Market Outlook | August 12, 2013

“How often misused words generate misleading thoughts.” (Herbert Spencer, 1820-1903)

Misleading conviction

With each upside tick, buyers pick up confidence and sellers become even more cautious. Strangely enough, conviction levels of bulls and bears appear much higher when measuring unofficial sentiments. Amazingly, the believers in an ongoing market rally seem as confident as those calling an ultimate top – which creates a confusing and rather suspenseful climate.

First, the bullish reawakening carries a strong momentum now that we’re in the multi-year rally. Persuasive bank analysts’ estimates, warm investor reception for risk and a convenient selling point to riding a wave and proclaim “in the moment” frenzy. Dancing above previous all-time highs brings out ferocious risk appetites and roaring index behaviors. Bullishness is contagious, and perception can influence, mislead and rapidly change. Risk-taking has rewarded the brave and the follower alike; thus, breaking the status-quo mindset requires an extraordinary catalyst. Guessing the turning point is nearly impossible, and ignoring recent gains is not a fair judgment either. But accepting the bullish conditions spearheaded by the Federal Reserve is much closer to the honest conclusion.

Secondly, there is the natural pause of cautious experts that looks beyond the brewing hubris. Of course, the gloom-and-doom mindset is not a healthy or balanced way of analyzing the past or present. However, questioning the merits of earnings growth combined with understanding the drivers of the ongoing rally is another form of skepticism. Not to mention, questioning the legitimacy of key economic drivers is reasonable. Surely, grasping labor and real economy growth is hard to pinpoint with accuracy. Regardless, financial positioning tells more about one’s conviction than artful presentations and self-serving commentaries.
“Rising demand for protection against stock declines has made the iPath S&P 500 VIX ETN the fifth-most active U.S. exchange-traded security. About 37.5 million shares of the ETN traded on average in the past 30 days.” (Bloomberg, August 9, 2013)

This illustrates the common theme over recent years, where protection for downside is highly demanded even in a rising market. At least one can somewhat conclude that any future market decline is not overly shocking. In other words, not all investors are going to be blindsided by pending worries.

Weakness accepted

Observers have established slow economic growth rates globally especially in first half of 2013. Commodities have been slowing along with emerging markets. Yet, the current puzzle is figuring out if both commodities and emerging markets are cheap enough to entice "value" investors. A timing question:

“Morgan Stanley calculates that emerging market equities have underperformed their developed counterparts by 18% over the last six months, one of the worst relative performances in history. As a result, the relative price-to-book ratio of emerging markets is 0.73, the lowest since 2004.” (The Economist, August 1, 2013)

Finding a timely entry point in emerging markets keeps many participants scrambling with lack of answers. The Chinese story and growth potential finds a way to confuse rather than reassure success. Yet it is the same frenzies that may attract barging hunters.

Signs to ponder

The US consumer market, should set the tone of collective mood since the consumer drives the economy. At times the consumer is stretched given limited wage growth, elevated gas prices and a less stellar job numbers. In terms of the fundamentals, retail related earnings this week geared to provide desired clues at to market conditions. Housing has made headline recoveries while student loan concerns looms. Nonetheless, markets which are driven by perception prefer to hear from the central bank before emphasizing visible concerns. However, one does not need the Federal Reserve to confirm the troublesome consumer conditions.

Article quotes:

“Most dangerously of all, the bulls think that China can fix its problems while growing at 7% or 7.5% – which is better than the 8% they used to think is the minimum acceptable, although worse then the 6% they will undoubtedly cite next year as the minimal acceptable growth rate. But these growth rates, the skeptics argue, are impossible. In order that Beijing get its arms around credit growth and reduce the extent of wasted investment, GDP growth rates – the skeptics argue – must drop considerably, although since rebalancing means that household income must grow faster than GDP, it will not be nearly as painful as the bulls think it will be. The issue about how much China’s GDP growth must slow in order to accommodate the necessary adjustment is probably the key difference between the bulls and the skeptics. Contrary to the new argument put forward by the old bulls, the problems of debt, investment and consumption in China are not new and unexpected, they are not just the normal growing pains associated with rapid growth in an otherwise healthy developing economy, they are not simply individual problems caused by irresponsible behavior, and they cannot be addressed except with far more radical changes than the bulls acknowledge.” (Michael Pettis, blog.mpettis.com, August 7, 2013)


“The truth this week came courtesy of the Consumer Financial Protection Bureau and the Wall Street Journal, whose data parsing revealed that about one in five college graduates who borrowed for tuition via the federal direct loans program are not paying the money back. More than half of all new jobs created this year in the US came in the low-wage sectors of retail, travel and restaurants. The consulting firm McKinsey & Company determined that only half of recent college graduates were working in fields that actually required a degree to perform well. The report's author dryly noted:” The cliché of the overeducated waiter or limousine driver seems to have some support.” All this debt followed by low-paying gigs has serious consequences for our young people. The New York Federal Reserve reported earlier this year that they believed that the rapidly growing problem of student debt was causing twenty-somethings to delay home and auto purchases. Others are beginning to suspect it is also impacting the country's fabled entrepreneurial culture. Earlier this year, the CFPB reported that many believe the burden of the student debt is costing the US startup jobs.” (The Guardian, August 8, 2013)



Levels: (Prices as of close August 9, 2013)

S&P 500 Index [1691.42] – Consolidating between 1687-1691 range. This suggests a mild pause as eclipsing 1700 is the next target on near-term investors mind.

Crude (Spot) [$105.78] – Mild consolidation between $103-106 range. Intermediate-term run is biased towards the upside but waning momentum setting up.

Gold [$1329.10] – Sings of bottoming resurfacing after a bounce from $1200. Optimist wondering if $1400 is attainable in the near-term. Nonetheless, the long-term trend appears biased for down to sideways movement.

DXY – US Dollar Index [81.18] – Slight decline in recent weeks leading to a move below the 50 and 200 day moving averages. Yet, the dollar index is trading much higher below its multi-year lows.

US 10 Year Treasury Yields [2.58%] – Back to trading below 2.60%. Unclear if breaking above 2.73% is attainable at this point.

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