Market Outlook | March 26, 2012

“Our imagination is the only limit to what we can hope to have in the future” -Charles F. Kettering (1883-1931)

Seasonal Reevaluation

Like seasonal changes, there is suspense and excitement circling around markets. Since the fall, broad indexes have proved to be less turbulent and led to steadily rising equity markets. Now this comforting trend faces a period of further questioning and potential readjustment, despite the strong bullish statement in the past six months. For buyers, the weeks ahead offer a chance to examine or to take profits or hold off on further buying. Meanwhile, sideline observers eager to enter have reawakened to the lack of liquid alternatives and are facing the new realities. Of course, the skeptical crowd did not quite vanish completely, as each minor down day is most likely to reignite previously known tiresome worries. The end of the first quarter presents a reshuffling period for fund managers to pinpoint on assessing “value” while trying to get clarity on the meaning of risk.

Isolating key themes

Before reacting or responding to pending headline results, a breather is ¬needed. As a start, distinguishing the critical big-picture themes of the US’s relative strength versus anticipating near-term price decline is vital for participants.

First, long-term themes mostly revolve around the edge of America’s financial and legal system, which is ahead of Emerging nations and few steps ahead of Europe. Secondly, in a period where low interest rates are well established, other global policymakers are following the US strategy in attempting to “race to the bottom” in lowering rates. In turn, this has reaffirmed the strength of stocks, especially when compared to other fixed-income investments. Plus, this forces traditional fixed-income investors to reassess and look into higher yielding instruments (explore taking risks). Thirdly, overly feared macro events, such as a European crisis and China slowdown, may not end up eroding US growth as hugely as anticipated. This becomes a stronger point if economic stabilization and restoration of innovation-based sectors continues to take hold. All three points above should not be forgotten if the S&P 500 index declines 5 or 10% in the near term.

Thinking ahead

At the same time, the post-2008 era created hesitancy over stock market stability and opened some desire for alternatives. That trend may encourage investors to dabble int0 niche areas. However, the liquidity of US markets remains intact, despite a mini-glitch last week that was specific to one company. Surely, cumulating glitches can have bigger implications, but for now the question is around the reversal of recent low-volume trends and the continuation of lower volatility. A sensitive period indeed. The stakes are raised with high-profile IPOs awaiting launches, the federal reserve planning to clarify the macro plans and the unveiling of recent corporate earnings results. All combine to add nerves to what has been for the most part a seamless recent uptrend. Yet, a new season and new quarter are known to test all kinds of convictions.

Article Quotes:

“First, China’s economy is overly dependent on fixed-asset investment and exports. Consumption represents only about 35 per cent of GDP, a figure well below those of developing countries such as India. The perpetuation of a production-intensive economic model owes much to inefficient capital allocation. This condition is buttressed by an illiberal and politicised financial system, as well as distorted input costs including subsidised energy and land prices. Second, one of the more troubling consequences of China’s capital-intensive growth model is that companies (and the government) have captured much of the enormous wealth generated in the last three decades at the expense of Chinese households. This dynamic is not only exacerbating an already yawning gap between the government and business elite on the one hand and the average Chinese citizen on the other; it is also repressing consumption…. Third, China’s vast regional disparities in living standards and average incomes are often likened to the contrast between different centuries. Policy makers in Beijing face the unique problem of having to deal with issues typical of both 21st-century middle-income countries and 20th-century developing countries.” (East Asia Forum, March 24, 2012)

“Accredited investors willing to invest in start-ups are simply too few to provide enough capital for young companies. My analysis of data from representative surveys of Americans reveals that venture capitalists and accredited business angels make equity investments in only about 15,000 businesses per year. But roughly 150,000 small companies receive informal investments every year. Thus, the vast majority of informal investment comes from unaccredited investors who cannot be solicited online but who learn about the investment opportunities through other means. Equity crowd funding will just improve the efficiency of this process. As anyone with a Facebook or Linked In account knows, allowing people to use online tools just facilitates interactions that people are undertaking anyway. The House bill minimizes the risks that investors face from equity crowd funding by limiting the amount of money they can lose. The bill limits investment to the lesser of $10,000 or 10 percent of the investor’s income. In what might only be described as a Washington miracle, Congress has a chance to pass bipartisan legislation to help entrepreneurs in a presidential election year.” (The American, March 22, 2012)

Levels:

S&P 500 Index [1397.11] – Near-term signs of pausing around 1400. Ablity to stay above 1350 will stir interest concerning the sustainability.

Crude [$106.87] – Recent momentum briefly stalling below $110. The multi-month upside move is creating a perception of price spikes.

Gold [$1658.00] – Struggling to break above $1750 while not dipping below $1610. An extended stalling process reflects a lack of catalysts for an upside move while lacking serious sellers. The faith of the commodity remains unsettled for weeks ahead.

DXY – US Dollar Index [79.34] – Hardly moving in recent weeks while remaining near all-time lows, suggesting the deprecating dollar has not changed significantly.

US 10 Year Treasury Yields [2.23%] – Although there has been much chatter of rising rates in recent days, the 2.40% range has served as a tough ceiling to overcome. Too early to declare a trend shift, as yields remain low.

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