Market Outlook | January 10, 2011

“To treat your facts with imagination is one thing, but to imagine your facts is another.” - John Burroughs (1837-1921)

Participants are slowly getting back to examining and reconfirming data that is sensitive to market movement while attempting to gauge overall sentiment. So far, it is the same story, until this uptrend presents some decline. That is the unknown that is driving up curiosity. Once again, momentum is a powerful force as witnessed in the rise of commodities and stock prices. Inversely, a downside momentum in the US dollar and interest rates is a forceful pattern in global trade. Simply, any shift of these established trends increases the suspense and leads to a noticeable reaction, which is dreaded daily in the opinion pages. Now, global risk appetite is healthy, based on upbeat market sentiment, positive performance data, and inflation in emerging markets.

The interlinked global market will require public and private participants to successfully manage rising food prices and adjust to impactful currency trends and other policies related to business operations. At the same time, policymakers will have to balance worries of sovereign defaults while spurring a perceived recovery. There are socioeconomic factors that persist in the current landscape beyond the usual investment circle challenges. In other words, the investor’s dilemma is closely tied to voter demand, and this can intensify. Perhaps, these macro issues seep into the mindset of lawmakers and consequently lead to a political topic outside the control of financial circles. In the near term, the response to the growing emerging market inflation and “currency wars” should set the overall tone.

At this junction, it is vital for participants to isolate a quarterly bet versus long-term trends when picking ideas. Clearly, the speculative game heavily requires accuracy in timing more than a longer-term investment. Now, traditional money managers define their investment horizon, making it a focused approach, and that has its merits. Therefore, at inflection points, it generally pays to observe and to stay patient versus reshuffling portfolios aggressively. Finally, opportunities in Merger & Acquisitions are catching the attention of dealmakers, given the attractive marketplace, as larger firms look to take advantage. Mega deals are bound to create biases in certain groups and, in turn, influence the buying demand of select stocks.

Specific Ideas

Despite being extended in the short-term, the shares of ARUN (Aruba Networks) offer an attractive exposure in the networking and communication group. The company’s sales grew over 85% in the past 5 years. This demonstrates strength, and it is noticed by shareholders. Broad market declines and price weakness can present a buy point on pullbacks.

MIG (Meadowbrook Insurance Group, Inc.) is worth a look, especially for investors looking for conservative ideas in financial services. The company specializes in property and causality and provides risk management products. After trading at historic lows of $1.02 in November 2002, MIG’s stock has slowly recovered in conjunction with its overall fundamentals. Interestingly, unlike the broad markets, the company’s shares peaked in 1998 and not 2008. Therefore, it appears to offer further room for upside growth, especially after a decade of declines and relative attractiveness.

Article Quotes:

“When an individual purchases a home, far from stimulating productivity, the purchaser instead simply transfers wealth to another individual. More to the point, an investment in property cannot help cure cancer, lead to the creation of efficiency-enhancing software or any capital good that makes us more productive, nor will it open foreign markets. A house is just a house, and not a gateway to other investment opportunities. When capital flows in the direction of property, on the margin, the productive parts of the economy suffer a capital deficit. And since the Fed's balance-sheet expansions boost the demand for mortgage-backed securities, the central bank is explicitly subsidizing increased capital flows in the direction of consumption at the expense of wealth-enhancing production.” (Realclearmarkets.com January 6, 2011)

“Currency appreciation, an improved social safety net, democratisation of credit – all these things if applied in China would no doubt help narrow the Chinese surplus by making exports less competitive and encouraging consumption, but they would be most unlikely to demolish the underlying savings glut, and in any case, social security and credit reform will take years, possibly decades, to implement in a meaningful way. A current account surplus, it should be pointed out, is only the mirror image of a capital surplus. If there is an excess of savings, the consequent excess of goods will be exported.” (The Telegraph, January 7, 2011)
Levels:

S&P 500 Index [1271.50] – Positive momentum remains in place as the run since March 2009 showcases ongoing recovery. The index is 10.67% above a 200-day moving average.

Crude [$88.03] – Maintaining its uptrend that was established in the summer. The commodity’s ability to hold above $88 will provide a better clue early in the 1st quarter.

Gold [$1368.90] – Consolidating in the current trading range between $1350 and $1400. This is a decisive point as buyers wait for discounts and sellers feel like early pullbacks. Yet, the force of this long-term run remains too strong.

DXY – US Dollar Index [81.02] – A 7% appreciation since the lows on November 4th and suggesting an early recovery in the US Dollar. However, this index is far removed from its summer highs of 88.70.

US 10 Year Treasury Yields [3.32%] – Near-term consolidation as yields attempt to hold 3.20%. This reflects a new range after a three months trend of rising rates.


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