Market Outlook |March 25, 2013

“The secret of all victory lies in the organization of the non-obvious.” (Marcus Aurelius, AD 121-180)

Thinking beyond

The most appealing and puzzling part of markets is that “nothing is quite obvious.” Having conviction is worthwhile when investing in an idea that’s working and bigger rewards await. The escalating Cyprus fear did not materialize to a collapsing market last week, nor it did lead to unimaginable spikes in gold prices. In fact, gold was up less than 1% last week, to many gold bugs’ surprise. Perhaps, markets have matured when it comes to digesting crisis-like news in recent years.

Also, participants have partially matured, as sudden overreactions are not at the dramatic levels last seen in summer 2011. In fact, volatility is still clinging to calmness, the S&P 500 index is nearing all-time highs and the Federal Reserve policies haven’t signaled changes. Nonetheless, the crowd is edgy while welcoming a new season. The news reporting is aggressive and curiosity is heightened to decipher the Eurozone, risk perception and the rest of the market-moving matters. Turbulence can re-emerge anytime, but is settles down quickly.

Before grappling with Cyprus’ even more puzzling deal and Eurozone matters, a breather is needed to reflect. Prior to making big (risky) moves for upcoming months, one is faced with understanding the nuances, hints and misunderstandings that continue to plague this market. There is plenty of discipline required to resist hype, fear-mongering and “obvious” statements. That’s the global message that keeps on teaching, especially in a period that’s desperately awaiting turning points. The Cyprus deal can spark reactions, but it will take time for participants to weigh the big-picture impacts. (To be continued) …

Clues: Two springs ago

The commodity downtrend became evident in early May 2011 – a point that might serve as an important turning point when reflecting back. The CRB Index (a collection of various commodities, which includes crude) peaked on May 6, 2011. In fact, crude fell below the $100 mark then, sparking some early bearish reactions. Interestingly, the US Dollar bottomed at the same time, putting in the lows as the strength continues today. An inflection point indeed! Back then, the dollar-crude inverse relationship was being dissected along with the end of quantitative easing II and the improving US economy. In several areas, the origins of today’s macro issues come from that colorful period.


Here is a headline from Friday May 6, 2011:

“U.S. crude oil futures [ended] with the biggest weekly loss in dollar terms since oil trading began on the New York Mercantile Exchange in 1983, as a stronger dollar prompted investors to continue trimming oil bets. The extended sell-off in an extremely volatile day snuffed out gains made after early data showed U.S. companies created jobs at the fastest pace in five years last month.” (Reuters).

Since May 2011, the Dollar Index is up nearly 14%, and the commodity index (CRB) is down 20%. The same message is echoed in the last six months, as further confirmation is needed to put an exclamation point to this trend. The broad indexes have spoken based on prior trend-shifting patterns. At the same time, unemployment that stood then at 9% is closer to 7.7%, which mirrors the improving confidence and undeniable improvement (even for those who doubt the data’s accuracy). So we should not be overly surprised with the optimism that’s swept risk managers and investors of all kinds. Sure, to say markets are overheating has some legitimacy to some extent, but we are not overheating, especially if collectively there is an agreement for further growth.

Internalizing

Speculating on pending European decisions or Congress votes is a very daunting task that can be closer to reckless gambling than sound planning. Sure, there is room for traders and short-term risk managers to participate in those heart-pounding events. Yet, the big picture themes/trends are worth understanding when it comes to currency, interest rates and equities. Otherwise, mapping out a plan is less likely. Despite the edginess that’s growing, there should not be an urgent need to make directional or big calls at this stage. The art of digesting prior clues provides better clarity, as exhibited by the dollar-crude relationship.

Article Quotes:

“China's crude oil imports from Iran rebounded last month from a 10-month low hit in January, official data showed, in line with an International Energy Agency (IEA) report that said new U.S. sanctions appeared to have had little impact on shipments. The rebound also came after an official from China's biggest refiner, Sinopec Corp, said his refinery will process more Iranian crude this year than last. China, Iran's top crude oil customer, bought nearly 2.0 million tonnes of Iranian crude in February, equivalent to about 521,330 barrels per day (bpd), up 68 percent from 309,906 bpd in January, according to data from the General Administration of Customs. February crude imports from Iran rose 81 percent from 288,576 bpd a year earlier. … China – along with other main buyers of Iranian crude, including India, Japan and South Korea – has been under pressure since last year to reduce imports in the face of U.S. and European sanctions. The West has imposed sanctions targeting Iran's vital oil sector as it suspects Tehran wants to develop nuclear weapons, an allegation Iran denies.” (Reuters, March 21, 2013).


“The Chinese government has expressively endorsed developing African states through the creation of economic, trade and cooperation zones (ETCZs) in Africa, similar to China’s own use of Special Economic Zones (SEZs) domestically. However, Chinese investors and companies work together with African leaders to develop specially tailored zones without a lot of Chinese government involvement in how the zones are designed or operated. While some of the Chinese companies are technically state-owned, the companies still enjoy a high degree of autonomy. Eight official government endorsed zones have been built thus far (although some have not begun operating yet). Private Chinese enterprises also operate their own. Since these zones are still new, it is hard to determine whether or not they are mutually beneficial to China and Africa, and a lot of the negative speculation on Chinese investment in Africa stems from this uncertainty. Although some of these zones are joint ventures, Chinese companies have also come under criticism for owning 100 percent of the shares in some of the ETCZs. This ignores the fact that prior experience has shown that many times the African stakeholders often inhibit the success of these kinds of projects due to rampant corruption and mismanagement. Thus, Chinese companies exercising ownership of the STCZs can actually be to the benefit of the ordinary Africans involved.” (The Diplomat, March 25, 2013)





Levels: (Prices as of close March 22, 2013)

S&P 500 Index [1556.89] – Nearly unchanged from last week after peaking on March 15, 2013 at 1563.62.

Crude (Spot) [$93.71] – Appears stuck in the near-term between $92-94. Crude is in a slow but noticeable downtrend. The price peaked at $114.83 (May 6, 2011) and momentum stalled at $110.55 last March.

Gold [$1613.75] – In the last year and a half, buyers have bought below $1600 and sold closer to $1750. This is a very visible pattern that’s becoming convincing and continues to encourage buyers to purchase.

DXY – US Dollar Index [82.69] – Since February 1, the dollar index is up 5.38%, showcasing a noticeable short-term response. Sustainability of this trend is still in question, despite the multi-month comeback of the “King Dollar.”

US 10 Year Treasury Yields [1.92%] – A fragile level is being tested. The 2% hurdle proves to be difficult yet again. The 50-day moving average is at 1.94%, which summarizes the recent behavior.



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