Market Outlook | May 28, 2012

“Pride makes us artificial and humility makes us real.” Thomas Merton (1915-1968)

Ongoing Outcries

The last four months showcased the decline in prices of assets stretching from gold to oil to global equities. Price corrections usually invite frenzied responses by most and hidden pragmatic messages for others. Certainly, it does not take much to ponder the lack of financial stability. Cautiously, one has to weigh the influence of irrational sellers, which tends to influence the consensus thought at a rapid pace.

For now, known economic barometers reiterate the scarcity of “growth” from China to the Americas while enhancing the expected doubt as the summer months loom. Yet, the European debacle is not going away soon and remains a noisemaking daily matter. Meanwhile, the outcry for stimulus, increased demand for regulation and uproar for solutions is uttered by experts and expressed by the public alike. It’s a theme that’s influencing the leaders of emerging and developing markets. These chatters for near-term solutions are centered on policymaking debates rather than concrete confidence restoration. Perhaps, in a mind-numbing trading environment, one would think fund managers would take a humble view in admitting the unknown consequences of this current era.

Trust restoration

The growing mood of distrust toward stocks has persisted for several months - way before Facebook’s initial public offering. This is a key distinction that’s omitted by the mainstream headline makers. This dampening stock trading volume has for a while forced financial firms to adjust their business models and expectations. At least, the so-called retail or casual investor, not too eager to jump-in, is the overall takeaway, on a relative basis. Regardless of directional moves of broad stock indexes, participation has waned and this trend is questionable. Perhaps, a loss in popularity for an asset class does not necessarily translate to a loss of US relative attractiveness. Neither does distrust of banks confirm a full-blown collapse, at least in the US system. These discoveries can take a while to restore confidence to desired levels for nostalgic observers.

Confronting risks

The volatility index (VIX) is around 20 – much lower than the frantic ranges witnessed in spring 2010 and fall 2011. Perhaps, the “spooked” stock market crowd has graciously bowed out of risk taking, leaving larger firms to wager between each other. Interestingly, recent patterns in Treasury yields and US Dollar suggest increased risk aversion, especially with Eurozone fears serving as the primary catalysts. We see a differing message between the volatility index (for stocks) versus macro-driven indicators. In upcoming weeks, this divergence can provide further clarity and a uniform outlook. Yet through all this fuzziness, bargain hunters are desperately searching for mispriced ideas. Generally, a collective confusion can turn into fruitful entry points, as history tends to illustrate again and again.

Article Quotes:

“To analyze how military experience translates into corporate leadership, the researchers looked up the names of CEOs that ran America’s top companies from 1980 to 2006 and matched them to their listings in various editions of “Who’s Who,” which explicitly requests military background in its annual biographical list of prominent Americans. The percentage of CEOs during this period with military experience – about 30 percent overall – may be surprising to those raised in the post-Vietnam era, who imagine a tiny fraction of 18-year-olds joining the armed forces. But military drafts meant that a stint in the military was quite common for men coming of age during World War II and the Korean and Vietnam Wars. Back in the 1980s, when many war veterans were about the right age to be running companies, nearly 60 percent of CEOs had military experience. Nowadays, with veterans of these wars entering their golden years, only 8 percent of CEOs have served. So whatever characterizes military leadership, it’s increasingly rare in the corner office. (Slate, May 25, 2012).


There are many things I wish America did better, but one thing that is often underappreciated about the place is its remarkable economic and institutional flexibility. When Michigan's economy implodes, that's bad – but people find it remarkably easy to pack up and move to sunnier climes. When Congress can scarcely keep the money for highway repair flowing, the city of Chicago pioneers new public-private sources of infrastructure finance. America's federal government is often a wreck. Luckily, America's success isn't driven almost entirely by the choices and actions of the federal government. … Meanwhile, American innovation is proving as impressive as ever. The golden age of the Space Race may be long gone, but private firms in America are putting ships into orbit. Apple is the envy of the world, and rightly so. Google is doing pioneering work on autonomous vehicles, which could revolutionise transport. IBM's Watson, and things like it, could change medicine and many other fields besides. (The Economist, May 25, 2012)




Levels:

S&P 500 Index [1317.82] – Attempting to bottom around the 1300-1320 range, following the recent sell-offs.

Crude [$90.86] – Back to a familiar range around $90. Down $20 from March 2012 highs as part of a multi-month sell-off process.

Gold [$1569.50] – Remains in an established downtrend and slightly above December 2011 lows around $1531.

DXY – US Dollar Index [82.40] – Since May 1, 2012, the dollar is up nearly 5%. To put it in perspective, the strengthening dollar is far off from last decade’s highs of 121.02. Thus, there is a long way to climb up, and recent changes need plenty of follow through.

US 10 Year Treasury Yields [1.73%] – Flirting with the low end of the recent range. Very close to September 2011 lows of 1.67%, which marked the recovery for risky assets.

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