Market Outlook | April 25, 2011

“I am not afraid of storms, for I am learning how to sail my ship.” - Louisa May Alcott

When evaluating simple numbers, it somewhat feels like 2007 all over again, given the current cheerful market performance. The similarity between now and then are visible in several areas: low volatility, surging stock market, new highs in commodity prices, weakness in the US Dollar, and lower interest rates. The spring and summer of 2007 reflected this picture despite early hints of a soon-to-follow credit crisis. Today, similar patterns of optimism are showcased despite the worrisome topics discussed by headline makers and political members. For the non-emotional observer, it is evident that there is lack of alternatives for the following existing trends:

1. A competing currency to the US Dollar is not fully developed.

2. Stock market exposure remains attractive as liquid assets are in higher demand, especially with low rates.

3. Commodities are favored by new entrants, while previously invested participants have not relinquished winning stakes—a forceful momentum driven trend that has been in place for over a decade.

4. Policymakers have fueled the financial system by reigniting growth-like activity.

5. On a relative basis, the US economy is strong, and risk of default is highly publicized but easily overblown and misinterpreted.

For the casual or even frequent observer, it can be quite astonishing that short-term memory (the 2008 shock) can be erased so quickly. Intriguing financial stories for the last three years have focused on lingering credit issues, mismanagement of capital, European worries, and a fragile economic recovery. However, there is a vast disconnect between daily “cheap talk” and the perception drive reality known as markets. As stated many times, the market is not a barometer for social or economic health. Thus, it marches to its own beat—a point that is often forgotten by a wide range of participants. Importantly, the drivers of market behaviors are rarely headline writers or analysts. Instead, each cycle focuses on key macro issue(s), which inherently creates discrepancy in perception. That said, a tipping point cannot be dismissed, and a temporary breather is not necessarily a crisis. For now, a near-term correction would hardly serve as a surprise. As usual, tops occur in an unexpected fashion. Today, the comfort level is rising; thus, observing is more appealing than betting aggressively. Until then, the markets will march to the same rhythm.

Specific Ideas:

TUR (Turkey Index Fund) offers an attractive exposure beyond the established emerging markets. Turkey has a productive labor force, especially given the expanding middle class. The 17th largest economy can build on recent momentum while being less correlated to Western markets. The fund peaked on November 2010 and has moderately corrected. This presents a relatively attractive pricing as an early turnaround is visible in recent weeks.

BX (The Blackstone Group) is the asset management firm that has established positive momentum since the summer of 2010. The fundamental strength is driven by recovery in real estate related investments . In looking ahead, successful capital raising efforts can bolster further private equity investments. Finally, the stock price closed at $19.10, which remains quite removed from its IPO price of $38—a mark that serves us the next vital benchmark.

PDLI (PDL Biopharma Inc) shares have declined significantly for the last 10 years. For bargain hunters, this biotech firm is worth a look as a long-term investment, given its attractive dividend yield. In addition, PDLI owns patents and receives royalties. Further declines at current prices ($6.28) can trigger buying opportunities.

Article Quotes:

“The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies. So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt? The truth is that these prices are “made” by herd behavior. John Maynard Keynes pointed out the reason many years ago: “The extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” When you don’t know what to do, you do what the next person does… The tension between democracy and finance is at the root of today’s rising discontent in Europe. Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.” (Project Syndicate, April 21, 2011)

“A Fed rule of thumb is that buying an extra $200bn of assets is the same as taking 25 basis points off the funds rate. That means current interest rates are, in effect, about minus 2 percent. The question is when they need to move higher. In making that judgment, the basic guideline for most officials will be some kind of policy rule that links interest rates to the amount of spare capacity in the economy and how far inflation is off target. Much depends on circumstances, and policy rules come in many different flavours, but simple examples used by the Fed suggest a need to tighten policy by the time the unemployment rate reaches 8 percent and core inflation hits 1.5 percent—and probably somewhat sooner. Many differences between policymakers rest on how soon they think the economy will reach this point (Financial Times, April 19, 2011)

Levels:

S&P 500 Index [1337.38] – Recent trend suggests that a trend is forming between 1300 -1320. Interestingly, in February, the 1344 range proved to be a top. That said, the next wave of moves will showcase if buyers are interested to accumulate above 1300.

Crude [$112.29] – Mid-February 2011 marked an explosive run as buyers jumped in the $85-90 range. The momentum is picking up strength and awaiting a catalyst for a noteworthy move.

Gold [$1504] – Directly up without major bumps as the commodity has appreciated nearly 5x’s since July 1999.

DXY – US Dollar Index [73.99] – Finished the week at a 3 year low as below 76 marks a new territory.

US 10 Year Treasury Yields [3.39%] – Trading in between the 50-day (3.45%) and 5-day (3.38%) moving averages.


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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.