Market Outlook | December 13, 2010

“The illusion which exalts us is dearer to us then ten-thousand truths.” - Alexander Pushkin

Down the Stretch

The current global theme can be summed up by synchronized asset appreciation as witnessed again by the activity last week. This strength in markets has been a prevailing theme, especially since the summer lows. Now the year-to-date returns showcase an 11.2% gain for the S&P 500 Index, and the more aggressive Russell Small Cap is up 24.2%. This performance alone serves as an attractive selling point to sideline observers who would look to reexamine entering next year. For those setting resolution and planning to reflect in the holiday season, it is a good time to ask where we’ve come from since the chaotic stage of 2008. Importantly, long-term investors need a solid grasp of inflection points while not attempting to overemphasize recent behaviors.

A Point of View

Interestingly, the spring of 2009, embarked an era of post-crisis and set the stage for a new cycle that is upon us. Since March 6, 2009, the S&P 500 Index has appreciated by 86%. In the same period, Gold is up nearly 47%. This is a perspective that may go unnoticed when gauging the mindset of investors. Now, these numbers might surprise those observers consumed in the day-to-day. In other words, these raw numbers serve as a barometer for providing some perspective and are helpful in mapping out a plan of attack for the next 3-6 months, while staying flexible for the unknowns.

Meanwhile, overall sentiment can convey a different message at times, especially when tracking real economic data, political posturing, or legal discussions. In looking back, it is vital to clarify that picking exact bottoms and dodging painful tops is the most daunting task for participants across various cycles. However, the last 21 months have showcased resilience in the marketplace, and at this point, the uptrend has been restored. Thus, the challenge is to specifically position investments in areas that will continue to build on this post-crisis recovery.
Glancing Ahead

As pundits submit their 2011 predictions, there is little ongoing suspense that’s mostly related to the faith of rising rates. As usual, the scramble of deciphering rates impacts issues tied to Federal Reserve policies, continued inflow into fixed income products, and relative attractiveness of other asset classes. The past three months demonstrate resurgence in Yields. In turn, this begs the question of any potential trend reversal, not only in US 10 Year Treasury Yields, but also in other themes that have worked in the past decade or two. In other words, the complacency of assuming “sure bets” in the rise of China, weakening Dollar, lower rates, and rising commodities might be challenged. Now, money managers will remind us, in the past, doubting these trends have been a costly proposition, and the trend has paid off. As usual, it is worth entertaining, especially to at least identifying catalysts before the next fear-driven movement. Perhaps, this is one area worth watching before raising the stakes in the first quarter of 2011.

Article Quotes:

“In reality, the retail sector added just over 300,000 new hires in the month of November. But the Labor Department didn't count those hires. That's because the Labor Department's final number of employment is seasonally adjusted. And since the retail sector disproportionately adds more workers this time of the year than the other 10 months, the Labor Department adjusts down the sector's employment numbers in November and December. So retail employment gets over counted in January and February when hiring is slow, and undercounted in November and December. The reason is to smooth the numbers, but it also distorts, particularly at times like these when the economy is hopefully at an inflection point.” (Salon.com, December 9, 2010)

“The Fed announced that it intends to buy $600 B in debt over an 8-month period beginning in November, or about $75 B each month. But that turns out to be about the size of new monthly issues of debt in the 2-1/2 to 10 year range. So if the Treasury were to continue to issue debt in the amounts and proportions that it has been over the last year, the Fed would only end up absorbing the new debt in this category over the next 6 months, while the amount that is less than 2-1/2 years or greater than 10 years would continue to grow….. The effects of the combined actions by the Treasury and the Fed would be to increase rather than decrease long-term interest rates.” (Econbrowser, December 11, 2010)

Levels:

S&P 500 Index [1240.40] – Year-end rally contributing to annual highs. The established uptrend since early September proved to erase summer losses and a continued re-acceleration. This momentum is positive as odds for minor pullbacks increase in weeks ahead.

Crude [$87.89] – As the commodity trades above $85, it mostly confirms the recent resurgence in recent weeks. Yet, the yearly behavior has mostly witnessed a sideways pattern.

Gold [$1375.25] – Noteworthy developments in the past month. The commodity peaked at $1421 on November 9, 2010, and topped again at $1420 on December 7, 2010. One can surmise that buying interest is waning or at least taking a pause at those levels. That said, this is just an early clue in an existing uptrend. However, a break below can create noticeable reactions on the trend.

DXY – US Dollar Index [79.37] – After stumbling in value the last two months, the DXY is back at a familiar range of 80. In the near-term, this simply suggests relative stability.

US 10 Year Treasury Yields [3.31%] – An explosive run up in the past few months. Yields have gone from 2.33% in early October to soaring above 3%. This is a vital macro trend as the curiosity looms regarding the sustainability of this run.




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