Market Outlook | November 29, 2010

“Weary the path that does not challenge. Doubt is an incentive to truth and patient inquiry leadeth the way.” - Hosea Ballou (1796 - 1861)


When investors reflect, they quickly notice that European worries triggered sell-offs in the spring. Now, the uptrend is being interrupted, and further selling is highly tied to default worries—a puzzle that’s lingering since 2008 and a clear cut resolution that’s far from reality. Clearly, these factors are well documented, and the economic construction of Europe is being questioned.

The stock market peaked on November 5, 2010, a little after the US election and the announcement of quantitative easing plans. Interestingly, since then, the dollar has climbed back significantly, despite the common think. Similarly, rates have recovered this month, which raise a curious question of legitimate trend reversal versus a temporary change in behavior. Attentive watching can produce some clues until the trend shift is fully visible.

These days, the momentum driven plays are under question as the upside run in market leaders, such as commodity related equities, paused. As we near year-end, the recent breather is a casual reminder of the reality of a new cycle. Financial services continue to suffer from headlines as some money managers’ reputations are at risk. Similarly, new regulatory policies are addressing details that impact investment management. Even in skeptical periods, the market still rewards analysts that find specific ideas, while market timing requires understanding of various index products and increasing sensitive news beyond the stock of interest. Combining these factors, the competition against traditional assets (stocks and bonds), is growing as some investors are frustrated by the lack of promised returns of the past decade. Meanwhile, the search for higher yields and increasing patterns of risk aversion persist in the minds of decision makers. Thus, an era of fragmented views among consensus and trust has yet recovered to conjure innovation and growth at a faster pace.

Grasping investor mindset is as challenging as predicting regulatory and policy makers’ outcome. Domestically, the tax rules are up for major changes this December. Speculators must add taxes to the mix of big picture themes that require time for higher conviction bets. The pending tax outcome can impact year-end trading as high net worth clients examine their moves. In turn, this is bound to reflect on flow patterns of liquid markets. In addition, new tax laws can give birth to new products and new sales pitches among money managers. In any case, this is another illustration of a new cycle that’s bringing new challenges and a reminder to adjust to a new playing field.

Article Quotes


"Still, if the recent turbulence has proven anything, it's that "shock and awe" measures are unlikely to appease investors for long, nor change their view that the bloc is fundamentally flawed because of a steep competitiveness gap that only a closer fiscal union may be able to solve. Going down this path is a non-starter for Germany, which has insisted instead that peripheral euro countries push through deflationary wage cuts and painful structural reforms to boost productivity, in line with its own successful economic model.” (Reuters, November 25, 2010)

“What then is productive debt? This is a question raised by a thought-provoking paper by Oxford University’s Dieter Helm, an expert in utility regulation. The kernel is the idea that all societies possess infrastructure assets, which should be thought of as systems. Transport, energy and water systems are examples. We also have education, health, market, financial, judicial, defence and political systems. The more complex the civilisation, the more complex are its systems.The creation and development of these assets usually involves the state, as provider, subsidiser or regulator. The reason is that they have “public good” characteristics. Thus, they would tend to be underprovided by competitive markets.” (Financial Times, November 25, 2010)



Levels

S&P 500 Index [1189.40] – Starting to trade in a near-term range between 1200 and 1180. Chartists are noticing the peak at 1200 of early spring and pondering the impact of the recent top in early November.

Crude [$83.76] – Buyers and sellers continue to wrestle between the $80-85 ranges. No major shift in recent weeks as a sideway pattern tells majority of the commodity’s story.

Gold [$1355] – Shows early and visible signs of short-term weakness around 1400. Most of this month witnessed a decline that might set up for an intermediate term consolidation.

DXY – US Dollar Index [80.35] – Since election lows, the US Dollar Index has gained 6.2%. This short term recovery is merely a digging out process from annual lows.

US 10 Year Treasury Yields [2.86%] – The past four months have demonstrated a consolidating process.


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