“Courage is resistance to fear, mastery of fear - not absence of fear.” - Mark Twain (1835 - 1910)
The strong month of September might have surprised those who heavily relied on average historical returns. Traditionally and statistically, the month of September is known to produce less than attractive returns .Perhaps, this time around, the anticipation of the unknown is even more thrilling, given that pessimistic views were becoming tiresome. Yet, a quick reminder, that relying solely on odds presents some dangers and neglects the mindset of investors. Despite a neutral to down weekly finish, the overall stock market showcased an impressive strength this early autumn. Another part to this puzzle is the waiting game and search for guidance from the election season. That clarity is missing, which has kept the bigger trends intact. On the other hand, there are pending issues in this new era of Financial Markets. Managers are adapting to new mechanics changes, which include exchange policies as a result of the flash crash earlier this spring. Clearly, various legislative changes to asset management, along with shrinking liquidity, are issues that can influence overall transactions. Finally, the past few weeks offered a relief rally, but sorting out European credit worries is unclear, which impacts the fragile sentiment.
Same Old Gold and Dollar Story
In terms of big macro drivers, there are not many changes to these decade-old themes. Specifically, the current established trend of strength in Gold prices, lower rates, and declining US Dollar. This relationship is highly publicized and remains dull, while failing to create a sense of excitement for aggressive investors. The weakness in the US Dollar is interlinked with various financial assets and in the radar of policy officials. Conversely, the momentum in Gold prices reemphasizess the movement towards risk aversion. That said, in the month ahead, currency policies are poised to set the tone for international relations as well as market behaviors. The lack of major shifts in macro trends for several years begs the question: why fight the existing trend? However, there are speculators that are active in the guessing game, in a period where most are discouraged to make gutsy bets. The surprise element finds a way to attract those eagerly waiting for an inflection point. However, at this point, the force behind a weaker Dollar (increasing Gold prices) remains too powerful. Each season, those betting against these trends are dwindling and failing to attract contrarian fans.
Few Positive Trends
Mergers & Acquisitions is a promising theme that’s gaining some traction and mainstream attention in that past few years. According to Bloomberg, “The jump in deals in the third quarter brings total announced takeovers to $1.48 trillion in the first nine months of 2010, compared with $1.76 trillion in all of 2009." This showcases that cash, waiting on the sidelines, is seeking new opportunity and emphasizes the bias toward further strength in large cap companies. Much of M&A discussions are centered on technology and other innovative-based groups. Many wait if larger companies plan to acquire growth-related companies. For those searching for company specific bets, there are opportunities, especially in cell phone technology – for example, Skyworks (SWKS), a company benefiting from the growing handset market, while projecting solid revenues. Interestingly, the shares of Skyworks rose nearly 500% since December 2008, illustrating the impressive outperformance. Other companies in a similar area include TriQuint (TQNT) and RF Micro (RFMD). On a similar point, biotech and medical equipment showcase fundamental strength, and they are poised to attract longer-term investors.
Article Quotes
“The crisis was followed by the slashing of interest rates in the developed world. These have had a limited effect in reviving lending in Western economies. But they have encouraged Western investors to buy higher-yielding assets, like emerging-market equities. Emerging-market equity funds have already received inflows of $45 billion this year, according to EPFR Global, a research group. And low rates will also boost credit creation in those developing countries that import American monetary policy via managed exchange rates.” (Economist, September 30, 2010)
"An 'international currency war' has broken out, according to Guido Mantega, Brazil's finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness. Mr Mantega's comments... follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.” (Financial Times, September 27, 2010)
Levels
S&P 500 Index [1146.24] – Consolidating near 1140 range, which begs further question about sustainability. Interestingly, the index ended the week closer to the higher range of this summer’s trend. A 13% rise since the lows reached on July 1, 2010.
Crude [$81.60] – A series of sharp upside moves, which were sparked by a weaker US Dollar. The commodity closed the month on a very strong note. It currently is not far removed from August 4th highs of $82.97.
Gold [$1317] – Explosive momentum remains in full gear. Psychologically breaking the 1300 mark sends a strong message of strength and potentially attracts addtional wave of new buyers in the current cycle.
DXY – US Dollar Index [78.08] – Since June 7, 2010, the US Dollar Index has declined by 12%. It ison the verge of giving up the annual gains witnessed earlier part of this year.
US 10 Year Treasury Yields [2.51%] – Further weakness as Yields attempt to hold above 2.60, which now seem rather fragile.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, October 04, 2010
Monday, September 27, 2010
Market Outlook| September 27, 2010
“Faith and doubt both are needed - not as antagonists, but working side by side to take us around the unknown curve.” (Lillian Smith 1897-1966)
Optimists are witnessing a strong month of September, given that we’ve taken a pause from major worrisome news. A weekly gain of 2.05% in the S&P 500 index serves as a warning for pessimists and a mild barometer of faith for sideline observers. At the same time, the Federal Reserve policy did not alter trends in interest rates and the US Dollar. Similarly, no major attitude changes in Gold, as it remains near all-time highs, and volatility is relatively calm. The challenge ahead is to look beyond recent relationships in macro indicators and accept potential surprises, especially in commodities and currencies.
Market observers are accustomed to pointing to fundamentals or trends in momentum when making calculated assessments. However, in this new cycle, anticipating decisions by policymakers extends beyond traditional analysis. For example, these issues are in the minds of investors: Bank of Japan’s intervention, trade discussions between US and China, and the ongoing capital flow to emerging markets. In other words, the idea of globalization is being reexamined, and the marketplace continues to evolve, while attracting a new breed of investors. However, political debates of crisis and tax management are inevitable and very difficult to ignore. Similarly, Brazil and China will face critical decisions in handling and sustaining recent growth. At some point, the overall consensus will have to accept these issues as regular business concerns in upcoming years
The current administration is providing some hints and making changes in anticipation of mid-term elections. Specifically, the recent changes of economic advisors suggests a search for balanced and new ideas. Similarly, there is a growing view that business leaders would perceive a balanced Congress as a positive catalyst. Through this maze, there are signs of US economic stability in labor and manufacturing. These slight improvements, especially in economic numbers, might not be too visible in mainstream headlines. As confidence is restored, investors might appreciate that this is not 2008. (Notes from September 2008 attached below) As in, it was only two falls ago, where “panic” became the sole and dominate word in financial services. As investors slowly put things into perspective, this might provide further boost to this fragile optimism. Yet the response to the recent crisis has contributed to a heavy rotation into Gold and Fixed Income products. Now, in looking ahead, some wonder if this current trend of risk aversion continues to hold. Maybe, here is another hint in terms of investor mindset: "International investors frustrated with some of the lowest yields on record for U.S. housing bonds are turning to Canada for higher returns. Canada Housing Trust sold C$6.25 billion ($6.1bn) of five-year bonds last week to yield 24.5 bps more than benchmark rates.” (Bloomberg, September 20, 2010)
Levels:
S&P 500 Index [1148.67] – Clearly, at 1040, buyers mostly find markets undervalued. Meanwhile, at 1140, there are growing questions of legitimacy of overall strength. Any pullbacks that show strong support at 1120 can set up a positive seasonal run.
Crude [$76.49] – Interestingly, only a few points removed from its 50-day moving average. That showcases the lack of trend in oil in recent weeks. Furthermore, the 200-day moving average stands at 77.68, stating the current pause in the fundamentals and sentiment of the commodity.
Gold [$1297] – The momentum continues its uptrend and closing near all-time highs. A 22% appreciation since February 5th lows .
DXY – US Dollar Index [79.39] – After a short-lived strength, the index is below a key $80 level. Near-term worries, combined with multi-year trends, reconfirm further weakness. Combining low rate and strengthening Gold create a hurdle for a recovery. Next key level is near annual lows of $76.60.
US 10 Year Treasury Yields [2.60%] – Attempting to stabilize and remains fragile, especially with few percentage points removed from annual lows. Like the Dollar, the threat of new is in the minds of traders and chartists.
Article Quotes:
"Leveraged-loan returns rose to their highest level of the year this week as Brickman Group Holdings Inc. took advantage of investor demand and marketed a loan without financial-maintenance requirements... Investors in search of extra yield have turned to high- risk, high-return loans, driving supply to more than double this year and allowing companies to bring so-called covenant-lite deals to market. Those loans are devoid of restrictions such as a mandate on maximum leverage, or debt to earnings before interest, taxes, depreciation, and amortization." (Bloomberg, September 24, 2010)
“While monthly data may be mixed, the trend data are consistently positive. Private job growth has been less than hoped for but positive nonetheless. Private payrolls increased 630,000 since January 1. In the first half of the year, private labor income increased in all components: hours worked, employment and wages. Hours worked have risen more rapidly than employment, which is typical for the early stages of an economic recovery. In fact, we are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries….. While we are not where we want to be, the economy is recovering and, barring specific shocks and bad policy, it should continue to grow over the next several quarters.” (Thomas M. Hoenig, Federal Reserve Bank of Kansas City, August 13, 2010)
From the archives: September 22, 2008
http://bit.ly/bhBSxK
“A memorable and historic week!....The financial meltdown in this capacity was unprecedented. Nonetheless, from an investor's view, hints of a cycle peak were mildly visible from various angles. Leading up to this decline, homebuilders peaked in 2005. Hard assets (Gold/Crude) soared most of this decade, while "paper assets" were out of favor. Credit concerns and a weakening economy have been a reality for the past year and a half. In March, the Bear Sterns failure sent alarms with lingering effect. This summer, lows were not enough to create a market bottom. At the same time, mid-week sentiment and panic selling further decelerated an oversold market. (Markettakers - September 22, 2008)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Optimists are witnessing a strong month of September, given that we’ve taken a pause from major worrisome news. A weekly gain of 2.05% in the S&P 500 index serves as a warning for pessimists and a mild barometer of faith for sideline observers. At the same time, the Federal Reserve policy did not alter trends in interest rates and the US Dollar. Similarly, no major attitude changes in Gold, as it remains near all-time highs, and volatility is relatively calm. The challenge ahead is to look beyond recent relationships in macro indicators and accept potential surprises, especially in commodities and currencies.
Market observers are accustomed to pointing to fundamentals or trends in momentum when making calculated assessments. However, in this new cycle, anticipating decisions by policymakers extends beyond traditional analysis. For example, these issues are in the minds of investors: Bank of Japan’s intervention, trade discussions between US and China, and the ongoing capital flow to emerging markets. In other words, the idea of globalization is being reexamined, and the marketplace continues to evolve, while attracting a new breed of investors. However, political debates of crisis and tax management are inevitable and very difficult to ignore. Similarly, Brazil and China will face critical decisions in handling and sustaining recent growth. At some point, the overall consensus will have to accept these issues as regular business concerns in upcoming years
The current administration is providing some hints and making changes in anticipation of mid-term elections. Specifically, the recent changes of economic advisors suggests a search for balanced and new ideas. Similarly, there is a growing view that business leaders would perceive a balanced Congress as a positive catalyst. Through this maze, there are signs of US economic stability in labor and manufacturing. These slight improvements, especially in economic numbers, might not be too visible in mainstream headlines. As confidence is restored, investors might appreciate that this is not 2008. (Notes from September 2008 attached below) As in, it was only two falls ago, where “panic” became the sole and dominate word in financial services. As investors slowly put things into perspective, this might provide further boost to this fragile optimism. Yet the response to the recent crisis has contributed to a heavy rotation into Gold and Fixed Income products. Now, in looking ahead, some wonder if this current trend of risk aversion continues to hold. Maybe, here is another hint in terms of investor mindset: "International investors frustrated with some of the lowest yields on record for U.S. housing bonds are turning to Canada for higher returns. Canada Housing Trust sold C$6.25 billion ($6.1bn) of five-year bonds last week to yield 24.5 bps more than benchmark rates.” (Bloomberg, September 20, 2010)
Levels:
S&P 500 Index [1148.67] – Clearly, at 1040, buyers mostly find markets undervalued. Meanwhile, at 1140, there are growing questions of legitimacy of overall strength. Any pullbacks that show strong support at 1120 can set up a positive seasonal run.
Crude [$76.49] – Interestingly, only a few points removed from its 50-day moving average. That showcases the lack of trend in oil in recent weeks. Furthermore, the 200-day moving average stands at 77.68, stating the current pause in the fundamentals and sentiment of the commodity.
Gold [$1297] – The momentum continues its uptrend and closing near all-time highs. A 22% appreciation since February 5th lows .
DXY – US Dollar Index [79.39] – After a short-lived strength, the index is below a key $80 level. Near-term worries, combined with multi-year trends, reconfirm further weakness. Combining low rate and strengthening Gold create a hurdle for a recovery. Next key level is near annual lows of $76.60.
US 10 Year Treasury Yields [2.60%] – Attempting to stabilize and remains fragile, especially with few percentage points removed from annual lows. Like the Dollar, the threat of new is in the minds of traders and chartists.
Article Quotes:
"Leveraged-loan returns rose to their highest level of the year this week as Brickman Group Holdings Inc. took advantage of investor demand and marketed a loan without financial-maintenance requirements... Investors in search of extra yield have turned to high- risk, high-return loans, driving supply to more than double this year and allowing companies to bring so-called covenant-lite deals to market. Those loans are devoid of restrictions such as a mandate on maximum leverage, or debt to earnings before interest, taxes, depreciation, and amortization." (Bloomberg, September 24, 2010)
“While monthly data may be mixed, the trend data are consistently positive. Private job growth has been less than hoped for but positive nonetheless. Private payrolls increased 630,000 since January 1. In the first half of the year, private labor income increased in all components: hours worked, employment and wages. Hours worked have risen more rapidly than employment, which is typical for the early stages of an economic recovery. In fact, we are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries….. While we are not where we want to be, the economy is recovering and, barring specific shocks and bad policy, it should continue to grow over the next several quarters.” (Thomas M. Hoenig, Federal Reserve Bank of Kansas City, August 13, 2010)
From the archives: September 22, 2008
http://bit.ly/bhBSxK
“A memorable and historic week!....The financial meltdown in this capacity was unprecedented. Nonetheless, from an investor's view, hints of a cycle peak were mildly visible from various angles. Leading up to this decline, homebuilders peaked in 2005. Hard assets (Gold/Crude) soared most of this decade, while "paper assets" were out of favor. Credit concerns and a weakening economy have been a reality for the past year and a half. In March, the Bear Sterns failure sent alarms with lingering effect. This summer, lows were not enough to create a market bottom. At the same time, mid-week sentiment and panic selling further decelerated an oversold market. (Markettakers - September 22, 2008)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, September 20, 2010
Market Outlook | September 20, 2010
“Patience is the best remedy for every trouble”. Titus Maccius Plautus
Even when stock markets showcase some glimpse of hope, the rush to Gold continues as the commodity closed the week at new all-time highs. In fact, any words of optimism or intra-day market strength cannot live up to the multi-decade, and well documented uptrend in Gold. That’s a prevailing theme in the past eight years as the idea dominates mainstream acceptance and shapes the consensus mindset. Of course, several factors contribute to Gold’s appreciation. However, in recent weeks, its relative attractiveness is visible and serves as an example that shows the power of momentum.
The S&P 500 index is barely positive for the year. This is mostly driven by the sharp recovery following some ease from escalated pessimism. In fact, investor sentiment points to some signs of confidence restoration. According to AAII, US small investor sentiment reached the highest optimistic reading for 2010. This mildly coincides with tamed volatility of the past five months.
However, global stock indexes appear extended and poised for some short-term declines. For example, the Turkish Index (TUR) is up nearly 39 % since February 2010.Similarly, South Africa (EZA), South Korea (EWY) and India (INP) have showcased leadership especially after stabilizing in late summer. These are themes worth tracking as these moves serve as a clue for the next multi-year cycle. In other words, investors will be tested on their overall willingness to stick with these themes especially during periods of sudden macro shift. At the same time, would investors add more capital into emerging themes and pull away from US stocks? That’s a reoccurring question facing investment managers planning for 2-3 years.
The highly anticipated Federal Reserve meeting takes place this week and it may cause some near-term reaction. Yet, many wonder if economic data or rate outlook lead to surprises. In addition, investors are deciding between placing bets ahead of mid-term elections or waiting for political results. At this point, the technicals confirm improvement in markets but warn of minor pullbacks. When examining the collective behavior, the market feel appears neutral but risk-takers are pleased to see rewards in niche ideas found in less obvious areas. Even in US markets, stock specific calls across various groups are proving to be fruitful. For example, DTV (Direct TV), SWKS (Skyworks), and AMZN (Amazon.com) have rewarded brave risk takers who purchased shares during summer lows.
