Market Outlook | November 21, 2011

“A pessimist is a person who has had to listen to too many optimists.” - Don Marquis (1878-1937)

Buyer’s Fatigue

It was not too long ago, in the summer of 2007, when pessimism or a cautious outlook became too unpopular among general investors. Even in the post 2008 era, previous damages were not quite understood until a few months ago when the glaring European crisis reinforced the fundamental issue of debt management. These days, the majority of buyers appear too fatigued of holding onto shares, while becoming exhausted of “bad” news and frustrated with a lack of genuine good news. Even when buying relatively cheap, the rewards are small and short-lived gains are rapidly erased. The more this happens, participants will become quick to lose patience and willing to sell even faster based on sensitive headlines. Perhaps this not only explains the pattern for the second half of the year but it is also reflected in last week’s events. Simply, less of a willingness to hold assets goes hand in hand with high volatility and the increasing cost of default insurance.

For specific financial insiders, previous fundamental training is not as handy in the current environment. Traditional principles such as valuations, momentum, and assumptions on rates or credit ratings are pointing to abnormal. Clearly, government and social stability is a fragile topic without a manuscript. After all, the European reconstruction period is fully underway with nauseating talks of a Eurozone break up. Perhaps those consequences are hard to quantify, thus the ongoing risk aversion remains the prevailing theme.

Fragile Edge

The US relative edge, versus alternative markets, is still intact, for those willing to see. In some measures US banks appear in better shape, in terms of balance sheet clean up, when compared with European banks. Nonetheless, American banks’ stocks have seen more punishment than reward in the past few months. In a world where there is no escape from broad risk or varying geographic exposure, the frustration inevitably persists as rational thinking takes time to reestablish. Plus, the US bank exposure to European assets is a mystery that’s bound to unfold. Meanwhile, patience is challenged for any risk takers across asset classes. A manic pattern lingers as the recent turbulence echoes July and September lows.

A few breathers here and there have kept US broad indexes from a truly ugly and irrevocable place. We start the short holiday week with the S&P 500 index down only 1.5% for the year. That’s better than the EEM (Emerging Market Index), which is down nearly 19% since January. Interestingly, the daring crowd dwindles fast, but betting against markets after consecutive downside moves does not come with guarantees either. The concept of relative edge faces political risk as managers desperately place their chips for salvaging some hopeful year-end gains.

Surprise Elements

Elements of upside surprises remain scarce at the moment, not only in Europe or the US, but China as well. Basically, it is hard to locate glaring data for better sentiment or changes of current downtrend and deadlocks. This is a tough place to be for those looking to buy at a discount or at attractive prices. Rewriting rules, reforming old behaviors and endlessly walking in uncharted territory is a risk that’s hard to comprehend and accept collectively. Thus the brave must distinguish blind gambling with a favorable risk-reward profile. At the same time, mood swings are too common even when it all seems too bleak.

Article Quotes:

“Indeed, all the gold controlled by the US government, which has by far the world’s largest official reserves, equals just 3 per cent of America’s official debt, which just passed the $15,000bn mark. Even Italy, a particularly large holder of bullion (in third place globally with the 10th largest economy) would be able to retire less than 6 per cent of its enormous sovereign debt if it were to dump its 2,451 tonnes. But while the dollar amounts may be paltry, Mr Bernanke must grasp that the symbolism is anything but. It is a mark of creeping distrust in the unofficial reserve currency, which nervous central bankers see being printed by the trillions even as America’s political leadership shows no sign of dealing with its daunting fiscal challenges. Fiscal worries are even more acute for the number two and three reserve currencies, the euro and the yen. Central bankers are late to the gold party. Private buyers of ETFs alone have accumulated 15 times as much since their advent a decade ago as governments bought last quarter.” (Financial Times, November 17, 2011)

“Local [Chinese] government financing vehicles borrowed heavily to support an infrastructure construction spree under Beijing's four trillion yuan stimulus package introduced at the end of 2008. They are due to pay a total debt of 1 trillion yuan annually from this year until 2013 and an outbreak of defaults could peak during the period, China International Corp warned earlier. The local governments rely heavily on revenue from land sales to pay back their loans. As the property market has slowed under government policy tightening, and as it takes time for government-funded projects to generate returns, there are signs some local governments are finding it difficult to repay their loans. Local governments' 6,576 financing vehicles had debt of 10.72 trillion yuan at the end of 2010, amounting to 26.9% of China's gross domestic product accrued since the global financial crisis in 2008, the National Audit Office reported in its first audit of local government debt in June. Only 54 county governments out of nearly 2,800 in the country had zero debt, it said.” (Asian Times, November 19, 2011)



Levels:

S&P 500 Index [1215.65] – Retracing from 50 day moving average. Ability to stay above 1200 will be tested in next days ahead.

Crude [$97.41] – After a fast paced move to $100, there is early indication of a pause. The two month momentum may need a further catalyst to keep the run sustainable.

Gold [$1719.00] – Struggling to hold above $1750 as evidence of a stalling pattern continues to develop.

DXY – US Dollar Index [78.06] – Continuing its bottoming process since May 2011. The relative strength of the currency remains unharmed despite near-term swings.

US 10 Year Treasury Yields [2.01%] – Interestingly, the lows in 2008 crisis stood at 2.03%. Currently, a struggle to stay above 2.0% is further indication of risk aversion and lack of “safer” alternatives.



Dear Readers:

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.