Market Outlook | October 10, 2011

“Truth can be stated in a thousand different ways, yet each one can be true.” - Swami Vivekananda (1863-1902)

Collective Confusion

Equal discomfort among buyers and sellers is becoming clearer in global stock and bond markets. This appears to make more sense since there are no major new bubbles to burst as we're still unbundling the remains of the 2008 crisis. Meanwhile, there are no significant booms or rallies to "die for" since March 2009. Even two years ago, the rally was a matter of an inevitable bounce, rather than a sustainable fundamental improvement. This is simply a directional deadlock combined with unsolved, yet well-known, worrisome topics.

Sanity Search

The last fifteen day moving average for the Volatility Index (VIX) sits at nearly 39. Basically, volatility is trading toward the higher end of the historical trend; although not quite at 2008 levels, it is still very high. Suspense builds as overall sentiment remains negative, without taking into account the growing political and social uprisings. Broad stock market indexes may consolidate around recent lows, but sideways patterns are not to be confused with a glaring shift in true growth. Even so, any minor move in labor data can be translated into a signal of hope at any given time. In addition, the much debated interventions and government plans are eagerly awaited as a catalyst for growth. Yet, the unwinding and de-risking era is felt from the consumer to the investor.

Meanwhile, consumers are bound to adjust for wage changes and other new spending realities which may resurface in this imbalanced global economy. One can observe and conclude the waning US consumption is seen in lower prices for crude, and eventually, along with a low rate environment. In practical terms, crude demand appears to decline, while mortgage rates are at historic lows. Frankly, this impacts long-term consumer and investor behavior, as the implications of weak economic conditions are obvious to spot. For now, sensitive day to day moves are too turbulent to make a calmer assessment or to project conclusions.

Mislabeling?

Perhaps the one bubble left to burst, or yet forming, is the recent shift to "safe assets.” US Treasuries may seem attractive for panic days but at some point foreign investors will have to reconsider alternatives. Commodities are retreating and Gold is taking a breather. Perhaps when the dust settles managers will reassess the meaning of safety. Importantly, the currency wars are alive and well, as the race to devalue currencies is the rapid fashionable statement facing countries’ leaders. Thus, the faith of emerging markets as a reliable growth story is too unclear, while inflation is the bigger discussion point. Through this temporary and mild chaos, the dollar recovery is the key mystery, especially to Gold owners. Last month served as an early wake-up call given the fragile relative strength of the dollar, which doesn’t provide strong enough of a statement for years ahead.


Desperate Calling

There are further downgrades of nations and banks, a quantitative easing announcement from the Bank of England and more short-selling bans in France. These obvious attempts to restore faith, while emphasizing the confirmation of weakness, are reminders that we’ve heard it all at this point. Panic alerts have been felt numerous times, and like it or not, the pressure is handed off to politicians. Even central bankers are suggesting that the solution is in the hands of policymakers. Unprecedented as it may be, that’s shocking and hard to accept for “pure capitalism.” Perhaps a positive perception can be created to stimulate the real economy, which takes a while. One fact is clear, problems do not go away overnight and economic growth requires more than posturing, especially when in unchartered territory.



Article Quotes:

“My impression is that the scare-mongering of self-serving financial "experts" on Wall Street is shortly about to become deafening. It would be catastrophe, utter catastrophe, no, Armageddon, to let the global financial system collapse - collapse! - because the world as we know it will indeed collapse, as day follows night, if bondholders, who knowingly and voluntarily take risk and invest at a spread, are actually allowed to lose anything! We cannot, in a thinking society, allow losses to befall risk-takers who make reckless loans and bad investments. We must, must at all costs, divert money away from health, education, and welfare, in order to save these companies from failure, because neither health, nor education, nor welfare are even possible unless we save the financial system from unthinkable meltdown. We have no choice. No choice at all. They are too big to fail, and we cannot hesitate - they must be saved, for the sake of our children, for our children's children, for our freedom, for the flag, and to honor the legacy of our forefathers, so that these Champions of Disfigured Capitalism can continue to do their vital work with impunity, unbound by any of the incentives or consequences that actually allow capitalism to work in practice.” (John Hussman, October 3, 2011)

“We have just had 30 years in which the ideology of the free market has been dominant. And yet, during that time, what has happened to the percentage of the British economy controlled by the Government? It has remained static, at around 45 per cent – or, by some calculations, increased slightly. The state, that is, has been able to increase its control even when there has been almost unanimous agreement that it would be far better if it were to control a much smaller slice of our collective wealth. What, then, is likely to happen now that free markets are going out of fashion, and state supervision is becoming an intellectually respectable alternative? The short answer is: a rapid increase in the portion of the economy controlled by the state. The process has its own momentum. It never stops of its own accord. Everyone should know what it will mean: permanent economic stasis, if not contraction; a lack of innovation and development; a diminution of opportunity for everyone; and an enormous increase in bureaucracy, waste and inefficiency. That has been the long-term legacy of state control everywhere it has been tried.” (The Telegraph, October 10, 2011)

Levels:

S&P 500 Index [1155.46] – Growing evidence of buyer interest around 1120 in the last few weeks. Interestingly, the 15 day average stands at 1153.85 as the consolidation phase continues to materialize.

Crude [$82.98] – Buyers appear to find value around $80 within the existing downtrend.

Gold [$1652.00] – Bottoming process between 1600 and 1650 as optimists seek price re-acceleration.

DXY – US Dollar Index [78.55] – Last month presented a glimpse of a recovery, yet the real test will be on the currency’s ability to surpass 80.

US 10 Year Treasury Yields [2.07%] – Back to 2% range after hitting multi-year lows of 1.67% on September 23, 2011.

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