Market Outlook | November 14, 2011

“Tug on anything at all and you'll find it connected to everything else in the universe.” - John Muir (1838 –1914)

Linked with Differences

There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.

In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.

Observer’s Dilemma

For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).

Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.

Down the Stretch

The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.

Article Quotes:

“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)

“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)

Levels:

S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.

Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.

Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.

DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.

US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.

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