Market Outlook | April 9, 2012

“Always do what you are afraid to do.” Ralph Waldo Emerson (1803-1882)

Present feel

Deciphering how to feel is where the majority of time is spent on market diagnoses. Either indexes tell us how we should feel; or politically driven engines shape what to feel For some, common-sense observations may provider better insights.

Scoreboard glancing reminds us that broad indexes, as measured by stock performance, showcase strength. The S&P 500 is up 11% for the year, while the bank index is up nearly 25%. So far, it is not farfetched for one to declare conditions are improving, at least from several months ago. Reading the jobs number, however, requires a shrewd grasp of mechanics, self-serving goals and unlocking missing details that may not appease the casual sentiment examiner.

Right ahead of the holiday weekend, the jobs number provided a not-so-amazing, but still upwardly trending message. There is plenty to dissect in that sense, along with earnings for the first quarter. This reveals mixed results of sorts, which some may use to jump to early conclusions. Somehow, the fear-mongering crowd has its share of followers, but a slanted view among traders can misleadingly pollute minds to disregard the noticeable strength. Putting mind games aside, a clear and open-minded approach is needed heading into quarterly earnings results and further examination of upwardly trending economic numbers – not to mention improving manufacturing and calmer volatility for several months.

Overcoming chatter

Perhaps the recent low-volatility trends are “too calm” for some participants’ liking, but by a few measures, the sense of comfort echoes levels last seen ahead of the crisis. Of course, it is too common to fear relentless success, especially when pending sell-offs and uncertainties are promoted as a possibility. First, memories of the last two spring seasons suggest that markets do slump heading into summer months. Sure, that’s mostly a thought driven by short-term memory, which has a profound influence and a potential of self-fulfilling prophecy. Secondly, the slowing China story is long awaited, and how that reality sets in is another wildcard. Finally, European concerns are convenient to spark and revisit worrisome issues that linger.

Uplifting Custom

Like quantitative easing and LTRO (Long-Term Refinancing Operation), the markets gained a vote of confidence in the early part of the year. Speculating is one matter, but encouragement of risk taking from policymakers provides another boost of market returns. These stimulus efforts can result in simple but unsustainable habits in which active participants count on the same trends to continue. On the other hand, the low interest rate model appears to be a necessary tactic for survival mode to improve global markets. As for now, speculators fight to find and preserve short-term gains while politicians focus on pending elections. The long-term health is left as a surprise (as pointed out by those opposing the Fed), which draws further intrigue for risk managers. Yet, for the traditional money managers, selectively betting along the US market, more often than not, continues to pay off in the long tracked market history. As simple as it seems for intellectual minds, the reality keeps proving itself despite scars and bruises, which are simply part of the game that all must accept.

Article Quotes:

“When strategists speak of the ‘Malacca Dilemma’, they mean that Beijing's sea lines of communications are highly vulnerable. In times of conflict between the US and China, the supply of crude and iron ore needed to keep the Chinese economy alive and kicking could be relatively easily cut off in the straits that connect the Indian Ocean with the Pacific. As such, a move would force the Chinese leadership rather quickly to the negotiation tables on the enemy's terms – and as it becomes clearer that the western Pacific holds vast untapped reserves of oil and natural gas – Beijing naturally sees control over the areas as a way out of its precarious situation. (According to Chinese estimates, oil and gas reserves in the western Pacific could meet Chinese demand for more than 60 years.) With official defense spending to top US$100 billion in 2012, and the actual amount estimated to be much higher, China's People's Liberation Army (PLA) seems on course towards building the strength needed to ensure all goes smoothly in China's quest for energy security.” (Asia Times, April 6, 2012)

“One of the reasons that a perception of manufacturing’s decline exists is the severe job losses that have been experienced within the sector – particularly given the dramatic impact such shifts can have in small communities all over America. … What factors are driving the changes in Chinese wages? Quite a few different things, as it turns out (all of which we find quite intuitive): ‘Chinese wages have been increasing at a rapid pace in recent years, driven by a variety of factors including shortage of workers in the coastal manufacturing areas, rising education levels among young workers, domestic inflation, and the government’s focus on raising national income levels in its 5-year plan(s).’ All of this should bode well for US manufacturing, since it makes the US more competitive in cost terms.” (Financial Times, April 4, 2011)


Levels:

S&P 500 Index [1398.08] – Ability to stay around 1400 provides some early clues for daily observers. A consolidation to 1350 appears plausible. Even in that case, the positive trend is poised to remain in place.

Crude [$103.31] – In the last five years, the bulk of trading for crude has stood within the $80-$100 range, outside of two extremes seen in 2008 (peak of $147 and low of $32). That said, guidance for next ranges is desperately awaited.

Gold [$1631.00] – At a quick glance, the multi-year run is convincing enough to claim gold is in a powerful run. However, the 7-month slump in price appreciation begs the question of when the next reacceleration will be. Otherwise, fragile trading ranges await around $1600.

DXY – US Dollar Index [79.00] – Early attempts at reacceleration, which will serve as a barometer for risk aversion. Yet, unless there is a dramatic move, the current pattern is all too familiar.

US 10 Year Treasury Yields [2.18%] – Similar to a short-lived spark in fall 2011, another sharp run up is pausing. The bottoming process for yields is taking shape between 1.80-2.20%. Yet several catalysts, along with time, are required to witness a noteworthy rise in yields.


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