Market Outlook | November 9, 2015

“Taking shelter in the dead is death itself, and only taking all the risk of life to the fullest extent is living.” (Rabindranath Tagore 1861-1941)

Summary

Regardless of earnings or sentiment, one thing is clear: US dollar based assets offer a relatively appealing investment for those looking to preserve wealth. A massive rush towards shelter is ‎a sign of increased demand for safety. US stocks, real estate, and bonds end up seeing cash inflow, especially at a time when emerging markets are crumbling or seemingly shaky. ‎Thus, the more selling in the commodities market the more troublesome action in Emerging Market currencies, which supports further strength in the US Dollar. This by now is a well established theme, and escaping it or ignoring it is not an option. Survival is the crux of the current market mechanics despite all the obsession around rate hikes.

The Fed’s Enigma

It's hard to tell what’s overly puzzling in this market – the participants asking for Fed guidance or the Fed enjoying the attention and PR game. It’s unbearable for some, who simply see the same ol’ policy of zero interest rates, a congress that’s out of ideas on job creation, and a market limited with the exception of few innovative ideas (tech, biotech). The faith in the global economy is still shaky despite the market dancing near-all-time highs. Certainly any positive economic movement is to be celebrated given the desperate need for good news, especially related to wages. Yet, the jobs numbers for October were exceptional versus expectation, while September was too ugly, so the truth is still being deciphered. Here is one balanced perspective:

“According to Sentier Research, median household income in September was 1.7 percent lower than in January 2000 after adjusting for inflation. Wages are expected to grow a bit faster in 2016: Private companies surveyed by PricewaterhouseCoopers in the third quarter predicted they’d raise wages next year by 3.1 percent, the first time since 2008 the number hasn’t been below 3 percent.” (Bloomberg, November 5, 2015)

Wealth Dissected

First, there are folks looking to create wealth via venture capital, real dollar investments, and human capital. Secondly, there are those looking to create jobs to sustain the middles class, which becomes a critical economic engine especially during an election seasons, of course. However, the job market faces a mismatch between skills and demand in some areas. The constant struggle between new, efficient technologies and antiquated business models creates further sluggishness in the current environment, especially for small businesses. Yet, low wage jobs growth has been a dominate theme and the enigma of dealing with a competitive global markets plagues business owners:

“The recovery has seen more low-wage job growth as these industries bounced back. But low-wage industries that cut wages have seen stronger employment growth since the end of the recession.” (Observer News, November 6, 2015)

That’s sums up the real economy in the trenches. With low inflation, the wage growth numbers are a bit tricky to digest or to at least it becomes difficult to claim a victorious recovery. Meanwhile, the S&P 500 index or Nasdaq may not reflect the real economy as shares are influenced by buybacks (impacting supply demand) as much as perception and investors desperation for safety.

Endless Questions

In terms of investments, those who’ve already created wealth seek shelter in liquid and proven assets. That’s where the market discussion becomes a bit lively, and risk tolerance is such a critical variable. If investments are doing well because folks are seeking shelter from a crumbling economy then is that really healthy? How does that look for the next 2-3 years? Commodities collapsed, but so did segments of the global economy. How does one expect growth? China is slowing down, but still tied to many economies – how does one analyze the inter-connected impact? Until these questions are answered, it’s difficult to see massive changes in the current status-quo. Surely, these unanswered questions will invite more safety rather than risk taking.
For now, the attraction of US assets over other areas is quite evident. The dollar index resurged recently, sparking further strength—a theme that was emphatic last year. The hype and anticipation of a rate hike is not impacting the already elevated, innovative based US themes (technology and healthcare). The collapse of BRICS mixed with increasing tensions in foreign policies and conflicts in Emerging Markets all lead to massive appeal of dollar based assets. Perhaps, that’s one question that’s already answered.


Article Quotes:

“China faces fundamental economic policy choices in which the whole world has a great stake. At a time when its economy is slowing and its wealth-holders desire to diversify their assets abroad, it is incoherent to favour both financial market liberalisation and exchange rate appreciation, as some in the US do. The necessary reforms if China is to grow sustainably and strongly over the next decade — such as closing unprofitable state enterprises and limiting the ability of local governments to borrow and build on a vast scale — will surely take a toll on growth in the short run. This will reduce demand for imports from the rest of the world and raise China’s trade surplus. Reasonable policy dialogue requires a recognition of the tensions between short and long term, and national and global interests. The world is likely to benefit from recognising that its deepest interests lie in China pursuing more not less reform, even at the expense of modest reductions in its contribution to global demand over the next couple of years, and possibly more exchange-rate depreciation than we would prefer.” (Financial Times, Lawrence Summers, November 8, 2015)

“Support for the euro has increased among citizens of the euro area in 2015, reaching an all-time high, according to the latest Eurobarometer survey of the European Commission. An overall 61% of respondents have confirmed that they see the European single currency as good for their own country, compared to 57% last year, the Commission said on its website.‘This marks the highest level of support since the Commission started the surveys in 2002,’ the EU executive body said. Support was highest in Luxembourg at 79%, followed by Ireland, which completed an economic adjustment programme in 2013, with 75%. Support for the euro has also increased in all other countries which have implemented or are implementing economic adjustment programmes. In Portugal, 61% of respondents see the euro as good for their country (+11 percentage points). The share of those supporting the euro as good for their country, has increased in Spain (64%, + 8pp. Support has also increased in Cyprus, reaching 50% (+ 8pp) and Greece (65%, +6pp). Moreover, 71% of respondents said that the euro is good for the EU as a whole. The survey was conducted from 12 to 14 October among some 17 500 citizens of the 19 member states of the euro area.” (Novinite JSC, November 6, 2015).

Key Levels: (Prices as of Close: November 6, 2015)

S&P 500 Index [2,099.20] – Climbs back to the familiar 2,100 level, where the index stayed for most of 2015. May 22nd highs of 2,134.72 are on the radar next.

Crude (Spot) [$44.29] – Selling pressure is mounting around $50. Although early technical signals of a bottom around $45, a follow-through is needed. Again, the supply-demand picture does not seem convincing enough to stir a sustainable upside move.

Gold [$1,088.90] – A commodities' cycle slowdown is further confirmed as Gold failed to hold $1,100, which was highlighted by an 8% drop in the last few weeks. Annual lows of $1,080.80 from July do not appear far removed from Friday's close.

DXY – US Dollar Index [99.16] – Since mid-October, the dollar strength has re-accelerated, which is very close to the March 2015 highs of 100.39.

US 10 Year Treasury Yields [2.32%] – A dramatic turnaround since the October 2nd lows of 1.90%, and a recent resurgence reflects responses to positive economic data points as rate hike discussions circulate.









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