Market Outlook | March 5, 2012

“The Excellency of every art is its intensity, capable of making all disagreeable evaporate.” (John Keats, 1795-1821)

Strength:

Momentum continues to favor a recovery in traditional markets. Enticing further buyers at this junction presents few challenges, given the extended chart patterns and loud screams from naysayers emphasizing caution. Yet, those looking to deploy capital investments lack many alternatives for investment exposure. For some capital allocators, importance is placed on having liquidity. Plus, the mindset of decision-makers is plagued with safety, even after a 27% move in the S&P 500 index since October 2011. Interestingly, there is a wishful crowd out there seeking higher growth, like returns, while not willing to risk much — simply not a practical expectation by many. Ongoing adjustments in desired returns will be required. This tuning of expected returns should drive more capital into known indexes and provide a further boost to the existing run.

Similarly, observers waited for strong pullbacks as a buy point, but that’s not been the case. Anticipating day-to-day, news-sensitive items omits the relative strength of the US markets. Dwelling on future unintended consequences may result in failing to spot the vital trading points. Motivated investors lurk to chase yields and remain willing to expand exposure beyond US equities and Treasuries. After all, the shaken confidence of the last few years does not impede the natural hunt for higher returns, not to mention the pent-up demand. Perhaps, intense eagerness is what drove markets higher at a faster pace so far this year. Big down days have not been visible thus far, which reiterates strength rather than irrational buying. Intense success is not to be feared but carefully cherished, and that’s the message from broad markets showing resilience.

Scarcity:

Today’s lack of options in the known and trusted investable asset signals the need to expand into illiquid assets, especially for larger fund managers. For example, direct asset purchasing is appealing due to a shortage of soft commodities. On that note, farmland investments are an attractive theme, given increasing food demand and positive set-up favoring agricultural-based commodities. A trend applicable in developed and frontier markets that presents a risk and reward is not to be overlooked by traditional asset managers. “In Illinois, specifically, high quality farm land also has surged in value, rising by about 27 percent in the last two years, from $7,500 an acre in January 2010 to $9,500 an acre in January 2012” (Kane County Chronicle, February 29, 2012).

Meanwhile, Chinese investment in African farmland is noteworthy and plays a key role in the flow of money. It reflects the demographics trends of China demanding more food while restating the perceived shortage of food as witnessed in the last decade. In the big picture, the European and credit markets’ recovery take some time. However, yield-seekers are left to explore tangible assets that fit longer-term trends. Importantly, these transactions do not end up benefiting from strength in overall liquid markets.

Rate Driven

Amidst the scramble for investment ideas, the low interest rate policies provide a definitive picture compared to other macro factors. Policies leading to lower rates are debated from all angles, but surly set the tone for analysts mapping out a three-to five-year plan. Partially, this is exhibited in calming volatility, as the central banks have clearly stated and remarked that low rates are here stay. Surely, assessing political and legal risk is too noisy to grasp now, with election uncertainty. However, those putting capital to work recognize the limitations in the reward of going against the Federal Reserve’s objections. Perhaps, a collective appreciation in hard and soft assets is a trend to follow. Surely dwelling on risk aversion may interest observers, but that approach is subsiding until the next pause. Interestingly, even if a downtrend begins to persist, then the safety net of further Fed easing is perceived to add confidence, as well. For now, stimulus efforts are working and interest rate directions are less mysterious.

Article Quotes:

“It is not so much that the Chinese eat more when they move to the cities. It is rather the composition of their diets which changes. They simply consume more animal proteins. Between 1994 and 2009, the Chinese effectively doubled their meat consumption from about 35 kilograms per annum to approximately 70 kilograms. … The United States, New Zealand and Australia are the heaviest meat eaters in the world with an average annual per capita consumption of about 110 kilograms. As the poor get wealthier, they will want more protein – mainly chicken, pork and beef. Converting a grain rich diet to a more protein rich diet will increase overall demand for grain significantly as livestock is inefficient in terms of converting grain to energy. It takes 2-3 kilograms of grain to produce 1 kilogram of chicken, about 4 kilograms of grain to produce 1 kilogram of pork and as much as 7-8 kilograms of grain to produce 1 kilogram of beef. Hence, if the average daily calorie consumption grows by 30% between now and 2030 as projected, demand for grain will grow by a multiple of that.” (Credit Writedowns, March 2, 2012)

“One thing is abundantly clear, however. The German economy has powered far ahead of France’s, and the gap is widening every year. Germany has maintained its industrial base and competitive edge, both technologically and in terms of cost, while France lacks a large sector of medium-size industrial enterprises and depends much more on services. The French share of global exports has steadily fallen, while the German share has steadily risen. French salaries have increased in real terms while German salaries have fallen, making French workers more expensive and thus less productive and competitive. French social protections for the unemployed are also much more lavish, especially after the Germans pushed through the so-called Hartz reforms, which largely limited unemployment benefits to 12 months. In France, the duration is 23 months for those under 50 and three years for those over 50, many of whom never work again. (New York Times, March 3, 2012)

Levels:

S&P 500 Index [1369.63] – Closed near the high end of the post-2008 recovery run. Uptrend momentum appears poised for retracements.

Crude [$106.70] – Current price levels above $105 mirror action of last spring. Strength restored and confirmed in recent months.

Gold [$1707.00] – Once again, buyers demand is questionable or neutral at around $1750. Sideways price action remains in place.

DXY – US Dollar Index [79.40] – Attempting to moderately re-accelerate. In a common trading range and in line with the 15-week moving average. Simply confirming the lack of major movement and remains in the low end of a multi-year trend.

US 10 Year Treasury Yields [1.97%] – In a very narrow range between 1.90% and 2.05%. Reinforces the point of low yields without major volatility.


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