Market Outlook | April 2, 2011

“An intense anticipation itself transforms possibility into reality; our desires being often but precursors of the things which we are capable of performing.” (Samuel Smile 1812-1904)

Anticipation

In a decorative manner, most weekend headlines pointed out the best quarter for the S&P 500 index in over a decade. Surely, the liquid and robust equity markets reconfirmed a definitive trend of strength – a feel-good story for participants and optimistic storytellers. Interestingly, the shares of top-performing companies in the first quarter did not showcase similar traits last year. “The 50 S&P 500 stocks that were down the most in 2011 were up an average of 23.8% in the first quarter, which is by far the best of any decile.” (Bespoke March 30, 2012.). This begs the question of whether the multi-month trend is part of a suppressed buy appetite that’s catching up to not-so-bad realities. Or else, this can be characterized as a short-lived recovery from depressed ranges. Momentum followers cannot easily deny improvements in economic factors, especially labor, although, when opened to interpretations, Nonetheless, in the current conditions, owning shares of US companies has its advantages, even as a short-term chatter of corrections looms around us.

Repeat Attempt

In looking ahead, the stock market’s ability to replicate winning ideas will be both scrutinized, while the gains can result in a more hyped tone. Surely, lofty expectations are being set while curiosities re-emerge in pondering if these winnings extend toward the year’s end. Much of the strength in US equities appears solid from historical patterns, and in some metrics it echoes a ‘90s-like bull market after a nearly 13% rise in the S&P 500 Index. Yet, it is not quite viewed in the same manner by all. Skeptical mindsets may not accept this fact of positive momentum (in stocks and labor numbers) despite the declining Euro-zone realities. At this point, European concerns are too persistent to vanish, as Spain’s economy stands to reignite familiar shock waves in the near-term.

Enigma

Meanwhile, as usual in recent years, the global attention finds a way to wait in suspense on the Chinese growth rate. In terms of sentiment, investors have realized the slowdown, whether in GDP or attitudes by policymakers, to prevent overheating. So far this year, the Chinese broad index (FXI) has underperformed when compared to other emerging markets. For bargain hunters, Chinese stocks may remain appealing, especially if improvements in manufacturing numbers. However, the decade-old (conventional) investor mindset has to wonder on the potential rewards of owning state-run companies offering attractive returns. Some bank analysts are slowly raising estimates in Chinese growth, which is contrarian for now and requires a follow-through. Yet, the sustainability of near-term recovery has implications on sentiment related to commodities and other nations tied to the Chinese economy. However, betting on a slowing China is not a new event, so perhaps upside surprise should not be easily dismissed.

Impactful

A sense of stability is forming in establishing a low-rate environment, which resulted in lower volatility and increased relative comfort. Policymakers for now have successfully calmed participants’ nerves, at least for a little while. The low rate continues to expand into key developed countries as this trend is led by the US and characterized by some as “currency wars”. Predicting changes to for further easing plans may leave managers scrambling and speculating on the dollar and interest rate policies. Both a mega driver of macro themes impacting the perception of commodity and currency pricing while distinguishing the interests between emerging and developed markets. When considering these points, another reason for more capital inflow into US Equities especially if the alternatives globally continue is be overly limiting.

Quotes:

"Here’s another facet of a Chinese slowdown: its role as an importer. The longstanding notion of China as the world’s exporter is beginning to look a bit dated, argues Tao Wang, UBS’ China economist. Recent data shows imports have risen while exports have fallen, and Tao says China’s import power should not be underestimated: ‘For one thing, China’s imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011. Also, as the numerous stories in financial newspapers can testify, China has become an increasingly important market for investment goods and certain high end consumer goods.’ 0.6 percentage points of Germany’s 3 per cent GDP growth for 2011 — or, about a fifth — was courtesy of its exports to China. Well, it probably helped Germany to reduce reliance on exporting to its fellow eurozone members. There’s a certain irony here in that Germany is simultaneously importing less from some eurozone peripherals, to a degree that could be harming their prospects of recovery. Meanwhile, Chinese imports also contributed to 0.1 percentage points of the US’ 1.7 per cent GDP growth in 2011. Not much of a small number, but not insignificant either — almost 6 per cent of US GDP growth. So, no wonder US companies are becoming increasingly worried about a Chinese slowdown. (Financial Times, March 26, 2012)

“To see the future of oil, consider the present of natural gas. Until recently, many thought the West was running out of gas — most of the easily accessible natural gas finds were being depleted, making the West reliant on ever more distant, ever more difficult reserves to exploit. The U.S., the world’s biggest natural gas importer, began to build ports to receive liquefied natural gas from distant continents in the expectation that it couldn’t import enough from Canada and Mexico. Then everything flipped. New technologies emerged to extract gas from shale and other rock formations. Because these so-called unconventional technologies — fracking is the best known among them — proved cheaper than obtaining gas from the harder-to-find “conventional” sources, and because shale gas is plentiful, the unconventional became the norm. Thanks to fracking, the U.S. has suddenly become the world’s largest producer of natural gas, creating a massive glut that has more than halved the price of natural gas. Those liquefied natural gas ports that the U.S. was building to import gas will now be used to export gas.” (Lawrence Solomon, Financial Post, March 30, 2012)

Levels:

S&P 500 Index [1408.47] – After reaching annual intra-day highs of 1419.15, the index closed at the higher end of a multi-month range. Currently trading 11% above the 200-day moving average.

Crude [$103.02] – Despite notable acceleration this year, crude has struggled to surpass the $107 range on numerous occasions. Further evidence is needed to justify the recent moves.

Gold [$1662.50] – Sideways pattern continues, as buyers have not shown enough demand to propel the commodity into new highs. Mostly, trading back and forth between $1600-1700.

DXY – US Dollar Index [79.00] – Barley moving, which comes as no surprise in recent months.

US 10 Year Treasury Yields [2.20%] – Pausing from recent acceleration. Surpassing the 2.40% range remains a challenge.


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