Market Outlook | July 14, 2014

“There is no terror in a bang, only in the anticipation of it.” Alfred Hitchcock (1899-1980)

Eagerness for substance

The last few months and weeks have reignited a spark of hubris mixed with a feeling of semi-invincibility by the bulls, showing that maybe a logical reset or reality check is highly anticipated. With the NASDAQ down 1.7% and a nearly 4% drop in the Russell 2000 (small cap index) last week, this is still not enough to alter the established strength.

An outcry for potential pre-crisis traits, as witnessed in 2007, is commonly found in financial literature. Yet all this chatter is hardly influential for market-moving forces, which overwhelmingly paint a one-sided view. Basically, “Nothing but upside” is the simple mantra and chant when markets go up, despite the bewildered crowd of market observers and veteran risk takers. Surely the “terror” of waiting for collective collapse/correction has been greater than actual market pain experienced in terms of share prices and volatility.

For nearly a year and surely half a year, for bears, it was difficult to comprehend the divergence between the roaring large-company shares and not-so-glorious economic data points. Talks of negative GDP either in the US or Europe made for good discussion points, but were shrugged off in daily market actions. Mainly, the consensus expects a better second half and that bravado is picking up steam, especially in GDP.


“Federal Reserve Bank of Chicago President Charles Evans said Friday it’s pretty unlikely the economy will suddenly grow fast enough to drive him to move forward his expected timing of the central bank’s first interest rate increase. Speaking to reporters, Mr. Evans said he could envisions a scenario where economic growth accelerated very sharply relative to expectations, inflation moved back toward the Fed’s target and wage gains returned to their historic levels.” (Wall Street Journal, July 11, 2014)

The realization that identifying events or data of weakness is not enough to claim an ultimate top is occurring. Too many false alarms take a toll, even if the top is closer than before. It’s fair to say that a 1% down day in the S&P 500 index would be an early sign of worry.

Hint searching

On May 28th, when the US 10 year yield reached a new low of 2.44%, it became difficult to proclaim that growth in the US was strongly visible. Surely, this is another twist to the script, as the 3% level once reached in late 2013 seemed so far. Perhaps, bond markets realized and could not ignore the less convincing economic growth in labor and wages. In fact, even Wall Street is struggling to make impressive revenue as in past years with declining trading activities. Perhaps, one should quickly realize this economy needs to show tangible strength. It is a messy recovery all around. Cheerleaders can cheer and markets can reward, but logic is not so simple, even when the consensus suggests a full-blown bull market.

As for stocks, corporate profit marches to its own beat and low rates only suggest further rotation into a sizzling or overheating stock market. Flow after flow poured into US stocks (and developed markets), and that was a massive train that could not slow down or seek other alternative areas.

It was unbearable to watch bears of all kinds surrendering when they saw volatility approach near-death. Meanwhile, the crowd anointing the Fed as the authority could not stop quoting the famous saying: “Don’t fight the Fed.” Pointing out the misleading perception of a bull market did not merit financial reward, from the gloom-and-doomers waiting for collapse to others who thought danger in foreign policy mishaps would actually turn into a bleeding stock market. Russia, Ukraine, Iraq and rest of the Middle East came and went as the China slowdown story started to get old. In fact, the China collapse story has been heard enough, and after a year of emerging market collapse, any susceptibility to downfall in BRICs did not overly shock. Now, the global growth pace is debatable as bargain hunters reexamine positions.

Another minor signal

European stocks last week sent an alarm to participants as memories of Eurozone collapse were contemplated, albeit briefly. In a period when many have surrendered to the concept that market collapse is around us, it would take Portuguese bank health concerns to stir some skepticism or search for safety. Maybe a follow-through of old European banking and system-related worries would give sellers enough reasons to exit. Meanwhile, earnings are expected with eagerness, but will vary by industry and specific names. Reaching a conclusive answer might take a few more days or weeks. Tech, biotech and other growth areas may set the tone, but the macro secret or magic is unclear. Pundits speculate, but this week needs to showcase that concerns are legitimate as much as growth. The Fed script has not lost its luster, but expectations are higher and higher by the day. Thus, risk management has been long contemplated, but waiting for the unexpected is a suspenseful task for buyers and sellers alike.

Articles Quotes

“Two of the world’s biggest banks have come out with very different takes on emerging-market debt. Strategists at UBS AG (UBSN)’s wealth management unit turned bearish on U.S. dollar debt of developing nations on June 26 as the securities rallied on renewed confidence that central banks will maintain their stimulus. Meanwhile, JPMorgan Chase & Co. (JPM) strategist Jan Loeys said in a report last week that the debt still offers good value compared with other options in developed nations. The contrasting views show how difficult it is to find value in markets inflated by more than five years of easy-money policies, where everything starts to look expensive to someone. Bonds of nations such as Mexico, Turkey and Russia have returned about 9 percent this year, their biggest gain since 2009. ‘We don’t think this asset class will perform as well in the second half of this year,’ said Mark Haefele, who oversees the investment strategy for $2 trillion at UBS’s global wealth management units. Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows. Last year, investors fled from emerging-market debt amid panic over the Federal Reserve’s plan to curtail its monthly asset purchases. The notes lost 8.3 percent in May and June, faring worse than most pockets of the credit markets.” (Bloomberg, July 9 2014)

“A property boom in the German capital pushed up the value of the average apartment by 27.5 per cent from 2010 to 2013, according to property researchers bulwiengesa. Prices in towns and cities across the country have soared by a fifth over the past four years. Since 2012, the average time it takes to sell a house privately has fallen by almost a fortnight to eight weeks, figures from property website immobilienscout24.de show. The lustre of what locals have dubbed betongold, literally concrete gold, has provoked concern among policy makers over the risks for financial stability. … The Bundesbank, which along with the finance ministry and regulator BaFin, sits on the Financial Stability Commission, the body tasked with maintaining the health of the financial system, said earlier this year that property prices in the big cities were now overvalued by as much as 25 per cent. Germany remains a nation of renters. The owner occupancy rate is just 53 per cent, according to Eurostat, compared with 78 per cent in Spain and a euro area average of 67 per cent. The rate has barely changed since 2010. Barriers to home ownership, such as transaction costs of around a tenth of a property’s value, are high. Strong tenants’ rights and a vibrant rental property market also help in swaying Germans from becoming homeowners. But conditions are ripe for change. At 0.15 per cent, economists view official interest rates as low for an economy expected to grow by 2 per cent this year and next. As Germany’s economy nears full capacity, borrowing costs are likely to remain on hold for at least another two years as the eurozone’s recovery stutters. There are anecdotal signs that cheap money is already shifting attitudes, with the younger generation increasingly viewing property as a sound investment. In research on Frankfurt’s property market early this year, bulwiengesa reported mounting interest from people in their 30s.” (Financial Times, July 13, 2014)



Levels: (Prices as of close July 11, 2014)

S&P 500 Index [1967.57] – Slightly off all-time highs set earlier in the month. Above 1985 or below 1960? The answer may potentially speak for the rest of the week, although low volume has persisted in recent days.

Crude (Spot) [$100.83] – Since June 20th, a sharp decline and sell-off is in full gear as the $100 point is revisited, yet again. The 200-day moving average is also near $100 and should set the tone moving ahead.

Gold [$1340.25] – Questions remain: Is $1280 is a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, a mild positive moment is visible in the last month, as the start of July should provide further answers.

DXY – US Dollar Index [80.36] –Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Since May, the pattern has been defined by a lack of meaningful movement, as reaching above 2.70% seems difficult.


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