Article Quotes:
"China will introduce credit-default swaps by year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the U.S. credit markets experienced over the last several years, according to an official with a state-backed Chinese financial association. China will limit the amount of leverage used in credit swaps and won't permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors, told reporters..." (Bloomberg, September 14, 2010)
“The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. …. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.” (Euro Pacific Capital, September 17, 2010)
Levels:
S&P 500 Index [1125.59] –Attempting to hold above 1120, which has not been sustainable for the most part of 2010. Odd makers observing those previous patterns wonder if a peak is a possibility.
Crude [$73.66] – Since October 2009, crude has remained in a tight range between $70-80. Clearly, this signals a consolidation phase following an explosive decade. In other words, momentum seekers might begin to seek explosive runs in other areas.
Gold [$1274] – Slowly but clearly, making all-time highs. Positive momentum remains intact as the index is over 9% above its 200 day moving average.
DXY– US Dollar Index [81.39] – Stands 15% higher than lows set in March 2008. Yet it feels like we’ve been in a similar range for several years. The 15 month moving average stands near 80.
US 10 Year Treasury Yields [2.73%] – Early form of stability in yields following the summer lows on August 25, 2010. Now, it’s flirting few points below its 50 day moving average of 2.78%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Even when stock markets showcase some glimpse of hope, the rush to Gold continues as the commodity closed the week at new all-time highs. In fact, any words of optimism or intra-day market strength cannot live up to the multi-decade, and well documented uptrend in Gold. That’s a prevailing theme in the past eight years as the idea dominates mainstream acceptance and shapes the consensus mindset. Of course, several factors contribute to Gold’s appreciation. However, in recent weeks, its relative attractiveness is visible and serves as an example that shows the power of momentum.
The S&P 500 index is barely positive for the year. This is mostly driven by the sharp recovery following some ease from escalated pessimism. In fact, investor sentiment points to some signs of confidence restoration. According to AAII, US small investor sentiment reached the highest optimistic reading for 2010. This mildly coincides with tamed volatility of the past five months.
However, global stock indexes appear extended and poised for some short-term declines. For example, the Turkish Index (TUR) is up nearly 39 % since February 2010.Similarly, South Africa (EZA), South Korea (EWY) and India (INP) have showcased leadership especially after stabilizing in late summer. These are themes worth tracking as these moves serve as a clue for the next multi-year cycle. In other words, investors will be tested on their overall willingness to stick with these themes especially during periods of sudden macro shift. At the same time, would investors add more capital into emerging themes and pull away from US stocks? That’s a reoccurring question facing investment managers planning for 2-3 years.
The highly anticipated Federal Reserve meeting takes place this week and it may cause some near-term reaction. Yet, many wonder if economic data or rate outlook lead to surprises. In addition, investors are deciding between placing bets ahead of mid-term elections or waiting for political results. At this point, the technicals confirm improvement in markets but warn of minor pullbacks. When examining the collective behavior, the market feel appears neutral but risk-takers are pleased to see rewards in niche ideas found in less obvious areas. Even in US markets, stock specific calls across various groups are proving to be fruitful. For example, DTV (Direct TV), SWKS (Skyworks), and AMZN (Amazon.com) have rewarded brave risk takers who purchased shares during summer lows.
Article Quotes:
"China will introduce credit-default swaps by year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the U.S. credit markets experienced over the last several years, according to an official with a state-backed Chinese financial association. China will limit the amount of leverage used in credit swaps and won't permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors, told reporters..." (Bloomberg, September 14, 2010)
“The politics of currency intervention are actually quite simple. Japan’s economy is dominated by large manufacturers that export lots of goods to Americans. The problem is that Americans can’t really afford to buy in the quantities that they did just a few years ago. So, instead of looking for new customers with more money to spend, either in their own country or in other productive economies, Japanese manufacturers use their political clout to lobby their government to bailout their traditional U.S. customers. …. In short, pushing up the dollar allows Japanese exporters to postpone a necessary, but costly, restructuring.” (Euro Pacific Capital, September 17, 2010)
Levels:
S&P 500 Index [1125.59] –Attempting to hold above 1120, which has not been sustainable for the most part of 2010. Odd makers observing those previous patterns wonder if a peak is a possibility.
Crude [$73.66] – Since October 2009, crude has remained in a tight range between $70-80. Clearly, this signals a consolidation phase following an explosive decade. In other words, momentum seekers might begin to seek explosive runs in other areas.
Gold [$1274] – Slowly but clearly, making all-time highs. Positive momentum remains intact as the index is over 9% above its 200 day moving average.
DXY– US Dollar Index [81.39] – Stands 15% higher than lows set in March 2008. Yet it feels like we’ve been in a similar range for several years. The 15 month moving average stands near 80.
US 10 Year Treasury Yields [2.73%] – Early form of stability in yields following the summer lows on August 25, 2010. Now, it’s flirting few points below its 50 day moving average of 2.78%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, September 13, 2010
Market Outlook | September 13, 2010
“The paradox of reality is that no image is as compelling as the one which exists only in the mind's eye.” - Shana Alexander
Risk aversion in early days of September should not serve as a shock to most. Clearly, in this jittery period, this early fall is bound to see various mixed feelings when it comes to confidence. That’s been the general market feel at a quick glance. Those chasing strong performance appear stuck, given the limited, relative opportunities. In other words, this might explain the rush to own Gold and instruments linked to fixed income. A Bloomberg article puts the herding mentality in perspective: “Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000..." Basically, recent outperformance of “safer assets” demonstrates the lack of willingness to wait for hopeful returns and less enthusiasm in making bets in innovation ideas. Instead, the attention has increasingly shifted towards Federal Reserve polices and other legislative implications. Importantly, the low interest rate environment is a dominant theme and increased borrowing by US and European companies. That said, the current climate presents unique features, and veterans in financial services will have to make adjustments to adapt. And that’s yet another challenge in this puzzle.
In the past few weeks, the collective investor mindset signals complacency and less eagerness to speculate. The S&P 500 Index is slowly climbing back to erase negative returns for 2010, and strength in the US Dollar significantly evaporated this summer. Both indicators point out the neutral-like market reaction, but they also warn of potential surprises ahead. Meanwhile, some money managers will take this time to wait and seek value at a cheaper cost. Clearly, seasonal changes and mid-term elections are one of the few things that create some hopes for sentiment shift. Meanwhile, for lawmakers, there are plenty of issues to address, from tax implication to further reforms in financial regulations. The suspense mostly resides in the government’s ability to solve issues tied to debt management. For investors, forecasting various possibilities for the ever-so-growing rules and regulations can be a daunting task. The points above add some color to the decreasing market activity and less upbeat feel for risk-taking.
Food related themes showcase some bright spots. In general, a neutral to down market has not stopped some US restaurants. For example, PF Chang’s (PFCB) is up 234% since 2008, at the lowest point of markets. Similarly, Panera Bread (PNRA) is up 189% since January 2008, and it is one of the few companies that kept a solid uptrend since the broad market crisis. Interestingly, the success for Panera is due to low debt, and it showcases that markets find a way to reward quality companies regardless of macroeconomic worries. Similarly, stocks in technology, such as Skyworks (SWKS) and Broadcom (BRCM) are trading near multi-month highs and showcasing sustainable upside moves. At least, this is a positive reflection in rebuilding confidence for those looking to make long-term picks.
Article Quotes:
“Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation’s 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private-sector workers.” (Financial Times, September 9, 2010)
“The ethical implications of an increasingly stressed global food chain are complex. For example, a number of countries, such as China, South Korea, and Saudi Arabia, have been actively buying up significant tracts of foreign farmland ….Farmland investments in Africa, Asia and Latin America are estimated already to be the equivalent of half the size of Italy. Armajaro, the hedge fund, recently put itself under the spotlight by cornering a significant slice of the world's cocoa market with a purchase of 240,000 tonnes of the physical commodity - the biggest such trade in 14 years.” (Telegraph, September 11, 2010)
Levels:
S&P 500 Index [1109.55] – Approaching a key 1120 level, which has been a near-term hurdle that’s difficult to overcome. The index closed at the higher end of key range between 1040 and 1020. Also, with S&P 500 a few points below the 200-day moving average of 1115.63; it can create some response from short-term traders.
Crude [$76.45] – Attempting to bottom for the third time since spring’s sharp correction. Interestingly, buyer showcased interest when Crude prices reached or fell below $72.
Gold [$1246.50] – Early signs of stalling in the short-term after yet another explosive run since July 2010. June 28th highs of 1261 are a key target to confirm the ongoing strength. Interestingly, long-term investors may continue to be comfortable anywhere above 1200.
DXY– US Dollar Index [82.69] – Maintaining dull-like pattern in the past several weeks. After a mid-summer depreciation, the US Dollar Index is lacking major movement.
US 10 Year Treasury Yields [2.79%] – After reaching annual lows of 2.41%, rates showed an explosive and noticeable mean-reversion in the past few days. Perhaps, the late August decline in rates was an overreaction and defined a clue to where rates might hold.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Risk aversion in early days of September should not serve as a shock to most. Clearly, in this jittery period, this early fall is bound to see various mixed feelings when it comes to confidence. That’s been the general market feel at a quick glance. Those chasing strong performance appear stuck, given the limited, relative opportunities. In other words, this might explain the rush to own Gold and instruments linked to fixed income. A Bloomberg article puts the herding mentality in perspective: “Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000..." Basically, recent outperformance of “safer assets” demonstrates the lack of willingness to wait for hopeful returns and less enthusiasm in making bets in innovation ideas. Instead, the attention has increasingly shifted towards Federal Reserve polices and other legislative implications. Importantly, the low interest rate environment is a dominant theme and increased borrowing by US and European companies. That said, the current climate presents unique features, and veterans in financial services will have to make adjustments to adapt. And that’s yet another challenge in this puzzle.
In the past few weeks, the collective investor mindset signals complacency and less eagerness to speculate. The S&P 500 Index is slowly climbing back to erase negative returns for 2010, and strength in the US Dollar significantly evaporated this summer. Both indicators point out the neutral-like market reaction, but they also warn of potential surprises ahead. Meanwhile, some money managers will take this time to wait and seek value at a cheaper cost. Clearly, seasonal changes and mid-term elections are one of the few things that create some hopes for sentiment shift. Meanwhile, for lawmakers, there are plenty of issues to address, from tax implication to further reforms in financial regulations. The suspense mostly resides in the government’s ability to solve issues tied to debt management. For investors, forecasting various possibilities for the ever-so-growing rules and regulations can be a daunting task. The points above add some color to the decreasing market activity and less upbeat feel for risk-taking.
Food related themes showcase some bright spots. In general, a neutral to down market has not stopped some US restaurants. For example, PF Chang’s (PFCB) is up 234% since 2008, at the lowest point of markets. Similarly, Panera Bread (PNRA) is up 189% since January 2008, and it is one of the few companies that kept a solid uptrend since the broad market crisis. Interestingly, the success for Panera is due to low debt, and it showcases that markets find a way to reward quality companies regardless of macroeconomic worries. Similarly, stocks in technology, such as Skyworks (SWKS) and Broadcom (BRCM) are trading near multi-month highs and showcasing sustainable upside moves. At least, this is a positive reflection in rebuilding confidence for those looking to make long-term picks.
Article Quotes:
“Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation’s 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private-sector workers.” (Financial Times, September 9, 2010)
“The ethical implications of an increasingly stressed global food chain are complex. For example, a number of countries, such as China, South Korea, and Saudi Arabia, have been actively buying up significant tracts of foreign farmland ….Farmland investments in Africa, Asia and Latin America are estimated already to be the equivalent of half the size of Italy. Armajaro, the hedge fund, recently put itself under the spotlight by cornering a significant slice of the world's cocoa market with a purchase of 240,000 tonnes of the physical commodity - the biggest such trade in 14 years.” (Telegraph, September 11, 2010)
Levels:
S&P 500 Index [1109.55] – Approaching a key 1120 level, which has been a near-term hurdle that’s difficult to overcome. The index closed at the higher end of key range between 1040 and 1020. Also, with S&P 500 a few points below the 200-day moving average of 1115.63; it can create some response from short-term traders.
Crude [$76.45] – Attempting to bottom for the third time since spring’s sharp correction. Interestingly, buyer showcased interest when Crude prices reached or fell below $72.
Gold [$1246.50] – Early signs of stalling in the short-term after yet another explosive run since July 2010. June 28th highs of 1261 are a key target to confirm the ongoing strength. Interestingly, long-term investors may continue to be comfortable anywhere above 1200.
DXY– US Dollar Index [82.69] – Maintaining dull-like pattern in the past several weeks. After a mid-summer depreciation, the US Dollar Index is lacking major movement.
US 10 Year Treasury Yields [2.79%] – After reaching annual lows of 2.41%, rates showed an explosive and noticeable mean-reversion in the past few days. Perhaps, the late August decline in rates was an overreaction and defined a clue to where rates might hold.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Tuesday, September 07, 2010
Market Outlook | September 7, 2010
“Live each season as it passes; breathe the air, drink the drink, taste the fruit, and resign yourself to the influences of each.” - Henry David Thoreau
Spring’s Fall
Like most Americans, this writer, as well, took a break from market action in the last two weeks of August leading up to Labor Day. Upon returning, one notices how big picture themes reaffirm ongoing themes. To start, there is a great emphasis placed on the mid-spring 2010 trend break, which triggered lower global investor confidence. Simply, the noise surrounding government lawsuits and financial regulations began the sell-off - not to mention, the panic-like response to credit conditions of select European markets. The attention and mild obsession of these events turned to political drama, which occupied more attention than the actual pursuit of growth and innovative opportunities. The rest is explained by lackluster volume and a significant decline in volatility as a sign of most participants’ willingness to await the next chapter.
Interestingly, financial markets, combined with participant emotions, set the tone within a particular season. In other words, seasonal factors should not be easily dismissed when it comes to investor mindset. For instance, the late April 2010 peak showcased downtrend in US stocks and further declines in interest rates. In the meantime, Gold’s 78% rise, since winter 2008, is relatively noticeable and demonstrates the comfort of investors for the commodity in nearly all seasons. Meanwhile, the glaring message pointed to a shift away from risk taking and a general need of “confidence restoration”. At least that's a simple overview and a quick summary of the current barometer.
Autumn’s Hope
A dose of optimism emerged last week with a recovery in equity markets along with stabilization of interest rates. Maybe some of the price appreciation in stocks can be explained by the appeal of the S&P 500 Index being at a 1040 range. Importantly, heading into the fall, a change in sentiment sets up an opportunity to make big cycle bets, especially for those daring optimists. Maybe this mild recovery revolves around the potential of a market shake up as result of elections. Yet, veterans know too well that investment views should be expressed way ahead of a much anticipated event. Some influencers of financial services maintain a strong view that argues against excess regulation with the goal of not deflating sentiment. True or not, mere perception will have a lot to say in the weeks ahead. A few points higher in broad indexes can spark additional momentum. Plus, labor data, combined with increased shipping activity, can stir some early confirmation. Importantly, money managers are challenged in finding differentiated ideas while adjusting for surprise elements.
Article Quotes:
“The S&P 500 is up a little more than 5% over the last 3 days… Unsurprisingly, the sectors that were down the most during the pullback are up the most during the rally. Industrials, Financials, and Technology got hit the hardest in the back half of August, and they have bounced quite a bit this week. Consumer Discretionary is the one sector that outperformed (slightly) during the pullback and is also outperforming over the last three days. The defensives -- Consumer Staples, Utilities, and Telecom -- all held up well as the market fell in August, but they're only up modestly on the bounce.” (Bespoke, September 3, 2010)
“Perhaps the explanation is found in currency movements. One effect of the euro-area crisis was to push the euro down against the dollar in the early months of this year—helping German firms but harming American exporters. Much of Germany’s second-quarter GDP growth came from trade, even as a wider trade gap sapped America’s economy. A weak pound could also explain Britain’s renewed economic strength, much as a surge in the yen has increased worries about Japan. On August 30th Japan’s central bank said it would offer banks ¥10 trillion ($118 billion) of six-month secured loans at its benchmark interest rate of 0.1%, on top of the ¥20 trillion of three-month loans it had already pledged.” (Economist, September 2, 2010)
Levels:
S&P 500 Index [1104.51] – For the fifth time this year, the index has recovered when reaching at, near, or below 1040. Yet, twice this summer, overcoming the hurdle of 1120 has a challenge request to ask buyers. Now, with a breath of fresh air, the optimistic quest might have reignited at the August 27th lows of 1039.
Crude [$74.60] – Attempting to recover from summer lows. Next upside level stands near $78 range as the 200-day moving average stands at $77.51. Range bound over the past 12 months showcases the neutral stage of the multi-year cycle.
Gold [$1240.50] – In the near-term, Gold price’s ability to climb back to annual highs 1261, will be closely watched by participants. The commodity is up 25.36% since lows of September 2009.
DXY– US Dollar Index [83.10] – Within the longer-term downtrend, a bottoming process is forming between $81-83. Once again, the 15-month moving average is near 80, which suggests that despite all recovery hopes and downside moves, the last few years have yet to see a dramatic shift.
