Market Outlook | March 28, 2011

“A weak man has doubts before a decision; a strong man has them afterwards.” - Karl Kraus (1874 - 1936)

Barely Surprising

Plenty of topics are floating as headline issues, but that is hardly news these days. Interestingly, Japan was facing de-leveraging matters for several months prior to the tragic events. Similarly, the European Union has struggled to reach a resolution since last summer. Whether US broad indexes go up or down is merely a reflection of select companies and not a barometer for business health. In this context, the stock market rise should not be confused with positive economic feel or job expansion. Importantly, when trying to assess the next 2-3 years, managers are asking where to find quality ideas, given scarcity in innovation, pending regulations in an era of overreliance in policymakers. Investors have focused on finding liquid based investments and sticking with working ideas. Perhaps, both contribute to further upside momentum, mainly when bad news is not necessarily breaking news. Clearly, the much needed breather took place, but buyers were eager to step back in. Is this impulse buying or bargain hunting? This is a question that traders will ponder in seeking timely entry points.

Evaluating Success

For the casual observer, an up day can paint an even more confusing picture while reiterating the disconnect between the market and real economy. That said, the stimulus efforts through low interest rates were designed to serve as a temporary solution. We are approaching a period in which the Federal Reserve efforts can be questioned if economic growth is less evident. In other words, the success of these measures to rekindle the efforts will be judged. In addition, a glaring disagreement among officials on interest rate views can stir additional concern. For others, a third year of a presidential cycle makes a strong buying case based on historical data. This plays into the mindsets of investors, and the net effect can play a bigger role in the second half of 2011.

Near-term Factors

The recent and minor correction symbolizes the first phase of a price adjustment. As usual, down days are followed up by sharp recovery in risky assets while coinciding with a sudden decline in volatility. This sudden shift was felt last week as the S&P 500 Index rose +2.70% while the Volatility Index declined 26.72%. This back and forth is not convincing of stable footing. For some, it might be too premature to declare the end of a natural correction. In the days ahead, the suspense will play out, given job data. Meanwhile, commodity prices are flirting with an inflection point, and this is bound to test conviction levels.



Article Quotes:

“As for finance, China’s objectives must be: first, to create a domestic system capable of supporting its own economic development; second, to help promote a global system that supports a tolerably stable world economy; and, third, to protect the former from the excesses of the latter. In achieving this difficult reconciliation China’s policies should be guided by the understanding that, in the long run, its financial system will be the hub of global finance. Yet the transition to full integration will be not only lengthy but also complex and fraught, with full integration of banking particularly dangerous….One aim should be to ensure that commodity-exporting countries – particularly poor ones, with limited capacity for governance – benefit from foreign investment and exports of natural resources. China will be a central player in securing such agreements.” (Financial Times, March 22, 2011)


“In 2000, the Federal Reserve migrated from the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics to a re-jiggered PCE index. The BLS, the official American government agency, had already been tinkering - quite candidly - with its methodologies. The move gathered steam in the early 1990s, when politicians determined to reduce the CPI inflation rate, as a gimmick to lower CPI-linked payments to Social Security pensioners. They argued that substitutions in goods, as well as hedonic improvements (benefits derived from new technologies like safety features) justified an overhaul of the index of about 80,000 goods. Switching from an arithmetic to a geometric weighting lowered the year-over-year CPI by about 2.7%, and the effects have compounded ever since.” (Fundweb, March 21, 2011)


Levels:

S&P 500 Index [1313.80] – Recovering from recent correction and facing a near-term hurdle at 1320. The behavior between 1300 and 1320 can signal some directional conviction this week.

Crude [$105.40] – Attempting to revisit March 7th highs of $106.95. The jolting upside run appears to stall for now, but the uptrend is well established at these levels

Gold [$1436] – Broke above key $1420 level. Yet, it’s early to claim that a re-acceleration is taking place.

DXY – US Dollar Index [76.21] – Barely holding on after making new lows around 76. Interestingly, that was a bottoming point in late fall/early winter.

US 10 Year Treasury Yields [3.43%] – Generally, stabilizing around 3.45% especially in the past two months.


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