“The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” - Winston Churchill
For longer-term investors, the action last week might not create enough unease to change course in 2011 plans. The consensus view mostly indicates strength in company earnings, favorable presidential cycle data, and increased merger and acquisitions. These highly polished and occasionally motivational points have some merits. In fact, these are key selling points as to why participants bought into this concept, especially towards the end of last summer. In other words, the upside market momentum is driven on the notion of an inevitable cycle recovery. This thought propelled the stock markets to rise at a significant pace in the last few months.
In the short-term, there are plenty of excuses and reasons to lean towards risk aversion. For one thing, European concerns have been in place, and further turbulence is hardly a surprise. Secondly, resurfacing inflation worries plague emerging markets as currently discussed in Asian economies. Meanwhile, US stock market offers a less timely entry point as a mere breather is much needed. Interestingly, some quarterly earnings results may reflect the upbeat rhythm painted by general market feel. However, on a relative basis, US markets are attractive and may lure in foreign capital. That said, managing surprises and expectation is the challenge ahead for investment decision makers.
At this junction, most technical observers are hesitant to declare the last few days as "the top.” As usual, it is well known that it takes few catalysts to shake the smooth sailing markets. Veteran observers are keenly aware that downside moves can be short lived sell-offs occurring at a rapid pace. For the day-to-day trader, it feels like every hour is filled with some highly charged headline material. Topics such as government shutdown, developing unrest, and Wal-Mart’s declining US sales spark enough volatility to create trading opportunities. The skill is in isolating noise from early signs of a sustainable decline for a frontline participant.
Within this fear-driven period, the attention seems too diverted away from the next big issues linked to interest rates and currencies. When the near-term dust settles, mapping out interest rate matters among central bankers can shape a better grasp of risk. Of course, the reactionary pattern in commodity prices should be factored in the Federal Reserves’ evaluation. Beyond the explosive run in Crude, there are other overlooked and existing hints of vulnerability. These cumbersome clues might be difficult to shake off as we all eagerly wait.
Article Quotes:
“The period between the War of 1812 and the Civil War is commonly called the “free banking era.” It is also called the era of “wildcat banks” because many banks were poorly capitalized, poorly if not fraudulently managed, and prone to failure. Conventional wisdom says that this era demonstrates conclusively the need for strict government regulation of money and banking. Like other free-market institutions, free banking rests on the sanctity of property rights, with no government involvement other than prosecution of theft or fraud. But there was substantial government involvement all along, so the “free banking” label is only accurate in relative terms.” (The Freeman Ideas on Liberty, March edition 2011)
“China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Concerns that a deterioration of lenders’ asset quality could derail the world’s fastest-growing major economy surfaced after credit expansion surged to a record 96 percent in 2009, prompting the banking regulator to tighten capital rules.” (Bloomberg, February 21, 2011)
Levels:
S&P 500 Index [1319.88] – Despite a weekly decline, the index is holding above 1300 and trading near its 15-day moving average of 1323.69.
Crude [$97.88] – A noticeable and well-noted explosive run. The peak of $103.41 on February 24, 2010, marks a multi-month top. Revisiting this range can trigger ongoing debates and speculation.
Gold [$1402.50] – Since November 2010, the commodity has failed at 1400. Yet again, this level is being tested and short-term history would suggest further pause ahead. The week ahead can provide a better clue on buyer’s interest.
DXY – US Dollar Index [77.27] – Relatively quiet and trading slightly below its 50-day moving average of 78.92. Basically, it has been mostly quiet since the peak in late 2010.
US 10 Year Treasury Yields [3.41%] – Establishing a near-term downtrend pattern since February 9, 2011. A dominate theme recently showcases a pattern between 3.30-3.50%. A trading range within these points suggests a normalization process at least in the short-term.
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, February 28, 2011
Tuesday, February 22, 2011
Market Outlook | February 22, 2011
“It must be admitted that there is a degree of instability which is inconsistent with civilization. But, on the whole, the great ages have been unstable ones.” - Alfred North Whitehead (1861-1947)
When observing US based indexes, one would notice the recovery in US markets continues as it recoups losses from 2007-08 crisis while restoring some confidence and reinforcing the power of perception. Perhaps, this provides a sense of fragile confidence, based on large company earnings, perceived value, and favorable reactions by key participants. The synchronized rise in the US stock market is helping the S&P 500 Index approach the 1400 level along with a quiet volatility. Rising markets are known to serve a marketing purpose in which sideline observers are enticed to step in or at least explore. A 30% appreciation in the S&P 500, since August 27, 2010, might dampen the voices of outspoken pundits, who highlight longer-term concerns. However, for those not relying on broader indexes as a barometer of well being, the above discussions of comfort might feel like a mere illusion. The growing disconnect between the market picture and the real economy sparks sensitive reaction as hinted at during the last two US elections. Similarly, odd makers would hardly claim today as a timely entry point to purchase stocks, given this extended market.
If you're a casual global news observer, you might be surprised and/or confused at the rapid widespread of global unrest. The escalating demand for power shift is a trend in itself with plenty of details to grasp as foreign policy experts map out future implications. Libya and Morocco are now added to this growing list of countries that look to reexamine their power structure. Then, it is fitting even for a casual observer to wonder the impact on sentiment, natural resources, and political risks. All factors become instantly relevant in a closely connected world. Clearly, this Monday (Presidents Day) witnessed a sharp rise in Crude and Gold, at least, as a short-term response to these events. Of course, the well-documented rise in agricultural commodities is tied to food riots. Perhaps, this provides a logical explanation to global frustration, which eventually will transform into a political matter. Where is the next turbulence going to come from? That is a natural question, but it is too early to ask without having fully grasped events that transpired.
If you've followed the Eurozone activities, you'll most likely wonder about the future result of German elections and the handling of persistent economic concerns facing southern European nations. It was only last spring that sovereign default worries triggered market sell-offs and ongoing bailout debates. Perhaps, a foreign exchange observer is too plugged in to gauge the Euro’s short-term behavior. Investment managers will have to dissect and scramble to figure out the relatively attractive place in Europe to capture economic growth for the next 5-10 years. In the near-term, stability is the question facing policymakers and investors alike for the weeks ahead.
If you're an emerging market investor, then assessing inflation and managing short-term risk is a lingering, but even more, puzzling question. A decade old theme is intriguing, and those familiar with China and Brazil are seeking the next cycle winner and reconsidering adding to winning positions. Interestingly, FXI (China 25 Fund) and EWZ (MSCI Brazil Fund) are not trading at multi-month highs. This is a noticeable contrast to the US indexes, and inquiring minds are pointing out that emerging market themes are becoming fatigued. Perhaps, inflation is one factor not to underestimate, and previous growth projection might have been too optimistic. Meanwhile, the global landscape remains highly tied to the faith of the US Dollar. This is not only a symbolic but also a practical manner in emerging market trends. Series of events can trigger mood swings in attitude of the US Dollar. At this point, the Dollar is accepted as a dominant currency as emerging economies continue to build a stronger financial infrastructure.
Connecting the Dots
Confluence of events can cause powerful reactions at a faster pace in an interlinked world. Sociopolitical matters have been brewing for a long while, but predicting inflection points in human (or market) behavior is too difficult. Interestingly, the fragility of financial systems in developed nations can trigger doubts for a short period. Yet, those doubts can be quickly forgotten until revisited at the next inflection point. Similarly, global markets have a way of exaggerating or underestimating a nations’ well-being, while painting a misleading perception for an extended period. In short, mean-reversion is necessary to get closer to the truth, but it is a painful process along the way.
Article Quotes
“While there are parallels with the US there are also unique features in Brazil. Risk management infrastructure has largely been missing in Brazil’s credit build up, with a “positive” credit bureau still not yet approved owing to consumer protection issues (a positive credit bureau shares credit history of all customers whereas negative bureau shares information for customers only in default, typically this information comes too late). This has enabled borrowers to build multiple lines of credit without the lenders’ knowledge, especially as most loans are “unsecured” and there is no collateral involved. Brazil is in this spot from a financial standpoint due to inefficiencies in the financial system. The operating expense to assets ratio of the Brazilian banking system is a staggering 4.2 per cent compared with 1.1 per cent and 1.6 per cent for Chinese and Indian banks respectively, and this large expense base keeps the cost of credit abnormally high.” (Financial Times, February 21, 2011)
“Although policymakers in the emerging markets clearly face important challenges, such concerns should be put into perspective. First, these capital flows have been driven by many factors, including expectations of more-rapid growth and thus higher investment returns in the emerging market economies than in the advanced economies. … Second, as I noted earlier, emerging market economies have a strong interest in a continued economic recovery in the advanced economies, which accommodative monetary policies in the advanced economies are intended to promote. Third, policymakers in the emerging markets have a range of powerful–although admittedly imperfect–tools that they can use to manage their economies and prevent overheating, including exchange rate adjustment, monetary and fiscal policies, and macroprudential measures. (Chairman Ben S. Bernanke, February 18, 2011)
Levels
S&P 500 Index [1343.01] – Multi-month highs are in place. The next question is in regards to the index’s ability to reach 1400. That is a level last reached and surpassed in 2000 and 2007. Interestingly, in both cases S&P 500 Index stayed above 1400 for short-lived period and eventually topped. However, the current trends point to the index being extended.
Crude [$86.20] – It has held above $84 and is attempting to breakout from a sideways pattern. The current news flow can provide near-term acceleration.
Gold [$1383.50] – For a few weeks, the commodity has remained in a calmer state in a narrow range of 1350-1400. Next discussion will circulate on Gold’s ability to revisit all-time highs of $1421 reached on November 9, 2010.
DXY – US Dollar Index [77.66] – Once again, the index pattern is not convincing of a strengthening dollar at this point.
US 10 Year Treasury Yields [3.57%] – Mildly pulling back after reaching 3.76%. In the weeks ahead, the magnitude of this decline is noteworthy for those tracking key macro shifts.
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.
When observing US based indexes, one would notice the recovery in US markets continues as it recoups losses from 2007-08 crisis while restoring some confidence and reinforcing the power of perception. Perhaps, this provides a sense of fragile confidence, based on large company earnings, perceived value, and favorable reactions by key participants. The synchronized rise in the US stock market is helping the S&P 500 Index approach the 1400 level along with a quiet volatility. Rising markets are known to serve a marketing purpose in which sideline observers are enticed to step in or at least explore. A 30% appreciation in the S&P 500, since August 27, 2010, might dampen the voices of outspoken pundits, who highlight longer-term concerns. However, for those not relying on broader indexes as a barometer of well being, the above discussions of comfort might feel like a mere illusion. The growing disconnect between the market picture and the real economy sparks sensitive reaction as hinted at during the last two US elections. Similarly, odd makers would hardly claim today as a timely entry point to purchase stocks, given this extended market.
If you're a casual global news observer, you might be surprised and/or confused at the rapid widespread of global unrest. The escalating demand for power shift is a trend in itself with plenty of details to grasp as foreign policy experts map out future implications. Libya and Morocco are now added to this growing list of countries that look to reexamine their power structure. Then, it is fitting even for a casual observer to wonder the impact on sentiment, natural resources, and political risks. All factors become instantly relevant in a closely connected world. Clearly, this Monday (Presidents Day) witnessed a sharp rise in Crude and Gold, at least, as a short-term response to these events. Of course, the well-documented rise in agricultural commodities is tied to food riots. Perhaps, this provides a logical explanation to global frustration, which eventually will transform into a political matter. Where is the next turbulence going to come from? That is a natural question, but it is too early to ask without having fully grasped events that transpired.
If you've followed the Eurozone activities, you'll most likely wonder about the future result of German elections and the handling of persistent economic concerns facing southern European nations. It was only last spring that sovereign default worries triggered market sell-offs and ongoing bailout debates. Perhaps, a foreign exchange observer is too plugged in to gauge the Euro’s short-term behavior. Investment managers will have to dissect and scramble to figure out the relatively attractive place in Europe to capture economic growth for the next 5-10 years. In the near-term, stability is the question facing policymakers and investors alike for the weeks ahead.
If you're an emerging market investor, then assessing inflation and managing short-term risk is a lingering, but even more, puzzling question. A decade old theme is intriguing, and those familiar with China and Brazil are seeking the next cycle winner and reconsidering adding to winning positions. Interestingly, FXI (China 25 Fund) and EWZ (MSCI Brazil Fund) are not trading at multi-month highs. This is a noticeable contrast to the US indexes, and inquiring minds are pointing out that emerging market themes are becoming fatigued. Perhaps, inflation is one factor not to underestimate, and previous growth projection might have been too optimistic. Meanwhile, the global landscape remains highly tied to the faith of the US Dollar. This is not only a symbolic but also a practical manner in emerging market trends. Series of events can trigger mood swings in attitude of the US Dollar. At this point, the Dollar is accepted as a dominant currency as emerging economies continue to build a stronger financial infrastructure.
Connecting the Dots
Confluence of events can cause powerful reactions at a faster pace in an interlinked world. Sociopolitical matters have been brewing for a long while, but predicting inflection points in human (or market) behavior is too difficult. Interestingly, the fragility of financial systems in developed nations can trigger doubts for a short period. Yet, those doubts can be quickly forgotten until revisited at the next inflection point. Similarly, global markets have a way of exaggerating or underestimating a nations’ well-being, while painting a misleading perception for an extended period. In short, mean-reversion is necessary to get closer to the truth, but it is a painful process along the way.