US 10 Year Treasury Yields [2.69%] – The last time yields reached below 2.50% was around late 2008. Once again, at these levels, investors continue to wonder if this marks the lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Spring’s Fall
Like most Americans, this writer, as well, took a break from market action in the last two weeks of August leading up to Labor Day. Upon returning, one notices how big picture themes reaffirm ongoing themes. To start, there is a great emphasis placed on the mid-spring 2010 trend break, which triggered lower global investor confidence. Simply, the noise surrounding government lawsuits and financial regulations began the sell-off - not to mention, the panic-like response to credit conditions of select European markets. The attention and mild obsession of these events turned to political drama, which occupied more attention than the actual pursuit of growth and innovative opportunities. The rest is explained by lackluster volume and a significant decline in volatility as a sign of most participants’ willingness to await the next chapter.
Interestingly, financial markets, combined with participant emotions, set the tone within a particular season. In other words, seasonal factors should not be easily dismissed when it comes to investor mindset. For instance, the late April 2010 peak showcased downtrend in US stocks and further declines in interest rates. In the meantime, Gold’s 78% rise, since winter 2008, is relatively noticeable and demonstrates the comfort of investors for the commodity in nearly all seasons. Meanwhile, the glaring message pointed to a shift away from risk taking and a general need of “confidence restoration”. At least that's a simple overview and a quick summary of the current barometer.
Autumn’s Hope
A dose of optimism emerged last week with a recovery in equity markets along with stabilization of interest rates. Maybe some of the price appreciation in stocks can be explained by the appeal of the S&P 500 Index being at a 1040 range. Importantly, heading into the fall, a change in sentiment sets up an opportunity to make big cycle bets, especially for those daring optimists. Maybe this mild recovery revolves around the potential of a market shake up as result of elections. Yet, veterans know too well that investment views should be expressed way ahead of a much anticipated event. Some influencers of financial services maintain a strong view that argues against excess regulation with the goal of not deflating sentiment. True or not, mere perception will have a lot to say in the weeks ahead. A few points higher in broad indexes can spark additional momentum. Plus, labor data, combined with increased shipping activity, can stir some early confirmation. Importantly, money managers are challenged in finding differentiated ideas while adjusting for surprise elements.
Article Quotes:
“The S&P 500 is up a little more than 5% over the last 3 days… Unsurprisingly, the sectors that were down the most during the pullback are up the most during the rally. Industrials, Financials, and Technology got hit the hardest in the back half of August, and they have bounced quite a bit this week. Consumer Discretionary is the one sector that outperformed (slightly) during the pullback and is also outperforming over the last three days. The defensives -- Consumer Staples, Utilities, and Telecom -- all held up well as the market fell in August, but they're only up modestly on the bounce.” (Bespoke, September 3, 2010)
“Perhaps the explanation is found in currency movements. One effect of the euro-area crisis was to push the euro down against the dollar in the early months of this year—helping German firms but harming American exporters. Much of Germany’s second-quarter GDP growth came from trade, even as a wider trade gap sapped America’s economy. A weak pound could also explain Britain’s renewed economic strength, much as a surge in the yen has increased worries about Japan. On August 30th Japan’s central bank said it would offer banks ¥10 trillion ($118 billion) of six-month secured loans at its benchmark interest rate of 0.1%, on top of the ¥20 trillion of three-month loans it had already pledged.” (Economist, September 2, 2010)
Levels:
S&P 500 Index [1104.51] – For the fifth time this year, the index has recovered when reaching at, near, or below 1040. Yet, twice this summer, overcoming the hurdle of 1120 has a challenge request to ask buyers. Now, with a breath of fresh air, the optimistic quest might have reignited at the August 27th lows of 1039.
Crude [$74.60] – Attempting to recover from summer lows. Next upside level stands near $78 range as the 200-day moving average stands at $77.51. Range bound over the past 12 months showcases the neutral stage of the multi-year cycle.
Gold [$1240.50] – In the near-term, Gold price’s ability to climb back to annual highs 1261, will be closely watched by participants. The commodity is up 25.36% since lows of September 2009.
DXY– US Dollar Index [83.10] – Within the longer-term downtrend, a bottoming process is forming between $81-83. Once again, the 15-month moving average is near 80, which suggests that despite all recovery hopes and downside moves, the last few years have yet to see a dramatic shift.
US 10 Year Treasury Yields [2.69%] – The last time yields reached below 2.50% was around late 2008. Once again, at these levels, investors continue to wonder if this marks the lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, August 16, 2010
Market Outlook | August 16, 2010
“Truly successful decision making relies on a balance between deliberate and instinctive thinking.” - Malcolm Gladwell
Last week, the message from the Federal Reserve further triggered worries, along with other factors, that suddenly shifted the calmness of volatility. Yet, glaringly, interest rates continued to decline, even lower than the much discussed 3% on the US 10 Year Yield. The negative stock market tone was supported by a weekly decline of nearly 4% in the S&P 500 Index. Basically, this shakes up the overall comfort zone, while emphasizing the lack of sustainability of early July’s buy signals. Over the halfway point of the year, broad indexes are showcasing negative annual returns, which, as usual, raise the stakes for outside observers. In other words, the concept of purchasing at current prices is less enticing and continues to lose its appeal, at least, momentarily.
Dilemma of Buyers
Earnings season usually causes a sensitive response, since company specific results are scrutinized at a higher level. In addition, technical indicators are suggesting that some areas are overpriced, while other momentum clues provide a sell signal. Perhaps, this contributes to a mentality of waiting until election time to buy shares at possibly lower prices. Interestingly, the moods of investors in the next few days can provide analysts withthe overall magnitude of resurfacing fright. Interestingly, even contrarians need heightened fear to take the brave approach of buying, while the panic sets in. Perhaps, we’re at a confusing state, where real economy data, fundamental business cycle, and psychology are pointing in a similar direction.
Investors Challenge
Money managers now face the challenge of finding asset classes, or company specific stocks, in hopes of gearing up for the next four months. That includes a traditionally turbulent month of September, ahead of mid-term elections. In addition, earnings results seem less likely to produce collective upside surprises. As we’ve seen over the years, catching surprises is where big turnaround bet becomes highly rewarding. However, at this phase, those actively involved in markets will have the challenge of seeking returns in sideways pattern while staying loose to hedge undesired, or less expected, moves. That, in itself, sounds reasonable at first, but it can become hard to execute. At least, conviction levels will be tested, keeping market participants more enthused.
A Balancing Act
Those accustomed to trend-following, from previous years, have to accept the growing importance of understanding government policies in the investment decision making process. Veteran participants are forced to readjust to those lessons, especially in the past two years. Of course, this is highlighted by the GM IPO, which is bound to cause political, financial, and social reactions. This public offering is a symbol of the continuation of bailout plans, and it sends a bigger message of the required adjustment in the current era.
Clearly, trend following alone is not the sole answer for outperformance. And this year has taught us that one has to isolate ideas to specific regions, companies, or concepts. Yet, investing in a relatively narrow idea creates liquidity issues in hopes of attaining higher return. For example, according to EPFR, “Funds investing in emerging-market local-currency debt have attracted $16.9 billion of net inflows so far, more than triple the record annual intake of $5 billion recorded in 2007” (Bloomberg, August 13, 2010). This reconfirms recent strength in specific emerging markets as seen by the strength of Chile, Turkey, and South Africa. Again, there is a balance between seeking huge returns and investing in relatively liquid instruments. The art of balancing the two is the goal of wise managers. Importantly, high conviction ideas seem to be always required, rather than going with the flow, as witnessed in several previous cycles.
At the same time, larger participants are desperately seeking higher yields, which naturally weigh heavily on influencing market response, and it changes the complication of the investing game. Perhaps, this explains why, “Hedge fund managers now account for a fifth of all trading volume in the $10,000bn US Treasury bond market” (Financial Times, August 11, 2010).
Levels:
S&P 500 Index [1079.25] failed to hold above 1120, and it fell even below the other key level of 1100.
Crude [$75.39] had a recent short-term rally near $83, which failed to attract buyers. Currently, it is in a sharp decline mode, yet odds are increasingly favorable to hold between $72 and $74 ranges. There is a strong possibility that the strengthening of the dollar contributed to declining crude prices.
Gold [$1214] is trading slightly above the 50-day moving average, which showcases that the commodity is trading in-line within a defined pattern.
DXY– US Dollar Index [82.94], this month, suggests an early rebound from the summer’s deceleration. However, the weekly recovery is not convincing of a sustainable rally.
US 10 Year Treasury Yields [2.67%] showed a 33% decline in rates after topping on April 5, 2010. Last Friday, it marked the lows for the year. Questions are expected at the next stop around 2.50%. To put some perspective, reaching near 2.50% was last witnessed during the height of the credit crisis of fall 2008.
Article Quotes
“True, central banks talk to a lot of practitioners in the financial markets and the real economy and have a good insight into the short-term money markets from their own operations. But beyond that, they are usually working off the same numbers as everyone else. Yet in times of great uncertainty, investors will cling on to anything they can to form a view about the economy, including assuming the Fed knows more than they do….. There is no such obvious disagreement between government and central bank in the US. But divisions elsewhere are destroying the coherence of fiscal policy. A stimulus-phobic Congress is blocking the White House. And with the recent departures of senior officials Peter Orszag and Christy Romer, there are signs of division and exhaustion within the administration’s economics team.” (Financial Times, August 13, 2010)
"Korea Teachers Pension, the nation's second-largest public pension fund, favors bonds and stocks of Brazil, China, Indonesia, and Malaysia over developed countries because their economies are expanding faster. 'We may invest more there,' Chief Investment Officer Lee Yun Kyu, who oversees 8.3 trillion won ($7.1 billion), said... 'Emerging nations, relatively free from the sovereign debt crisis, will be in good shape.’” (Bloomberg, August 11, 2010)
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Last week, the message from the Federal Reserve further triggered worries, along with other factors, that suddenly shifted the calmness of volatility. Yet, glaringly, interest rates continued to decline, even lower than the much discussed 3% on the US 10 Year Yield. The negative stock market tone was supported by a weekly decline of nearly 4% in the S&P 500 Index. Basically, this shakes up the overall comfort zone, while emphasizing the lack of sustainability of early July’s buy signals. Over the halfway point of the year, broad indexes are showcasing negative annual returns, which, as usual, raise the stakes for outside observers. In other words, the concept of purchasing at current prices is less enticing and continues to lose its appeal, at least, momentarily.
Dilemma of Buyers
Earnings season usually causes a sensitive response, since company specific results are scrutinized at a higher level. In addition, technical indicators are suggesting that some areas are overpriced, while other momentum clues provide a sell signal. Perhaps, this contributes to a mentality of waiting until election time to buy shares at possibly lower prices. Interestingly, the moods of investors in the next few days can provide analysts withthe overall magnitude of resurfacing fright. Interestingly, even contrarians need heightened fear to take the brave approach of buying, while the panic sets in. Perhaps, we’re at a confusing state, where real economy data, fundamental business cycle, and psychology are pointing in a similar direction.
Investors Challenge
Money managers now face the challenge of finding asset classes, or company specific stocks, in hopes of gearing up for the next four months. That includes a traditionally turbulent month of September, ahead of mid-term elections. In addition, earnings results seem less likely to produce collective upside surprises. As we’ve seen over the years, catching surprises is where big turnaround bet becomes highly rewarding. However, at this phase, those actively involved in markets will have the challenge of seeking returns in sideways pattern while staying loose to hedge undesired, or less expected, moves. That, in itself, sounds reasonable at first, but it can become hard to execute. At least, conviction levels will be tested, keeping market participants more enthused.
A Balancing Act
Those accustomed to trend-following, from previous years, have to accept the growing importance of understanding government policies in the investment decision making process. Veteran participants are forced to readjust to those lessons, especially in the past two years. Of course, this is highlighted by the GM IPO, which is bound to cause political, financial, and social reactions. This public offering is a symbol of the continuation of bailout plans, and it sends a bigger message of the required adjustment in the current era.
Clearly, trend following alone is not the sole answer for outperformance. And this year has taught us that one has to isolate ideas to specific regions, companies, or concepts. Yet, investing in a relatively narrow idea creates liquidity issues in hopes of attaining higher return. For example, according to EPFR, “Funds investing in emerging-market local-currency debt have attracted $16.9 billion of net inflows so far, more than triple the record annual intake of $5 billion recorded in 2007” (Bloomberg, August 13, 2010). This reconfirms recent strength in specific emerging markets as seen by the strength of Chile, Turkey, and South Africa. Again, there is a balance between seeking huge returns and investing in relatively liquid instruments. The art of balancing the two is the goal of wise managers. Importantly, high conviction ideas seem to be always required, rather than going with the flow, as witnessed in several previous cycles.
At the same time, larger participants are desperately seeking higher yields, which naturally weigh heavily on influencing market response, and it changes the complication of the investing game. Perhaps, this explains why, “Hedge fund managers now account for a fifth of all trading volume in the $10,000bn US Treasury bond market” (Financial Times, August 11, 2010).
Levels:
S&P 500 Index [1079.25] failed to hold above 1120, and it fell even below the other key level of 1100.
Crude [$75.39] had a recent short-term rally near $83, which failed to attract buyers. Currently, it is in a sharp decline mode, yet odds are increasingly favorable to hold between $72 and $74 ranges. There is a strong possibility that the strengthening of the dollar contributed to declining crude prices.
Gold [$1214] is trading slightly above the 50-day moving average, which showcases that the commodity is trading in-line within a defined pattern.
DXY– US Dollar Index [82.94], this month, suggests an early rebound from the summer’s deceleration. However, the weekly recovery is not convincing of a sustainable rally.
US 10 Year Treasury Yields [2.67%] showed a 33% decline in rates after topping on April 5, 2010. Last Friday, it marked the lows for the year. Questions are expected at the next stop around 2.50%. To put some perspective, reaching near 2.50% was last witnessed during the height of the credit crisis of fall 2008.
Article Quotes
“True, central banks talk to a lot of practitioners in the financial markets and the real economy and have a good insight into the short-term money markets from their own operations. But beyond that, they are usually working off the same numbers as everyone else. Yet in times of great uncertainty, investors will cling on to anything they can to form a view about the economy, including assuming the Fed knows more than they do….. There is no such obvious disagreement between government and central bank in the US. But divisions elsewhere are destroying the coherence of fiscal policy. A stimulus-phobic Congress is blocking the White House. And with the recent departures of senior officials Peter Orszag and Christy Romer, there are signs of division and exhaustion within the administration’s economics team.” (Financial Times, August 13, 2010)
"Korea Teachers Pension, the nation's second-largest public pension fund, favors bonds and stocks of Brazil, China, Indonesia, and Malaysia over developed countries because their economies are expanding faster. 'We may invest more there,' Chief Investment Officer Lee Yun Kyu, who oversees 8.3 trillion won ($7.1 billion), said... 'Emerging nations, relatively free from the sovereign debt crisis, will be in good shape.’” (Bloomberg, August 11, 2010)
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, August 09, 2010
Market Outlook| August 9, 2010
“It is a bad plan that admits of no modification.” - Publilius Syrus (~100 BC)
Macro Factors
Interest rates and volatility were two factors that caught the minds of investors heading into 2010. Clearly, these are key macro drivers of financial markets across various climates. Interestingly, at the end of last week, global investors were reminded that US rates are still low and that volatility is calmer than expected. The first half of 2010 showcased that the speculators estimate of rising rates were gaining popularity, but they did not play out as expected. These low rates trigger further inquiry about deflation, which is becoming a much discussed topic among economists. In addition, lower borrowing costs are helping companies, as it is projected that $100 billion US corporate bonds will be sold this month (Bloomberg, August 6, 2010). Like declining rates, volatility has been well tempered. When combining worrisome results from 2008 and spring of this year, there was a growing fear of additional turbulence. Once again, the consensus thoughts might have failed to materialize, and these lessons provide a key takeaway of not being shaken up by circulating noise. Instead, preparing for surprises in these macro themes is worth a closer look.
In terms of currency, the Dollar remains weak, and economic numbers are not showcasing signs of improvement. Generally, investors seek to place capital in countries with higher interest rates. Perhaps, that mostly explains the two-month decline in the US Dollar as it reverts back to its multi-decade depreciation - a familiar pattern indeed. In fact, the Dollar Index has declined nearly 10% since June 7, 2010. Meanwhile, the disappointment of non-trending markets has contributed to capital inflow into Gold related investments. Yet, it is unclear if Gold has become the new “hot” money or a shelter against other speculative themes. This puzzle should be resolved in the months ahead as investors showcase overall conviction.
