Market Outlook | February 6, 2012

“Logic: The art of thinking and reasoning in strict accordance with the limitations and incapacities of the human misunderstanding.” (Ambrose Bierce 1842 –1913)

An awakening

Recent market moves have awakened investors from the dull and fearful mindsets. A minor rejuvenation in confidence is leading to second thoughts from those who were deeply awaiting a market collapse. Europe remains essential to the global economy, as the anticipated worst case scenarios serve as a negotiation tactic than a proven fact. Similarly, the much talked about “hard-landing” in China feels like a popular and convenient opinion that lingers from the overly fear biased estimates. At the same time, it appears too early to declare a unanimous bull market across key economies.

Not good enough?

The stock market is smoothly pointing to a positive multi-month trend. Headline makers were offered plenty of cheerful and noteworthy statistics this weekend. For example, the Nasdaq closed at an 11 year high and the Dow Jones index reached its best levels since May 2008. In addition, the S&P 500 index has gained over 25% rally since October 4, 2011 lows which reinforces further strength. Interestingly, the S&P downgrade of US debt, in last August is far forgotten while the historic opinion failed to cripple a recovery. Simply, the resilience of the financial system reaffirms the relative edge of America’s economy.

Even a good market performance has its shares of doubters. Improvement in labor numbers has yet to deter naysayers, who are overly focused on the politics of an election year. As expected, those invested in political circles present a conflicted and mostly self-serving view. Obviously, identifying the usual political oriented or social banter is not enough to formulate an investment plan. Now, the stubborn gloom and doom crowd may struggle to deny the increasing drivers of a positive momentum. On the other hand, over- hyping the recent moves has its dangers of overstating the collective confidence. However, most can agree that a follow through, in this recent rally has the cheerful and the gloomy observer equally waiting in a suspenseful manner.

Near-term Digestion

A breather from the upside moves is approaching in days and weeks ahead. Amazingly enough, fear, which was trading at a significant premium is now heavily discounted. Clearly, volatility is remains in a downtrend serving as a barometer of calming nerves. The current market set up may lead to some traders to take some profits or at least hedge their winnings. Nonetheless, the overall bias favors an upside move that has weary sideline observers eagerly watching for next attractive entry points.

Looming in the background, are the day to day results from European resolution efforts. Meanwhile, a better than expected outcome can extended this rally into the late spring months. The surprise element is quite alive as long as majority of money managers continue to view the unresolved Europe ending up in a collapse. In the near-term, a back and forth debate between buyers and sellers can lead to neutral trading patterns. However, the bigger picture favors a recovery and unfairly dismissing that message over the long-term can prove to be costly.

Article Quotes:

“China’s voracious appetite for energy to feed its continued economic development will become increasingly important as the state continues its transition into an industrial powerhouse. In 2009, China just barely overtook the United States as the largest consumer of energy in the world; by 2025, its energy consumption is projected to eclipse the United States by nearly 50 percent. In order to secure access to the energy resources it needs to fuel its economy, Beijing is developing a broad range of energy sources, including investments in solar technology and hydroelectric development. Yet conventional fossil fuels, China is betting, are likely to remain dominant. As a result, Beijing is developing a robust portfolio of fossil fuel resources from a variety of locations, including the Middle East, Central Asia and the South China Sea, in an effort to reduce its vulnerability from any one source. Middle East oil must transit through the Strait of Malacca, which, as Beijing is acutely aware, poses a strategic vulnerability should any state choose to compromise the sea lines of communications by blocking the strait.” (The Diplomat, February 4, 2012)

“The UK is starting to adopt some of the most aggressive US tactics, such as dawn raids on financial institutions and plea bargains, and it recently enacted a ban on bribery that is even tougher than the US foreign corrupt practices act. The eye-watering fines that companies pay in the US may also become a reality in the UK under new proposals from the solicitor general, Edward Garnier. Mr Garnier would like to introduce deferred prosecution agreements (DPAs) akin to those across the Atlantic. The US Department of Justice netted $2.3bn from 32 deferred prosecution agreements in 2010, according to statistics gathered by Gibson Dunn, the law firm. Under a DPA a company can admit wrongdoing, pay a fine and bring in independent monitors. In exchange, prosecutors agree to suspend criminal charges, allowing the company to remain on lucrative government tender lists. In theory, UK regulators and prosecutors could become more powerful than Wall Street expects. In addition to the far-reaching 2010 Bribery Act, the UK laws prohibiting insider dealing are also broader than those in the US, as Mr Einhorn discovered to his peril” (Financial Times, February 5, 2012)


Levels:

S&P 500 Index [1344.90] – Uptrend intact. Breaking out of 1350 and reaching last May highs of 1370 is the next challenge for optimist participants.

Crude [$97.84] – The commodity has yet to establish a well-defined trend above $100. However, any pullback is hardly a dent in the 12 year upside run.

Gold [$1734.00] – Moving at a slower pace in past 5 months. Buyer’s momentum for a re-acceleration is not too convincing. Nonetheless, buyers confirmed interest at $1600.

DXY – US Dollar Index [78.90] – The strong run since September has taken a minor break in the last two weeks. Interestingly, the dollar index is in-line with its 5 day moving average (78.58).

US 10 Year Treasury Yields [1.92%] – No major change in the several weeks. Attempting to stay above its new intra-day lows of 1.79% achieved on January 31, 2012.

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