Market Outlook | February 13, 2012

“Even cowards can endure hardship; only the brave can endure suspense.” Mignon McLaughlin (1913-1983)

Suspenseful set-up

After a strong run in global stock markets and improvements in US labor results, the credibility of this ongoing recovery faces a suspenseful and eager crowd. The sustainability of a cheerful stock market raises few additional near-term questions. Since October 2011, the uneasy investor feeling showed signs of relative calmness, as showcased by a significant decline in volatility and markup in prices of risky assets. Ironically, it was around early fall 2011, when bad news became exhausted as the gloom and doom estimates appeared too extreme. In fact, claims of European collapse seemed far-fetched and evidence of great depression-like traits were not conclusive.

In other words, the skeptic crowd grew into a larger audience from summer to fall 2011 before losing steam in the past four months. At the same time, the optimistic group is charged up so far in 2012, and will continue to loudly gain further confidence for months ahead. Interestingly enough, both extreme crowds are stubborn in their views but maintain equally high conviction levels. However, the cool-headed outside observer might see a pending period of neutrality. Chart observers are quick to point out that the S&P 500 index is nearing and needing a mild breather at current levels. After all, it’s only natural to have price corrections as it provides a period for all to digest the dislocation between reality and perception. Importantly, assessing risk in sensitive periods is too tricky, and filtering headlines is vital for a better market read. Now, there is a desperate yet nagging desire to decipher the next macroeconomic catalyst.

Reigniting

Much of the last three years has seen a focus on policymakers’ implementation of stimulus-driven resolutions. Now capital allocators are not quite convinced by the proposed government-driven solutions while pondering the prospects of further quantitative easing. Similarly, it’s unclear if the labor number improvements are tangible rather than a clever presentation of economic data. Obviously, the magnitude of economic recovery will determine further talks of Federal Reserve stimulus efforts, while reigniting familiar and passionate debates. The mysterious part of both policymaking and crisis aversion should entice speculators to make bold moves. Basically, the doubt element related to governance risk will persist, especially as financial services reform remains a top priority. Simply put, that’s the new reality that investors will have to accept rather than fight.
Near-term challenges

The multi-month positive performance does not necessarily demonstrate that money managers are buying aggressively or showing signs of complacency. Yet those purchasing shares of US assets since last quarter are looking to hedge or take some profits in days ahead. Investors who strive in periods of high turbulence have been desperately waiting on the sidelines. Thus, volatility traders are too eager to unleash and participate in wild swings. Meanwhile, bargain hunters and value seekers will have to stay focused on selective entry points while not losing perspective of the big picture. Discipline, more often than not, has proved to be more rewarding than chasing short-term trends.

Article Quotes:

“About 11 per cent of the world’s people are over 60 at the moment. In the next 25 years that will double, to almost a fifth, and one in six of those people will be over 80, according to a forthcoming book, Global Aging in the 21st Century, by sociologists Susan McDaniel of the University of Lethbridge and Zachary Zimmer of the University of California. While this is affecting every country and region – even sub-Saharan Africa is now seeing a very fast rise in its proportion of seniors – some countries are being hit very hard. While 12 per cent of Chinese are now over 60, in two decades, there will be more than 28 per cent. Brazil faces a similar blow. It will be very difficult for countries that are only just emerging from poverty to suddenly face huge elder-care costs. Peak people will be an age when jobs compete for workers rather than vice versa. The cheapest labour will vanish. We’re already seeing this: Because China is aging very fast, its dwindling working-age population is turning down the lowest-paid jobs and pushing up the minimum wage sharply, as well as the once-minimal costs of social services: Stuff from China will stop being cheap, because the Chinese aren’t young.” (The Globe & Mail, February 11, 2012)

“And as David Rothkopf points out in his incisive and timely new book, Power Inc, the pendulum has swung sharply from public to corporate in the last generation. That has changed the character of the US economy. ‘In the past there was a tight connection between economic growth leading to jobs creation, which in turn led to broad wealth creation,’ Mr. Rothkopf says. ‘Those links no longer seem to work.’ While profits have been soaring for the past two years, the US economy is now beginning to add enough jobs to reduce the headline rate. But at this speed it will still take until 2020 to restore those lost since 2007 and make up for population growth. For a small share of Americans, strong income growth is back. But for most of those now finding jobs, wages are well below the starting salaries in previous recoveries. ‘Two-tier’ corporations, such as Caterpillar and Chrysler, which hire new people on less than half the wages of older ones and with fewer benefits, are becoming typical.” (Financial Times, February 12, 2012)



Levels:

S&P 500 Index [1342.64] – Stalling around 1350, a level that triggered sell-offs in May and July 2011. Once again, that key level is being tested and setting the psychological barometer.

Crude [$98.67] – Hardly any significant movement the last 50 days. A tight trading range between $96-102.

Gold [$1711.50] –Struggling to move above 1750, last visited in mid-November. Once again, momentum is stalling and ability to stay above $1610 can provide clue on overall buyers’ appetite.

DXY – US Dollar Index [79.11] – Remains in an intermediate-term uptrend as it trades above its 200-day moving average. The dollar is setting up to strengthen in the near-term.

US 10 Year Treasury Yields [1.98%] – For over a month, sitting in a narrow range between 1.80%-2.20%. Until further macro catalysts, this pattern should continue to hold.


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