Market Outlook | July 9, 2012

“Order is repetition of units. Chaos is multiplicity without rhythm.” (M. C. Escher, 1898-1972)

Heating puzzle

It was a holiday-shortened week that witnessed further coordinated global easing and the ever-so-common interventions. Then, the US jobs results triggered heated political discussion points on levels of growth. Meanwhile, the stock market trading in a narrower range witnessed some mild reactions to the labor conditions. Despite headline excitement, the overall New York Stock exchange volume stood well below the norm, which reveals lackluster participation rates. Yet, the broad US markets are up for the year (S&P 500 Index: 7.7% and Nasdaq 100: 14.7%) but emphasis might be biased around the deflating sentiment.

Plus, lack of comfort in the debatable economic growth measures presents edginess, especially when the revived manufacturing data took a dip. There’s plenty to decipher in the labor conditions, but it’s safe to say that good news remains very scarce. This justifies owning stocks more than selling – at least from a contrarian view. Thus, the search for quiet summer months is harder to find in recent years with the interlinked nature of markets and dissatisfied audiences with varying self-interest. Investors will have to sort out the loud rhetoric versus actual unknown results. That’s where the limited opportunities lie for the brave and patient.

Ambiguity mounting

Through all this, the mystery of quarterly corporate earning results looms around the corner – not to mention the Eurozone turbulences that can erupt periodically or be resolved temporarily. In any case, we’re accustomed to both. Clearly, the low interest theme is a global phenomenon stretching beyond US central banks. China’s recent policies may require additional time to digest from the recent slowdown. It’ll be a tough month ahead for speculators and forecasters of all kinds. Thus, the speculative nature of markets is viewed as less of a skill or luck, and is based more on guessing outcomes. Maybe that entices some, but the whole idea of making money for retirement in markets is questioned severely. Finding shelter in “safe assets” has proven to be unsatisfying, which showcases no shelter for risk avoidance in this recovery cycle.

Then of course, there is the not-so-pleasant "debt ceiling" issue that may resurface as a potential near-term disruption. It all adds up to a less cheery anticipation, while expert knowledge for forecasting is in less demand in this changing landscape of financial services. However, the grim outlooks require as much scrutiny as the hopeful bunch, which will require more patience than desired.

Trust restoration

Rebuilding confidence in the financial system is difficult to manage, especially when recovery itself is not collectively convincing. Large banks have seen their shares of challenges from defective instruments, hedges that have gone wrong and reputational residues from crisis fallout. The recent flurry of regulatory framework being established is colorful, but practical results are unclear, causing minor trepidation. Thus, central bankers, policymakers and larger private companies are facing critical decision points. Fund managers will be forced to think critically rather than guessing in the weeks ahead. Perhaps, that’s a valuable moneymaking skill along with patience to combat this murky setup.

Article Quotes:

“We showed that the manufacturing multiplier – the number of indirect manufacturing jobs generated by one additional manufacturing job – is higher than conventionally believed. This is extremely important for understanding the current job weakness of the U.S. economy. The offshoring of production, and the large trade deficits, may have affected employment more than most economists thought. This also helps us situate manufacturing in today’s tech-driven economy. For the foreseeable future – or at least the next few years – economic growth is going to be led by the broad communications sector. It’s unlikely that manufacturing will ever be as central to the economy as it was before. However, the higher manufacturing multiplier suggests that manufacturing has an important role in running a balanced and sustainable economy, by moving us toward a production economy that creates jobs, that is more stable, and does not rely so heavily on borrowing as our current economy. Of all the benefits, that may be the greatest of all.” (The Progressive Policy Institute, May 2012)

“After thirty years, China is nearing the end of its super-high-growth phase, but that shouldn’t be a shock. It’s much like the twenty-five-year growth spurts by earlier East Asian economies such as South Korea, and it was always bound to slow. But it is resilient. For all the gloom these days, I end up around where The Economist did in April, when it concluded that China’s ‘quirks and unfairnesses’ – financial repression, sops to the state-owned enterprises – will help it withstand a shock. China is still on pace to overtake the United States as the world’s largest economy by 2020. If you want to know if it’s a better investment than other places, consider that U.S. fund managers continue to move in. (They put $2.5 billion into Chinese stocks this year, after pulling out $2.6 billion last year, according to the research firm EPFR Global.) If China was a stock, it would be down now, but, viewed from another angle, that means it is cheap.” (The New Yorker, July 6, 2012)

Levels:

S&P 500 Index [1354.68] –Interestingly, attempts to stay above 1360 failed in late June, and a second attempt in July seems mildly vulnerable. This setup invites short-term technical sell-offs, yet won’t grossly impact the fundamentals of a positive trend.

Crude [$84.45] – A dramatic move from $77 to $88 in matter of a few days sparked a puzzling reaction at the start of this month. Perhaps stabilizing at mid-$80 range as the fundamentals and sentiment remain highly unclear, with some possibilities for further turbulence.

Gold [$1587.00] – Mostly a non-trending theme continues to persist. In the past 10 months, gold has attracted strong buyer attitude around $1540 and waning interest closer to $1750. Long-term believers in the yellow metal anxiously await a lift to sustain a multi-year run.

DXY – US Dollar Index [83.37] – Closed the week very close to annual highs. A strengthening dollar is a theme that’s been building slowly since May 2011.

US 10 Year Treasury Yields [1.54%] – Only a few points removed from all-time lows of 1.43%, while March highs of 2.39% appear further away given the recent pattern. Yet this three-decade downtrend move is surely difficult to turn around over months or quarters.


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