Article Quotes
“While there are parallels with the US there are also unique features in Brazil. Risk management infrastructure has largely been missing in Brazil’s credit build up, with a “positive” credit bureau still not yet approved owing to consumer protection issues (a positive credit bureau shares credit history of all customers whereas negative bureau shares information for customers only in default, typically this information comes too late). This has enabled borrowers to build multiple lines of credit without the lenders’ knowledge, especially as most loans are “unsecured” and there is no collateral involved. Brazil is in this spot from a financial standpoint due to inefficiencies in the financial system. The operating expense to assets ratio of the Brazilian banking system is a staggering 4.2 per cent compared with 1.1 per cent and 1.6 per cent for Chinese and Indian banks respectively, and this large expense base keeps the cost of credit abnormally high.” (Financial Times, February 21, 2011)
“Although policymakers in the emerging markets clearly face important challenges, such concerns should be put into perspective. First, these capital flows have been driven by many factors, including expectations of more-rapid growth and thus higher investment returns in the emerging market economies than in the advanced economies. … Second, as I noted earlier, emerging market economies have a strong interest in a continued economic recovery in the advanced economies, which accommodative monetary policies in the advanced economies are intended to promote. Third, policymakers in the emerging markets have a range of powerful–although admittedly imperfect–tools that they can use to manage their economies and prevent overheating, including exchange rate adjustment, monetary and fiscal policies, and macroprudential measures. (Chairman Ben S. Bernanke, February 18, 2011)
Levels
S&P 500 Index [1343.01] – Multi-month highs are in place. The next question is in regards to the index’s ability to reach 1400. That is a level last reached and surpassed in 2000 and 2007. Interestingly, in both cases S&P 500 Index stayed above 1400 for short-lived period and eventually topped. However, the current trends point to the index being extended.
Crude [$86.20] – It has held above $84 and is attempting to breakout from a sideways pattern. The current news flow can provide near-term acceleration.
Gold [$1383.50] – For a few weeks, the commodity has remained in a calmer state in a narrow range of 1350-1400. Next discussion will circulate on Gold’s ability to revisit all-time highs of $1421 reached on November 9, 2010.
DXY – US Dollar Index [77.66] – Once again, the index pattern is not convincing of a strengthening dollar at this point.
US 10 Year Treasury Yields [3.57%] – Mildly pulling back after reaching 3.76%. In the weeks ahead, the magnitude of this decline is noteworthy for those tracking key macro shifts.
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, February 14, 2011
Market Outlook | February 14, 2011
“Technology is similarly just a catalyst at times for fundamental forces already present.” - Scott Cook
Within the current uptrend, volatility has stayed low, as illustrated by various exchange data points. A reduction in turbulence might help long-term investors who occasionally look to make investment adjustments. However, the lower volatility is creating limited day-to-day opportunities for active traders. This impacts exchanges and money managers whose revenue is strongly tied to volatility based trading. Interestingly, policymakers are evaluating the expansion of derivative products, and the competition for exchange based products is heating up as well. These points above illustrate the significant influence of trading mechanics that lead to a changing market dynamic.
These days, one can track the profit’s key exchanges, since they became public a few years ago. Of course, the financial headlines this weekend highlight merger discussions, which can change overall trading behaviors while presenting further regulatory challenges. This recent trend is partially attributed to innovative electronic exchanges, which have reduced overall pricing and in turn increased competition. “Brokers who owned the NYSE 10 years ago earned 6.25 cents or more when buying and selling 100 shares. Now, the spread is a penny for the most heavily traded stocks” (Bloomberg, February 10, 2011). That said, money managers are reevaluating strategies in seeking yields and implementing growth driven models while attempting to establish expertise for the current landscape. In other words, advancement in technological and informational speed is forcing adjustments in traditional financial services. Perhaps, forward-looking managers will look to alternative assets classes or sharpening existing systems to create an edge.
Within the altering technical matters in place, much of the attention, as usual, is centered on the macro climate. Although, extraordinary behaviors are not too visible in Gold or Crude, as both key commodities are pausing. Similarly, long-term yields have somewhat stabilized despite the chatter of sudden spikes. Meanwhile, the Dollar is too quiet for now at this early junction of the year. This relative period of silence makes some nervous in anticipation of a trend shift. Pundits highlight the political instability that is brewing, while others emphasize higher food prices. Yet, the S&P 500 Index (up 5.7% year to date) paints a cheerful picture of corporate profit stability, improving economic growth, and reacceleration from the 2008 crisis. These optimistic arguments are as hard to deny as they are to accept, especially when digging deeper. Perhaps, this sets the stage for a gut check in early spring as various catalysts continue to build.
Article Quotes:
“The booming piracy industry is a neat metaphor for our globalised economy. Just about everything you need to know about how money is made and lost is encapsulated in the daily battles between cargo captains and the pirate skiffs in the Somali basin. For starters, know your customer. One of the keys to understanding the modern multinational is to realise it hates embarrassment. Bear in mind that when faced with any challenge, whether from a lobby group, government or nerdy teenager on Twitter, its instinctive response is to crumple. Then imagine what it will do when confronted with poor people with guns: give in without a fight. Sure enough, most shipping companies don’t even allow their guards to bear weapons. It is not the kind of thing Human Resources wants to get involved in. All the pirates have to do is take a ship, steer it to harbour, and then ask for a few million dollars for its return.” (Financial Times, February 10, 2011)
“The Federal Reserve has held short-term interest rates to nil. We have expanded our balance sheet to unprecedented levels, with the effect of holding down mortgage rates and the rate of interest paid on Treasuries and the myriad financial instruments that are priced off of Treasuries, including corporate debt. After much debate―which included strong concern expressed by one member with a formal vote and others, like me, who did not have voting rights in 2010―the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. …The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: ‘Monetary policy responsibility cannot substitute for government irresponsibility’.” (Speech by Federal Reserve of Dallas, February 8, 2011)
Levels:
S&P 500 Index [1329.15] – Up nearly 28% since bottoming in August 27, 2010. Establishing multi-year highs as the ongoing uptrend is intact.
Crude [$85.58] – Momentum stalled at the $90 range and sparked a near-term decline. Odds for a bounce at current levels would seem favorable. A sharper drop below $85 can signal further selling, given the noteworthy decline this month.
Gold [$1364. 00] – Once again, 1350 is a key base in the recent consolidation. Most optimistic investors are looking at the current range as a reentry, with hopes of revisiting 1400.
DXY – US Dollar Index [78.46] – Not showcasing any significant directional move. Potentially, investors are waiting for further data and adjustment in Federal Reserve plan for the next key movement.
US 10 Year Treasury Yields [3.62%] – In a multi-month uptrend and early signs of pausing. The week ahead will demonstrate the sustainability of the 3.60% after economic and inflation related data.
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.
Within the current uptrend, volatility has stayed low, as illustrated by various exchange data points. A reduction in turbulence might help long-term investors who occasionally look to make investment adjustments. However, the lower volatility is creating limited day-to-day opportunities for active traders. This impacts exchanges and money managers whose revenue is strongly tied to volatility based trading. Interestingly, policymakers are evaluating the expansion of derivative products, and the competition for exchange based products is heating up as well. These points above illustrate the significant influence of trading mechanics that lead to a changing market dynamic.
These days, one can track the profit’s key exchanges, since they became public a few years ago. Of course, the financial headlines this weekend highlight merger discussions, which can change overall trading behaviors while presenting further regulatory challenges. This recent trend is partially attributed to innovative electronic exchanges, which have reduced overall pricing and in turn increased competition. “Brokers who owned the NYSE 10 years ago earned 6.25 cents or more when buying and selling 100 shares. Now, the spread is a penny for the most heavily traded stocks” (Bloomberg, February 10, 2011). That said, money managers are reevaluating strategies in seeking yields and implementing growth driven models while attempting to establish expertise for the current landscape. In other words, advancement in technological and informational speed is forcing adjustments in traditional financial services. Perhaps, forward-looking managers will look to alternative assets classes or sharpening existing systems to create an edge.
Within the altering technical matters in place, much of the attention, as usual, is centered on the macro climate. Although, extraordinary behaviors are not too visible in Gold or Crude, as both key commodities are pausing. Similarly, long-term yields have somewhat stabilized despite the chatter of sudden spikes. Meanwhile, the Dollar is too quiet for now at this early junction of the year. This relative period of silence makes some nervous in anticipation of a trend shift. Pundits highlight the political instability that is brewing, while others emphasize higher food prices. Yet, the S&P 500 Index (up 5.7% year to date) paints a cheerful picture of corporate profit stability, improving economic growth, and reacceleration from the 2008 crisis. These optimistic arguments are as hard to deny as they are to accept, especially when digging deeper. Perhaps, this sets the stage for a gut check in early spring as various catalysts continue to build.
Article Quotes:
“The booming piracy industry is a neat metaphor for our globalised economy. Just about everything you need to know about how money is made and lost is encapsulated in the daily battles between cargo captains and the pirate skiffs in the Somali basin. For starters, know your customer. One of the keys to understanding the modern multinational is to realise it hates embarrassment. Bear in mind that when faced with any challenge, whether from a lobby group, government or nerdy teenager on Twitter, its instinctive response is to crumple. Then imagine what it will do when confronted with poor people with guns: give in without a fight. Sure enough, most shipping companies don’t even allow their guards to bear weapons. It is not the kind of thing Human Resources wants to get involved in. All the pirates have to do is take a ship, steer it to harbour, and then ask for a few million dollars for its return.” (Financial Times, February 10, 2011)
“The Federal Reserve has held short-term interest rates to nil. We have expanded our balance sheet to unprecedented levels, with the effect of holding down mortgage rates and the rate of interest paid on Treasuries and the myriad financial instruments that are priced off of Treasuries, including corporate debt. After much debate―which included strong concern expressed by one member with a formal vote and others, like me, who did not have voting rights in 2010―the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. …The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: ‘Monetary policy responsibility cannot substitute for government irresponsibility’.” (Speech by Federal Reserve of Dallas, February 8, 2011)
Levels:
S&P 500 Index [1329.15] – Up nearly 28% since bottoming in August 27, 2010. Establishing multi-year highs as the ongoing uptrend is intact.
Crude [$85.58] – Momentum stalled at the $90 range and sparked a near-term decline. Odds for a bounce at current levels would seem favorable. A sharper drop below $85 can signal further selling, given the noteworthy decline this month.
Gold [$1364. 00] – Once again, 1350 is a key base in the recent consolidation. Most optimistic investors are looking at the current range as a reentry, with hopes of revisiting 1400.
DXY – US Dollar Index [78.46] – Not showcasing any significant directional move. Potentially, investors are waiting for further data and adjustment in Federal Reserve plan for the next key movement.
US 10 Year Treasury Yields [3.62%] – In a multi-month uptrend and early signs of pausing. The week ahead will demonstrate the sustainability of the 3.60% after economic and inflation related data.
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, February 07, 2011
Market Outlook | February 7, 2011
“Safety is something that happens between your ears, not something you hold in your hands.” – Jeff Cooper (1920-2006)
The Beat Goes On
The rising upside move last week serves as another example, where markets drum to their own beat and worries can be ignored or at least postponed. In fact, the broad US indexes have found a way to pay less attention to long or near-term issues related to global unrest. Instead, much of the ongoing appreciation is caused by positive quarterly reports from US large corporations. Major headlines continue to credit and outline the “better than expected” sales forecast that has been met. Veterans will consistently reiterate that markets are an expectation game. This might console participants who are confused between the daily economic truth and the health of electronic driven markets. On the other hand, optimists attribute this current run as an early indication of the attractiveness of US investments compared to overheating emerging markets.
Adjusting Lenses
Meanwhile, few are taking notes and a little caution in anticipation of early spring, where the pressures of slow economic growth and the elevated commodity prices begin to seep through into balance sheets of mid to small cap companies. In other words, the S&P 500 companies might not be an accurate reflection of US businesses, and one should remain cautious in using this index as a barometer of safety. Yet, portfolio managers will remind us that they’re paid to outperform, and success is closely tracked on a monthly basis. That requires staying shrewd and identifying momentum regardless of implications beyond the existing quarter. Rightly or wrongly, that is the mindset of an average money manager.
In the meantime, day-to-day followers struggle to identify the right period to bet on declining markets as it becomes a less compelling story (until it begins to materialize). Clearly, fighting against the Federal Reserve is a daunting task, and professionals acknowledge that it is a powerful force to defeat. Simply, a rising stock market, along with low interest rate policies, partially contributes to further rise in commodities. Perhaps, that’s a summary of the last decade, and remnants of that theme continue to persist at least in the early days of 2011.
Midwinter Mindset
As we have reached the midway point through this winter, there is plenty of macro driven factors to decipher. On that note, the break out in the US 10 Year Treasury Yields is noteworthy. Investors are anxiously waiting to see if 4% will be revisited as witnessed in mid 2009 and early 2010. This trend questions if participants accept the fact that the economic recovery is sustainable in the near-future. “The difference between yields on two- and 10-year yields rose to 2.89 percentage points last week, above median of 1.81 percentage points the past decade” (Bloomberg, February 6, 2011). Usually, this is known to support a rising economy among consensus in which money flows away from treasuries and into risky assets, such as junk bonds and stocks. Perhaps, this makes sense to a casual observer, who continues to glance at a rising market, growing risk appetite, and weaker volatility. That said, the art ahead is to go with the flow until figuring out the potential catalyst that can disrupt this overly comfortable status quo.
Article Quotes:
“On this evidence, austerity appears to only redress the competitive and structural divergences at a snail’s pace. With the possible exception of Ireland, the periphery countries have no choice but to enact structural reforms to stimulate innovation and increase competition in product and labour markets. Absent these changes, the divergences between the periphery and core may not close, or may even widen again (European Commission 2010). So far, each country has taken modest steps. Though not yet reflected in competitiveness indicators, Greece appears to be embarking on far-reaching structural reforms as part of its EU-IMF programme (IMF 2010). But across Europe these measures have been insufficient. This should not be too surprising. Reforms such as liberalising the markets for professional services attack powerful interest groups directly – and nearly always require the application of an external force.” (VoxEU.org, February 6, 2011)
“The Treasury argues that many borrowers it thought were eligible for help turned out not to be because they earned too much, their homes were too expensive or were not their primary residence, or because they couldn’t meet documentation requirements. Many who were eligible, it says, got a private modification instead. Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent. Long after the crisis and the recession, the housing bust that caused them lingers on.” (Economist, February 3rd 2011)
Levels:
S&P 500 Index [1310.87] – Multi-year highs as the index continues its uptrend. The index is 13.16% above its 200-day moving average.
