Market Outlook | June 11, 2012

“Courage is not simply one of the virtues, but the form of every virtue at the testing point.” (C.S. Lewis, 1898-1963)

Struggle Recognized

Participants acknowledge and accept the slowing growth environment as showcased by recent data. Now, with that reality established, occasional panic-like responses are less of a shock these days than previously imagined. At the same time, casual investors have run out of patience in dealing with risk taking, while most fund managers reexamine the stability of financial systems in a fragile period.
Required adjustments in policy making stirs fearful responses for Chinese or Brazilian leaders, despite being touted as the alternative option to the U.S. and Europe. Equally, developed markets leaders quarrel with stimulus and economic revival deliberation on a daily basis. Of course, different challenges face matured versus maturing economies. Yet both face heavy scrutiny in navigating in the uncharted territory of a highly connected but slowing global system. In a cycle where unknowns have escalated dramatically, being a risk taker takes on a different meaning, and risk itself takes a while to grasp.

Intertwined Puzzle

Discovering the true nature of the Eurozone conditions is tricky and frankly ugly, when considering the political maneuverings. Equally, gauging the rapidly changing investor perceptions creates some suspense. Being optimistic on postponement of bad news is not a solid investment plan, but it is somewhat a common practice. Specifically a bail out rally, as showcased with Spain over the weekend, may turn out to be short lived, but that surely does not discourage the crowd from cheering.

Meanwhile, betting against the world's key assets is questionable, despite the constant urges from overly cautious crowds. Yet, in most cases, courage is known to pay more in markets than a long bet on sustainable demise. Even in a period where there is a "1930's" like depression, it is often quoted not necessarily safe to bet against traditional assets. For over three years, we've learned that moods are hard to decipher; faith in political leaders is at somewhat desperate lows; and growth industries aren't glaringly obvious.

Fearing Good News

In regards to envisioning a surprise element of a rally, it is healthy to feel fear in a period where there is surrounding overemphasis on the current list of worries. Still, it’s not quite accurate to proclaim that panic is at the highest level, with the Volatility Index closer to 20 than 40. Yet, an upbeat outlook and pragmatic case for further strength is in play. A lack of desired returns, along with the slowing of emerging markets, are points that are inescapable for fund managers. Buying land, infrastructure projects, and/or other real assets continue to gain momentum for now, while the overcrowded “safe asset” mania raises questions and doubts of a new bubble.

Finding bargains in the weeks ahead (value stocks or in select commodities) can stimulate buyers who are playing catch on their portfolios’ annual returns. In the last two summers, the post panics rallies ended up spoiling us into forgetting the previous concerns and tensions. Interestingly, a similar set up is building here. Chart observers and odds makers like the chances of a recovery, and headlines might paint a pleasant picture. Thus, anticipating several series of good news ahead of the election is not worth underestimating.

Article Quotes:

"Capitalism did not end, because of two major adaptations. First, the organizing and political clout of workers grew and allowed them to fight back through progressive legislation. The Progressive Era and the New Deal in the U.S., and labor governments in Europe, broke up the trusts, reined in the runaway wealth of the elite with progressive income and estate taxes, and empowered workers to bargain to gain a larger share of the benefits of their productivity increases. In the short run, the wealth and power of the elites was diminished (which is why they fought these changes tooth and nail and predicted the end of America, democracy, and everything else would result). But in the long run, these changes put the masses back on the side of sustaining capitalism, and kept it going…. Sadly, Marx was right about one aspect of capitalism—it is prone to periodic crises. Even rational actors tend to over-borrow if they are unduly optimistic about asset values and risk; the adjustment of labor forces to new technology is not a smooth and frictionless process; and the political institutions that provide the vital legal and contractual framework for capitalism to function can sometimes get clogged by political clashes and deadlock, or turn out to be wrongly designed to cope with the kind and scale of economic problems that emerge from growth." (The Atlantic, June 7, 2012)


“In the past, money manager Blau had no qualms about buying bonds issued by banks. But since the Lehman Brothers bankruptcy and the Greek disaster, no investor is willing to lend banks money without demanding substantial collateral in return. Instead, Blau is increasingly making the kinds of investments that banks used to make, in real estate, for example. When Deutsche Bank sold its freshly renovated twin towers in Frankfurt to its fund subsidiary DWS last year, the financing came from Allianz.There is little Blau isn't willing to explore in his search for investment returns, from infrastructure projects to wind farms. The latest craze is, of all things, parking meters. Two years ago, Allianz and a group of partners invested €1 billion in a company that operates parking meters in Chicago. And while banks shy away from funding Germany's cash-strapped local authorities, insurance companies are increasingly interested in municipal bonds. German life insurer R+V Lebensversicherung recently bought €20 million in bonds from the western German city of Wiesbaden.” (Spiegel Online International, June 5, 2012)



Levels:

S&P 500 Index [1325.66] – Strong case for an early bottoming process at 1288-1300. The near three month correction can entice further buying.

Crude [$84.10] – Following a sharp drop since March 1st, Crude still remains around 13% removed from 200-day moving average. Staying above $84 will set the tone and provide clues as to buyers’ appetite.

Gold [$1576.50] – Much anticipated inflection point between $1550-1600, in which buyer demand is long awaited. A failed recover here can stir less confidence for Gold for the rest of 2012.

DXY – US Dollar Index [82.51] – Closer to a higher trend of multi-month range. Ability to keep at these ranges is not clear.

US 10 Year Treasury Yields [1.63%] – Barely holding above all-time lows of 1.43%, while attempting to dig out of the 1.60%-1.80% range.



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