Market Outlook | February 7, 2011

“Safety is something that happens between your ears, not something you hold in your hands.” – Jeff Cooper (1920-2006)

The Beat Goes On

The rising upside move last week serves as another example, where markets drum to their own beat and worries can be ignored or at least postponed. In fact, the broad US indexes have found a way to pay less attention to long or near-term issues related to global unrest. Instead, much of the ongoing appreciation is caused by positive quarterly reports from US large corporations. Major headlines continue to credit and outline the “better than expected” sales forecast that has been met. Veterans will consistently reiterate that markets are an expectation game. This might console participants who are confused between the daily economic truth and the health of electronic driven markets. On the other hand, optimists attribute this current run as an early indication of the attractiveness of US investments compared to overheating emerging markets.

Adjusting Lenses

Meanwhile, few are taking notes and a little caution in anticipation of early spring, where the pressures of slow economic growth and the elevated commodity prices begin to seep through into balance sheets of mid to small cap companies. In other words, the S&P 500 companies might not be an accurate reflection of US businesses, and one should remain cautious in using this index as a barometer of safety. Yet, portfolio managers will remind us that they’re paid to outperform, and success is closely tracked on a monthly basis. That requires staying shrewd and identifying momentum regardless of implications beyond the existing quarter. Rightly or wrongly, that is the mindset of an average money manager.

In the meantime, day-to-day followers struggle to identify the right period to bet on declining markets as it becomes a less compelling story (until it begins to materialize). Clearly, fighting against the Federal Reserve is a daunting task, and professionals acknowledge that it is a powerful force to defeat. Simply, a rising stock market, along with low interest rate policies, partially contributes to further rise in commodities. Perhaps, that’s a summary of the last decade, and remnants of that theme continue to persist at least in the early days of 2011.

Midwinter Mindset

As we have reached the midway point through this winter, there is plenty of macro driven factors to decipher. On that note, the break out in the US 10 Year Treasury Yields is noteworthy. Investors are anxiously waiting to see if 4% will be revisited as witnessed in mid 2009 and early 2010. This trend questions if participants accept the fact that the economic recovery is sustainable in the near-future. “The difference between yields on two- and 10-year yields rose to 2.89 percentage points last week, above median of 1.81 percentage points the past decade” (Bloomberg, February 6, 2011). Usually, this is known to support a rising economy among consensus in which money flows away from treasuries and into risky assets, such as junk bonds and stocks. Perhaps, this makes sense to a casual observer, who continues to glance at a rising market, growing risk appetite, and weaker volatility. That said, the art ahead is to go with the flow until figuring out the potential catalyst that can disrupt this overly comfortable status quo.

Article Quotes:

“On this evidence, austerity appears to only redress the competitive and structural divergences at a snail’s pace. With the possible exception of Ireland, the periphery countries have no choice but to enact structural reforms to stimulate innovation and increase competition in product and labour markets. Absent these changes, the divergences between the periphery and core may not close, or may even widen again (European Commission 2010). So far, each country has taken modest steps. Though not yet reflected in competitiveness indicators, Greece appears to be embarking on far-reaching structural reforms as part of its EU-IMF programme (IMF 2010). But across Europe these measures have been insufficient. This should not be too surprising. Reforms such as liberalising the markets for professional services attack powerful interest groups directly – and nearly always require the application of an external force.” (VoxEU.org, February 6, 2011)

“The Treasury argues that many borrowers it thought were eligible for help turned out not to be because they earned too much, their homes were too expensive or were not their primary residence, or because they couldn’t meet documentation requirements. Many who were eligible, it says, got a private modification instead. Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent. Long after the crisis and the recession, the housing bust that caused them lingers on.” (Economist, February 3rd 2011)

Levels:

S&P 500 Index [1310.87] – Multi-year highs as the index continues its uptrend. The index is 13.16% above its 200-day moving average.

Crude [$89.03] – It appears fatigued in the near-term. The commodity has struggled to stay above $90. However, the trend is mostly sideways.

Gold [$1355.50] – Early signs of recovering from a downtrend. It seems to barely hold above 1350 as a point where new buyers might look to add and existing holders might look to sell.

DXY – US Dollar Index [78.04] – Mostly a nonevent as witnessed for several months. A long step back reminds us that this downtrend has been in place for 25 years.

US 10 Year Treasury Yields [3.63%] – Breaking out of a multi-week trading range. This rise in yields bottomed on October 8, 2010 and is accelerating to 9-month highs.


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.