Crude [$89.03] – It appears fatigued in the near-term. The commodity has struggled to stay above $90. However, the trend is mostly sideways.
Gold [$1355.50] – Early signs of recovering from a downtrend. It seems to barely hold above 1350 as a point where new buyers might look to add and existing holders might look to sell.
DXY – US Dollar Index [78.04] – Mostly a nonevent as witnessed for several months. A long step back reminds us that this downtrend has been in place for 25 years.
US 10 Year Treasury Yields [3.63%] – Breaking out of a multi-week trading range. This rise in yields bottomed on October 8, 2010 and is accelerating to 9-month highs.
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.
The Beat Goes On
The rising upside move last week serves as another example, where markets drum to their own beat and worries can be ignored or at least postponed. In fact, the broad US indexes have found a way to pay less attention to long or near-term issues related to global unrest. Instead, much of the ongoing appreciation is caused by positive quarterly reports from US large corporations. Major headlines continue to credit and outline the “better than expected” sales forecast that has been met. Veterans will consistently reiterate that markets are an expectation game. This might console participants who are confused between the daily economic truth and the health of electronic driven markets. On the other hand, optimists attribute this current run as an early indication of the attractiveness of US investments compared to overheating emerging markets.
Adjusting Lenses
Meanwhile, few are taking notes and a little caution in anticipation of early spring, where the pressures of slow economic growth and the elevated commodity prices begin to seep through into balance sheets of mid to small cap companies. In other words, the S&P 500 companies might not be an accurate reflection of US businesses, and one should remain cautious in using this index as a barometer of safety. Yet, portfolio managers will remind us that they’re paid to outperform, and success is closely tracked on a monthly basis. That requires staying shrewd and identifying momentum regardless of implications beyond the existing quarter. Rightly or wrongly, that is the mindset of an average money manager.
In the meantime, day-to-day followers struggle to identify the right period to bet on declining markets as it becomes a less compelling story (until it begins to materialize). Clearly, fighting against the Federal Reserve is a daunting task, and professionals acknowledge that it is a powerful force to defeat. Simply, a rising stock market, along with low interest rate policies, partially contributes to further rise in commodities. Perhaps, that’s a summary of the last decade, and remnants of that theme continue to persist at least in the early days of 2011.
Midwinter Mindset
As we have reached the midway point through this winter, there is plenty of macro driven factors to decipher. On that note, the break out in the US 10 Year Treasury Yields is noteworthy. Investors are anxiously waiting to see if 4% will be revisited as witnessed in mid 2009 and early 2010. This trend questions if participants accept the fact that the economic recovery is sustainable in the near-future. “The difference between yields on two- and 10-year yields rose to 2.89 percentage points last week, above median of 1.81 percentage points the past decade” (Bloomberg, February 6, 2011). Usually, this is known to support a rising economy among consensus in which money flows away from treasuries and into risky assets, such as junk bonds and stocks. Perhaps, this makes sense to a casual observer, who continues to glance at a rising market, growing risk appetite, and weaker volatility. That said, the art ahead is to go with the flow until figuring out the potential catalyst that can disrupt this overly comfortable status quo.
Article Quotes:
“On this evidence, austerity appears to only redress the competitive and structural divergences at a snail’s pace. With the possible exception of Ireland, the periphery countries have no choice but to enact structural reforms to stimulate innovation and increase competition in product and labour markets. Absent these changes, the divergences between the periphery and core may not close, or may even widen again (European Commission 2010). So far, each country has taken modest steps. Though not yet reflected in competitiveness indicators, Greece appears to be embarking on far-reaching structural reforms as part of its EU-IMF programme (IMF 2010). But across Europe these measures have been insufficient. This should not be too surprising. Reforms such as liberalising the markets for professional services attack powerful interest groups directly – and nearly always require the application of an external force.” (VoxEU.org, February 6, 2011)
“The Treasury argues that many borrowers it thought were eligible for help turned out not to be because they earned too much, their homes were too expensive or were not their primary residence, or because they couldn’t meet documentation requirements. Many who were eligible, it says, got a private modification instead. Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent. Long after the crisis and the recession, the housing bust that caused them lingers on.” (Economist, February 3rd 2011)
Levels:
S&P 500 Index [1310.87] – Multi-year highs as the index continues its uptrend. The index is 13.16% above its 200-day moving average.
Crude [$89.03] – It appears fatigued in the near-term. The commodity has struggled to stay above $90. However, the trend is mostly sideways.
Gold [$1355.50] – Early signs of recovering from a downtrend. It seems to barely hold above 1350 as a point where new buyers might look to add and existing holders might look to sell.
DXY – US Dollar Index [78.04] – Mostly a nonevent as witnessed for several months. A long step back reminds us that this downtrend has been in place for 25 years.
US 10 Year Treasury Yields [3.63%] – Breaking out of a multi-week trading range. This rise in yields bottomed on October 8, 2010 and is accelerating to 9-month highs.
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, January 31, 2011
Market Outlook | January 31, 2011
“What you perceive, your observations, feelings, interpretations, are all your truth. Your truth is important. Yet it is not The Truth.” - Linda Ellinor
Bigger Picture
For a long while, geopolitical worries have stayed relatively silent for casual headline followers and slightly-impacted invested participants. Yet, the rising food price is one issue that’s been well addressed and potentially a key catalyst for some turbulence-like conditions. Now, in terms of markets, global tension may serve as an excuse to sell. It should be noted that regardless of political instability, this market was setting up for a consolidation or, at least, a much needed breather. In the past year, inflation in emerging markets and weakness in some European economies presented some minor setbacks to the existing asset appreciation. A downtrend here is not much of a surprise. However, the magnitude of declines provides a better read on market feel.
Previous Clues
Technical observers have pointed out the increasing odds of mean reversion, given the extended broad indexes and commodity markets. Interestingly, Gold prices showcased an early hint of a slowing momentum since early December 2010. On the other hand, Crude strengthened in past few weeks as some expect a further rise in periods of unrest. Obviously, each commodity has its own sensitive response to news. Therefore, identifying few trends in turbulent times remains tricky in the weeks ahead. Meanwhile, the spike in VIX (volatility index) from 16 to 20 last Friday can hardly go unnoticed. Perhaps, a key tipping point and how this plays out is of interest to observers and participants alike. Finally, investment managers may shift focus in the search for hedging tools and attempting not to overreact on the near-term unknowns.
A Wider Perspective
From one angle, the general sentiment has relatively improved from an overly fearful state of March 2009. The existing uptrend has been in place for nearly two years. This run is driven by low rates, increasing complacency/low volatility, and optimism in the decisions of policymakers.
Global investors face few options in the current environment:
- Seek higher-yielding instruments
- Add to trending long-term themes (i.e. commodities and China related)
- Selectively pick quality and monitor some stocks specific ideas
- Stay cautious by managing cash and currency shifts
In addition to these above, legislative response to taxes and business related laws are awaited by those looking to put capital to work. Also, the response of policymakers to interest rates, serve as better guidance to the matters stated above. These issues are at the forefront of financial decision makers and affect general participants as well. Points associated with economic improvement and credit expansion are bound to be scrutinized closely, especially if a sour mood begins to resurface. This is a harsh reminder that navigating in the post 2008 crisis requires increased nimbleness and immediate actions. Veteran pundits are noticing that it takes much work these days to protect capital, while dodging periods of sharp sell-offs.
Article Quotes:
“The catalyst for a resumption of periodic crises came with deregulation in banking and capital markets in the 1970s, together with the emergence of wholesale money markets. With ready access to funds, banks embarked on a dash for growth across the developed world. Property-based financial crises ensued in the mid-1970s in the US and UK; in the mid-1980s in America; in the early 1990s in Japan, the Nordic countries and the UK again; then once again in the English-speaking countries along with Spain from 2007. What lies beneath this increasing tendency for property-induced trouble? ‘The most likely explanation,’ says Lord Desai, emeritus professor at the London School of Economics, ‘is that innovation dried up.’ Property, that is, has acted as a sink for excess liquidity when industry’s demand for funds has been weak.” (Financial Times, January 26, 2011)
“If history is any guide, the price of oil will not rise in a straight line, and the secular uptrend will be punctuated by severe economic recessions. After all, the cure for a high oil price is a high oil price! At some point during the course of this business cycle, as the price of oil continues to rise, it will (once again) cause economic pain for the overstretched citizens of the developed world. When that happens, consumption will slow down and we will experience demand destruction in some parts of the world. In our view, the next economic recession will be caused by yet another spike in the price of oil and during the next business slowdown, crude will get whacked again. This is the reason why we will liquidate all our energy related investments prior to the onset of the next economic recession.” (The Daily Reckoning, January 29, 2011)
Levels:
S&P 500 Index [1276.34] – After a range bound trading pattern, the decline last Friday (Jan 29) was noticeable. Breaking below the 15-day moving average of 1284 serves as the first sign of retracement.
Crude [$89.11] – A downtrend appears to develop after peaking on January 3, 2010—mostly in the $88-90 range and struggling to make new highs. The momentum from last year faces some resistance, but it’s too early to call any top.
Gold [$1334.50] – Noticeable break below $1350. Safe to say, the commodity in entering a consolidation period from escalated levels. However, it remains above its 200-day moving average of 1278.75—a move below that level can create a response.
DXY – US Dollar Index [78.13] – Barely holding above 78. No major significant improvement in the dollar as it awaits policymakers’ decision to stir a catalyst.
US 10 Year Treasury Yields [3.32%] – Finding a steady range between 3.30% and 3.45%. The odds of those levels holding is suspenseful for most.
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.
Bigger Picture
For a long while, geopolitical worries have stayed relatively silent for casual headline followers and slightly-impacted invested participants. Yet, the rising food price is one issue that’s been well addressed and potentially a key catalyst for some turbulence-like conditions. Now, in terms of markets, global tension may serve as an excuse to sell. It should be noted that regardless of political instability, this market was setting up for a consolidation or, at least, a much needed breather. In the past year, inflation in emerging markets and weakness in some European economies presented some minor setbacks to the existing asset appreciation. A downtrend here is not much of a surprise. However, the magnitude of declines provides a better read on market feel.
Previous Clues
Technical observers have pointed out the increasing odds of mean reversion, given the extended broad indexes and commodity markets. Interestingly, Gold prices showcased an early hint of a slowing momentum since early December 2010. On the other hand, Crude strengthened in past few weeks as some expect a further rise in periods of unrest. Obviously, each commodity has its own sensitive response to news. Therefore, identifying few trends in turbulent times remains tricky in the weeks ahead. Meanwhile, the spike in VIX (volatility index) from 16 to 20 last Friday can hardly go unnoticed. Perhaps, a key tipping point and how this plays out is of interest to observers and participants alike. Finally, investment managers may shift focus in the search for hedging tools and attempting not to overreact on the near-term unknowns.
A Wider Perspective
From one angle, the general sentiment has relatively improved from an overly fearful state of March 2009. The existing uptrend has been in place for nearly two years. This run is driven by low rates, increasing complacency/low volatility, and optimism in the decisions of policymakers.
Global investors face few options in the current environment:
- Seek higher-yielding instruments
- Add to trending long-term themes (i.e. commodities and China related)
- Selectively pick quality and monitor some stocks specific ideas
- Stay cautious by managing cash and currency shifts
In addition to these above, legislative response to taxes and business related laws are awaited by those looking to put capital to work. Also, the response of policymakers to interest rates, serve as better guidance to the matters stated above. These issues are at the forefront of financial decision makers and affect general participants as well. Points associated with economic improvement and credit expansion are bound to be scrutinized closely, especially if a sour mood begins to resurface. This is a harsh reminder that navigating in the post 2008 crisis requires increased nimbleness and immediate actions. Veteran pundits are noticing that it takes much work these days to protect capital, while dodging periods of sharp sell-offs.
Article Quotes:
“The catalyst for a resumption of periodic crises came with deregulation in banking and capital markets in the 1970s, together with the emergence of wholesale money markets. With ready access to funds, banks embarked on a dash for growth across the developed world. Property-based financial crises ensued in the mid-1970s in the US and UK; in the mid-1980s in America; in the early 1990s in Japan, the Nordic countries and the UK again; then once again in the English-speaking countries along with Spain from 2007. What lies beneath this increasing tendency for property-induced trouble? ‘The most likely explanation,’ says Lord Desai, emeritus professor at the London School of Economics, ‘is that innovation dried up.’ Property, that is, has acted as a sink for excess liquidity when industry’s demand for funds has been weak.” (Financial Times, January 26, 2011)
“If history is any guide, the price of oil will not rise in a straight line, and the secular uptrend will be punctuated by severe economic recessions. After all, the cure for a high oil price is a high oil price! At some point during the course of this business cycle, as the price of oil continues to rise, it will (once again) cause economic pain for the overstretched citizens of the developed world. When that happens, consumption will slow down and we will experience demand destruction in some parts of the world. In our view, the next economic recession will be caused by yet another spike in the price of oil and during the next business slowdown, crude will get whacked again. This is the reason why we will liquidate all our energy related investments prior to the onset of the next economic recession.” (The Daily Reckoning, January 29, 2011)
Levels:
S&P 500 Index [1276.34] – After a range bound trading pattern, the decline last Friday (Jan 29) was noticeable. Breaking below the 15-day moving average of 1284 serves as the first sign of retracement.
