Market Outlook | February 4, 2013

“People who demand neutrality in any situation are usually not neutral but in favor of the status quo.” (Max Eastman, 1883-1969)

Art of interpretation

Even a shrinking fourth-quarter GDP did not slow down the overly determined and existing bullish stock market. After all, the weak GDP results were driven by decreasing defense spending, while consumer spending remained healthy. Participants digested those factors quickly and looked beyond the headline noise of nearly zero growth. The link between a weak economy and the need for additional stimulus is where the curiosity begins to heat up. For now, that is mostly a mystery left for the Federal Reserve to muster an answer and direction.

Observers continue to learn there is no tight or magical connection between fluctuating economic reports and collective stock market behavior. Pinpointing at handful of influential data points is a daunting and humbling task for analysts. Not to mention, sample sizes on various economic data may fail to capture the full and relevant story – as interpreted by influential market participants. The prevailing theme in the past few months centers around better-than-expected labor and housing results. Within that context, January’s employment numbers reconfirmed the improvement in labor markets. The positive twist primarily centered around this surprise: “The economy added 247,000 jobs in November and 196,000 in December, the BLS said. That’s a total of 127,000 more for the two months than previously estimated.” (Bloomberg, February 1, 2013).

Mostly unchanged

The major big-picture influences seem hardly changeable. The interest rate policies combined with US dollar behavior both remain in place. For a while now, “fear” has not been overly feared, a spike in volatility is less anticipated and numbness to bad news is virtually becoming a norm.

This demonstrates the power of the status quo; thus, the message of this strong bullish market is becoming clearer for fund managers, forecasters and speculators of all kinds. Succumbing to these realities adds a slight jolt to further buying, even if the bubble-like scenarios are silently brewing. Sure, some company-specific performances can vary from the general trend, but the economic numbers are in a recovery mode. Thus, the reported data are failing to make a strong case for bearish setups. In a competitive landscape where managers are measured by monthly performance, it is difficult to ignore and not participate in the perceived trend. The skill that is rewarding in looking ahead, is knowing when these clunky trends begin to shift noticeably. Otherwise, “fighting the Fed” may end up being a deadly game for portfolio managers. Again and again, risk-taking is deeply encouraged and saving is punished, and that’s the blunt takeaway.

The earnings games

At some point, the game of beating earnings expectations may be sufficient to uphold the current stock market run. Heading into this quarter, the ability of larger companies to keep up with desired profitability has been questioned. Sure, analysts can tweak estimates by setting up potential surprises. “In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies beating sales estimates to date reflects an improvement relative to recent quarters.” (Factset Earning Insights, February 1, 2013).

As usual, a dose of skepticism will be required, even though the unanimous trend favors rising share prices. Yet, a skeptical approach alone should not dictate one’s investment decisions, since irrational patterns are as common as "misleading perception." Either way, until the so-called truth is discovered, the markets have a “mind of their own.” Beating collective expectations is the name of the game, as it fuels a perception of positive developments.

Article Quotes:

“This week we saw another move that is likely to alter the perception of Swiss banks. UBS and Credit Suisse, two of the banks at the centre of the IRS investigations, significantly raised their charges for holding gold – making it very unattractive for private individuals to deposit the precious metal with them. The primary reason for the decision was not to stick it to the IRS, of course. Rather it is to move gold off the banks' balance sheets ahead of the introduction of the Basel III rules, which require them to change the ratio of capital to assets. The banks are encouraging clients to move their gold deposits to “allocated” accounts, which sit outside the banks’ balance sheets and generally attract far larger fees, and are primarily aimed at institutional investors. The rise in charges on “unallocated” will undoubtedly discourage private individuals from keeping gold on deposit with Swiss banks. One gold market analyst told me the banks were now ‘terrified of US clients, who account for a significant proportion of their client base.’” (New Statesman, February 1, 2013)

“While the Cypriot economy may be worth only 18 billion euros, making it the third smallest in the euro zone, the problems it poses are among the most complex Europe has faced, combining elements of Greece, Spain and Ireland. The latest estimates from analysts are that the country needs 17.5 billion euros to get back on its feet, including 10 billion for its fractured banking sector and up to 7.5 billion for general government operations and debt servicing. While small in nominal terms, that would amount to almost 100 percent of its gross domestic product, making it the biggest euro zone rescue after Greece and nearly three times the size of the package that was granted to Portugal in 2011. There's no question that the euro zone has the money to help, the problem is how Cyprus could ever afford to pay the money back – the bailout is just not sustainable. And unless it is made sustainable, the International Monetary Fund will not take part, which would cast doubt on its overall credibility.” (Reuters, January 31, 2013).

Levels:

S&P 500 Index [1513.17] – Strength resumes with multi-year new highs, indicating that the bullish market is re-energizing. The breakout above 1460 marked a new buildup in positive momentum.

Crude (Spot) [$97.77] – More than a 15% appreciation since December 11, 2013. Newly forming upward movement is in place, with $100 being a key anticipated range.

Gold [$1669.00] – Trading between the 200-day ($1662.44) and 50-day ($1685.09) moving averages. This new range defines a nearly trend-less behavior in the past several weeks. Despite the popularity of the asset, the drivers of demand and supply remain more mysterious than most would like to admit.

DXY – US Dollar Index [79.12] – Although the pace of the dollar weakness slowed down in September 2012, there are no convincing signs of a sustainable dollar rally.

US 10 Year Treasury Yields [2.01%] – A minor near-term milestone was achieved by closing above 2%. These levels were last achieved in March-April 2012. Enhanced curiosity looms, filled with skepticism on its ability to carry on with this multi-month pattern of rising rates.


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