Another Inflection Point
On one hand, it’s quite evident that the increasing levels of pessimism in certain areas are justifiable. Now, gauging the confidence of investors is rather a tough read, given this period of disorientation and lack of trend. In a way, an inflection point is reoccurring here with sustainability of the July rally and possible improvement in “real” economic trends. Twice in the past 3 months, when the S&P 500 reached around 1120, it declined and failed to hold. Now, a similar set up is taking place and raises the questions as to which catalysts can spur buying interest or if new elements of confidence have resurfaced. Despite the difficulty of finding a market rhythm, there is an opportunity to bet on "turning points”. Specifically, managers will have to assess overall directional view of the stock market for the rest of the year. Secondly, those with strong long-term views on currency or interest rates might look to reposition overall holdings. Finally, those taking defensive stands need to gain more comfort in credit environments and government policies to create a cycle revival. These are lingering issues from the fall-out of not only the crisis of 2008, but also have deep roots that began in the end of the US bull market in 2000.
Developing Themes
Basically, the last decade focused heavily on hard commodities, such as Gold and Crude. To have a multi-year idea work, there needs to be an agreement of a speculative theme that is of interest to various global participants. The agriculture theme continues to soar, led by wheat prices. This fits into a trend favoring the rise in prices, soft commodities, and food related groups. Countries tied to agriculture, especially in emerging markets, will look to attract foreign capital, given the explosive food demand in Asian countries. At the same time, export policies by key nations will have a lot to say on the implication of rewards and risks associated to this trend. Given the theme of population growth and new emerging economies, this topic will hit the radar of money managers and politicians, given the fundamental social implication. Even in the United States, food related stocks are showcasing relative strength. For example, (BGS) B&G Foods, Inc., manufacturer of shelf-stable foods, has risen over 53% since November 2009. Similarly, Brazilian sugar producer, (CZZ) Cosan, Ltd., has increased by nearly 80% since the fall of 2009. The company’s revenue growth is greatly attributed to rises in sugar prices.
Levels:
S&P 500 Index [1121.64] is facing an inflection point near 1120. Last time, these ranges were revisited in mid July and lead to a downside move from a psychological view.
Crude [$80.70] closed near where we started the year, which is mirrored by the 200-day moving average of $77.81. Investors are awaiting a major directional shift.
Gold [$1207.75] shows further evidence of buyer interest at $1140-1160. Now, the next question is if those bullish views will come back to purchase more above $1220.
DXY– US Dollar Index [80.40] continues to stabilize around $80, and there has not been much movement in recent weeks following a two month downturn.
US 10 Year Treasury Yields [2.81%] had another finish resulting in annual lows. A noticeable weakness in rates after a failed attempt of stabilization at 3%.
Article Quotes:
“It takes years to discover and mine a new source of gold or nickel, but a farmer can plant different seeds and boost supply in just one growing season. If the price of wheat remains high, this will prompt farmers to plant more lucrative crops and supply will increase. This will lead to lower prices. So, the current price spike should not be a cause of great concern. But looking further ahead, there are reasons to worry. Global fundamentals are supportive of a long-term rise in the price of food. At the moment there are just under 7bn mouths to feed around the world. The United Nations (UN) believes there will be more than 9bn people by 2050. In fact, the UN's Food and Agriculture Organisation (FAO) forecasts that total world demand for agricultural products will jump 60pc between now and 2030 – rising much more rapidly than the population….. Demand for grains in emerging markets increases more than the population because of one simple fact – richer people eat more meat.” (Telegraph, August 8, 2010)
“First, we at the Fed must continue to comport ourselves in a manner that exorcises any lingering worries about our willingness to brook any political interference with our commitment to fostering price stability and maximum sustainable employment. We delivered on our duty to restore liquidity to the commercial paper, asset-backed securities, interbank lending, and other markets. We then closed out all of our extraordinary liquidity facilities, doing so without costing the taxpayer a dime (imagine that: a government agency that closes programs after they have outlived their usefulness!). We have worked hard to earn the respect of the marketplace and of the nation, and we dare not risk it at a time when there is so much uncertainty elsewhere. Second, our political leaders should muster the courage to pull up their socks and strike a better balance between the long-term need to keep government debt low and the short- to medium-term need for an appropriate level of fiscal stimulus.” (Federal Reserve of Dallas, July 29, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Macro Factors
Interest rates and volatility were two factors that caught the minds of investors heading into 2010. Clearly, these are key macro drivers of financial markets across various climates. Interestingly, at the end of last week, global investors were reminded that US rates are still low and that volatility is calmer than expected. The first half of 2010 showcased that the speculators estimate of rising rates were gaining popularity, but they did not play out as expected. These low rates trigger further inquiry about deflation, which is becoming a much discussed topic among economists. In addition, lower borrowing costs are helping companies, as it is projected that $100 billion US corporate bonds will be sold this month (Bloomberg, August 6, 2010). Like declining rates, volatility has been well tempered. When combining worrisome results from 2008 and spring of this year, there was a growing fear of additional turbulence. Once again, the consensus thoughts might have failed to materialize, and these lessons provide a key takeaway of not being shaken up by circulating noise. Instead, preparing for surprises in these macro themes is worth a closer look.
In terms of currency, the Dollar remains weak, and economic numbers are not showcasing signs of improvement. Generally, investors seek to place capital in countries with higher interest rates. Perhaps, that mostly explains the two-month decline in the US Dollar as it reverts back to its multi-decade depreciation - a familiar pattern indeed. In fact, the Dollar Index has declined nearly 10% since June 7, 2010. Meanwhile, the disappointment of non-trending markets has contributed to capital inflow into Gold related investments. Yet, it is unclear if Gold has become the new “hot” money or a shelter against other speculative themes. This puzzle should be resolved in the months ahead as investors showcase overall conviction.
Another Inflection Point
On one hand, it’s quite evident that the increasing levels of pessimism in certain areas are justifiable. Now, gauging the confidence of investors is rather a tough read, given this period of disorientation and lack of trend. In a way, an inflection point is reoccurring here with sustainability of the July rally and possible improvement in “real” economic trends. Twice in the past 3 months, when the S&P 500 reached around 1120, it declined and failed to hold. Now, a similar set up is taking place and raises the questions as to which catalysts can spur buying interest or if new elements of confidence have resurfaced. Despite the difficulty of finding a market rhythm, there is an opportunity to bet on "turning points”. Specifically, managers will have to assess overall directional view of the stock market for the rest of the year. Secondly, those with strong long-term views on currency or interest rates might look to reposition overall holdings. Finally, those taking defensive stands need to gain more comfort in credit environments and government policies to create a cycle revival. These are lingering issues from the fall-out of not only the crisis of 2008, but also have deep roots that began in the end of the US bull market in 2000.
Developing Themes
Basically, the last decade focused heavily on hard commodities, such as Gold and Crude. To have a multi-year idea work, there needs to be an agreement of a speculative theme that is of interest to various global participants. The agriculture theme continues to soar, led by wheat prices. This fits into a trend favoring the rise in prices, soft commodities, and food related groups. Countries tied to agriculture, especially in emerging markets, will look to attract foreign capital, given the explosive food demand in Asian countries. At the same time, export policies by key nations will have a lot to say on the implication of rewards and risks associated to this trend. Given the theme of population growth and new emerging economies, this topic will hit the radar of money managers and politicians, given the fundamental social implication. Even in the United States, food related stocks are showcasing relative strength. For example, (BGS) B&G Foods, Inc., manufacturer of shelf-stable foods, has risen over 53% since November 2009. Similarly, Brazilian sugar producer, (CZZ) Cosan, Ltd., has increased by nearly 80% since the fall of 2009. The company’s revenue growth is greatly attributed to rises in sugar prices.
Levels:
S&P 500 Index [1121.64] is facing an inflection point near 1120. Last time, these ranges were revisited in mid July and lead to a downside move from a psychological view.
Crude [$80.70] closed near where we started the year, which is mirrored by the 200-day moving average of $77.81. Investors are awaiting a major directional shift.
Gold [$1207.75] shows further evidence of buyer interest at $1140-1160. Now, the next question is if those bullish views will come back to purchase more above $1220.
DXY– US Dollar Index [80.40] continues to stabilize around $80, and there has not been much movement in recent weeks following a two month downturn.
US 10 Year Treasury Yields [2.81%] had another finish resulting in annual lows. A noticeable weakness in rates after a failed attempt of stabilization at 3%.
Article Quotes:
“It takes years to discover and mine a new source of gold or nickel, but a farmer can plant different seeds and boost supply in just one growing season. If the price of wheat remains high, this will prompt farmers to plant more lucrative crops and supply will increase. This will lead to lower prices. So, the current price spike should not be a cause of great concern. But looking further ahead, there are reasons to worry. Global fundamentals are supportive of a long-term rise in the price of food. At the moment there are just under 7bn mouths to feed around the world. The United Nations (UN) believes there will be more than 9bn people by 2050. In fact, the UN's Food and Agriculture Organisation (FAO) forecasts that total world demand for agricultural products will jump 60pc between now and 2030 – rising much more rapidly than the population….. Demand for grains in emerging markets increases more than the population because of one simple fact – richer people eat more meat.” (Telegraph, August 8, 2010)
“First, we at the Fed must continue to comport ourselves in a manner that exorcises any lingering worries about our willingness to brook any political interference with our commitment to fostering price stability and maximum sustainable employment. We delivered on our duty to restore liquidity to the commercial paper, asset-backed securities, interbank lending, and other markets. We then closed out all of our extraordinary liquidity facilities, doing so without costing the taxpayer a dime (imagine that: a government agency that closes programs after they have outlived their usefulness!). We have worked hard to earn the respect of the marketplace and of the nation, and we dare not risk it at a time when there is so much uncertainty elsewhere. Second, our political leaders should muster the courage to pull up their socks and strike a better balance between the long-term need to keep government debt low and the short- to medium-term need for an appropriate level of fiscal stimulus.” (Federal Reserve of Dallas, July 29, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, August 02, 2010
Market Outlook | August 2, 2010
“You must first have a lot of patience to learn to have patience.” - Stanislaw J. Lec (1909 - 1966)
Test of Patience
Despite a positive July finish (Dow 7.8% and S&P 500 6.9%), the story for US markets can be summarized as a robotic-like response in broad indexes without much flair, specifically, when the S&P 500 Index reaches a little above 1100, which triggers a signal of caution for participants, while suggesting that we’re too positive. And anywhere below 1080 appears to mark a selling point. Combining these factors, mostly explains the narrow trading ranges. These swings showcase the collective fuzzy feel and true test of patience for those willing to participate. In turn, this frustrates those trend seekers, while, at the same time, it challenges the skill sets of forecasters. In addition, it feels like there is a growing fixation on chart patterns and some emphasis on select economic indicators.
Basically, continual discussion on the current cycle downtrend is highly visible in headlines and day-to-day conversation. However, for money managers, the daunting task of finding emerging and distinguished ideas is still on high demand. The highly-documented recovery concerns are hard to ignore. In fact, interest rates remain very low, and the cost of borrowing continues to decline as measured by the US 10 Year Treasury, which is below 3%. Perhaps, for some, rates are too cheap to borrow, which can mean that not much activity is taking place. In other words, lower rates coincide with lower than expected confidence. However, volatility appears calm for the moment, and maybe it will fit the desires of global policymakers in an attempt to reach some stability. Interestingly, monthly declines in US Dollar and Gold provide an early clue to some risk tolerance and a slight move away from risk-aversion.
Jotting Down New Themes:
It was only two or three years ago, where "decoupling", began to dominate the thoughts of strategists and portfolio managers. The theory argued the potential of strength in emerging markets and weakness in developed markets. Interestingly, after an up and down moves market proved to be more correlated than usual. However, in looking ahead, divergence among global markets is inevitable as learned in previous years. The first step requires indentifying areas of fundamental growth that stems from natural growth and moderate legal structure, and secondly, picking out timely entry points in selective ideas without major disruption from macroeconomic events. That said, on the surface, it appears that high risk and very fruitful potential rewards are less available, especially given the sentiment in the past 3 months. That said, patient investors will notice that indexes of countries, such as Turkey and South Africa, are demonstrating relative strength. Turkish Index Fund is not far removed from its all-time highs, reached on April 16, 2010. Similarly, Istanbul Stock Exchange market reached record highs last week as it continues to develop and expand. Notably, most of the attraction is driven by foreign investors who appreciate the growth rate of manufactured goods and cheaper transportation cost for exporting to Europe.
Again, despite worries, some optimists might have to soon consider taking on heavier risk in an attempt to capture profound returns. The type of returns that attract long-term investors requires meaningful bets within a favorable cycle. Some veterans will simply argue that the point of this whole game is to seek multi-year favorable returns without guessing and stressing too much. As usual, the quest of finding that illustrious answer is a daunting task, involving more than average risk. However, those in the game will have to try their luck at some point.
Article Quotes:
Revisiting thoughts from the Federal Reserve from two summers ago:
“Structural changes in emerging market economies have helped these countries during the recent period. One change in particular is the strengthening of the policy environment. With improved economic and financial policies, emerging market economies are more flexible and less subject to internal and external shocks that scare investors and disrupt asset markets. Inflation rates have come down dramatically since 1995, in part, as a result of better monetary policy, assisted in many cases by more flexible exchange rate regimes that allowed monetary authorities to focus more intensively on domestic price stability. Fiscal balances are much improved, and many emerging market economies are running current account surpluses. Improvements in the policy environment have helped reinforce perceptions that emerging market assets, on average, are less risky than in the past and are less likely to be sold off in the event of financial disruptions and generalized retreats from risk, such as we have seen since August. As evidence of this, as I noted earlier, emerging market credit spreads have become less sensitive to movements in industrial country corporate spreads, and this trend has been ongoing even prior to the events of the last year.” (Speech by Donald L. Kohn, June 26, 2008)
“It's common to hear concerns that the U.S. economy faces a Japan-style lost decade. But as I've documented, when it comes to employment, income growth, market performance, and fiscal management we've already had a lost decade. The period between 2001 and 2008, characterized by easy fiscal and monetary policy, lax regulation, and low taxes on capital gains, dividends, and income produced pathetic results—and then ended in the worst debacle since the Great Depression. And the macroeconomic performance of our last decade turns out to be worse than we thought. In this release, the BEA revised growth figures for 2007, 2008, and 2009. In 2007, instead of growing 2.1 percent, the economy grew only 1.9 percent. In 2008, instead of growing 0.4 percent, it didn't grow at all. And in 2009, instead of shrinking 2.4 percent, it shrank by 2.6 percent.” (Slate, July 30, 2010)
Levels:
S&P 500 Index [1101.60] is, once again, attempting to climb and hold significantly above 1100. Interestingly, the index is trading at nearly a midpoint between the 50-day and 200-day average. Perhaps, this is evidence that investors are highly skewed to technical indicators and computer driven models.
Crude [$78.95] is mostly in-line with its 200-day moving average of $77.81. This reconfirms the 3-month sideway range as most await an external catalyst for price movement.
Gold [$1169] closed out a negative month of July, after peaking on June 28, 2010. Long-term buyers will watch closely as the behavior of Gold nears 1140 and 1120.
DXY– US Dollar Index [81.53] is nearly in a 2-month decline, which most likely coincides with non-impressive economic numbers.
US 10 Year Treasury Yields [2.90%] continues to maintain a defined downtrend with no early signs of a recovery. Yearly lows stand at 2.85%, reached on July 21, 2010.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Test of Patience
Despite a positive July finish (Dow 7.8% and S&P 500 6.9%), the story for US markets can be summarized as a robotic-like response in broad indexes without much flair, specifically, when the S&P 500 Index reaches a little above 1100, which triggers a signal of caution for participants, while suggesting that we’re too positive. And anywhere below 1080 appears to mark a selling point. Combining these factors, mostly explains the narrow trading ranges. These swings showcase the collective fuzzy feel and true test of patience for those willing to participate. In turn, this frustrates those trend seekers, while, at the same time, it challenges the skill sets of forecasters. In addition, it feels like there is a growing fixation on chart patterns and some emphasis on select economic indicators.
Basically, continual discussion on the current cycle downtrend is highly visible in headlines and day-to-day conversation. However, for money managers, the daunting task of finding emerging and distinguished ideas is still on high demand. The highly-documented recovery concerns are hard to ignore. In fact, interest rates remain very low, and the cost of borrowing continues to decline as measured by the US 10 Year Treasury, which is below 3%. Perhaps, for some, rates are too cheap to borrow, which can mean that not much activity is taking place. In other words, lower rates coincide with lower than expected confidence. However, volatility appears calm for the moment, and maybe it will fit the desires of global policymakers in an attempt to reach some stability. Interestingly, monthly declines in US Dollar and Gold provide an early clue to some risk tolerance and a slight move away from risk-aversion.