Crude [$89.11] – A downtrend appears to develop after peaking on January 3, 2010—mostly in the $88-90 range and struggling to make new highs. The momentum from last year faces some resistance, but it’s too early to call any top.
Gold [$1334.50] – Noticeable break below $1350. Safe to say, the commodity in entering a consolidation period from escalated levels. However, it remains above its 200-day moving average of 1278.75—a move below that level can create a response.
DXY – US Dollar Index [78.13] – Barely holding above 78. No major significant improvement in the dollar as it awaits policymakers’ decision to stir a catalyst.
US 10 Year Treasury Yields [3.32%] – Finding a steady range between 3.30% and 3.45%. The odds of those levels holding is suspenseful for most.
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, January 24, 2011
Market Outlook | January 24, 2011
“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” - John Quincy Adams
The synchronized upside movement in key asset classes is bound to witness some correction in recent months. As highly documented, for a while, the commodity run seems to need a breather along with broad stock market indexes. Gold and other metals are setting an early tone given recent declines. This pattern has some wondering if food related commodities are the next to see some price adjustments. In other words, the ongoing appreciation in agricultural themes is visible from cotton to corn as demands continue to rise. On a similar point, a few volatility indicators suggest that the period of calmness faces some near-term challenges as one should not discount the odds of minor turbulence. In addition, last week, small cap indexes sharply declined at a faster pace than the S&P 500 Index. For strategists, that signals a lesser tolerance for risk. Finally, earnings season presents investors with various data points to digest. However, the attention is most likely to refocus on macro issues rather than the stock specific factors.
During these periods, money managers will have to consider hedging or selling to take actionable steps on the early hints of a directional shift. As usual, surviving key turbulent cycles is applied by preserving quality and seeking to produce consistent return, especially for those measured by annual returns. Now, the decision making process for a portfolio manager is beyond going with the flow (momentum driven), which has been the case since the summer months. Basically, any fear driven sell-offs can present opportunity to buy innovative ideas at cheaper prices. Similarly, there are fundamental arguments that create a case to sell some overvalued assets linked to basic materials and emerging markets. Of course, longer-term investors are not going to easily bail out on short-term pauses in oil prices and vulnerable trends in the Chinese markets. In some cases, investors with a 5-10 year time frame might be less willing to follow the week to week moving parts while requiring further confirmation of a slowdown. Yet, glancing at pending investor reactions is of interest to all.
In conjunction to price driven adjustments, the interest rate environment can provide valuable clues as to the nature of the next move. Clearly, the interlinked nature of markets is a factor that is felt for active traders. For example, the US 10 Year Treasury Yields have risen from 2.33% to 3.40% since October 2010. In the same period, the BKX (Bank Index) has risen 13%. This is a notable trend that is worth watching to evaluate the correlation of rising rates and appreciation of bank stocks. Simply, the rest of the winter months offer a chance to handpick select financials for those looking for higher risk/reward profiles into the spring and summer months. Once again, the value of closely observing at inflection points helps to accumulate ideas for future entry points. However, a confusing landscape creates further doubts, and this can begin to play out in the days ahead.
Article Quotes:
“Unlike in the mortgage crisis, state debt has not generally been repackaged into opaque, complex securities. Furthermore, and contrary to what many pundits suggest, state governments cannot simply declare bankruptcy. Bondholders are also privileged creditors in almost all states. It is thus difficult for states to default: they would generally have to stop paying employees before they stopped making debt payments. At the local level, however, the situation is different. Many US cities can declare bankruptcy – and given their numbers a severe crisis in at least one major city is both feasible and quite possible...But even if the relevant state government decides not to step in, and a city is forced to default, the direct macroeconomic consequences are unlikely to be substantial – unless that default triggers others to follow.” (Financial Times, January 20, 2011)
“Social Security's nonmarketable bonds are merely markers for actual Treasury bonds, which must be sold, and for which interest must be paid. Thus, Social Security is entirely dependent on the Treasury's sale of new bonds for its future solvency. If interest rates spike or global buyers become wary of buying trillions of dollars in U.S. T-bills, costs for that borrowing will skyrocket, crowding out all other federal spending. As a result, U.S. taxpayers are now paying twice for their Social Security benefits: Once through payroll taxes, and again when the Treasury uses their taxes to pay interest on the bonds it sold to fund Social Security.” (Daily Finance, January 20, 2011)
Levels:
S&P 500 Index [1283.35] – Establishing a new range above 1200 while maintaining an uptrend. Friday’s closing price is 11.24% above the 200-day moving average.
Crude [$89.11] – Near-term pause is forming within a tight range between $88-92 in the past two months.
Gold [$1367] – After holding in above $1350 (key support level), Gold prices have witnessed ongoing declines. A break below $1350 potentially creates further selling pressure.
DXY – US Dollar Index [79.16] – Struggled to break above 81 on two occasions and remains in a fragile territory, given the ongoing downtrend.
US 10 Year Treasury Yields [3.40%] – Holding in near multi-month highs as a rise in rates is becoming an accepted trend in recent weeks. The 50-day moving average stands at 3.16%, which demonstrates an early hint of established strength.
---
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.
The synchronized upside movement in key asset classes is bound to witness some correction in recent months. As highly documented, for a while, the commodity run seems to need a breather along with broad stock market indexes. Gold and other metals are setting an early tone given recent declines. This pattern has some wondering if food related commodities are the next to see some price adjustments. In other words, the ongoing appreciation in agricultural themes is visible from cotton to corn as demands continue to rise. On a similar point, a few volatility indicators suggest that the period of calmness faces some near-term challenges as one should not discount the odds of minor turbulence. In addition, last week, small cap indexes sharply declined at a faster pace than the S&P 500 Index. For strategists, that signals a lesser tolerance for risk. Finally, earnings season presents investors with various data points to digest. However, the attention is most likely to refocus on macro issues rather than the stock specific factors.
During these periods, money managers will have to consider hedging or selling to take actionable steps on the early hints of a directional shift. As usual, surviving key turbulent cycles is applied by preserving quality and seeking to produce consistent return, especially for those measured by annual returns. Now, the decision making process for a portfolio manager is beyond going with the flow (momentum driven), which has been the case since the summer months. Basically, any fear driven sell-offs can present opportunity to buy innovative ideas at cheaper prices. Similarly, there are fundamental arguments that create a case to sell some overvalued assets linked to basic materials and emerging markets. Of course, longer-term investors are not going to easily bail out on short-term pauses in oil prices and vulnerable trends in the Chinese markets. In some cases, investors with a 5-10 year time frame might be less willing to follow the week to week moving parts while requiring further confirmation of a slowdown. Yet, glancing at pending investor reactions is of interest to all.
In conjunction to price driven adjustments, the interest rate environment can provide valuable clues as to the nature of the next move. Clearly, the interlinked nature of markets is a factor that is felt for active traders. For example, the US 10 Year Treasury Yields have risen from 2.33% to 3.40% since October 2010. In the same period, the BKX (Bank Index) has risen 13%. This is a notable trend that is worth watching to evaluate the correlation of rising rates and appreciation of bank stocks. Simply, the rest of the winter months offer a chance to handpick select financials for those looking for higher risk/reward profiles into the spring and summer months. Once again, the value of closely observing at inflection points helps to accumulate ideas for future entry points. However, a confusing landscape creates further doubts, and this can begin to play out in the days ahead.
Article Quotes:
“Unlike in the mortgage crisis, state debt has not generally been repackaged into opaque, complex securities. Furthermore, and contrary to what many pundits suggest, state governments cannot simply declare bankruptcy. Bondholders are also privileged creditors in almost all states. It is thus difficult for states to default: they would generally have to stop paying employees before they stopped making debt payments. At the local level, however, the situation is different. Many US cities can declare bankruptcy – and given their numbers a severe crisis in at least one major city is both feasible and quite possible...But even if the relevant state government decides not to step in, and a city is forced to default, the direct macroeconomic consequences are unlikely to be substantial – unless that default triggers others to follow.” (Financial Times, January 20, 2011)
“Social Security's nonmarketable bonds are merely markers for actual Treasury bonds, which must be sold, and for which interest must be paid. Thus, Social Security is entirely dependent on the Treasury's sale of new bonds for its future solvency. If interest rates spike or global buyers become wary of buying trillions of dollars in U.S. T-bills, costs for that borrowing will skyrocket, crowding out all other federal spending. As a result, U.S. taxpayers are now paying twice for their Social Security benefits: Once through payroll taxes, and again when the Treasury uses their taxes to pay interest on the bonds it sold to fund Social Security.” (Daily Finance, January 20, 2011)
Levels:
S&P 500 Index [1283.35] – Establishing a new range above 1200 while maintaining an uptrend. Friday’s closing price is 11.24% above the 200-day moving average.
Crude [$89.11] – Near-term pause is forming within a tight range between $88-92 in the past two months.
Gold [$1367] – After holding in above $1350 (key support level), Gold prices have witnessed ongoing declines. A break below $1350 potentially creates further selling pressure.
DXY – US Dollar Index [79.16] – Struggled to break above 81 on two occasions and remains in a fragile territory, given the ongoing downtrend.
US 10 Year Treasury Yields [3.40%] – Holding in near multi-month highs as a rise in rates is becoming an accepted trend in recent weeks. The 50-day moving average stands at 3.16%, which demonstrates an early hint of established strength.
---
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, January 17, 2011
Market Outlook | January 17, 2011
“If we would guide by the light of reason, we must let our minds be bold.” - Louis D. Brandeis
At first glance, it seems rosy for those invested in domestic stocks and commodities. The returns of the last seven months (S&P 500 + 27.83%) indicate that going with the flow is a feasible option for now. In the minds of some veterans, a smooth-sailing market behavior has its rewards, but it is prudent to think and stay a step ahead. As usual, facts are needed to justify those worrisome thoughts, especially given the high cost of mistiming momentum. Interestingly, perception mostly tends to dominate financial markets, and facts can become the postmortem exercise. A US economic recovery is painted by leaders and some key data points. Perhaps, this recent pickup is felt in some regions and select industries. Yet, for many, there is a noticeable disparity between the general economy and financial markets that is too big to ignore. Perhaps, this is another age-old lesson that suggests not confusing the market recovery with economic well being.
Now, some ‘savvy’ participants are not cheerleading this glitter-like performance and acknowledging socio-economic factors, such as escalating agricultural prices and increasing regulatory pressures. Of course, money managers are simply asked to produce returns regardless of rhetoric or gloom-and-doom discussions. That being said, the current landscape requires balancing general sentiment while attempting to closely time potential hazards. Interestingly, some are waiting for the ideal entry point as a result of short-term panic. For the stock market, that last major point for a bold buyer was around March 6, 2009. Finding this set up in traditional assets is not an easy task, especially with the volatility index near its lows. Therefore, identifying themes where buyers are rushing to sell is not that obvious. From an opportunity standpoint, innovative ideas with a longer-time horizon are poised to present rewards. In other words, a brave approach in lesser known areas is one alternative to those wanting a better idea for a relatively easier method of chasing momentum.
The threat of inflation is on the radar, and it has become a global discussion from Brazil to South Korea. For the past several months, headlines featured Chinese policymakers taking several measures to cool the ongoing real estate boom. Clearly, the explosive run in emerging markets is hardly new material and heavily discussed in the investment circle. In fact, the FXI (China 25 Index Fund) is not trading all-time highs and is far removed from the October 2007 peak. This displays that investors have taken a closer look, and overall enthusiasm is more tempered than commodity markets. Finally, these above points are highly connected to interest rates and currency imbalances. Therefore, the first quarter should provide some answers in conviction levels and pending catalysts for a change in tone.
Article Quotes:
“Recent data make clear that the risks of a double-dip recession and deflation have ebbed and that economic growth and job creation are beginning to flow. Yet the ships of job-creating investment remain, for the most part, tied to the docks—or worse, choose to sail for foreign ports where tax and regulatory conditions are more favorable, very much in the same way that Ohio, Michigan, New York and California businesses and workers have navigated to Texas. I don’t believe this has much to do with the Fed. None of my business contacts, large or small, publicly held or private, are complaining about the cost of borrowing, the lack of liquidity or the availability of capital. All express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” (Federal Reserve of Dallas, January 12, 2011)
“There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting. One academic said: ‘Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.’…Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become “increasingly disconnected from the fundamentals” but so far has said there is no nationwide bubble.” (The Telegraph, January 16, 2011)
Levels:
S&P 500 Index [1293.24] – Closing at multi-year highs. Clearly, the index is at the highest point since the 2008 crisis.
Crude [$91.54] – The suspense is around the next target of $100 barrel as the momentum is net positive. A very short-term hurdle is at $92.58 set early this year.
Gold [$1367] – Since early November 2010, the commodity has failed to escalate above $1400 on three occasions. It’s in a consolidation mode, and charts suggest higher odds of buyers at $1350.
DXY – US Dollar Index [79.16] – Hovering between $78-80 the last few weeks. In fact, the 50-day moving average stands at $79.54. This illustrates the stagnant behavior in the currency.
US 10 Year Treasury Yields [3.32%] – Holding above 3.30%, a new short-term trend. The recovery since early October 2010 is still in full effect and worth noting as a turning point.
---
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.
At first glance, it seems rosy for those invested in domestic stocks and commodities. The returns of the last seven months (S&P 500 + 27.83%) indicate that going with the flow is a feasible option for now. In the minds of some veterans, a smooth-sailing market behavior has its rewards, but it is prudent to think and stay a step ahead. As usual, facts are needed to justify those worrisome thoughts, especially given the high cost of mistiming momentum. Interestingly, perception mostly tends to dominate financial markets, and facts can become the postmortem exercise. A US economic recovery is painted by leaders and some key data points. Perhaps, this recent pickup is felt in some regions and select industries. Yet, for many, there is a noticeable disparity between the general economy and financial markets that is too big to ignore. Perhaps, this is another age-old lesson that suggests not confusing the market recovery with economic well being.
