Market Outlook | May 14, 2012

“Agitation is the marshalling of the conscience of a nation to mold its laws.” Robert Peel (1788-1850)

Replaying

Reminiscent of last year, old worries are mounting and new grim facts untangle while fresh sets of discoveries enhance the existing suspense. Fragile attempts at European stability resurface while US business leaders scramble to instill trust as politicians and regulars attempt to deliver a plan for the impatient crowd. From Spain’s nationalization of banks to powerful election results in Europe, collective emotions are flaring. All in all, tension is back again and for market followers the script is becoming too familiar.

Amazingly, numbers find a way to fasinate observers – at least on a simple year-to-year comparision. Strange as it may be, on May 2, 2011, the S&P 500 Index peaked at 1370. Today it’s holding at a delicate range around 1350, leaving buyers and sellers to haggle for the next move. Of course, history does not always repeat itself in the same exact form – at lease we’d like to think so. Similarly, one can glance at the volaitlity index which peaked around 20 last May. Today, the expected fear barrmoter stands around 19.89 as of the end of last Friday. Not quite extreme fear levels, but quite reflective of a sensitive crowd that’s anxiously dealing with known problems but unknown consequences heading into the summer months.

Loss confronted

Against this big-picture backdrop, perhaps last week was not an ideal time to announce the loss of $2 billion dollars, especially for a “risk management expert.” Certainly, these days, there is no mercy for banks admitting fault when the overall climate is increasingly edgy. Unforgiving crowds continue to emerge as a theme that’s visible in voters and investors alike. Basically, the vote of confidence in the existing system is not producing a thrilling response. However, for executives of public companies, it may not be a bad time to dump all bad news in a jittery environment. Piling onto the pot of bad news is one strategy as less pleasant news becomes somewhat of the norm. Thus, discovering a bank loss or lack of control quickly takes us back down memory lane to an unshakeable new financial world. Basically, the effects of 2008 are with us – hard to shake – and regulatory measures are even more justifiable now.

Dissecting Mottos

In a basic form, the sales pitches of popular investment slogans are being questioned or being digested. Those fed up with paper assets and those clinging onto unfavorable views of the Federal Reserve's plan concluded that owning gold might be one safer answer. Of course, one glaring advertisement for gold lies in its past performance. Simply, it’s visible in its 12-year chart, demonstrating an eye-catching upward slide. Re-runs of that advertisement can get a crowd excited. Yet gold this year is up only 1%, reflecting a sluggish near-term performance and testing the will of commodity supporters. Again, just because central banks are buying to diversify their currency position is no guarantee for gold to skyrocket above $2500. Nor should waning stock and global growth issues spur an audience to turn to other alternative options.

Growth search

For a while, advisors remind us of the historical performance of the last decade, in which emerging markets vastly outperformed established markets. Clearly, for a while this so-called structural shift became fashionable and real in some respects. Mainly, this mindset created momentum in emerging markets, and drove plenty of folks to “chase the money” by owning possessions in China and other nations. Now this thought is not rosy, as recent headline outcomes continue to reconfirm the slowdown:

“China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. ….India's industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment. Output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before.” (Associated Press, May 11, 2012)

Meanwhile, the classic textbook investment suggests that US Treasuries remain a barometer for risk-free rates. So far it has been the symbol of risk aversion, but on a basic level the returns are unappealing. Now yields are less than 2%, around all-time lows, as showcased for weeks, especially in a period where shelter is hard to find. Plenty of managers would rather give up higher returns for the comfort of perceived safety. This song and dance at some point has to end or take a new shape. The thought of safety may turn into a liability for those planning ahead. Perhaps, that’s the message from recent patterns in gold, emerging markets and US Treasuries. Soon we will have a better confirmation

Through all this, the lack of investment options may require investors to engage in further risk taking to meet desirable hurdles. For now, the near-term emphasis is highly focused on a barrage of worries. Yet, selective buying in US stocks and less discovered emerging markets may prove fruitful a year or so from now.

Article Quotes:

“US-based public pension funds constitute one of the most prominent institutional investor segments investing in real estate. The aggregate assets under management held by US public pensions that are active in real estate is over USD 3 trillion, with the average real estate allocation amounting to 6.3% of total assets, below the 8% average target allocation of this group of investors. Fifty-seven percent of public pension funds based in the US that invest in real estate have assets under management of below USD 1 billion; a further 28% have assets of between USD 1 billion and USD 9.99 billion. Eleven percent have total assets of USD 10-49.99 billion. Five percent have total assets of USD 50 billion or more. Seventy-three percent of US public pension funds that invest in real estate have a real estate allocation of less than USD 250 million.” (Preqin, May 2, 2012)

“In the face of the overwhelming demographic facts, Greece and Wisconsin will have to shed their antiquated notions of work and retirement. … Even if you believe in the economic promise of austerity, there are simply no cost-cutting measures to buoy an economy with one-third of the people retired and a sub-replacement birth rate. If we can begin to integrate our aging population into economic life, the payoff would be two-fold. First, it would stop the bleeding brought about by bygone retirement schemes and entitlements. Second, it would add GDP to the economy by growing the skilled workforce. Sure, the workplace of today is far different than it was 20 and even 10 years ago – but this can’t be an excuse to marginalize the aging. Instead, the older population is Greece’s and the world’s greatest hope for economic growth and recovery; and this group has decades of experience and expertise to offer. Throughout Europe, the story is much the same. Only Turkey, France, and Ireland have birth rates over 2.0, and the average old-age dependency ratio in Europe is 25 to 100; it will climb to 47 to 100 by 2050. “ (The Fiscal Times, May 11, 2012)

Levels:

S&P 500 Index [1353.69] – Attempting to hold 1350, as the index is below its 50-day moving average.

Crude [$96.13] – Barely holding on above $96, as the decline continues. The recent sharp fall is stimulated by higher inventory than expected; plus, slowing global demand triggers an inevitable downside action.

Gold [$1583] – A drop below the $1600 is eye grabbing in one view. Interestingly, the recent lows stood at $1531 on December 29, 2011. Now, enthusiasm is waning but buyers seeking a bargain might dabble. Yet this downtrend is hard to ignore.

DXY – US Dollar Index [79.19] – Since May 6, 2011, the index has managed to rise by 10%. Although not glaringly noticeable, a strengthening dollar is quietly and slowly brewing. Index is up 10 days in a row, making a noteworthy macro statement.

US 10 Year Treasury Yields [1.83%] – All-time lows are not too far at 1.67% and the downtrend pressures looms larger.

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