Grasping the landscape
Moderate optimism is being felt, and rightfully
so, after a three-year re-awakening of a bull market. Anticipation of
improvement in housing and less panic about Europe fueled price movement of
risky assets. Central banks stuck to their grand plan of maintaining a low rate
policy as an ongoing stimulus effort. Importantly, minimizing the elements for
downside surprises was essential in taming volatility.
As stated in many ways and forms,
betting on low volatility and strong European market performance would not have
been viewed as a winning strategy (to put it politely) by most last year. The
frenzied thoughts and chatter from more than a year ago were not overly
influential as US
The scramble to grasp why global
markets are up has been overly discussed as usual at year-end. Meanwhile, pondering
reasons for possible decline in asset prices is worth observing while
selectively extracting meaningful themes. And keeping an open mind for
surprises typically is rewarding even in this short-term-oriented marketplace.
Revisiting: The known worrisome topics
Concerns looming around a potential peak
or correction in US markets circle around the following:
1)
Difficult to sustain corporate earnings which have reached historic highs in
recent years.
2)
Expiration and replacement of Operation Twist. Consequences of Federal Reserve’s
stimulus efforts as time passes.
3)
Markets reaching extended or exhausted levels, given the broad-base rally over
the past three years.
4)
Government deliberation: policy makers’ perceived mismanagement, leading to
additional uncertainty in Europe and US.
5)
Volatility rising from relatively low levels driven by shifts in sentiments
favoring "risk-aversion."
6)
Sell-offs in key commodities following a multi-year run, causing a drag in
other risky assets.
First, crude inventories continue to
rise, causing a negative impact on pricing. "U.S.
average daily output will climb 14 percent this year, the most in six decades,
according to the Energy Department, as Anadarko Petroleum Corp. and Chesapeake
Energy Corp. exploit new deposits from North Dakota to Texas.” (Bloomberg,
December 13, 2012)
Secondly, gold prices have not
surpassed all-time highs and appear to have lost some luster versus pervious
years. Goldbugs overall may not be too pleased with actual results, given the
lofty expectations.
Continuing the run
Despite the points above, there are forces
to support the ongoing bull market. Similarly, the natural worries do not
translate into fear-like behavior overnight and to claim a bubble-like collapse
is due loses merit unless there are drastic fundamental changes. Of course,
during a tense period after a bank crisis and flash crash, there is a growing
audience that has a wide appetite for calamity.
Favorable points supporting the current
upside run include:
1.
Speculators expressing a negative market view remain elevated via "short
interest" in the S&P 500 index. The indicator is near summer highs,
suggesting sentiment is not quite overly positive. Therefore, worries of a
sudden sharp sell-off should not feared like 2000 and 2008.
2.
Economic recovery persists related to housing and labor as trends build on
positive results. A business cycle that’s bottoming and geared to convince
doubters on sustainability.
3.
Limited investment options in a low-yield environment leaves room for further
upside in select liquid assets. Unless there are major shifts in currencies and
interest rates, the lack of alternatives theme remains in force.
4.
The interconnected global marketplace is gearing for another run for a
synchronized upside movement from recovering China
Between now and year-end, capturing new developing themes may not
be highly visible. Plus, the worrisome items do not disappear and will be
pondered for most of 2013, as well. Anticipation for a trend shift grows daily,
but the existing trend is not broken easily. Thus, the challenge for trades is
to balance both views selectively. This is a daunting task indeed.
Article
Quotes:
“Apartment prices in Manhattan have
increased substantially relative to rents over the past seventeen years,
raising concern about the sustainability of current prices. Although they have
retreated somewhat since 2008, price-rent ratios in the borough are more than
twice as high as they were in the mid-1990s. Part of this increase can be
explained by lower mortgage rates, which tend to lift sales prices relative to
rents by reducing financing costs, and by lower property taxes. Moreover,
price-rent ratios appear to have been unusually low in the mid-1990s. Still,
current rent levels, mortgage rates, and property tax rates make it difficult
to account for the high prices of Manhattan co-ops and condominiums in 2011
without assuming an expected future price appreciation of at least 4 percent
per year. That figure could be even higher if transaction costs and risk
premiums are included. While the analysis here covers the period through 2011, reports
of accelerating rents but stable apartment prices in 2012 suggest that people
may have tempered their expectations for price appreciation.” (The Federal Reserve Bank of New York, November 9,
2012).
“During a difficult summer, the
leadership’s understated response to China’s economic woes looked like an
under-reaction. But the economy has gathered momentum in recent months.
Industrial production grew by over 10% in the 12 months to November, its first
double-digit growth since March. … The recovery is also visible in electricity
output (up by 7.9% in the same period). This had failed to grow in the 12
months to June, inspiring fears that the economy was much weaker than the
official growth figures suggest. But two
related problems still weigh on China’s manufacturers. The first is excess
capacity in industries such as steel, cement and carmaking. The second is
excess inventory. In the first half of the year unsold goods piled up as firms
failed to find customers for their wares. Since then they have slowed production
and reduced their stockpiles..” (The Economist, December 15, 2012).
Levels:
S&P 500 Index [1413.58] – Closed right near the 50-day moving average. Once
again, this suggests the strength remains intact, despite growing odds of a near-term
pause.
Crude [$85.93] – Since mid-October, crude has failed to surpass $90.
Many of the price swings continue to occur between $85-95. Interestingly, the
annual highs of $110 seem too far and revisiting July lows of $77.28 would
require a major shift. Understandably, followers of crude prices are on edge
for the next directional movement.
Gold [$1696.25] – For more than 15 months, gold has failed to surpass
$1900 on three occasions. Interestingly, in the last three months, gold has also
not significantly declined below $1700. The much-discussed hype and enthusiasm
may not match price actions.
DXY – US Dollar Index [80.15] – The last three months showcase some signs of a strengthening
dollar. This reinforces the bottoming process that began in May 2011.
US 10 Year Treasury Yields [1.70%] – Digging out of historic lows for several months
and beginning to show moderately rising yields. Breaking above 1.85% could
spark a noteworthy trend.
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
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