Now, some ‘savvy’ participants are not cheerleading this glitter-like performance and acknowledging socio-economic factors, such as escalating agricultural prices and increasing regulatory pressures. Of course, money managers are simply asked to produce returns regardless of rhetoric or gloom-and-doom discussions. That being said, the current landscape requires balancing general sentiment while attempting to closely time potential hazards. Interestingly, some are waiting for the ideal entry point as a result of short-term panic. For the stock market, that last major point for a bold buyer was around March 6, 2009. Finding this set up in traditional assets is not an easy task, especially with the volatility index near its lows. Therefore, identifying themes where buyers are rushing to sell is not that obvious. From an opportunity standpoint, innovative ideas with a longer-time horizon are poised to present rewards. In other words, a brave approach in lesser known areas is one alternative to those wanting a better idea for a relatively easier method of chasing momentum.
The threat of inflation is on the radar, and it has become a global discussion from Brazil to South Korea. For the past several months, headlines featured Chinese policymakers taking several measures to cool the ongoing real estate boom. Clearly, the explosive run in emerging markets is hardly new material and heavily discussed in the investment circle. In fact, the FXI (China 25 Index Fund) is not trading all-time highs and is far removed from the October 2007 peak. This displays that investors have taken a closer look, and overall enthusiasm is more tempered than commodity markets. Finally, these above points are highly connected to interest rates and currency imbalances. Therefore, the first quarter should provide some answers in conviction levels and pending catalysts for a change in tone.
Article Quotes:
“Recent data make clear that the risks of a double-dip recession and deflation have ebbed and that economic growth and job creation are beginning to flow. Yet the ships of job-creating investment remain, for the most part, tied to the docks—or worse, choose to sail for foreign ports where tax and regulatory conditions are more favorable, very much in the same way that Ohio, Michigan, New York and California businesses and workers have navigated to Texas. I don’t believe this has much to do with the Fed. None of my business contacts, large or small, publicly held or private, are complaining about the cost of borrowing, the lack of liquidity or the availability of capital. All express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” (Federal Reserve of Dallas, January 12, 2011)
“There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting. One academic said: ‘Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.’…Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become “increasingly disconnected from the fundamentals” but so far has said there is no nationwide bubble.” (The Telegraph, January 16, 2011)
Levels:
S&P 500 Index [1293.24] – Closing at multi-year highs. Clearly, the index is at the highest point since the 2008 crisis.
Crude [$91.54] – The suspense is around the next target of $100 barrel as the momentum is net positive. A very short-term hurdle is at $92.58 set early this year.
Gold [$1367] – Since early November 2010, the commodity has failed to escalate above $1400 on three occasions. It’s in a consolidation mode, and charts suggest higher odds of buyers at $1350.
DXY – US Dollar Index [79.16] – Hovering between $78-80 the last few weeks. In fact, the 50-day moving average stands at $79.54. This illustrates the stagnant behavior in the currency.
US 10 Year Treasury Yields [3.32%] – Holding above 3.30%, a new short-term trend. The recovery since early October 2010 is still in full effect and worth noting as a turning point.
---
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, January 10, 2011
Market Outlook | January 10, 2011
“To treat your facts with imagination is one thing, but to imagine your facts is another.” - John Burroughs (1837-1921)
Participants are slowly getting back to examining and reconfirming data that is sensitive to market movement while attempting to gauge overall sentiment. So far, it is the same story, until this uptrend presents some decline. That is the unknown that is driving up curiosity. Once again, momentum is a powerful force as witnessed in the rise of commodities and stock prices. Inversely, a downside momentum in the US dollar and interest rates is a forceful pattern in global trade. Simply, any shift of these established trends increases the suspense and leads to a noticeable reaction, which is dreaded daily in the opinion pages. Now, global risk appetite is healthy, based on upbeat market sentiment, positive performance data, and inflation in emerging markets.
The interlinked global market will require public and private participants to successfully manage rising food prices and adjust to impactful currency trends and other policies related to business operations. At the same time, policymakers will have to balance worries of sovereign defaults while spurring a perceived recovery. There are socioeconomic factors that persist in the current landscape beyond the usual investment circle challenges. In other words, the investor’s dilemma is closely tied to voter demand, and this can intensify. Perhaps, these macro issues seep into the mindset of lawmakers and consequently lead to a political topic outside the control of financial circles. In the near term, the response to the growing emerging market inflation and “currency wars” should set the overall tone.
At this junction, it is vital for participants to isolate a quarterly bet versus long-term trends when picking ideas. Clearly, the speculative game heavily requires accuracy in timing more than a longer-term investment. Now, traditional money managers define their investment horizon, making it a focused approach, and that has its merits. Therefore, at inflection points, it generally pays to observe and to stay patient versus reshuffling portfolios aggressively. Finally, opportunities in Merger & Acquisitions are catching the attention of dealmakers, given the attractive marketplace, as larger firms look to take advantage. Mega deals are bound to create biases in certain groups and, in turn, influence the buying demand of select stocks.
Specific Ideas
Despite being extended in the short-term, the shares of ARUN (Aruba Networks) offer an attractive exposure in the networking and communication group. The company’s sales grew over 85% in the past 5 years. This demonstrates strength, and it is noticed by shareholders. Broad market declines and price weakness can present a buy point on pullbacks.
MIG (Meadowbrook Insurance Group, Inc.) is worth a look, especially for investors looking for conservative ideas in financial services. The company specializes in property and causality and provides risk management products. After trading at historic lows of $1.02 in November 2002, MIG’s stock has slowly recovered in conjunction with its overall fundamentals. Interestingly, unlike the broad markets, the company’s shares peaked in 1998 and not 2008. Therefore, it appears to offer further room for upside growth, especially after a decade of declines and relative attractiveness.
Article Quotes:
“When an individual purchases a home, far from stimulating productivity, the purchaser instead simply transfers wealth to another individual. More to the point, an investment in property cannot help cure cancer, lead to the creation of efficiency-enhancing software or any capital good that makes us more productive, nor will it open foreign markets. A house is just a house, and not a gateway to other investment opportunities. When capital flows in the direction of property, on the margin, the productive parts of the economy suffer a capital deficit. And since the Fed's balance-sheet expansions boost the demand for mortgage-backed securities, the central bank is explicitly subsidizing increased capital flows in the direction of consumption at the expense of wealth-enhancing production.” (Realclearmarkets.com January 6, 2011)
“Currency appreciation, an improved social safety net, democratisation of credit – all these things if applied in China would no doubt help narrow the Chinese surplus by making exports less competitive and encouraging consumption, but they would be most unlikely to demolish the underlying savings glut, and in any case, social security and credit reform will take years, possibly decades, to implement in a meaningful way. A current account surplus, it should be pointed out, is only the mirror image of a capital surplus. If there is an excess of savings, the consequent excess of goods will be exported.” (The Telegraph, January 7, 2011)
Levels:
S&P 500 Index [1271.50] – Positive momentum remains in place as the run since March 2009 showcases ongoing recovery. The index is 10.67% above a 200-day moving average.
Crude [$88.03] – Maintaining its uptrend that was established in the summer. The commodity’s ability to hold above $88 will provide a better clue early in the 1st quarter.
Gold [$1368.90] – Consolidating in the current trading range between $1350 and $1400. This is a decisive point as buyers wait for discounts and sellers feel like early pullbacks. Yet, the force of this long-term run remains too strong.
DXY – US Dollar Index [81.02] – A 7% appreciation since the lows on November 4th and suggesting an early recovery in the US Dollar. However, this index is far removed from its summer highs of 88.70.
US 10 Year Treasury Yields [3.32%] – Near-term consolidation as yields attempt to hold 3.20%. This reflects a new range after a three months trend of rising rates.
---
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.
Participants are slowly getting back to examining and reconfirming data that is sensitive to market movement while attempting to gauge overall sentiment. So far, it is the same story, until this uptrend presents some decline. That is the unknown that is driving up curiosity. Once again, momentum is a powerful force as witnessed in the rise of commodities and stock prices. Inversely, a downside momentum in the US dollar and interest rates is a forceful pattern in global trade. Simply, any shift of these established trends increases the suspense and leads to a noticeable reaction, which is dreaded daily in the opinion pages. Now, global risk appetite is healthy, based on upbeat market sentiment, positive performance data, and inflation in emerging markets.
The interlinked global market will require public and private participants to successfully manage rising food prices and adjust to impactful currency trends and other policies related to business operations. At the same time, policymakers will have to balance worries of sovereign defaults while spurring a perceived recovery. There are socioeconomic factors that persist in the current landscape beyond the usual investment circle challenges. In other words, the investor’s dilemma is closely tied to voter demand, and this can intensify. Perhaps, these macro issues seep into the mindset of lawmakers and consequently lead to a political topic outside the control of financial circles. In the near term, the response to the growing emerging market inflation and “currency wars” should set the overall tone.
At this junction, it is vital for participants to isolate a quarterly bet versus long-term trends when picking ideas. Clearly, the speculative game heavily requires accuracy in timing more than a longer-term investment. Now, traditional money managers define their investment horizon, making it a focused approach, and that has its merits. Therefore, at inflection points, it generally pays to observe and to stay patient versus reshuffling portfolios aggressively. Finally, opportunities in Merger & Acquisitions are catching the attention of dealmakers, given the attractive marketplace, as larger firms look to take advantage. Mega deals are bound to create biases in certain groups and, in turn, influence the buying demand of select stocks.
Specific Ideas
Despite being extended in the short-term, the shares of ARUN (Aruba Networks) offer an attractive exposure in the networking and communication group. The company’s sales grew over 85% in the past 5 years. This demonstrates strength, and it is noticed by shareholders. Broad market declines and price weakness can present a buy point on pullbacks.
MIG (Meadowbrook Insurance Group, Inc.) is worth a look, especially for investors looking for conservative ideas in financial services. The company specializes in property and causality and provides risk management products. After trading at historic lows of $1.02 in November 2002, MIG’s stock has slowly recovered in conjunction with its overall fundamentals. Interestingly, unlike the broad markets, the company’s shares peaked in 1998 and not 2008. Therefore, it appears to offer further room for upside growth, especially after a decade of declines and relative attractiveness.
Article Quotes:
“When an individual purchases a home, far from stimulating productivity, the purchaser instead simply transfers wealth to another individual. More to the point, an investment in property cannot help cure cancer, lead to the creation of efficiency-enhancing software or any capital good that makes us more productive, nor will it open foreign markets. A house is just a house, and not a gateway to other investment opportunities. When capital flows in the direction of property, on the margin, the productive parts of the economy suffer a capital deficit. And since the Fed's balance-sheet expansions boost the demand for mortgage-backed securities, the central bank is explicitly subsidizing increased capital flows in the direction of consumption at the expense of wealth-enhancing production.” (Realclearmarkets.com January 6, 2011)
“Currency appreciation, an improved social safety net, democratisation of credit – all these things if applied in China would no doubt help narrow the Chinese surplus by making exports less competitive and encouraging consumption, but they would be most unlikely to demolish the underlying savings glut, and in any case, social security and credit reform will take years, possibly decades, to implement in a meaningful way. A current account surplus, it should be pointed out, is only the mirror image of a capital surplus. If there is an excess of savings, the consequent excess of goods will be exported.” (The Telegraph, January 7, 2011)
Levels:
S&P 500 Index [1271.50] – Positive momentum remains in place as the run since March 2009 showcases ongoing recovery. The index is 10.67% above a 200-day moving average.
Crude [$88.03] – Maintaining its uptrend that was established in the summer. The commodity’s ability to hold above $88 will provide a better clue early in the 1st quarter.
Gold [$1368.90] – Consolidating in the current trading range between $1350 and $1400. This is a decisive point as buyers wait for discounts and sellers feel like early pullbacks. Yet, the force of this long-term run remains too strong.
DXY – US Dollar Index [81.02] – A 7% appreciation since the lows on November 4th and suggesting an early recovery in the US Dollar. However, this index is far removed from its summer highs of 88.70.
US 10 Year Treasury Yields [3.32%] – Near-term consolidation as yields attempt to hold 3.20%. This reflects a new range after a three months trend of rising rates.
---
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, January 03, 2011
Market Outlook| January 3, 2011
“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” - T.S. Eliot
General Feel
In 2010, the winning themes included the decade old commodities and Emerging Markets as well as relatively cheaper and riskier assets. For bargain hunters, there were rewarding bets in the US from small cap growth to corporate bonds. The appreciation in value of “risky” assets is mostly caused by a bounce from highly depressed levels as a result of the 2008 crisis. Perhaps, this puts things in perspective as the majority sold while in a panic mode and then potentially created a rebirth of a new cycle. Yet, the few, daring risk-takers profited on accumulating in the spring of 2009, an era of fierce and mostly justified skepticism. These days, being a buyer of a global asset is hardly classified as a daring move, given that consensus view is not as bearish. At least, pessimism appears relatively tame, based on traditional barometers. The volatility index closed the year towards its lows, suggesting a calmer and less turbulent near-term outlook. Needless to say, this comfort is more of a reflection of the past rather than a hint into the future.
One should acknowledge that making judgment on a little over two-year period can be misleading. Therefore, it begs the following key question: Are recent gains a move towards normalization or an extended run poised for pullbacks? The suspense of answering this question is bound to play out in the day-to-day news flow, and these thoughts should float in the minds of asset managers. The heart of this curious question above is centered on interest rates and currency expectations. Importantly, key decision makers and influential participants can set the general tone. Clearly, policymakers’ recent decisions of low rates have driven corporate bond sales and stimulated additional loan issuance. For example, “Corporate bond sales worldwide topped $3 trillion for a second straight year.” (Bloomberg, December 30, 2010).