Jotting Down New Themes:
It was only two or three years ago, where "decoupling", began to dominate the thoughts of strategists and portfolio managers. The theory argued the potential of strength in emerging markets and weakness in developed markets. Interestingly, after an up and down moves market proved to be more correlated than usual. However, in looking ahead, divergence among global markets is inevitable as learned in previous years. The first step requires indentifying areas of fundamental growth that stems from natural growth and moderate legal structure, and secondly, picking out timely entry points in selective ideas without major disruption from macroeconomic events. That said, on the surface, it appears that high risk and very fruitful potential rewards are less available, especially given the sentiment in the past 3 months. That said, patient investors will notice that indexes of countries, such as Turkey and South Africa, are demonstrating relative strength. Turkish Index Fund is not far removed from its all-time highs, reached on April 16, 2010. Similarly, Istanbul Stock Exchange market reached record highs last week as it continues to develop and expand. Notably, most of the attraction is driven by foreign investors who appreciate the growth rate of manufactured goods and cheaper transportation cost for exporting to Europe.
Again, despite worries, some optimists might have to soon consider taking on heavier risk in an attempt to capture profound returns. The type of returns that attract long-term investors requires meaningful bets within a favorable cycle. Some veterans will simply argue that the point of this whole game is to seek multi-year favorable returns without guessing and stressing too much. As usual, the quest of finding that illustrious answer is a daunting task, involving more than average risk. However, those in the game will have to try their luck at some point.
Article Quotes:
Revisiting thoughts from the Federal Reserve from two summers ago:
“Structural changes in emerging market economies have helped these countries during the recent period. One change in particular is the strengthening of the policy environment. With improved economic and financial policies, emerging market economies are more flexible and less subject to internal and external shocks that scare investors and disrupt asset markets. Inflation rates have come down dramatically since 1995, in part, as a result of better monetary policy, assisted in many cases by more flexible exchange rate regimes that allowed monetary authorities to focus more intensively on domestic price stability. Fiscal balances are much improved, and many emerging market economies are running current account surpluses. Improvements in the policy environment have helped reinforce perceptions that emerging market assets, on average, are less risky than in the past and are less likely to be sold off in the event of financial disruptions and generalized retreats from risk, such as we have seen since August. As evidence of this, as I noted earlier, emerging market credit spreads have become less sensitive to movements in industrial country corporate spreads, and this trend has been ongoing even prior to the events of the last year.” (Speech by Donald L. Kohn, June 26, 2008)
“It's common to hear concerns that the U.S. economy faces a Japan-style lost decade. But as I've documented, when it comes to employment, income growth, market performance, and fiscal management we've already had a lost decade. The period between 2001 and 2008, characterized by easy fiscal and monetary policy, lax regulation, and low taxes on capital gains, dividends, and income produced pathetic results—and then ended in the worst debacle since the Great Depression. And the macroeconomic performance of our last decade turns out to be worse than we thought. In this release, the BEA revised growth figures for 2007, 2008, and 2009. In 2007, instead of growing 2.1 percent, the economy grew only 1.9 percent. In 2008, instead of growing 0.4 percent, it didn't grow at all. And in 2009, instead of shrinking 2.4 percent, it shrank by 2.6 percent.” (Slate, July 30, 2010)
Levels:
S&P 500 Index [1101.60] is, once again, attempting to climb and hold significantly above 1100. Interestingly, the index is trading at nearly a midpoint between the 50-day and 200-day average. Perhaps, this is evidence that investors are highly skewed to technical indicators and computer driven models.
Crude [$78.95] is mostly in-line with its 200-day moving average of $77.81. This reconfirms the 3-month sideway range as most await an external catalyst for price movement.
Gold [$1169] closed out a negative month of July, after peaking on June 28, 2010. Long-term buyers will watch closely as the behavior of Gold nears 1140 and 1120.
DXY– US Dollar Index [81.53] is nearly in a 2-month decline, which most likely coincides with non-impressive economic numbers.
US 10 Year Treasury Yields [2.90%] continues to maintain a defined downtrend with no early signs of a recovery. Yearly lows stand at 2.85%, reached on July 21, 2010.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 26, 2010
Market Outlook | July 26, 2010
“One of the greatest pains to human nature is the pain of a new idea.” - Walter Bagehot (1826 - 1877)
It may be hard to focus on upside gains when worries of economic stability resurface in the minds of policymakers and business decision makers. How many feel comfortable on the S&P 500 Index’s ability to revisit the highs of 1576.09 reached in 2007? The answer is, most likely, not many, which explains the lack of buy-hold mentality, combined with lackluster volume or full confidence in the anticipation of further gains. So the common mindset has been to navigate these narrow trading ranges. Plus the ever-so-frustrating downtrend to no-trend is becoming accepted as the norm. In fact, a trending market can be the surprise here and less foreseen. Investors’ short-term memory within the last 3 months (S&P 500 annual peak on April 26, 2010) has focused on risk sensitivity and a re-emphasis on fear. Now, with July winding down, some burst of optimism can be supported by positive earnings results. Perhaps, the case for a sustainable upside run can materialize with the aid of fundamental strength in key companies and minor labor improvements. In other words, a temporary change in investor sentiment can change anytime now, as the gloomy stories become overly tiresome. However, this hopeful spark should not be mistaken for longer-term revival.
As for themes, volatility is finding a way to stay calm after the spring uproar. Meanwhile, interest rates continue to dip lower and inflation is not much of a threat. In the US, some might argue that larger cap companies look favorable, at least for steadiness. Importantly, the relative attractiveness of innovation themes in Healthcare and Technology are worth a look for the second half. For example, Biotech presents opportunities for explosive upside gains as witnessed by the GENZ (Genzyme) afterhours performance of GENZ (Genzyme). On a similar note, MNTA (Momenta Pharmaceutical) rose nearly 80% in one day, based on approval from the FDA for anti-clotting drugs. In technology, a 39% jump in revenue for RVBD (Riverbed Tech) reconfirms that estimates remain too pessimistic and surprise elements are a strong possibility.
Simply, this showcases that companies, which are less linked to interest rate or commodity pricing, can entice investors to examine the company specific fundamentals. That said, finding these types of ideas are challenging when bogged down with negative macroeconomic headlines and ongoing, uncontrollable regulatory discussions. Yet, markets, as usual, reward distinct ideas, which offer above average growth. Perhaps, this serves as a fresh reminder of big picture stability and restoration in investor confidence for upcoming months.
In the last decade, China and Brazil confirmed economic strength and attracted significant capital among foreign investors. In terms of higher growth, both countries are finding new competition in the emerging market space, especially for seekers of higher risk/reward. Chile continues to demonstrate further economic strength, given the country’s solid infrastructure and reconstruction. These days, it is not easy to find a stock that’s trading at all-time highs. Clearly, even the MSCI Emerging Market index witnessed its all time highs in October 2007. Interestingly, SAN (Banco Santander-Chile) made new highs last week, given its positive momentum. Even though pullbacks might be needed for timely buy points, the market usually provides the relevant hints for new growth stories.
Levels:
S&P 500 [1102.66] is near the high range of a two-month trading pattern, which is noticeable between 1060 and 1120.
Crude [$78.98] is above $80 in the near-term can spur momentum for bullish participants. However, longer-term picture is still unclear at current price levels.
Gold [$1190] has been slowing its upward acceleration since May. However, investors appear to gain some comfort of strength around 1200.
DXY– US Dollar Index [82.46] shows that Dollar strength is taming in the past month. Perhaps, a symbol of less heightened fear experience in the spring sell-offs.
US 10 Year Treasury Yields [2.99%] A step back reminds us that rates are in decade long downtrend. In fact, there has been a 56% decline since peaking at 6.82% in January 2000.
Article Quotes:
“’China last month ordered local governments to ensure repayment and to concentrate on completing projects already under way. Financing units that fund only public projects and rely on the fiscal income of local governments to repay debt should stop spending,’ the State Council said June 13. Local governments have also been barred from guaranteeing loans taken by their financing vehicles…..Lending hasn’t slowed as much as official data suggests because Chinese banks are shifting loans off balance sheets by repackaging them into investment products that are sold to investors, the report showed.” (Bloomberg, July 23, 2010)
“Although no other country has reached the crisis point hit by Greece -- where borrowing costs skyrocketed until a joint European Union-IMF bailout provided emergency funding -- the IMF noted that European countries and the United States will be competing this year to refinance some $4 trillion in government bonds maturing in the second half of the year. …. The interest rates paid by countries such as Spain and Italy -- and even some, such as Belgium, considered at the heart of ‘core Europe’ -- have been rising again in comparison to those paid by Germany, the continent's top economic performer.” (Washington Post, July 8, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
It may be hard to focus on upside gains when worries of economic stability resurface in the minds of policymakers and business decision makers. How many feel comfortable on the S&P 500 Index’s ability to revisit the highs of 1576.09 reached in 2007? The answer is, most likely, not many, which explains the lack of buy-hold mentality, combined with lackluster volume or full confidence in the anticipation of further gains. So the common mindset has been to navigate these narrow trading ranges. Plus the ever-so-frustrating downtrend to no-trend is becoming accepted as the norm. In fact, a trending market can be the surprise here and less foreseen. Investors’ short-term memory within the last 3 months (S&P 500 annual peak on April 26, 2010) has focused on risk sensitivity and a re-emphasis on fear. Now, with July winding down, some burst of optimism can be supported by positive earnings results. Perhaps, the case for a sustainable upside run can materialize with the aid of fundamental strength in key companies and minor labor improvements. In other words, a temporary change in investor sentiment can change anytime now, as the gloomy stories become overly tiresome. However, this hopeful spark should not be mistaken for longer-term revival.
As for themes, volatility is finding a way to stay calm after the spring uproar. Meanwhile, interest rates continue to dip lower and inflation is not much of a threat. In the US, some might argue that larger cap companies look favorable, at least for steadiness. Importantly, the relative attractiveness of innovation themes in Healthcare and Technology are worth a look for the second half. For example, Biotech presents opportunities for explosive upside gains as witnessed by the GENZ (Genzyme) afterhours performance of GENZ (Genzyme). On a similar note, MNTA (Momenta Pharmaceutical) rose nearly 80% in one day, based on approval from the FDA for anti-clotting drugs. In technology, a 39% jump in revenue for RVBD (Riverbed Tech) reconfirms that estimates remain too pessimistic and surprise elements are a strong possibility.
Simply, this showcases that companies, which are less linked to interest rate or commodity pricing, can entice investors to examine the company specific fundamentals. That said, finding these types of ideas are challenging when bogged down with negative macroeconomic headlines and ongoing, uncontrollable regulatory discussions. Yet, markets, as usual, reward distinct ideas, which offer above average growth. Perhaps, this serves as a fresh reminder of big picture stability and restoration in investor confidence for upcoming months.
In the last decade, China and Brazil confirmed economic strength and attracted significant capital among foreign investors. In terms of higher growth, both countries are finding new competition in the emerging market space, especially for seekers of higher risk/reward. Chile continues to demonstrate further economic strength, given the country’s solid infrastructure and reconstruction. These days, it is not easy to find a stock that’s trading at all-time highs. Clearly, even the MSCI Emerging Market index witnessed its all time highs in October 2007. Interestingly, SAN (Banco Santander-Chile) made new highs last week, given its positive momentum. Even though pullbacks might be needed for timely buy points, the market usually provides the relevant hints for new growth stories.
Levels:
S&P 500 [1102.66] is near the high range of a two-month trading pattern, which is noticeable between 1060 and 1120.
Crude [$78.98] is above $80 in the near-term can spur momentum for bullish participants. However, longer-term picture is still unclear at current price levels.
Gold [$1190] has been slowing its upward acceleration since May. However, investors appear to gain some comfort of strength around 1200.
DXY– US Dollar Index [82.46] shows that Dollar strength is taming in the past month. Perhaps, a symbol of less heightened fear experience in the spring sell-offs.
US 10 Year Treasury Yields [2.99%] A step back reminds us that rates are in decade long downtrend. In fact, there has been a 56% decline since peaking at 6.82% in January 2000.
Article Quotes:
“’China last month ordered local governments to ensure repayment and to concentrate on completing projects already under way. Financing units that fund only public projects and rely on the fiscal income of local governments to repay debt should stop spending,’ the State Council said June 13. Local governments have also been barred from guaranteeing loans taken by their financing vehicles…..Lending hasn’t slowed as much as official data suggests because Chinese banks are shifting loans off balance sheets by repackaging them into investment products that are sold to investors, the report showed.” (Bloomberg, July 23, 2010)
“Although no other country has reached the crisis point hit by Greece -- where borrowing costs skyrocketed until a joint European Union-IMF bailout provided emergency funding -- the IMF noted that European countries and the United States will be competing this year to refinance some $4 trillion in government bonds maturing in the second half of the year. …. The interest rates paid by countries such as Spain and Italy -- and even some, such as Belgium, considered at the heart of ‘core Europe’ -- have been rising again in comparison to those paid by Germany, the continent's top economic performer.” (Washington Post, July 8, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 19, 2010
Market Outlook| July 19, 2010
“You may be deceived if you trust too much, but you will live in torment if you do not trust enough.” - Frank Crane
A sense of stability is barely forming from overly pessimistic ranges in global markets. Clearly, tangible upside factors may not glare brightly. Interestingly, key asset prices are not showcasing a defined trend, while US broad indexes attempt to dig out of annual lows. Now this situation should test nerves, confidence, and patience for various participants in days ahead. One noticeable minor trend is the decline of the dollar in the past two months. In fact, DXY (Dollar Index) declined significantly, despite growing belief of the weakening Euro. Perhaps, these short-term patterns should not take away from recent dollar strength. Similarly, interest rates have dipped lower below a critical 3% yet again. Basically, a four plus month decline in rates begs the question of whether or not we are due for a trend shift. Or, at least, some time is needed to digest the effects of the financial reform.
Beyond market sentiment, economic factors, such as labor conditions, reinforce the damages left over from 2008. This time, it may not be enough to only seek ideas in commodities and emerging markets when constructing a portfolio. Clearly, real estate woes and credit issues linger at full volume and might partially explain the short spurted market movement amidst jittery investors. In other words, lots of inspiration is needed to entice long-term investors in traditional US markets.
Meanwhile, trading, based on sensitive headlines, is becoming common and heavily acceptable as the norm for actively involved traders. Also, managers continue to heavily depend on technical signals and shorter-term focused tools. Some wonder if that herd-like mentality of using similar tools leads to undesired returns. However, reliance on popular methods cannot be neglected, given its influence on overall psychology.
To perhaps reiterate the obvious, it was in the spring of 2000 in which the stock market signaled for shrewd observers the importance of increasing foreign exposure and the need to diversify into Gold and Crude. Now, a decade removed, having international exposure is not only viable in China, India, or Brazil. Rather, several areas exist in emerging countries, especially for those looking for low correlation to US markets. For example, BCH (Banco de Chile) is nearly trading at annual highs. Similarly, CorpBanca (BCA) is up nearly 48%, since a sharp spike that began on May 25, 2010. In fact, index tracking Chilean market bottomed in 2008, at the height of US credit worries, and now continues to trend higher.
On one hand, liquidity worries drove capital back to US stocks and treasuries. However, for those taking a less defensive posture, opportunities exist in select regions. The balancing act between liquidity and high growth-rate opportunity is worth noting in investor behavior.
Levels:
S&P 500 [1064.88] had choppy action between 1060 and 1120, which is another signal of range-bound unresolved trend.
Crude [$76.01] remains in a neutral range between $74 and $78, which is in between 50- and 200-day moving averages.
Gold [$1189.25] has been declining in the past few weeks, yet holding above $1180, which seems opportune for a short-term recovery.
DXY– US Dollar Index [82.48] is approaching a key technical level of above 80. That is around the 200-day moving average.
US 10 Year Treasury Yields [2.92%] continue to maintain a defined downtrend with no early signs of a recovery.
Article Quotes:
“China’s steelmakers are certainly being squeezed. Measures to cool property markets have caused prices for construction steel to fall by 17% since mid-April. The price of hot-rolled coil steel used to make cars and domestic appliances has seen a similar decline. Meanwhile, the price of the iron ore the steelmakers import as their core ingredient rose by nearly 50% in the first half of the year, squeezing margins. So steel mills could be running down their iron-ore stocks, because they see demand falling and because they suspect that ore prices will fall later this year. Spot prices at Chinese ports have fallen in recent weeks, suggesting that destocking has begun.” (Economist, July 15, 2010)
"For Germany, bailing out its neighbors to save the euro is proving a price worth paying. Rising share prices and foreign sales at Bayerische Motoren Werke AG and Siemens AG show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece... As exporters benefit from the lower labor costs and currency stability fostered by the euro's 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index is the 16-nation bloc's best performing major benchmark this year. That's reinforcing Germany's status as a pillar of euro stability rather than a weak link as European policy makers scramble to stop the region lurching back into recession." (Bloomberg, July 14, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
A sense of stability is barely forming from overly pessimistic ranges in global markets. Clearly, tangible upside factors may not glare brightly. Interestingly, key asset prices are not showcasing a defined trend, while US broad indexes attempt to dig out of annual lows. Now this situation should test nerves, confidence, and patience for various participants in days ahead. One noticeable minor trend is the decline of the dollar in the past two months. In fact, DXY (Dollar Index) declined significantly, despite growing belief of the weakening Euro. Perhaps, these short-term patterns should not take away from recent dollar strength. Similarly, interest rates have dipped lower below a critical 3% yet again. Basically, a four plus month decline in rates begs the question of whether or not we are due for a trend shift. Or, at least, some time is needed to digest the effects of the financial reform.
