Market Outlook | April 23, 2012

“Our Age of Anxiety is, in great part, the result of trying to do
today's jobs with yesterday's tools.” Marshall McLuhan (1911- 1980)


Spring Revisited


Murmurs of last spring’s Eurozone fright and darker visions mostly scared risk takers and casual observers alike. With short-term memories convenient and relatively fresh, the issue of sovereign debt risk is dreadfully revisited. This is a tiresome issue, but each round presents a different angle in a new season, as Spanish concerns take the front-seat discussion for policy makers and commentators. Several months of improving sentiment that focused on restoration in global markets is now severely in question, yet again.


Confronting and addressing the core economic matters is where most leaders have chosen to shy away from, given the layers of complication. This mostly revolves around preservation of self-interest, which has unveiled its true nature. For scoreboard watchers and price influencers, the resurfacing grim thoughts and
emotional responses do set up a period for charged up near-term contemplations brewing to form mild uncertainty. Along with elections and political positioning, the search for clues lives on, while policies related to interest rates remain ever so intriguing to any stakeholder.


Around the same time last spring, volatility and the S&P 500 index traded very close to today’s levels. Yet, unlike the last two Aprils, the US 10 Year Treasury is trading below 2% instead of where it stood above 3% – an eye-grabbing macro trend that hits at the core of pending suspense. We also see growing discussions on how yields
dropped for the fifth week, which suggests shelter to safer assets. Surely, risk aversion is trigged by European events, as witnessed several times in the post-2008 era. For what it is worth, gold is not at all-time highs; neither are crude prices, at least for now, which again refocuses attention to central banks and policymakers.


Strength Examined

A six- to nine-month look back reminds us of the emphasis on and comfort in positive stock market trends. Some buyers who lucked out in staying resilient continue to cherish actual results that turned out better than the gloomiest of predictions, especially when panic peaked in summer 2011. As usual, the better-than-expected market performance did not fully dispel the usual concerns of labor restoration, known and unknown debt concerns and deliberation on pragmatic economic solutions. Yet, the perception between those having market investment exposure versus those digesting traditional economic data may produce varying outlooks.


The data from the earnings season may confirm or justify recent positive trends, at least in market behaviors. All eyes are fixated on these seasonal discoveries of the health of profitability in larger companies. So far, quarterly reports have demonstrated positive outcomes (against expectations) and further discovery awaits as we enter the crux of earning season. Investors face a conflict between pausing to let the looming turbulence pass versus gaining more comfort in owning shares and potentially increasing exposure in US equity markets. The investment options offered an appealing point, but finding a timely entry point is a daunting task in itself. Conventional yet practical viewpoints point to chasing higher returns,while others are willing to pay up for liquid market exposure. These dynamics are critical for investment managers in shaping portfolios to meet desired annual numbers as we’re nearing the midway point.


Resilience

Considering all points, global markets remain interconnected and for the most part share a collective upside move. Of course, financial behaviors easily become politicized and confusing, especially when short-term turbulence is the dominating theme. Plus, glaring crisis matters inevitably play out in the open markets at certain periods
with some spurts. Gauging the Federal Reserve’s intervention is the artful skill required from those active in markets. Speculative as it may be, betting along the central banks is the path favored by near-term traders despite waning investor sentiment. Meanwhile, value seekers should not feel to panic and sell or eagerly purchase, as
opportunities will present themselves in less flashy companies andindustries.


Article Quotes:


“After eight straight quarter increases, overall tax collections in the fourth quarter of 2011 are above the peak levels in most states.Total revenues were 3.0 percent higher in the fourth quarter of 2011 than in the same quarter of 2007. In the fourth quarter of 2011, 33 states reported higher tax revenue collections than in the same quarter of 2007. However, if we adjust the numbers for inflation, nationwide tax receipts show 3.4 percent decline in the fourth quarter of 2011 compared to the same quarter of 2007. … For most of the period during and after the last recession, local tax collections remained relatively strong. However, the trends are now shifting due in part to the lagged impact of falling housing prices on property tax collections. For the quarter ending in December, the 1.0 percent decline in the four-quarter moving average of local tax collections is weak compared to historical averages. The largest year-over-year growth in local tax collections in recent history was recorded in the third quarter of r of 2005, at 5.8 percent” (Rockfeller Institute ofGovernment – April 2012)


“So while Bo's particular brand of charisma may have been a bridge toofar, this is when China needs dynamic leadership most. As highlighted in a February World Bank study, China may well be facing another key inflection point and will require a new wave of economic reforms, such as commercializing the banking sector and redefining the state's role in the economy, or risk increasing the likelihood of a hard landing. But it will take an empowered and proactive new leadership to implement such an agenda over the strong resistance of powerful vested interests such as sprawling state firms and entrenched local officials. Instead, what Beijing has, and what is on display in the Bo case, is a stovepiped bureaucracy that strains to present a unified face to its people and the world. The problem is that an effective remedy would involve substantial structural changes to a system in which key players, such as the Chinese military, seek to advance their parochial interests by exploiting the gaps that pervade the current Leninist structure and which breed poor policy coordination. Extensive corruption also has filled the vacuum left by the demise of ideology,and the leadership has fostered a top-down decision-making culturethat discourages competing ideas and punishes any public hint of disagreement within the party's seniorranks. (Council of Foreign Relations, April 18, 2012)


Levels:

S&P 500 Index [1378.53] – Multi-month run alive but mildly pausing. Mostly uneventful pattern in the last few days. Verdict awaited in earnings sentiment and continuation of optimism. Trading almost around the 50-day moving average, which catches the attention of technical observers.

Crude [$103.50] – Additional evidence of strong buyers’ influences around the $100 range. Despite lacking upside boost, the uptrend has not broken.

Gold [$1641.50] – A tug-of-war between near-term buyers. Back and forth moves between $1650-1750 do not provide enough clues for projections, but emphasize that fueling the upside momentum is taking a while for gold optimists.

DXY – US Dollar Index [79.19] – Barely moving in recent days; hovering at familiar ranges.

US 10 Year Treasury Yields [1.96%] – Since March 20 peak of 2.39%, the downtrend has driven yields down below 2%.



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