Managing Expectations
The anticipation among pundits of rising rates does not quite serve as a surprise in the financial circles. However, the market consequences and participant response is the unknown that can damage unequipped portfolios. The rate and currency speculation is bound to be highly debated and contested among buyers and sellers. At the same time, the explosive run in natural resources and further growth in Emerging Markets is most likely to correspond with currency behaviors. Simply, the synchronized price appreciation of global assets resembles the pattern of 2007. Interestingly, the last six months resemble that unified and uninterrupted movement. That said, any sudden shifts in macro trends, such as a significant rise in the US Dollar, can lead to a sensitive reaction and eventually labeled as a surprise. Therefore, this time around, unlike fearful periods of spring 2009, the opportunities might be presented for those staying patient while keenly observing. In other words, chasing rewards in this smooth sailing uptrend might prove trickier than advertised by marketplace chatter.
Article Quotes:
“The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since). Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, i.e. have mortgages in excess of the current value of the property” (Financial Times, December 30, 2010)
“The rest of Europe is now talking about imposing penalties on private-sector lenders in future rescues. That will turn each crisis into a game of chicken as bondholders sell before they get penalised. And financing packages do not deal with an underlying lack of competitiveness in many European economies. Without the ability to devalue, the restoration of competitiveness requires painful austerity measures and wage restraint. That leads to another potential flashpoint for 2011: the lack of global co-ordination. Gone is the consensus seen at the G20 meeting in April 2009. Europe will be pursuing austerity, China is trying to rein in bank lending but America has opted for another fiscal stimulus. This is a throwback to pre-crisis 2007, with American deficit-financed consumption set against Chinese surplus-creating exports” (The Economist, December 29, 2010)
Levels:
S&P 500 Index [1257.64] – The index finished 2010, up 12.8%. Above 1200 suggests an established uptrend. Minor pullbacks can confirm the magnitude of buyers’ conviction.
Crude [$91.38] – Since late August, the commodity has risen nearly 30%. Recently, buyers’ interest increased around $88 a barrel. Clearly, a move above a psychological $100 range creates further curiosity and contributes to ongoing herding.
Gold [$1405.50] – Since the crisis of fall 2008, the commodity has nearly doubled. This proves the momentum driven behavior which contributes to some fears for those considering selling.
DXY – US Dollar Index [79.02] – In the past few weeks, several short-lived rallies and minor declines that keep the index around a familiar and stagnant territory. Fair to say range bound, yet again.
US 10 Year Treasury Yields [3.29%] – Since late October 2008, Yields rose by nearly 100 basis points. This is a noticeable and highly watched macro trend.
-----
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.
General Feel
In 2010, the winning themes included the decade old commodities and Emerging Markets as well as relatively cheaper and riskier assets. For bargain hunters, there were rewarding bets in the US from small cap growth to corporate bonds. The appreciation in value of “risky” assets is mostly caused by a bounce from highly depressed levels as a result of the 2008 crisis. Perhaps, this puts things in perspective as the majority sold while in a panic mode and then potentially created a rebirth of a new cycle. Yet, the few, daring risk-takers profited on accumulating in the spring of 2009, an era of fierce and mostly justified skepticism. These days, being a buyer of a global asset is hardly classified as a daring move, given that consensus view is not as bearish. At least, pessimism appears relatively tame, based on traditional barometers. The volatility index closed the year towards its lows, suggesting a calmer and less turbulent near-term outlook. Needless to say, this comfort is more of a reflection of the past rather than a hint into the future.
One should acknowledge that making judgment on a little over two-year period can be misleading. Therefore, it begs the following key question: Are recent gains a move towards normalization or an extended run poised for pullbacks? The suspense of answering this question is bound to play out in the day-to-day news flow, and these thoughts should float in the minds of asset managers. The heart of this curious question above is centered on interest rates and currency expectations. Importantly, key decision makers and influential participants can set the general tone. Clearly, policymakers’ recent decisions of low rates have driven corporate bond sales and stimulated additional loan issuance. For example, “Corporate bond sales worldwide topped $3 trillion for a second straight year.” (Bloomberg, December 30, 2010).
Managing Expectations
The anticipation among pundits of rising rates does not quite serve as a surprise in the financial circles. However, the market consequences and participant response is the unknown that can damage unequipped portfolios. The rate and currency speculation is bound to be highly debated and contested among buyers and sellers. At the same time, the explosive run in natural resources and further growth in Emerging Markets is most likely to correspond with currency behaviors. Simply, the synchronized price appreciation of global assets resembles the pattern of 2007. Interestingly, the last six months resemble that unified and uninterrupted movement. That said, any sudden shifts in macro trends, such as a significant rise in the US Dollar, can lead to a sensitive reaction and eventually labeled as a surprise. Therefore, this time around, unlike fearful periods of spring 2009, the opportunities might be presented for those staying patient while keenly observing. In other words, chasing rewards in this smooth sailing uptrend might prove trickier than advertised by marketplace chatter.
Article Quotes:
“The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since). Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, i.e. have mortgages in excess of the current value of the property” (Financial Times, December 30, 2010)
“The rest of Europe is now talking about imposing penalties on private-sector lenders in future rescues. That will turn each crisis into a game of chicken as bondholders sell before they get penalised. And financing packages do not deal with an underlying lack of competitiveness in many European economies. Without the ability to devalue, the restoration of competitiveness requires painful austerity measures and wage restraint. That leads to another potential flashpoint for 2011: the lack of global co-ordination. Gone is the consensus seen at the G20 meeting in April 2009. Europe will be pursuing austerity, China is trying to rein in bank lending but America has opted for another fiscal stimulus. This is a throwback to pre-crisis 2007, with American deficit-financed consumption set against Chinese surplus-creating exports” (The Economist, December 29, 2010)
Levels:
S&P 500 Index [1257.64] – The index finished 2010, up 12.8%. Above 1200 suggests an established uptrend. Minor pullbacks can confirm the magnitude of buyers’ conviction.
Crude [$91.38] – Since late August, the commodity has risen nearly 30%. Recently, buyers’ interest increased around $88 a barrel. Clearly, a move above a psychological $100 range creates further curiosity and contributes to ongoing herding.
Gold [$1405.50] – Since the crisis of fall 2008, the commodity has nearly doubled. This proves the momentum driven behavior which contributes to some fears for those considering selling.
DXY – US Dollar Index [79.02] – In the past few weeks, several short-lived rallies and minor declines that keep the index around a familiar and stagnant territory. Fair to say range bound, yet again.
US 10 Year Treasury Yields [3.29%] – Since late October 2008, Yields rose by nearly 100 basis points. This is a noticeable and highly watched macro trend.
-----
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, December 20, 2010
Market Outlook | December 20, 2010
“Industry, perseverance, and frugality make fortune yield.” - Benjamin Franklin
The overall optimism is slowly rising among investment circles, given the positive market performance. Clearly, the early divers and risk takers acknowledge the rewards today. Meanwhile, majority pundits are compelled to recommend buying, and that is after the evidence of further appreciation is presented. Now, participants should be wary of hearing and reading calls that are too optimistic. Instead, it might be wiser to acknowledge that future turbulence is part of the equation even in a positive environment. Despite the connivance of making annual predictions, the mood and pattern of the first quarter sets up the psychological outlook. Therefore, surviving the early part of 2011 without a severe damage should be a key goal to consider in managing longer-term portfolios.
The next six weeks present a tricky climate for making investment decisions. Therefore, observing these issues below might be fruitful:
- Lower trading volume around the holiday season creates a difficult gauge of high conviction movements.
- Potential selling or capital preservation in the first quarter is inevitable as managers reexamine ideas and wait to manage headline sensitive issues.
- Macro trend shifts find a way to transpire at the start of new seasons.
- Commodities appear to near a mild inflection point.
- Continuation of rising rates cast some doubts on rate sensitive instruments.
- Volatility is relatively low and can lead to misleading optimism.
- Assuming further decline in US Dollar is not necessarily a safe bet.
To expand on the thoughts above, analysts appear to be in agreement on a positive feel, which should make one take a step back. Interestingly, VIX (Volatility Index) is nearing annual lows, which suggest further complacency and a growing comfort on continuation of this uptrend. Yet, those can be riskier periods as the Volatility Index reached its lowest point on April 16, 2010, eventually leading to sharp sell-offs. Usually, patterns do not repeat themselves in the same form. However, some junction of a cycle calls for caution in timing and selecting specific ideas.
On the other hand, there have been several worrisome issues that received plenty of attention beyond the weakness of labor and economic growth. For example, the various concerns of European economics, such as Greece and Ireland, were debated for the most part of this year. Perhaps, this is a multi-year theme that is not easy to shake off. Thus, this leads to some realignment of capital among investment managers. Interestingly, in looking ahead, we should note that surprises are likely to occur as displayed in various cycles in market history.
The surprise element of a downturn is most likely to come from the least expected area. In other words, the European issues were highly publicized, and the impact dictated sell-offs and polices. Conversely, the potential of growing bubble-like patterns in Emerging Markets is less discussed and potentially an underestimated theme. Thus, the survival mode of the early part of 2011 should take this factor in strong consideration. Generally, outliers are not accounted for risk management tools and in the mindsets of groupthink. However, managing surprises and avoiding major hits on unknown events enhances the longevity of investors. Finally, let’s not forgot that attractive entry points are most likely to present themselves at least once or twice in any calendar year. Once these points are identified, then being aggressive makes relative sense.
Happy Holidays and a healthy New Year!
Article Quotes:
“The authorities are making at least two mistakes. One is that they are determined to avoid defaults or haircuts on currently outstanding sovereign debt for fear of provoking a banking crisis. The bondholders of insolvent banks are being protected at the expense of taxpayers. This is politically unacceptable. A new Irish government to be elected next spring is bound to repudiate the current arrangements. Markets recognise this and that is why the Irish rescue brought no relief. Second, high interest rates on rescue packages make it impossible for the weaker countries to improve their competitiveness vis-Ã -vis the stronger ones. Resentment between creditors and debtors is liable to grow and there is a real danger that the euro may destroy the political and social cohesion of the EU.” (George Soros Financial Times, December 15, 2010)
“In some respects, this historical sketch is reassuring. It suggests that, even when currency tensions appear to have degenerated into competitive devaluations in the past, the main motive for devaluation lay elsewhere, principally in the need to align the exchange rate with domestic policies. But that is also the bad news. It suggests that, unless politically thorny domestic reforms are tackled, currency tensions will continue to fester, and may escalate. Currency tensions could contribute to inappropriate macroeconomic policy responses, deterioration in international relations, and protectionism (though not necessarily in the form of competitive devaluations), especially if the global macroeconomic environment worsens. How can we avoid this? The answer takes two forms: encouraging greater exchange-rate flexibility and, more crucially, enacting domestic reforms in the core countries.” (VOX, December 20, 2010)
Levels:
S&P 500 Index [1243.91] – A climb above 1200, suggests the cycle recovery of the post credit crisis era.
Crude [$88.02] – A move above $85 solidifies stability and resurgence in buyer interest.
Gold [$1368.50] – Few weeks of trading showcase a trading range between 1350 and 1400. Much attention will be paid on the next move outside of these tight ranges. Overall, a breather here seems appropriate, given the uptrend for nearly 11 months.
DXY – US Dollar Index [80.73] – Nearly an 8% rise since November 4, 2010—a near-term recovery, but a longer-term stability. At this stage, a directional bias is not clearly defined.
US 10 Year Treasury Yields [3.31%] – An explosive rise here in the fourth quarter, possibly setting up for a near-term correction. However, recent move is highly noteworthy in terms of grasping the longer-term cycle.
Please note: The next MarketTakers will be published on January 3, 2011.
-----
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.
The overall optimism is slowly rising among investment circles, given the positive market performance. Clearly, the early divers and risk takers acknowledge the rewards today. Meanwhile, majority pundits are compelled to recommend buying, and that is after the evidence of further appreciation is presented. Now, participants should be wary of hearing and reading calls that are too optimistic. Instead, it might be wiser to acknowledge that future turbulence is part of the equation even in a positive environment. Despite the connivance of making annual predictions, the mood and pattern of the first quarter sets up the psychological outlook. Therefore, surviving the early part of 2011 without a severe damage should be a key goal to consider in managing longer-term portfolios.
The next six weeks present a tricky climate for making investment decisions. Therefore, observing these issues below might be fruitful:
- Lower trading volume around the holiday season creates a difficult gauge of high conviction movements.
- Potential selling or capital preservation in the first quarter is inevitable as managers reexamine ideas and wait to manage headline sensitive issues.
- Macro trend shifts find a way to transpire at the start of new seasons.
- Commodities appear to near a mild inflection point.
- Continuation of rising rates cast some doubts on rate sensitive instruments.
- Volatility is relatively low and can lead to misleading optimism.
- Assuming further decline in US Dollar is not necessarily a safe bet.
To expand on the thoughts above, analysts appear to be in agreement on a positive feel, which should make one take a step back. Interestingly, VIX (Volatility Index) is nearing annual lows, which suggest further complacency and a growing comfort on continuation of this uptrend. Yet, those can be riskier periods as the Volatility Index reached its lowest point on April 16, 2010, eventually leading to sharp sell-offs. Usually, patterns do not repeat themselves in the same form. However, some junction of a cycle calls for caution in timing and selecting specific ideas.