Beyond market sentiment, economic factors, such as labor conditions, reinforce the damages left over from 2008. This time, it may not be enough to only seek ideas in commodities and emerging markets when constructing a portfolio. Clearly, real estate woes and credit issues linger at full volume and might partially explain the short spurted market movement amidst jittery investors. In other words, lots of inspiration is needed to entice long-term investors in traditional US markets.
Meanwhile, trading, based on sensitive headlines, is becoming common and heavily acceptable as the norm for actively involved traders. Also, managers continue to heavily depend on technical signals and shorter-term focused tools. Some wonder if that herd-like mentality of using similar tools leads to undesired returns. However, reliance on popular methods cannot be neglected, given its influence on overall psychology.
To perhaps reiterate the obvious, it was in the spring of 2000 in which the stock market signaled for shrewd observers the importance of increasing foreign exposure and the need to diversify into Gold and Crude. Now, a decade removed, having international exposure is not only viable in China, India, or Brazil. Rather, several areas exist in emerging countries, especially for those looking for low correlation to US markets. For example, BCH (Banco de Chile) is nearly trading at annual highs. Similarly, CorpBanca (BCA) is up nearly 48%, since a sharp spike that began on May 25, 2010. In fact, index tracking Chilean market bottomed in 2008, at the height of US credit worries, and now continues to trend higher.
On one hand, liquidity worries drove capital back to US stocks and treasuries. However, for those taking a less defensive posture, opportunities exist in select regions. The balancing act between liquidity and high growth-rate opportunity is worth noting in investor behavior.
Levels:
S&P 500 [1064.88] had choppy action between 1060 and 1120, which is another signal of range-bound unresolved trend.
Crude [$76.01] remains in a neutral range between $74 and $78, which is in between 50- and 200-day moving averages.
Gold [$1189.25] has been declining in the past few weeks, yet holding above $1180, which seems opportune for a short-term recovery.
DXY– US Dollar Index [82.48] is approaching a key technical level of above 80. That is around the 200-day moving average.
US 10 Year Treasury Yields [2.92%] continue to maintain a defined downtrend with no early signs of a recovery.
Article Quotes:
“China’s steelmakers are certainly being squeezed. Measures to cool property markets have caused prices for construction steel to fall by 17% since mid-April. The price of hot-rolled coil steel used to make cars and domestic appliances has seen a similar decline. Meanwhile, the price of the iron ore the steelmakers import as their core ingredient rose by nearly 50% in the first half of the year, squeezing margins. So steel mills could be running down their iron-ore stocks, because they see demand falling and because they suspect that ore prices will fall later this year. Spot prices at Chinese ports have fallen in recent weeks, suggesting that destocking has begun.” (Economist, July 15, 2010)
"For Germany, bailing out its neighbors to save the euro is proving a price worth paying. Rising share prices and foreign sales at Bayerische Motoren Werke AG and Siemens AG show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece... As exporters benefit from the lower labor costs and currency stability fostered by the euro's 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index is the 16-nation bloc's best performing major benchmark this year. That's reinforcing Germany's status as a pillar of euro stability rather than a weak link as European policy makers scramble to stop the region lurching back into recession." (Bloomberg, July 14, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 12, 2010
Market Outlook | July 12, 2010
“If you wait for opportunities to occur, you will be one of the crowd.” - Edward de Bono
A mixed, but early, recovery clue:
A positive short week, as those who played the odds took advantage of severely beaten up markets and eventually witnessed an inevitable recovery. Bold speculators would have benefited from a weekly gain of nearly 5% for broad indexes. Now, a uniform confirmation of improving economy is not easily visible at this point. At the same time, dominant themes in the post crisis mentality include higher demand for transparency and avoiding less liquid assets. Of course, as lingering skepticism fades, newer opportunities should emerge, especially at the early stages of the third quarter. In the weeks ahead, perhaps most managers will consider to lighten up on hedging related holdings. Generally, less pessimism gives boost for additional momentum. Importantly, an acceptable catalyst is desperately needed to calm those watching from the sidelines.
Understanding previous weakness:
The danger of mass thinking can lead to building an investment framework that is biased by short-term sentiment. Specifically, there is an ongoing view that volatility continues to rise in the months ahead. Meanwhile, staying defensive and positioning in less risky assets is painted as the acceptable norm by experts. Conversely, some wonder the probabilities of repeating similar downtrend in the second quarter, which saw extreme negativity. In other words, the fear-driven spring months appear to have factored in lots of worst case scenarios. Perhaps, earlier results were justifiable, given the debacle of sovereign debt and the collapse of Euro, which reinforced ongoing vulnerability. In fact, further expert discussion of depression and market collapse appear to have long-established that bad news is not “new” information. At least the surprise element has faded into a consensus belief.
Aggressive, but hopeful, short-term:
In the US, low interests rates have failed to entice business activity so far. At this point, this concept of lower borrowing rates for the purpose of increased credit is losing confidence. This became noticeable when the US 10 Year Treasury failed below 3%, and mortgage rates are lower than historical averages. Basically, those closely observing economic numbers continue to point out the difficulty of finding growth in various banking segments. Yet, the sudden improvement of credit, combined with the relative attractiveness of US markets, and favorable risk/reward in stock market pricing can converge to create a meaningful upside move. To reach this rosy trend, the Federal Reserve and other regulators would need to show sustainable and business friendly policies that materialize into the private sector. That, in turn, produces lending into the private sector, which gradually translates to some economic strength. For now, patience is required to navigate this turning point.
Levels:
S&P 500 [1077.96] is showcasing buyers’ interest around 1060 after dipping below annual lows of 1010. Next key target is around 1100 and 1120.
Crude [$76.09] closed slightly above its 15, 20, and 50-day moving averages, which all stand near $75. This solidifies the ongoing range bound pattern.
Gold [$1208.75] maintains its uptrend, especially reaccelerated in early February. Again, 1200 marks an intriguing entry point for those with a bullish view. Multiple days of declines are consolidating at current ranges.
DXY– US Dollar Index [83.94] faces minor pullbacks in recent weeks, following an uninterrupted run for the majority of the year.
US 10 Year Treasury Yields [3.05%] are slowly recovering after a jittery 3-month period of declines. At this point, recovery, back to a psychologically valuable 3%, is not convincing of a trend of rising rates.
Article Quotes:
"China's home prices are set to fall as much as 20% in a 'healthy' correction, said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. China's property boom is 'cash-driven' rather than 'leverage-fuelled,' which means there's only a low chance of the type of forced selling that exacerbated the U.S. housing market collapse, he said... That view contrasts with Harvard University's Kenneth Rogoff's prediction yesterday of a 'collapse' in China's property market that will hit the nation's banking system. Property prices in 70 Chinese cities rose 12.4% in May, the second-fastest pace on record, heightening concern a bubble is forming in the nation's housing market." (Bloomberg, July 6, 2010)
“The bottom line is clear: there exists, at present, a gigantic net flow of funds into the liabilities of the governments of advanced countries. Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries.” (Financial Times, July 6, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
A mixed, but early, recovery clue:
A positive short week, as those who played the odds took advantage of severely beaten up markets and eventually witnessed an inevitable recovery. Bold speculators would have benefited from a weekly gain of nearly 5% for broad indexes. Now, a uniform confirmation of improving economy is not easily visible at this point. At the same time, dominant themes in the post crisis mentality include higher demand for transparency and avoiding less liquid assets. Of course, as lingering skepticism fades, newer opportunities should emerge, especially at the early stages of the third quarter. In the weeks ahead, perhaps most managers will consider to lighten up on hedging related holdings. Generally, less pessimism gives boost for additional momentum. Importantly, an acceptable catalyst is desperately needed to calm those watching from the sidelines.
Understanding previous weakness:
The danger of mass thinking can lead to building an investment framework that is biased by short-term sentiment. Specifically, there is an ongoing view that volatility continues to rise in the months ahead. Meanwhile, staying defensive and positioning in less risky assets is painted as the acceptable norm by experts. Conversely, some wonder the probabilities of repeating similar downtrend in the second quarter, which saw extreme negativity. In other words, the fear-driven spring months appear to have factored in lots of worst case scenarios. Perhaps, earlier results were justifiable, given the debacle of sovereign debt and the collapse of Euro, which reinforced ongoing vulnerability. In fact, further expert discussion of depression and market collapse appear to have long-established that bad news is not “new” information. At least the surprise element has faded into a consensus belief.
Aggressive, but hopeful, short-term:
In the US, low interests rates have failed to entice business activity so far. At this point, this concept of lower borrowing rates for the purpose of increased credit is losing confidence. This became noticeable when the US 10 Year Treasury failed below 3%, and mortgage rates are lower than historical averages. Basically, those closely observing economic numbers continue to point out the difficulty of finding growth in various banking segments. Yet, the sudden improvement of credit, combined with the relative attractiveness of US markets, and favorable risk/reward in stock market pricing can converge to create a meaningful upside move. To reach this rosy trend, the Federal Reserve and other regulators would need to show sustainable and business friendly policies that materialize into the private sector. That, in turn, produces lending into the private sector, which gradually translates to some economic strength. For now, patience is required to navigate this turning point.
Levels:
S&P 500 [1077.96] is showcasing buyers’ interest around 1060 after dipping below annual lows of 1010. Next key target is around 1100 and 1120.
Crude [$76.09] closed slightly above its 15, 20, and 50-day moving averages, which all stand near $75. This solidifies the ongoing range bound pattern.
Gold [$1208.75] maintains its uptrend, especially reaccelerated in early February. Again, 1200 marks an intriguing entry point for those with a bullish view. Multiple days of declines are consolidating at current ranges.
DXY– US Dollar Index [83.94] faces minor pullbacks in recent weeks, following an uninterrupted run for the majority of the year.
US 10 Year Treasury Yields [3.05%] are slowly recovering after a jittery 3-month period of declines. At this point, recovery, back to a psychologically valuable 3%, is not convincing of a trend of rising rates.
Article Quotes:
"China's home prices are set to fall as much as 20% in a 'healthy' correction, said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. China's property boom is 'cash-driven' rather than 'leverage-fuelled,' which means there's only a low chance of the type of forced selling that exacerbated the U.S. housing market collapse, he said... That view contrasts with Harvard University's Kenneth Rogoff's prediction yesterday of a 'collapse' in China's property market that will hit the nation's banking system. Property prices in 70 Chinese cities rose 12.4% in May, the second-fastest pace on record, heightening concern a bubble is forming in the nation's housing market." (Bloomberg, July 6, 2010)
“The bottom line is clear: there exists, at present, a gigantic net flow of funds into the liabilities of the governments of advanced countries. Of course, some countries can still get into difficulties. But it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries.” (Financial Times, July 6, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 05, 2010
Market Outlook | July 5, 2010
“One's first step in wisdom is to question everything - and one's last is to come to terms with everything.” Georg Christoph Lichtenberg (1742 - 1799)
Confidence Severely Tested:
This current environment proves the difficulty of getting over the crisis of 2008. First of all, policymakers are revisiting discussions for new regulation as clearly stated in headlines and casual daily discussions. Secondly, the European default worries reignite, which leads to additional political concerns. Of course, these issues are based on the core principles of governing future risks. In addition, key pundits published a negative outlook with chatter of a possible depression and eroding confidence. These points eventually sparked some frenzy. Finally, US mid-term elections set the stage for a vicious battle ahead especially with a weak economy and vexed crowd seeking changes. Basically, the emotional and practical view strongly confirms weak global markets. Interestingly, answers are hard to come by and the reward might be in asking the right question. Perhaps, investors and policymakers can adapt this approach into making decisions at a period where trust is severely tested.
Puzzle Continues:
For money managers, a thematic game plan is not easy to construct when interest rates head lower along with asset prices. In short, the ongoing puzzle continues. From a directional perspective, the speculative thrill has dramatically declined across global sectors and asset classes. Instead, a natural response can drive participants to employ the “wait and see” approach. For a while, 1040 on S&P 500 index marked a hopeful reentry point. This was a barometer for an optimist willing to purchase shares at discounts prices. Meanwhile, the S&P 500 Index witnessed a weekly decline of 8.3%. That partially sets the tone for hesitancy and a more conservative mindset. However, odds might suggest that taking chances for a recovery is not that unfavorable at start of this month. In addition, quarterly adjustments contribute to some market movement and a better read is needed as things settle down.
Looking ahead:
Finding positive catalysts is not easily identifiable over the holiday weekend. Yet the oversold and overly negative environment sets up eventful weeks ahead. Similarly, so far the consensus bet of higher rates are wrong, as rates on US 10 Year Yields dipped below 3%. It was only six months ago, where the general belief revolved around higher rates. Another lesson that reminds us that popularity does not translate to reality. At the same time, as the spring downtrend extends to mid-summer, one should be careful to not dwell on a sentiment of defeat. Once again, seeking out neglected ideas makes sense for some, especially when pessimism reaches extreme ranges. Interestingly, stocks that have showed consistent uptrend since the early 1980’s are very rare and hard to find. A long-term chart showcases the multi-decade strength of K (Kellogg) and ECL (Ecolab). Amazingly, both companies demonstrate that food and healthcare related areas found ways to survive various bubbles and downturns. Perhaps, this is a minor clue into sustainable ideas and sums up current conditions.
Levels:
S&P 500 [1022.58] is nearly down 17% since topping on April 26, 2010. The recent downtrend confirms the well established selling pressure. Interestingly, the sharp fall below 1060 triggered weak technical signals.
Crude [$72.14] is revisiting a narrow trading range below $75 and above $70. Investors wait for a sign of a major trend shift at these inflection points.
Gold [$1201] prices witnessed minor declines last few days the commodity is positive above 1200, which will retest further buyer interest. The uptrend is well established and relative weakness of other asset classes.
DXY– US Dollar Index [84.42] Stabilizing around $84, which is few points removed from annual highs.
US 10 Year Treasury Yields [2.97%] in the last 3 months, yields have gone from 4% to below 3%. That said, a mean reversion trade suggests a recovery back to 3.20% as the 20 day moving average stands at 3.14%.
Article quotes:
“The auto dealers won their exemption the old-fashioned way, by lobbying the hell out of Congress. But the fact that they succeeded where bigger, more powerful companies didn’t reveals something important about the politics of influence on Capitol Hill: lobbying isn’t just about money. The companies that lobbied most successfully around the financial-reform bill didn’t necessarily pay the most. Instead, they were able to bring grassroots pressure to bear on individual congressmen and to present themselves as remote from Wall Street.” ( New Yorker, July 5, 2010)
“Chinese authorities have this year been trying to cool the economy as it expanded at an 11.9 percent annual pace in the first quarter, and to reduce property-market speculation. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion). The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month.” (Bloomberg, July 5, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Confidence Severely Tested:
This current environment proves the difficulty of getting over the crisis of 2008. First of all, policymakers are revisiting discussions for new regulation as clearly stated in headlines and casual daily discussions. Secondly, the European default worries reignite, which leads to additional political concerns. Of course, these issues are based on the core principles of governing future risks. In addition, key pundits published a negative outlook with chatter of a possible depression and eroding confidence. These points eventually sparked some frenzy. Finally, US mid-term elections set the stage for a vicious battle ahead especially with a weak economy and vexed crowd seeking changes. Basically, the emotional and practical view strongly confirms weak global markets. Interestingly, answers are hard to come by and the reward might be in asking the right question. Perhaps, investors and policymakers can adapt this approach into making decisions at a period where trust is severely tested.
Puzzle Continues:
For money managers, a thematic game plan is not easy to construct when interest rates head lower along with asset prices. In short, the ongoing puzzle continues. From a directional perspective, the speculative thrill has dramatically declined across global sectors and asset classes. Instead, a natural response can drive participants to employ the “wait and see” approach. For a while, 1040 on S&P 500 index marked a hopeful reentry point. This was a barometer for an optimist willing to purchase shares at discounts prices. Meanwhile, the S&P 500 Index witnessed a weekly decline of 8.3%. That partially sets the tone for hesitancy and a more conservative mindset. However, odds might suggest that taking chances for a recovery is not that unfavorable at start of this month. In addition, quarterly adjustments contribute to some market movement and a better read is needed as things settle down.
