Market Outlook | December 3, 2012

“Blame is safer than praise” Ralph Waldo Emerson (1803-1882)

Familiar banter

It wasn't long ago that the phrase “manufactured news” was used by some during the debt ceiling crisis. Now, the much and overly discussed “fiscal cliff” is reaching a tiresome level of over-hyped discussion. It’s debatable whether the actual substance is overblown or the fear-mongering produces political posturing and indirect market confusion. Nonetheless, unlike the summer of 2011, when a lack of government cooperation led to increased volatility and market turmoil, this time around there is a sea of calm in participants’ reactions. Interestingly, panic-like mode is not easily generated and spikes in volatility have yet to materialize. At the same time, there is no comforting sign of safety in an already low-rate environment with limited investment themes. In the near-term, the political debate may heat up on the surface, but the US’s relative edge cannot be easily dismissed from an investor’s perspective.

Clarity search

There is a rising equity market climate as the S&P 500 index maintains its strength above 1400. Ongoing bullish residues from the recent recovery are visible for chart observers and a few economic trend followers. Finding tangible reasons for further bullish stability is harder after the year-over-year appreciations. In addition, sustaining attractive earnings is an uphill climb and the quantitative-easing-as-stimulus tactic is wearing down as a long-term solution. So the puzzled crowd awaits the next substantive matter, especially in housing strength, GDP growth and key corporate fundamentals, particularly those related to consumer trends.

Last week, US GDP numbers for the third quarter were revised higher. However, the headline and one-line summary does not tell the full story: The latest GDI [Gross Domestic Income] data tell a sobering story. In the three months through September, GDI grew at an annualized, inflation-adjusted rate of only 1.7 percent, compared with 2.7 percent for GDP. Historically, when we've seen divergences like this, it has been more common for the GDP estimate to be revised toward the GDI estimate. So future revisions are likely to show that GDP growth was a bit weaker than the current optimistic headlines suggest. (Bloomberg, November 29, 2012). There are signs of improvement, yet the pace of economic strength is sluggish enough to welcome debates and differing interpretations. A fragile consumer environment combined with weak macro backdrop requires time to accelerate investor sentiment. Thus, the labor numbers remain vital along with housing improvement in months ahead. Perhaps, any disappointment in those areas can spark further sensitivity.

Abandoning last decade’s themes remains difficult. Too early to claim the gold run has peaked. Similarly, it’s too premature to conclude that Chinese investments are not attractive at these levels.  Clues on emerging market slowdown have persisted throughout the year. Recent rejuvenation of the Chinese recovery is gaining some traction but is met with a dose of skepticism. Equally, the slowdown in the BRIC nations is too evident across various indicators: “The $1.69 billion initial public offering for Moscow-based wireless telecommunications provider, MegaFon, brings the volume of IPOs from BRIC issuers to $21.5 billion, a 60% decline compared to last year at this time and the slowest year-to-date period for BRIC IPOs since 2003.” (Reuters, Deals intelligence, November 29, 2012).

Conflicting thoughts

The recovery process since 2009 has produced a move away from financial collapse and major recession and reemphasized relative US strength. This has created a dilemma for those taking a directional view. Fund managers are forced to take risks in emerging markets and revisit the Chinese economic strength, appealing trends in Mexico or cheap assets in most of Europe. US investors are diving deeper into mortgage-related and higher-risk assets, given the low-rate environment. At the same time, issuance of corporate bonds escalates and enthusiasm in equity markets wanes, but both trends can suddenly shift. The inherent conflicts in major trends are not easy and bound to challenge forecasters.

Article Quotes:

“Today’s modern household appliances are not only cheaper than ever before, they are the most energy-efficient appliances in history, resulting in additional savings for consumers through lower operating costs. The average dishwasher today is not only more than twice as energy-efficient as a comparable 1981 model, but its cost today is only about 1/3 the price of the 1981 dishwasher, measured in what is ultimately most important: our time. Put those two factors together, and the average American’s dishwasher today is about six times better than the dishwasher of thirty years ago. Stated differently, if dishwashers hadn’t fallen in price by a factor of three since 1981, and if they hadn’t improved in energy efficiency by a factor of more than two, Americans today might be paying more than $1,000 for a basic dishwasher instead of $300, and it would take more than twice as much energy to operate. Likewise, we would expect comparable large decreases in the amount of work time required to buy the other four appliances, along with significant reductions in operating costs due to their increased energy efficiency. … Today’s affordable and energy-efficient household appliances are part of the ‘miracle of manufacturing,’ which continues to deliver cheaper and better goods to American consumers year after year, which translates into a higher standard of living for all Americans, especially for lower and middle-income households.” (The American Enterprise Institute, December 1, 2012)

“The physical environment is in pretty good shape. It is cleaner in developed countries than it was in those same countries when they were developing, and the same potential exists in countries that are still developing today. While some resources have been depleted so that the easiest-to-obtain supplies are gone and what remains is costly and difficult to obtain (oil being the most prominent example), that very cost makes the discovery and development of substitutes possible, necessary, and likely. We have barely breached the surface of nuclear, solar, geothermal, wind, and tidal power. Recent fossil fuel discoveries have been a pleasant and unforeseen surprise (though we’d be foolish to rely on more such good fortune). People have been finding cheaper substitutes for existing resources since the beginning of human history, and there is no sign that we will stop any time soon. We have heard concerns about the permanent slowing or stopping of global growth after every depression or severe recession. In the 1890s, the idea was circulated that everything worth inventing had already been invented. In the 1930s, it was popular to say that capitalism had created the mechanism of its own destruction. In the 1970s, concerns focused on foreign competition and resource constraints, and some people forecast mass starvation. Today’s concerns are no different in principle, and they are no more realistic.” (Advisors Perspective, Laurence B. Siegel, November 27, 2012)

Levels:

S&P 500 Index [1416.18] – Trading between the 50- and 200-day moving averages. Buyers’ interest around 1380 showcases ongoing investor willingness for US equity exposure.

Crude [$88.91] – Calmness remains, as wide price swings are not visible. The range between $85-90 is becoming too familiar.

Gold [$1726.00] – Soaring above $1750 or decreasing below $1700 creates equal suspense. There is a lack of trend clarity for now, despite overall buyers’ demand.

DXY – US Dollar Index [80.15] – The 200- and 50-day moving averages stand at 80. This reinforces the lack of movement in several months.

US 10 Year Treasury Yields [1.61%] – A drop below 1.60% has been very short-lived. The most noticeable period of very low rates took place this summer. No evidence of trend reversal from this multi-year rate drop.

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