On the other hand, there have been several worrisome issues that received plenty of attention beyond the weakness of labor and economic growth. For example, the various concerns of European economics, such as Greece and Ireland, were debated for the most part of this year. Perhaps, this is a multi-year theme that is not easy to shake off. Thus, this leads to some realignment of capital among investment managers. Interestingly, in looking ahead, we should note that surprises are likely to occur as displayed in various cycles in market history.
The surprise element of a downturn is most likely to come from the least expected area. In other words, the European issues were highly publicized, and the impact dictated sell-offs and polices. Conversely, the potential of growing bubble-like patterns in Emerging Markets is less discussed and potentially an underestimated theme. Thus, the survival mode of the early part of 2011 should take this factor in strong consideration. Generally, outliers are not accounted for risk management tools and in the mindsets of groupthink. However, managing surprises and avoiding major hits on unknown events enhances the longevity of investors. Finally, let’s not forgot that attractive entry points are most likely to present themselves at least once or twice in any calendar year. Once these points are identified, then being aggressive makes relative sense.
Happy Holidays and a healthy New Year!
Article Quotes:
“The authorities are making at least two mistakes. One is that they are determined to avoid defaults or haircuts on currently outstanding sovereign debt for fear of provoking a banking crisis. The bondholders of insolvent banks are being protected at the expense of taxpayers. This is politically unacceptable. A new Irish government to be elected next spring is bound to repudiate the current arrangements. Markets recognise this and that is why the Irish rescue brought no relief. Second, high interest rates on rescue packages make it impossible for the weaker countries to improve their competitiveness vis-Ã -vis the stronger ones. Resentment between creditors and debtors is liable to grow and there is a real danger that the euro may destroy the political and social cohesion of the EU.” (George Soros Financial Times, December 15, 2010)
“In some respects, this historical sketch is reassuring. It suggests that, even when currency tensions appear to have degenerated into competitive devaluations in the past, the main motive for devaluation lay elsewhere, principally in the need to align the exchange rate with domestic policies. But that is also the bad news. It suggests that, unless politically thorny domestic reforms are tackled, currency tensions will continue to fester, and may escalate. Currency tensions could contribute to inappropriate macroeconomic policy responses, deterioration in international relations, and protectionism (though not necessarily in the form of competitive devaluations), especially if the global macroeconomic environment worsens. How can we avoid this? The answer takes two forms: encouraging greater exchange-rate flexibility and, more crucially, enacting domestic reforms in the core countries.” (VOX, December 20, 2010)
Levels:
S&P 500 Index [1243.91] – A climb above 1200, suggests the cycle recovery of the post credit crisis era.
Crude [$88.02] – A move above $85 solidifies stability and resurgence in buyer interest.
Gold [$1368.50] – Few weeks of trading showcase a trading range between 1350 and 1400. Much attention will be paid on the next move outside of these tight ranges. Overall, a breather here seems appropriate, given the uptrend for nearly 11 months.
DXY – US Dollar Index [80.73] – Nearly an 8% rise since November 4, 2010—a near-term recovery, but a longer-term stability. At this stage, a directional bias is not clearly defined.
US 10 Year Treasury Yields [3.31%] – An explosive rise here in the fourth quarter, possibly setting up for a near-term correction. However, recent move is highly noteworthy in terms of grasping the longer-term cycle.
Please note: The next MarketTakers will be published on January 3, 2011.
-----
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, December 13, 2010
Market Outlook | December 13, 2010
“The illusion which exalts us is dearer to us then ten-thousand truths.” - Alexander Pushkin
Down the Stretch
The current global theme can be summed up by synchronized asset appreciation as witnessed again by the activity last week. This strength in markets has been a prevailing theme, especially since the summer lows. Now the year-to-date returns showcase an 11.2% gain for the S&P 500 Index, and the more aggressive Russell Small Cap is up 24.2%. This performance alone serves as an attractive selling point to sideline observers who would look to reexamine entering next year. For those setting resolution and planning to reflect in the holiday season, it is a good time to ask where we’ve come from since the chaotic stage of 2008. Importantly, long-term investors need a solid grasp of inflection points while not attempting to overemphasize recent behaviors.
A Point of View
Interestingly, the spring of 2009, embarked an era of post-crisis and set the stage for a new cycle that is upon us. Since March 6, 2009, the S&P 500 Index has appreciated by 86%. In the same period, Gold is up nearly 47%. This is a perspective that may go unnoticed when gauging the mindset of investors. Now, these numbers might surprise those observers consumed in the day-to-day. In other words, these raw numbers serve as a barometer for providing some perspective and are helpful in mapping out a plan of attack for the next 3-6 months, while staying flexible for the unknowns.
Meanwhile, overall sentiment can convey a different message at times, especially when tracking real economic data, political posturing, or legal discussions. In looking back, it is vital to clarify that picking exact bottoms and dodging painful tops is the most daunting task for participants across various cycles. However, the last 21 months have showcased resilience in the marketplace, and at this point, the uptrend has been restored. Thus, the challenge is to specifically position investments in areas that will continue to build on this post-crisis recovery.
Glancing Ahead
As pundits submit their 2011 predictions, there is little ongoing suspense that’s mostly related to the faith of rising rates. As usual, the scramble of deciphering rates impacts issues tied to Federal Reserve policies, continued inflow into fixed income products, and relative attractiveness of other asset classes. The past three months demonstrate resurgence in Yields. In turn, this begs the question of any potential trend reversal, not only in US 10 Year Treasury Yields, but also in other themes that have worked in the past decade or two. In other words, the complacency of assuming “sure bets” in the rise of China, weakening Dollar, lower rates, and rising commodities might be challenged. Now, money managers will remind us, in the past, doubting these trends have been a costly proposition, and the trend has paid off. As usual, it is worth entertaining, especially to at least identifying catalysts before the next fear-driven movement. Perhaps, this is one area worth watching before raising the stakes in the first quarter of 2011.
Article Quotes:
“In reality, the retail sector added just over 300,000 new hires in the month of November. But the Labor Department didn't count those hires. That's because the Labor Department's final number of employment is seasonally adjusted. And since the retail sector disproportionately adds more workers this time of the year than the other 10 months, the Labor Department adjusts down the sector's employment numbers in November and December. So retail employment gets over counted in January and February when hiring is slow, and undercounted in November and December. The reason is to smooth the numbers, but it also distorts, particularly at times like these when the economy is hopefully at an inflection point.” (Salon.com, December 9, 2010)
“The Fed announced that it intends to buy $600 B in debt over an 8-month period beginning in November, or about $75 B each month. But that turns out to be about the size of new monthly issues of debt in the 2-1/2 to 10 year range. So if the Treasury were to continue to issue debt in the amounts and proportions that it has been over the last year, the Fed would only end up absorbing the new debt in this category over the next 6 months, while the amount that is less than 2-1/2 years or greater than 10 years would continue to grow….. The effects of the combined actions by the Treasury and the Fed would be to increase rather than decrease long-term interest rates.” (Econbrowser, December 11, 2010)
Levels:
S&P 500 Index [1240.40] – Year-end rally contributing to annual highs. The established uptrend since early September proved to erase summer losses and a continued re-acceleration. This momentum is positive as odds for minor pullbacks increase in weeks ahead.
Crude [$87.89] – As the commodity trades above $85, it mostly confirms the recent resurgence in recent weeks. Yet, the yearly behavior has mostly witnessed a sideways pattern.
Gold [$1375.25] – Noteworthy developments in the past month. The commodity peaked at $1421 on November 9, 2010, and topped again at $1420 on December 7, 2010. One can surmise that buying interest is waning or at least taking a pause at those levels. That said, this is just an early clue in an existing uptrend. However, a break below can create noticeable reactions on the trend.
DXY – US Dollar Index [79.37] – After stumbling in value the last two months, the DXY is back at a familiar range of 80. In the near-term, this simply suggests relative stability.
US 10 Year Treasury Yields [3.31%] – An explosive run up in the past few months. Yields have gone from 2.33% in early October to soaring above 3%. This is a vital macro trend as the curiosity looms regarding the sustainability of this run.
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.
Down the Stretch
The current global theme can be summed up by synchronized asset appreciation as witnessed again by the activity last week. This strength in markets has been a prevailing theme, especially since the summer lows. Now the year-to-date returns showcase an 11.2% gain for the S&P 500 Index, and the more aggressive Russell Small Cap is up 24.2%. This performance alone serves as an attractive selling point to sideline observers who would look to reexamine entering next year. For those setting resolution and planning to reflect in the holiday season, it is a good time to ask where we’ve come from since the chaotic stage of 2008. Importantly, long-term investors need a solid grasp of inflection points while not attempting to overemphasize recent behaviors.
A Point of View
Interestingly, the spring of 2009, embarked an era of post-crisis and set the stage for a new cycle that is upon us. Since March 6, 2009, the S&P 500 Index has appreciated by 86%. In the same period, Gold is up nearly 47%. This is a perspective that may go unnoticed when gauging the mindset of investors. Now, these numbers might surprise those observers consumed in the day-to-day. In other words, these raw numbers serve as a barometer for providing some perspective and are helpful in mapping out a plan of attack for the next 3-6 months, while staying flexible for the unknowns.
Meanwhile, overall sentiment can convey a different message at times, especially when tracking real economic data, political posturing, or legal discussions. In looking back, it is vital to clarify that picking exact bottoms and dodging painful tops is the most daunting task for participants across various cycles. However, the last 21 months have showcased resilience in the marketplace, and at this point, the uptrend has been restored. Thus, the challenge is to specifically position investments in areas that will continue to build on this post-crisis recovery.
Glancing Ahead
As pundits submit their 2011 predictions, there is little ongoing suspense that’s mostly related to the faith of rising rates. As usual, the scramble of deciphering rates impacts issues tied to Federal Reserve policies, continued inflow into fixed income products, and relative attractiveness of other asset classes. The past three months demonstrate resurgence in Yields. In turn, this begs the question of any potential trend reversal, not only in US 10 Year Treasury Yields, but also in other themes that have worked in the past decade or two. In other words, the complacency of assuming “sure bets” in the rise of China, weakening Dollar, lower rates, and rising commodities might be challenged. Now, money managers will remind us, in the past, doubting these trends have been a costly proposition, and the trend has paid off. As usual, it is worth entertaining, especially to at least identifying catalysts before the next fear-driven movement. Perhaps, this is one area worth watching before raising the stakes in the first quarter of 2011.
Article Quotes:
“In reality, the retail sector added just over 300,000 new hires in the month of November. But the Labor Department didn't count those hires. That's because the Labor Department's final number of employment is seasonally adjusted. And since the retail sector disproportionately adds more workers this time of the year than the other 10 months, the Labor Department adjusts down the sector's employment numbers in November and December. So retail employment gets over counted in January and February when hiring is slow, and undercounted in November and December. The reason is to smooth the numbers, but it also distorts, particularly at times like these when the economy is hopefully at an inflection point.” (Salon.com, December 9, 2010)
“The Fed announced that it intends to buy $600 B in debt over an 8-month period beginning in November, or about $75 B each month. But that turns out to be about the size of new monthly issues of debt in the 2-1/2 to 10 year range. So if the Treasury were to continue to issue debt in the amounts and proportions that it has been over the last year, the Fed would only end up absorbing the new debt in this category over the next 6 months, while the amount that is less than 2-1/2 years or greater than 10 years would continue to grow….. The effects of the combined actions by the Treasury and the Fed would be to increase rather than decrease long-term interest rates.” (Econbrowser, December 11, 2010)
Levels:
S&P 500 Index [1240.40] – Year-end rally contributing to annual highs. The established uptrend since early September proved to erase summer losses and a continued re-acceleration. This momentum is positive as odds for minor pullbacks increase in weeks ahead.
Crude [$87.89] – As the commodity trades above $85, it mostly confirms the recent resurgence in recent weeks. Yet, the yearly behavior has mostly witnessed a sideways pattern.
Gold [$1375.25] – Noteworthy developments in the past month. The commodity peaked at $1421 on November 9, 2010, and topped again at $1420 on December 7, 2010. One can surmise that buying interest is waning or at least taking a pause at those levels. That said, this is just an early clue in an existing uptrend. However, a break below can create noticeable reactions on the trend.
DXY – US Dollar Index [79.37] – After stumbling in value the last two months, the DXY is back at a familiar range of 80. In the near-term, this simply suggests relative stability.
US 10 Year Treasury Yields [3.31%] – An explosive run up in the past few months. Yields have gone from 2.33% in early October to soaring above 3%. This is a vital macro trend as the curiosity looms regarding the sustainability of this run.
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, December 06, 2010
Market Outlook | December 6, 2010
“Real wealth is ideas plus energy.” - Richard Buckminster (1895-1983)
At this junction, the broad index points to a simply stronger finish to an already positive 2010 performance. The stock and commodity markets were in cooling off mode heading into last week. Mostly, the November downtrend can be classified as an inevitable decline following the autumn rally. However, risk appetite is slowly coming back as the S&P 500 Index rallied nearly 3% for the week, commodities are resurging, and volatility estimates are more tamed. Now, the labor numbers might fail to tell a similar optimistic story, but as usual, this may not impact the forward looking markets.
Reading overall sentiment is tricky since, for the most part, key asset classes, such as corporate bonds, emerging market stocks, and commodity related investments, project a healthy appetite in the mindset of investors. Meanwhile, we are in a period where investors are presented with various niche areas and several financial vehicles. An example of usage of various instruments is demonstrated here: “The value of currency derivatives worldwide doubled in the past three years to $3.2 trillion amid the 'turbulence' of the credit crisis” (Bloomberg, November 30, 2010). This potentially exemplifies further investor usage of various tools, while showcasing enhanced demand for hedging. Thus, reading fear is confusing when markets erupt and psychology leans toward caution.