Looking ahead:
Finding positive catalysts is not easily identifiable over the holiday weekend. Yet the oversold and overly negative environment sets up eventful weeks ahead. Similarly, so far the consensus bet of higher rates are wrong, as rates on US 10 Year Yields dipped below 3%. It was only six months ago, where the general belief revolved around higher rates. Another lesson that reminds us that popularity does not translate to reality. At the same time, as the spring downtrend extends to mid-summer, one should be careful to not dwell on a sentiment of defeat. Once again, seeking out neglected ideas makes sense for some, especially when pessimism reaches extreme ranges. Interestingly, stocks that have showed consistent uptrend since the early 1980’s are very rare and hard to find. A long-term chart showcases the multi-decade strength of K (Kellogg) and ECL (Ecolab). Amazingly, both companies demonstrate that food and healthcare related areas found ways to survive various bubbles and downturns. Perhaps, this is a minor clue into sustainable ideas and sums up current conditions.
Levels:
S&P 500 [1022.58] is nearly down 17% since topping on April 26, 2010. The recent downtrend confirms the well established selling pressure. Interestingly, the sharp fall below 1060 triggered weak technical signals.
Crude [$72.14] is revisiting a narrow trading range below $75 and above $70. Investors wait for a sign of a major trend shift at these inflection points.
Gold [$1201] prices witnessed minor declines last few days the commodity is positive above 1200, which will retest further buyer interest. The uptrend is well established and relative weakness of other asset classes.
DXY– US Dollar Index [84.42] Stabilizing around $84, which is few points removed from annual highs.
US 10 Year Treasury Yields [2.97%] in the last 3 months, yields have gone from 4% to below 3%. That said, a mean reversion trade suggests a recovery back to 3.20% as the 20 day moving average stands at 3.14%.
Article quotes:
“The auto dealers won their exemption the old-fashioned way, by lobbying the hell out of Congress. But the fact that they succeeded where bigger, more powerful companies didn’t reveals something important about the politics of influence on Capitol Hill: lobbying isn’t just about money. The companies that lobbied most successfully around the financial-reform bill didn’t necessarily pay the most. Instead, they were able to bring grassroots pressure to bear on individual congressmen and to present themselves as remote from Wall Street.” ( New Yorker, July 5, 2010)
“Chinese authorities have this year been trying to cool the economy as it expanded at an 11.9 percent annual pace in the first quarter, and to reduce property-market speculation. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion). The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month.” (Bloomberg, July 5, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 28, 2010
Market Outlook | June 28, 2010
“The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” - Ronald Reagan (1911 - 2004)
For the most part, optimism and confidence have stayed mostly quiet. Yet, evidence of a convincing improvement in the economic trends is not easy to spot, given weak housing data. Naturally, the lack of confirmation leads to frustration for some, especially for those seeking for attractive buy points. Meanwhile, partakers are gearing up for end of month readjustments, which featured key index rebalancing and reassessment on the impact of banking policies. From a scoreboard watcher’s perspective, broad US indexes remain down for the year (S&P 500 -3.4%), and sentiment is mostly negative, which coincides with a heavy spring/early summer sell-off. For the most part, positive catalysts are desperately needed to reconfirm a beginning of a new uptrend. In fact, the lingering effects of bubble discussions might contribute to less than desired willingness to buy above 1100 on the S&P 500 Index.
For awhile, resource-based countries, sectors, and companies have benefited and led a sustainable uptrend last decade. In this current transition mode, commodities are not as cheap as before and confidence is constrained. In addition, China-related indexes topped in 2007 and have failed to recover to new highs and showcase a waning momentum. Similarly, the Brazilian stock market has underperformed US markets, especially since December 2009. These points are showcased by strength in Gold, relative strength in US Dollar, and further buying of US treasuries. Putting all of that together confirms the defensive posture of money managers and increasing difficulty of finding differentiated and trending ideas. Plus, the low interest rate environment has not fully translated to credit expansion as desired and promised by some policymakers. Interestingly, Financials and Consumer related areas seem to struggle to attract capital. Now, a contrarian view would suggest these interest sensitive themes offer shorter-term opportunities and higher risk for speculative traders.
In terms of idea selection, certainly, there is gravitation towards more liquid and large cap companies. However, few ideas resurface in select themes for longer-term investors. For example, security and protection services company ID (L-1 Identity Solutions) presents a favorable growth rate in a niche technology group. Conversely, momentum driven stocks in basic materials, such as BLL (Ball Corp), run the risk of sharp sell-offs. In this case, the stock has grown sevenfold and is a bit pricey, compared to other alternatives. In both cases, the challenge is for managers to diligently seek quality ideas, while grasping timely big picture themes.
Levels:
S&P 500 [1076.76] is establishing a narrow range between 1060 and 1100. Investors are less reluctant to find reasons above or below these ranges.
Crude [$78.86] prices, in the past seven months, have stabilized and bounced back around $70. However, buying interest above $80 a barrel seems less enthusiastic. Thus, that raises questions about overall fundamental strength.
Gold [$1254] is very close to yearly highs, as the multi-month strength continues to take hold. At this point, the selling pressure has yet to materialize.
DXY– US Dollar Index [85.31] is consolidating after a strong, multi-month run. Index has retraced closer to its 50-day moving average and appears like a healthy pullback.
US 10 Year Treasury Yields [3.10%] is flirting near recent lows as the downtrend remains intact. Yields closed near annual lows, which can set up a sharp near-term turnaround.
Article Quotes:
“Another reason why debt matters has to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.” (Economist, June 24 2010)
“Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense skepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. ‘We're heading towards a double-dip recession,’ said Chris Whalen, a former Fed official and now head of Institutional Risk Analytics. ‘The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognize that money velocity has slowed, and we are going into deflation. The only default option left is to crank up the printing presses again.’" (Telegraph, June 24, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
For the most part, optimism and confidence have stayed mostly quiet. Yet, evidence of a convincing improvement in the economic trends is not easy to spot, given weak housing data. Naturally, the lack of confirmation leads to frustration for some, especially for those seeking for attractive buy points. Meanwhile, partakers are gearing up for end of month readjustments, which featured key index rebalancing and reassessment on the impact of banking policies. From a scoreboard watcher’s perspective, broad US indexes remain down for the year (S&P 500 -3.4%), and sentiment is mostly negative, which coincides with a heavy spring/early summer sell-off. For the most part, positive catalysts are desperately needed to reconfirm a beginning of a new uptrend. In fact, the lingering effects of bubble discussions might contribute to less than desired willingness to buy above 1100 on the S&P 500 Index.
For awhile, resource-based countries, sectors, and companies have benefited and led a sustainable uptrend last decade. In this current transition mode, commodities are not as cheap as before and confidence is constrained. In addition, China-related indexes topped in 2007 and have failed to recover to new highs and showcase a waning momentum. Similarly, the Brazilian stock market has underperformed US markets, especially since December 2009. These points are showcased by strength in Gold, relative strength in US Dollar, and further buying of US treasuries. Putting all of that together confirms the defensive posture of money managers and increasing difficulty of finding differentiated and trending ideas. Plus, the low interest rate environment has not fully translated to credit expansion as desired and promised by some policymakers. Interestingly, Financials and Consumer related areas seem to struggle to attract capital. Now, a contrarian view would suggest these interest sensitive themes offer shorter-term opportunities and higher risk for speculative traders.
In terms of idea selection, certainly, there is gravitation towards more liquid and large cap companies. However, few ideas resurface in select themes for longer-term investors. For example, security and protection services company ID (L-1 Identity Solutions) presents a favorable growth rate in a niche technology group. Conversely, momentum driven stocks in basic materials, such as BLL (Ball Corp), run the risk of sharp sell-offs. In this case, the stock has grown sevenfold and is a bit pricey, compared to other alternatives. In both cases, the challenge is for managers to diligently seek quality ideas, while grasping timely big picture themes.
Levels:
S&P 500 [1076.76] is establishing a narrow range between 1060 and 1100. Investors are less reluctant to find reasons above or below these ranges.
Crude [$78.86] prices, in the past seven months, have stabilized and bounced back around $70. However, buying interest above $80 a barrel seems less enthusiastic. Thus, that raises questions about overall fundamental strength.
Gold [$1254] is very close to yearly highs, as the multi-month strength continues to take hold. At this point, the selling pressure has yet to materialize.
DXY– US Dollar Index [85.31] is consolidating after a strong, multi-month run. Index has retraced closer to its 50-day moving average and appears like a healthy pullback.
US 10 Year Treasury Yields [3.10%] is flirting near recent lows as the downtrend remains intact. Yields closed near annual lows, which can set up a sharp near-term turnaround.
Article Quotes:
“Another reason why debt matters has to do with the role of banks in the economy. By their nature, banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once. If banks struggle to meet their own debts, they have no choice but to reduce their lending. If this happens on a large scale, as it did in the 1930s, the ripple effect for the economy as a whole can be devastating.” (Economist, June 24 2010)
“Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense skepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. ‘We're heading towards a double-dip recession,’ said Chris Whalen, a former Fed official and now head of Institutional Risk Analytics. ‘The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognize that money velocity has slowed, and we are going into deflation. The only default option left is to crank up the printing presses again.’" (Telegraph, June 24, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 21, 2010
Market Outlook | June 21, 2010
“Always listen to experts. They'll tell you what can't be done and why. Then do it.” Robert Heinlein (1907 - 1988)
Nearly two weeks ago, equity markets seemed overly cheap, and a short-term recovery was to be expected. Now a minor bounce back doesn’t entirely resolve the ongoing puzzle as options expired and month-end is few days away. In these lackluster days, participants are questioning the market’s ability to attract long-term investors. Therefore, managers will look to weigh the potential of a sustainable rally, particularly, if fundamentals confirm a positive message. Importantly, even a casual observer notices the growing hesitation in financial systems, especially with chatter of various regulations. In fact, the view that government injection contributes to further risk taking and increase in confidence remains mysterious at this point.
Digesting economic and macro data serves more as a distraction than a helpful, timely guide. Interestingly, other topics requiring further deciphering include the cause of a recent trading glitch, credit crisis, and increasing government spending. That said, there is a danger in assuming that recent events are fully understood and grasped by most participants. Also, key drivers of fear are based on extensive regulations. These apprehensions are not quite justified in one assuming that it might dampen business activities or expecting that new policies will avoid further crisis. Both of these popular views are too uncontrollable, and perhaps convenient, for political headlines, rather than a prudent market strategy.
Another perspective suggests taking an imaginative short-term view. Innovation groups offer opportunities in biotech, technology, and other emerging groups. Bargains are found and made worthwhile for multi-month selections. Meanwhile, energy news flow might have created worries in a sector that outperformed for over a decade. On the other hand, Gold’s strength reconfirms the defensive posture of global investors. At the same time, the past few days are witnessing volatility declining as the VIX (Volatility Index) declines significantly below spring highs of 48.20. A possible rotation out of Gold and further calming in volatility should catch the eyes of active traders in upcoming trading days.
Levels:
S&P 500 [1117.51] is indicating, that around 1060, investors have shown interest in buying. This is based on market recovery from lows in February and May 2010. However, around 1120, doubts remain, which suggest that buyers are seeking more convincing factors.
Crude [$77.18] is trading in a narrow range, right around its 200-day moving average. The commodity appears trendless, more than usual, in the near-term.
Gold [$1256] re-accelerated and finished the week at annual highs. Positive momentum is intact, given that Gold is up over 90% since August 2007.
DXY– US Dollar Index [85.69] is nearing 86-89 points, which are levels last seen in late 2008 and early 2009. Interestingly, at that time, the index failed to sustain its relative strength.
US 10 Year Treasury Yields’ [3.21%] 20-day moving average showcases that rates have at the current range for several weeks.
Article Quotes:
"From Shanghai to Singapore, policy makers are struggling in their efforts to curb property bubbles that threaten to derail the world's fastest growing region. In China, home prices are surging at a record pace even after authorities set price ceilings, demanded higher deposits, and limited second-home purchases. In Hong Kong... a site auctioned on June 8 fetched the most since the market peak of 1997. It's a similar story in Singapore and Taiwan as prices defy cooling measures. 'Governments allow the property bubble to get so big and then try to use administrative measures to keep out speculators,' said Andy Xie, former Morgan Stanley chief economist for Asia-Pacific... 'It creates the risk of a very hard landing. The right thing to do is raise interest rates.'" (Bloomberg, June 17, 2010)
The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year. (Economist June 17, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Nearly two weeks ago, equity markets seemed overly cheap, and a short-term recovery was to be expected. Now a minor bounce back doesn’t entirely resolve the ongoing puzzle as options expired and month-end is few days away. In these lackluster days, participants are questioning the market’s ability to attract long-term investors. Therefore, managers will look to weigh the potential of a sustainable rally, particularly, if fundamentals confirm a positive message. Importantly, even a casual observer notices the growing hesitation in financial systems, especially with chatter of various regulations. In fact, the view that government injection contributes to further risk taking and increase in confidence remains mysterious at this point.
Digesting economic and macro data serves more as a distraction than a helpful, timely guide. Interestingly, other topics requiring further deciphering include the cause of a recent trading glitch, credit crisis, and increasing government spending. That said, there is a danger in assuming that recent events are fully understood and grasped by most participants. Also, key drivers of fear are based on extensive regulations. These apprehensions are not quite justified in one assuming that it might dampen business activities or expecting that new policies will avoid further crisis. Both of these popular views are too uncontrollable, and perhaps convenient, for political headlines, rather than a prudent market strategy.
Another perspective suggests taking an imaginative short-term view. Innovation groups offer opportunities in biotech, technology, and other emerging groups. Bargains are found and made worthwhile for multi-month selections. Meanwhile, energy news flow might have created worries in a sector that outperformed for over a decade. On the other hand, Gold’s strength reconfirms the defensive posture of global investors. At the same time, the past few days are witnessing volatility declining as the VIX (Volatility Index) declines significantly below spring highs of 48.20. A possible rotation out of Gold and further calming in volatility should catch the eyes of active traders in upcoming trading days.
Levels:
S&P 500 [1117.51] is indicating, that around 1060, investors have shown interest in buying. This is based on market recovery from lows in February and May 2010. However, around 1120, doubts remain, which suggest that buyers are seeking more convincing factors.
Crude [$77.18] is trading in a narrow range, right around its 200-day moving average. The commodity appears trendless, more than usual, in the near-term.
Gold [$1256] re-accelerated and finished the week at annual highs. Positive momentum is intact, given that Gold is up over 90% since August 2007.
DXY– US Dollar Index [85.69] is nearing 86-89 points, which are levels last seen in late 2008 and early 2009. Interestingly, at that time, the index failed to sustain its relative strength.
US 10 Year Treasury Yields’ [3.21%] 20-day moving average showcases that rates have at the current range for several weeks.
Article Quotes:
"From Shanghai to Singapore, policy makers are struggling in their efforts to curb property bubbles that threaten to derail the world's fastest growing region. In China, home prices are surging at a record pace even after authorities set price ceilings, demanded higher deposits, and limited second-home purchases. In Hong Kong... a site auctioned on June 8 fetched the most since the market peak of 1997. It's a similar story in Singapore and Taiwan as prices defy cooling measures. 'Governments allow the property bubble to get so big and then try to use administrative measures to keep out speculators,' said Andy Xie, former Morgan Stanley chief economist for Asia-Pacific... 'It creates the risk of a very hard landing. The right thing to do is raise interest rates.'" (Bloomberg, June 17, 2010)
The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year. (Economist June 17, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 14, 2010
Market Outlook | June 14, 2010
markettakers.blogspot.com
“Imagination is more important than knowledge” Albert Einstein (1879 - 1955)
Investors realized that market anxiety was becoming overdone in the near-term. In addition, previous weekly numbers suggested that participants were overloading to protect against downside moves. At the same time, betting against global markets and risky assets is less timely than early May 2010. Summing up these issues mostly explains the weekly gains in broad indexes (S&P 500 +2.51% and Russell 2000 +2.19%). Perhaps, that’s not much of a surprise, for those tracking key technical indicators which suggested favorable odds of a recovery. A simple chart pattern showcased that the S&P 500 was poised for a short-term rally around 1040-1060. In other words, it argued for risk taking and going against excessive negative headlines. This upturn is too early to judge and a sustainability recovery will greatly depend on economic and earnings conditions. With options expiring this Friday June 18th, participants will look to adjust their positions while reexamining overall market outlook.
Early summer days have witnessed lower volume and lesser volatility. Also, emerging trends and investor biases are not easily identifiable. Plus, the natural digestion after a volatile period is followed by a lackluster trading environment. Yet, in looking ahead, it’s very hard to dismiss buying opportunities. A casual gauge of market sentiment remains mostly negative. In fact, some pundits are gearing up for a second wave of a credit crisis caused by government debt bubble and non-improving economic conditions. Clearly, a weakening Euro and sovereign debt angst are heavily documented. As a result, seekers of differentiated ideas might have a limited profitable potential in these themes and might have to dig deeper somewhere else.
