where we want to be, the economy is recovering and, barring specific shocks and bad policy, it should continue to grow over the next several quarters.” (Thomas M. Hoenig, Federal Reserve Bank of Kansas City, August 13, 2010)

From the archives: September 22, 2008

http://bit.ly/bhBSxK

“A memorable and historic week!....The financial meltdown in this capacity was unprecedented. Nonetheless, from an investor's view, hints of a cycle peak were mildly visible from various angles. Leading up to this decline, homebuilders peaked in 2005. Hard assets (Gold/Crude) soared most of this decade, while "paper assets" were out of favor. Credit concerns and a weakening economy have been a reality for the past year and a half. In March, the Bear Sterns failure sent alarms with lingering effect. This summer, lows were not enough to create a market bottom. At the same time, mid-week sentiment and panic selling further decelerated an oversold market. (Markettakers - September 22, 2008)






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.