Market Outlook | June 10, 2013

“Good teaching is one-forth preparation and three-fourths theater.” (Gail Godwin 1937-Present)

Dichotomy

A few triggers of potential unrest in global markets are loudly visible despite a positive weekly finish for the S&P 500 Index and the not-so-catastrophic labor numbers for May. Underneath the surface, mild turbulence is brewing while financial minds ponder the faith of interest rates and speculate on quantitative easing exit plans.
Meanwhile, other nations resume efforts to replicate the art of asset price stimulus via easing (of course). With home values and stock markets above or around pre-bubble levels, for some Americans, the perception of feeling wealthy or normal seems rather legitimate, as opposed to digesting the not-so-pleasant to mixed economic realities that persist. This ironic maze brings forth a disconnect often used and misused in political arenas and general discussions. For the so-called professionals, it is crucial to navigate thoroughly to survive any pending fallout. For market observers making distinctions between the dominant status quo and trend shifts, it is a burning question with higher stakes.

The quiet turbulence

The message from emerging stock markets acknowledges the weakness of the real and slowing global economy. For example, since March 7, 2013, the Brazilian Index (EWZ) is down nearly 15%. Similarly, Mexico (EWW) saw its stocks fall by more than 15% after peaking on April 11, 2013. Last week, the Turkish stock market (TUR) fell nearly 10%. Perhaps, these key markets followed the footsteps of the Japanese stock market decline from two weeks ago. Related or not, sell-offs have been materializing across various markets. These movements are worth highlighting as the US equity markets have maintained composure thus far by avoiding sharp sell-offs.

Interestingly, the emerging market decline has coincided with commodity price deceleration. The simple logic goes: If global demand softens, then commodity prices need to correct as well. This mirrors the same cyclical perspective. So far this year, one can say it is only natural to have moderation in both given the over decade run.

Practical dilemma

There might be a disconnect between weak economic growth and inflated assets that lives on. Clearly, that's the message. Maintaining high asset values while applying low interest rate policy is hardly new anywhere these days. In a world that's still somewhat desperate for growth and yield, there are not many alternatives to stocks. It’s a tough case to claim this is of a bubble of 2008 nature, as the participation rate by investors is not quite at the same pace.

“U.S. equity trading volume has dropped 7 percent in the first five months of the year, positioning it as the fourth year in a row of decline. For the five months through May, U.S. equity average daily volume was 6.34 billion shares, down 7 percent from the same period in 2012, according to data from Credit Suisse's Trading Strategy Group. Trading in exchange-traded funds dropped 9 percent, while trading in stocks fell 7 percent. (Traders Magazine, June 7, 2013).

If the number and level of participants in equity markets remain at low levels, then calling bubbles is not quite accurate. That’s the challenge and danger for those betting on further gloom or a repeat of recent history. At some point, the hints of market slowdown cannot be just ignored easily or dismissed collectively. The labor and GDP lack of growth is one factor, while earnings require further clarity that needs unlocking. The status quo has been quite powerful in lifting asset prices, but expectations are rising and patience is wearing thin as the market truth is being confronted.

Article quotes:

“Data released on Sunday showed China's annual consumer inflation slowed in May while bank lending fell below expectations, more evidence that the world's second-largest economy could slow further in the second quarter. Fuel demand in China, the world's second-largest user and a key driver for global oil markets, grew at the slowest pace in four years last year as the economy expanded less rapidly. China consumed roughly 9.48 million barrels per day of oil in May, according to Reuters calculations based on preliminary government data. Reuters tallies implied oil demand by adding crude throughput and net imports of refined products, but excludes changes in inventories which China rarely discloses. That compared to 9.38 million bpd in May last year and April's 9.6 million bpd. The lackluster consumption was mostly due to weak refinery throughput, which gained 2.4 percent over a weak year-earlier base to 9.2 million bpd, data from the National Statistical Bureau showed on Sunday, the lowest daily rate since September 2012.” (Reuters, June 9, 2013)

“The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway. That number was even worse than it looked since new orders plunged 3.5 points while inventories rose. The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December. Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline. Consumer expenditures for April declined 0.2% and disposable income 0.1%. Compared to a year-earlier, real consumer spending is up a paltry 2.1% and real disposable income only 1%. Even then, consumers were able to maintain this inadequate rate of spending only by reducing their savings rate to 2.5%. Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle. Real GDP has increased only 1.8% over the last four reported quarters, within a range that has been in force since the first quarter of 2010. The current quarter is shaping up as no better. Manufacturing production has declined for the last two months and three of the last four.” (Comstock Partners, Inc June 6, 2013).

Levels: (Prices as of close June 7, 2013)

S&P 500 Index [1643.38] – After temporarily pausing, the index bounced back from 1600. In upcoming days, bullish participants await revisiting all-time highs (1687 on May 22). The four-year bull market is facing an inflection point, and sustaining this run will be severely questioned.

Crude (Spot) [$96.03] – Once again, climbing back to $96, a familiar resistance range. Staying above it has been a challenge, as the $100 point has seemed elusive in recent months.

Gold [$1400.00] – Since October 5, 2012 the commodity has dropped by 24%. Clearly, this confirms the downtrend. The discounted price might attract new buyers seeking a liftoff, but the cycle is hard to dismiss.

DXY – US Dollar Index [81.66] – A sharp two-week sell-off in dollars wiped out last month’s gains. It’s too early to determine the nature of the recent sell-off, but the strengthening trend is mildly pausing.

US 10 Year Treasury Yields [2.17%] – Since May 1 lows of 1.61%, yields are raising and holding steady. Reaching and breaking above 2.50% will prompt a new wave of confirmation of a stable rising yield theme. For now, between the skepticism and lack of evidence, speculators line up.








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