At this vulnerable and sensitive point, policymakers are challenged in attempting to of avoid further scares. Currently, observers are pondering the convenient and cautious strategies rather than committing capital for surprises. Specifically, Gold and US Dollar have benefited from significant inflow in recent months. These ideas are compelling for momentum driven investors. However, for aggressive speculators taking an imaginative approach is worth examining in various sectors that suffered in the past seven weeks. Few early turnaround opportunities are presented in cheap international companies, innovative stories in Biotechnology and other growth areas in consumer discretionary. On a relative basis, Biotech companies such as ENZN (Enzon Pharmaceutical) and BRLI (Bio Reference Labs) continue to demonstrate fundamental strength and offer promising entry points.
Levels:
S&P 500 [1091.60] held in around 1060 and attracted buyers as it approaching its 200 day moving average of 1107 and showcasing an early form of a recovery from deeply oversold levels.
Crude [$73.78] is in a tight range between $70-75. A tough read for a directional call but stabilizing at current levels.
Gold [$1220] showcased an explosive run since February’s lows of 1058. Gold prices are few points removed from all-time highs reached early last week.
DXY– US Dollar Index [88.23] A noticeably strength since Mid-April as the Dollar index is trading near annual highs.
US 10 Year Treasury Yields [3.23%] attempting to bottom at current levels. Interestingly, 3.20% marked a bottom in early December. Similarly, investors will closely watch for a trend shift.
Article Quotes:
“Every loan bears some risk that it will not be repaid. In making a loan, a lender has two considerations: First, it must be able to price the risk of the loan accurately or, second, it must reduce its risk exposure by reducing the number of loans it makes, the amount it lends or the risk profile of those to whom it lends. Regulations that interfere with the ability to price risk accurately thus inevitably produce efforts to reduce risk exposure by curtailing lending. ….. But the inability to accurately price risk goes beyond macroeconomic-level uncertainty: Congress' meddling in credit markets has directly interfered with the ability of lenders to price the risk of lending accurately. Proposals for still more interventions provide still greater threats of uncertainty, further undermining confidence and predictability. (Washington times June 8, 2010)
“Since the global financial crisis, the venture capital industry has been tarred with the same brush as private equity, yet its returns are driven by equity-financed R&D, rather than the layering of debt finance. While private equity has struggled with the decreased availability of cheap debt capital, the leading specialist investment managers in the biotechnology venture space have quietly been building the value of highly innovative early-stage life science companies….. In 2009, the average transaction size for venture-backed biotechnology companies was $278m, up from $199m in 2008, according to research by Credit Suisse. In 2009 deal values ranged from $255m to $850m, so these are significant transactions, and the multiples on invested capital earned by the early backers of these companies have been significant as well.” (Fund Strategy, June 7, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
“Imagination is more important than knowledge” Albert Einstein (1879 - 1955)
Investors realized that market anxiety was becoming overdone in the near-term. In addition, previous weekly numbers suggested that participants were overloading to protect against downside moves. At the same time, betting against global markets and risky assets is less timely than early May 2010. Summing up these issues mostly explains the weekly gains in broad indexes (S&P 500 +2.51% and Russell 2000 +2.19%). Perhaps, that’s not much of a surprise, for those tracking key technical indicators which suggested favorable odds of a recovery. A simple chart pattern showcased that the S&P 500 was poised for a short-term rally around 1040-1060. In other words, it argued for risk taking and going against excessive negative headlines. This upturn is too early to judge and a sustainability recovery will greatly depend on economic and earnings conditions. With options expiring this Friday June 18th, participants will look to adjust their positions while reexamining overall market outlook.
Early summer days have witnessed lower volume and lesser volatility. Also, emerging trends and investor biases are not easily identifiable. Plus, the natural digestion after a volatile period is followed by a lackluster trading environment. Yet, in looking ahead, it’s very hard to dismiss buying opportunities. A casual gauge of market sentiment remains mostly negative. In fact, some pundits are gearing up for a second wave of a credit crisis caused by government debt bubble and non-improving economic conditions. Clearly, a weakening Euro and sovereign debt angst are heavily documented. As a result, seekers of differentiated ideas might have a limited profitable potential in these themes and might have to dig deeper somewhere else.
At this vulnerable and sensitive point, policymakers are challenged in attempting to of avoid further scares. Currently, observers are pondering the convenient and cautious strategies rather than committing capital for surprises. Specifically, Gold and US Dollar have benefited from significant inflow in recent months. These ideas are compelling for momentum driven investors. However, for aggressive speculators taking an imaginative approach is worth examining in various sectors that suffered in the past seven weeks. Few early turnaround opportunities are presented in cheap international companies, innovative stories in Biotechnology and other growth areas in consumer discretionary. On a relative basis, Biotech companies such as ENZN (Enzon Pharmaceutical) and BRLI (Bio Reference Labs) continue to demonstrate fundamental strength and offer promising entry points.
Levels:
S&P 500 [1091.60] held in around 1060 and attracted buyers as it approaching its 200 day moving average of 1107 and showcasing an early form of a recovery from deeply oversold levels.
Crude [$73.78] is in a tight range between $70-75. A tough read for a directional call but stabilizing at current levels.
Gold [$1220] showcased an explosive run since February’s lows of 1058. Gold prices are few points removed from all-time highs reached early last week.
DXY– US Dollar Index [88.23] A noticeably strength since Mid-April as the Dollar index is trading near annual highs.
US 10 Year Treasury Yields [3.23%] attempting to bottom at current levels. Interestingly, 3.20% marked a bottom in early December. Similarly, investors will closely watch for a trend shift.
Article Quotes:
“Every loan bears some risk that it will not be repaid. In making a loan, a lender has two considerations: First, it must be able to price the risk of the loan accurately or, second, it must reduce its risk exposure by reducing the number of loans it makes, the amount it lends or the risk profile of those to whom it lends. Regulations that interfere with the ability to price risk accurately thus inevitably produce efforts to reduce risk exposure by curtailing lending. ….. But the inability to accurately price risk goes beyond macroeconomic-level uncertainty: Congress' meddling in credit markets has directly interfered with the ability of lenders to price the risk of lending accurately. Proposals for still more interventions provide still greater threats of uncertainty, further undermining confidence and predictability. (Washington times June 8, 2010)
“Since the global financial crisis, the venture capital industry has been tarred with the same brush as private equity, yet its returns are driven by equity-financed R&D, rather than the layering of debt finance. While private equity has struggled with the decreased availability of cheap debt capital, the leading specialist investment managers in the biotechnology venture space have quietly been building the value of highly innovative early-stage life science companies….. In 2009, the average transaction size for venture-backed biotechnology companies was $278m, up from $199m in 2008, according to research by Credit Suisse. In 2009 deal values ranged from $255m to $850m, so these are significant transactions, and the multiples on invested capital earned by the early backers of these companies have been significant as well.” (Fund Strategy, June 7, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 07, 2010
Market Outlook | June 7, 2010
“While grief is fresh, every attempt to divert only irritates. You must wait till it is digested, and then amusement will dissipate the remains of it.” - Samuel Johnson (1709 - 1784)
Approaching the midyear point presents a reflective stage. The results of a six week sell-off have turned the year-to-date performance returns to a negative for broad indexes . Generally, a pullback, greater than 10%, will naturally lead investors to reassess their thoughts and find new trends within existing themes. As expected, most summer worries mirrored winter discussions, such as overvalued emerging markets, a vulnerable Europe, and shaky sustainability for risky assets. Clearly, these factors resurfaced in several forms. In fact, observers are fixated on daily European credit news flow along with US economic and debt improvement. Perhaps, this is a good time to dig deep in other non-headline materials.
Mindsets
To understand investor behavior, it might help to categorize the thought process of participants into two mindsets. First, there are those whose core mentality treats markets like a “casino", mainly driven by the thrill and agony of seeking a short-term gain. At the same time, these are investors hoping for luck and are quick to jump into the dangerous zone of "sure bets". Secondly, there are those who are seeking opportunities with willingness to have an open mind and a flexible investment time frame and who are driven by the intellectual challenge of navigating the unknown.
Dangers of Group Thought
Generally, one can expect that when these two categories agree on an idea, then an explosive move is more likely to take hold. So this brings us to the current marketplace, where seekers of "sure bets" have been recently humbled and longer-term players are sorting through numerous potentials. The herd mentality proved to be wrong a few months ago, especially on betting on rising rates and increasing inflation, due to an expected economic growth. Perhaps, the low interest rate environment might have created a false optimism, which drove capital into risky assets. However, market corrections damaged highly sensitive areas, specifically ideas linked with China and Crude. Again, this was another reminder of the risks of herding and the importance of understanding market timing. Yet, markets teach us that various environments call for a different reaction; hence, the daunting challenge for a player of this game.
Imagining the Unimaginable
Credit related areas may present a sudden upside move, which can serve as a surprise. Any fundamental strength, such as increasing lending opportunities, can spark an infectious optimism. At this point, casual observers may not rush to seek turnaround in Financials, which remain globally unpopular, and positive signals are subtle to see. However, any marginal credit improvements could spark a positive reaction, especially in interest sensitive groups. This much discussed fear of the system can change at a rapid pace, just like investor’s moods. That said, the S&P 500 Index at 1060 can entice technical buying from a speculator’s perspective. Basically, money managers are offered plenty of assets that are deeply neglected at a discounted price. Interestingly, participation in the stock market will require management of near-term volatility, adjusting to pending policymaker decisions, and patience for further calmness from emotionally charged levels. Of course, these points above are hard to dismiss, even for the most bullish investor. However, staying open-minded for unfathomable opportunities is worth a strong consideration.
Levels:
S&P 500 [1064.88] showed early signs of bottoming around 1060, which can attract long-term buyers and speculators to observe closely. That said, a major hurdle awaits around 1100, based on previous weekly data. Perhaps, this is another confirmation to the current reluctance and growing fear.
Crude [$71.51] had a downtrend in tact below $75 as the commodity is trading very close to its 15-day moving average. Notably, in the past six months, Crude has traded in a range between $70 and $80, and it is removed from extreme levels.
Gold [$ 1203.50] is maintained an uptrend that was sparked by a reacceleration process around late March 2010.
DXY– US Dollar Index [88.23] had a recent surge that confirms the established strength. Like Gold, the late March recovery reflects a defensive posture by investors.
US 10 Year Treasury Yields [3.20%] is back to December 2009 levels, as the rate surge looks short-lived at the moment. Participants wait to see if the May 25th intra-day lows of 3.06% can mark an inflection point.
Article Quotes:
“As mentioned earlier, survey data shows that such measures of confidence continue to linger around the lowest levels seen in a generation. …Stock prices fall with growing government involvement in the economy or with rising inflation. The sharp rise in the government's share of output, in the last decade, and the threat of greater inflation, in the next one, are important factors behind the 30 percent decline in the inflation-adjusted Dow Jones Industrial Average since 2000. Eye-popping deficits of the past year have lowered optimism about the future, kept stock prices depressed, and reduced key elements in new investment spending. These negative side effects of the stimulus spending are certainly slowing down the recuperative process that market forces are attempting to generate.” (Cato Institute, May/ June 2010)
“The sad truth is that when the chips are down, regulators become reluctant to put their money where their mouths are—or more precisely, they become too eager to put their money where they said they would not. Few, if any, policymakers have been willing to let large banking organizations fail, thereby missing an opportunity to impose significant losses on failed institutions’ creditors. We know from intuition and experience that any financial institution, deemed TBTF, will not be allowed to fail in the traditional sense. When such an institution becomes troubled, its creditors are protected in the name of market stability. The TBTF problem is exacerbated if the central bank and regulators view wiping out big bank shareholders as too disruptive, extending this measure of protection to ordinary equity holders.” (Richard W. Fisher Federal Reserve of Dallas, June 3, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Approaching the midyear point presents a reflective stage. The results of a six week sell-off have turned the year-to-date performance returns to a negative for broad indexes . Generally, a pullback, greater than 10%, will naturally lead investors to reassess their thoughts and find new trends within existing themes. As expected, most summer worries mirrored winter discussions, such as overvalued emerging markets, a vulnerable Europe, and shaky sustainability for risky assets. Clearly, these factors resurfaced in several forms. In fact, observers are fixated on daily European credit news flow along with US economic and debt improvement. Perhaps, this is a good time to dig deep in other non-headline materials.
Mindsets
To understand investor behavior, it might help to categorize the thought process of participants into two mindsets. First, there are those whose core mentality treats markets like a “casino", mainly driven by the thrill and agony of seeking a short-term gain. At the same time, these are investors hoping for luck and are quick to jump into the dangerous zone of "sure bets". Secondly, there are those who are seeking opportunities with willingness to have an open mind and a flexible investment time frame and who are driven by the intellectual challenge of navigating the unknown.
Dangers of Group Thought
Generally, one can expect that when these two categories agree on an idea, then an explosive move is more likely to take hold. So this brings us to the current marketplace, where seekers of "sure bets" have been recently humbled and longer-term players are sorting through numerous potentials. The herd mentality proved to be wrong a few months ago, especially on betting on rising rates and increasing inflation, due to an expected economic growth. Perhaps, the low interest rate environment might have created a false optimism, which drove capital into risky assets. However, market corrections damaged highly sensitive areas, specifically ideas linked with China and Crude. Again, this was another reminder of the risks of herding and the importance of understanding market timing. Yet, markets teach us that various environments call for a different reaction; hence, the daunting challenge for a player of this game.
Imagining the Unimaginable
Credit related areas may present a sudden upside move, which can serve as a surprise. Any fundamental strength, such as increasing lending opportunities, can spark an infectious optimism. At this point, casual observers may not rush to seek turnaround in Financials, which remain globally unpopular, and positive signals are subtle to see. However, any marginal credit improvements could spark a positive reaction, especially in interest sensitive groups. This much discussed fear of the system can change at a rapid pace, just like investor’s moods. That said, the S&P 500 Index at 1060 can entice technical buying from a speculator’s perspective. Basically, money managers are offered plenty of assets that are deeply neglected at a discounted price. Interestingly, participation in the stock market will require management of near-term volatility, adjusting to pending policymaker decisions, and patience for further calmness from emotionally charged levels. Of course, these points above are hard to dismiss, even for the most bullish investor. However, staying open-minded for unfathomable opportunities is worth a strong consideration.
Levels:
S&P 500 [1064.88] showed early signs of bottoming around 1060, which can attract long-term buyers and speculators to observe closely. That said, a major hurdle awaits around 1100, based on previous weekly data. Perhaps, this is another confirmation to the current reluctance and growing fear.
Crude [$71.51] had a downtrend in tact below $75 as the commodity is trading very close to its 15-day moving average. Notably, in the past six months, Crude has traded in a range between $70 and $80, and it is removed from extreme levels.
Gold [$ 1203.50] is maintained an uptrend that was sparked by a reacceleration process around late March 2010.
DXY– US Dollar Index [88.23] had a recent surge that confirms the established strength. Like Gold, the late March recovery reflects a defensive posture by investors.
US 10 Year Treasury Yields [3.20%] is back to December 2009 levels, as the rate surge looks short-lived at the moment. Participants wait to see if the May 25th intra-day lows of 3.06% can mark an inflection point.
Article Quotes:
“As mentioned earlier, survey data shows that such measures of confidence continue to linger around the lowest levels seen in a generation. …Stock prices fall with growing government involvement in the economy or with rising inflation. The sharp rise in the government's share of output, in the last decade, and the threat of greater inflation, in the next one, are important factors behind the 30 percent decline in the inflation-adjusted Dow Jones Industrial Average since 2000. Eye-popping deficits of the past year have lowered optimism about the future, kept stock prices depressed, and reduced key elements in new investment spending. These negative side effects of the stimulus spending are certainly slowing down the recuperative process that market forces are attempting to generate.” (Cato Institute, May/ June 2010)
“The sad truth is that when the chips are down, regulators become reluctant to put their money where their mouths are—or more precisely, they become too eager to put their money where they said they would not. Few, if any, policymakers have been willing to let large banking organizations fail, thereby missing an opportunity to impose significant losses on failed institutions’ creditors. We know from intuition and experience that any financial institution, deemed TBTF, will not be allowed to fail in the traditional sense. When such an institution becomes troubled, its creditors are protected in the name of market stability. The TBTF problem is exacerbated if the central bank and regulators view wiping out big bank shareholders as too disruptive, extending this measure of protection to ordinary equity holders.” (Richard W. Fisher Federal Reserve of Dallas, June 3, 2010)
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Subscribe to:
Posts (Atom)