Beyond the Worries
As daring investors look to either take profits or redeploy capital into new ideas, the casual observer is left deciphering few questions. Only few days ago, the European credit problems escalated from headline chatter into sensitive market responses. In other words, there is no shortage of worrisome issues, such as bubble-like patterns in emerging markets and the fragile status of certain European economies. Even heading into year-end, one can assume that credit and economic concerns have not fully vanished. This, in turn, suggests that risk takers are still offered some reward.
Basically, from money managers’ views, as long as consensus is not too bullish, the work is in finding attractive ideas while grasping the associated, less known details. Similarly, other big picture unknowns, such as taxation and regulatory impact, are bound to entice investors to speculate in upcoming weeks. On the other hand, finding themes less affected by government decisions are worth identifying. Those ideas might be limited, given significant policymaker influence in this environment. However, the key message here suggests that the unsettled market opens up opportunities across various timeframes and caters to an assortment of risk tolerances.
Specific Ideas
There are opportunities in momentum driven areas that have excelled in niche areas. For instance, Interactive Intelligence (ININ) presents an attractive story, and the shares are even more appealing on pending pullbacks. The company is in the software business, and their service arena ranges from voice-over Internet protocol to workflow management. In terms of investors looking for innovative themes into next year, ININ is worth a look as it provides exposure to phone center automation and enterprise IP telephony. In other words, the line of business fits into global themes of interest to expanding businesses. Importantly, any sell-off in the near-term can be viewed as a purchasing opportunity for longer-term investors.
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), a water and sewage service provider, is one way to bet on expanding Brazilian infrastructure. SBS maintains its uptrend, and as shares consolidate between $46-50, there are opportunities for timely buy points. In addition, those seeking long-term investments might find the utility sector attractive, and few find this stock appealing ahead of the World Cup in 2014.
Article Quotes
“Consider the measurement of unemployment. The unemployment rate has currently settled in at roughly 10 % for the past three years, yet the employment to population ratio is at its lowest level in thirty years and has declined from 64% to 58%. So what is more important? The fact that 10% of a smaller population is not working? Or that the employment rate has dropped so precipitously? Can the 10% number, alone, allow anyone to make any conclusions about anything?.... Housing represents roughly 30% of the "core" Consumer Price Index. However, its computation is based not upon actual rents, but on the statistical modeling of "rent equivalents." This device has failed to capture the recent transformation of housing from an item of consumption to a speculative asset.” (Reuven Brenner, Forbes, December 1, 2010)
“Both the S&P Midcap 400 and Smallcap 600 made new bull market highs this week, while the largecap S&P 500 remains below its November closing high. Smallcaps and midcaps have both begun to distance themselves from their largecap brethren in terms of performance as the end of the year approaches. …the Midcap 400 is up 21.56% so far in 2010, while the Smallcap 600 is up slightly less at 20.19%. The S&P 500 is up just 9.34%. As shown in the two smaller charts below the big chart, the spreads between the YTD performance of the Smallcap 600 and Midcap 400 versus the S&P 500 are at their highest levels of the year.” (Bespoke Investment Group, December 3, 2010)
Levels
S&P 500 Index [1224.71] – Explosive recovery contributes to a move that’s almost near yearly highs that were reached in early November. Mostly a reestablishment of positive trend appears to resurface to close out the few remaining trading days.
Crude [$89.10] – A breakout above $85, after several weeks of sluggish back and forth trading— an early resurgence that can attract long-term observers. However, some will note that nearly a 6%, 1-week move might require a breather.
Gold [$1403.50] – A short-lived pause, as re-acceleration is underway. The momentum continues to build and feeds into the ongoing trend, inviting new investors to reconsider.
DXY – US Dollar Index [79.37] – As expected, increase in commodity prices lead to an inverse response for the US Dollar. The index is struggling to hold above $80, which serves as a multi-year barometer on near-term sentiment.
US 10 Year Treasury Yields [3.00%] – The recent behavior has yields revising the 3% level for the first time since mid-summer—a sign of normalization after a period breakdown.
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.
At this junction, the broad index points to a simply stronger finish to an already positive 2010 performance. The stock and commodity markets were in cooling off mode heading into last week. Mostly, the November downtrend can be classified as an inevitable decline following the autumn rally. However, risk appetite is slowly coming back as the S&P 500 Index rallied nearly 3% for the week, commodities are resurging, and volatility estimates are more tamed. Now, the labor numbers might fail to tell a similar optimistic story, but as usual, this may not impact the forward looking markets.
Reading overall sentiment is tricky since, for the most part, key asset classes, such as corporate bonds, emerging market stocks, and commodity related investments, project a healthy appetite in the mindset of investors. Meanwhile, we are in a period where investors are presented with various niche areas and several financial vehicles. An example of usage of various instruments is demonstrated here: “The value of currency derivatives worldwide doubled in the past three years to $3.2 trillion amid the 'turbulence' of the credit crisis” (Bloomberg, November 30, 2010). This potentially exemplifies further investor usage of various tools, while showcasing enhanced demand for hedging. Thus, reading fear is confusing when markets erupt and psychology leans toward caution.
Beyond the Worries
As daring investors look to either take profits or redeploy capital into new ideas, the casual observer is left deciphering few questions. Only few days ago, the European credit problems escalated from headline chatter into sensitive market responses. In other words, there is no shortage of worrisome issues, such as bubble-like patterns in emerging markets and the fragile status of certain European economies. Even heading into year-end, one can assume that credit and economic concerns have not fully vanished. This, in turn, suggests that risk takers are still offered some reward.
Basically, from money managers’ views, as long as consensus is not too bullish, the work is in finding attractive ideas while grasping the associated, less known details. Similarly, other big picture unknowns, such as taxation and regulatory impact, are bound to entice investors to speculate in upcoming weeks. On the other hand, finding themes less affected by government decisions are worth identifying. Those ideas might be limited, given significant policymaker influence in this environment. However, the key message here suggests that the unsettled market opens up opportunities across various timeframes and caters to an assortment of risk tolerances.
Specific Ideas
There are opportunities in momentum driven areas that have excelled in niche areas. For instance, Interactive Intelligence (ININ) presents an attractive story, and the shares are even more appealing on pending pullbacks. The company is in the software business, and their service arena ranges from voice-over Internet protocol to workflow management. In terms of investors looking for innovative themes into next year, ININ is worth a look as it provides exposure to phone center automation and enterprise IP telephony. In other words, the line of business fits into global themes of interest to expanding businesses. Importantly, any sell-off in the near-term can be viewed as a purchasing opportunity for longer-term investors.
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), a water and sewage service provider, is one way to bet on expanding Brazilian infrastructure. SBS maintains its uptrend, and as shares consolidate between $46-50, there are opportunities for timely buy points. In addition, those seeking long-term investments might find the utility sector attractive, and few find this stock appealing ahead of the World Cup in 2014.
Article Quotes
“Consider the measurement of unemployment. The unemployment rate has currently settled in at roughly 10 % for the past three years, yet the employment to population ratio is at its lowest level in thirty years and has declined from 64% to 58%. So what is more important? The fact that 10% of a smaller population is not working? Or that the employment rate has dropped so precipitously? Can the 10% number, alone, allow anyone to make any conclusions about anything?.... Housing represents roughly 30% of the "core" Consumer Price Index. However, its computation is based not upon actual rents, but on the statistical modeling of "rent equivalents." This device has failed to capture the recent transformation of housing from an item of consumption to a speculative asset.” (Reuven Brenner, Forbes, December 1, 2010)
“Both the S&P Midcap 400 and Smallcap 600 made new bull market highs this week, while the largecap S&P 500 remains below its November closing high. Smallcaps and midcaps have both begun to distance themselves from their largecap brethren in terms of performance as the end of the year approaches. …the Midcap 400 is up 21.56% so far in 2010, while the Smallcap 600 is up slightly less at 20.19%. The S&P 500 is up just 9.34%. As shown in the two smaller charts below the big chart, the spreads between the YTD performance of the Smallcap 600 and Midcap 400 versus the S&P 500 are at their highest levels of the year.” (Bespoke Investment Group, December 3, 2010)
Levels
S&P 500 Index [1224.71] – Explosive recovery contributes to a move that’s almost near yearly highs that were reached in early November. Mostly a reestablishment of positive trend appears to resurface to close out the few remaining trading days.
Crude [$89.10] – A breakout above $85, after several weeks of sluggish back and forth trading— an early resurgence that can attract long-term observers. However, some will note that nearly a 6%, 1-week move might require a breather.
Gold [$1403.50] – A short-lived pause, as re-acceleration is underway. The momentum continues to build and feeds into the ongoing trend, inviting new investors to reconsider.
DXY – US Dollar Index [79.37] – As expected, increase in commodity prices lead to an inverse response for the US Dollar. The index is struggling to hold above $80, which serves as a multi-year barometer on near-term sentiment.
US 10 Year Treasury Yields [3.00%] – The recent behavior has yields revising the 3% level for the first time since mid-summer—a sign of normalization after a period breakdown.
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, November 29, 2010
Market Outlook | November 29, 2010
“Weary the path that does not challenge. Doubt is an incentive to truth and patient inquiry leadeth the way.” - Hosea Ballou (1796 - 1861)
When investors reflect, they quickly notice that European worries triggered sell-offs in the spring. Now, the uptrend is being interrupted, and further selling is highly tied to default worries—a puzzle that’s lingering since 2008 and a clear cut resolution that’s far from reality. Clearly, these factors are well documented, and the economic construction of Europe is being questioned.
The stock market peaked on November 5, 2010, a little after the US election and the announcement of quantitative easing plans. Interestingly, since then, the dollar has climbed back significantly, despite the common think. Similarly, rates have recovered this month, which raise a curious question of legitimate trend reversal versus a temporary change in behavior. Attentive watching can produce some clues until the trend shift is fully visible.
These days, the momentum driven plays are under question as the upside run in market leaders, such as commodity related equities, paused. As we near year-end, the recent breather is a casual reminder of the reality of a new cycle. Financial services continue to suffer from headlines as some money managers’ reputations are at risk. Similarly, new regulatory policies are addressing details that impact investment management. Even in skeptical periods, the market still rewards analysts that find specific ideas, while market timing requires understanding of various index products and increasing sensitive news beyond the stock of interest. Combining these factors, the competition against traditional assets (stocks and bonds), is growing as some investors are frustrated by the lack of promised returns of the past decade. Meanwhile, the search for higher yields and increasing patterns of risk aversion persist in the minds of decision makers. Thus, an era of fragmented views among consensus and trust has yet recovered to conjure innovation and growth at a faster pace.
Grasping investor mindset is as challenging as predicting regulatory and policy makers’ outcome. Domestically, the tax rules are up for major changes this December. Speculators must add taxes to the mix of big picture themes that require time for higher conviction bets. The pending tax outcome can impact year-end trading as high net worth clients examine their moves. In turn, this is bound to reflect on flow patterns of liquid markets. In addition, new tax laws can give birth to new products and new sales pitches among money managers. In any case, this is another illustration of a new cycle that’s bringing new challenges and a reminder to adjust to a new playing field.
Article Quotes
"Still, if the recent turbulence has proven anything, it's that "shock and awe" measures are unlikely to appease investors for long, nor change their view that the bloc is fundamentally flawed because of a steep competitiveness gap that only a closer fiscal union may be able to solve. Going down this path is a non-starter for Germany, which has insisted instead that peripheral euro countries push through deflationary wage cuts and painful structural reforms to boost productivity, in line with its own successful economic model.” (Reuters, November 25, 2010)
“What then is productive debt? This is a question raised by a thought-provoking paper by Oxford University’s Dieter Helm, an expert in utility regulation. The kernel is the idea that all societies possess infrastructure assets, which should be thought of as systems. Transport, energy and water systems are examples. We also have education, health, market, financial, judicial, defence and political systems. The more complex the civilisation, the more complex are its systems.The creation and development of these assets usually involves the state, as provider, subsidiser or regulator. The reason is that they have “public good” characteristics. Thus, they would tend to be underprovided by competitive markets.” (Financial Times, November 25, 2010)
Levels
S&P 500 Index [1189.40] – Starting to trade in a near-term range between 1200 and 1180. Chartists are noticing the peak at 1200 of early spring and pondering the impact of the recent top in early November.
Crude [$83.76] – Buyers and sellers continue to wrestle between the $80-85 ranges. No major shift in recent weeks as a sideway pattern tells majority of the commodity’s story.
Gold [$1355] – Shows early and visible signs of short-term weakness around 1400. Most of this month witnessed a decline that might set up for an intermediate term consolidation.
DXY – US Dollar Index [80.35] – Since election lows, the US Dollar Index has gained 6.2%. This short term recovery is merely a digging out process from annual lows.
US 10 Year Treasury Yields [2.86%] – The past four months have demonstrated a consolidating process.
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.
When investors reflect, they quickly notice that European worries triggered sell-offs in the spring. Now, the uptrend is being interrupted, and further selling is highly tied to default worries—a puzzle that’s lingering since 2008 and a clear cut resolution that’s far from reality. Clearly, these factors are well documented, and the economic construction of Europe is being questioned.
The stock market peaked on November 5, 2010, a little after the US election and the announcement of quantitative easing plans. Interestingly, since then, the dollar has climbed back significantly, despite the common think. Similarly, rates have recovered this month, which raise a curious question of legitimate trend reversal versus a temporary change in behavior. Attentive watching can produce some clues until the trend shift is fully visible.
These days, the momentum driven plays are under question as the upside run in market leaders, such as commodity related equities, paused. As we near year-end, the recent breather is a casual reminder of the reality of a new cycle. Financial services continue to suffer from headlines as some money managers’ reputations are at risk. Similarly, new regulatory policies are addressing details that impact investment management. Even in skeptical periods, the market still rewards analysts that find specific ideas, while market timing requires understanding of various index products and increasing sensitive news beyond the stock of interest. Combining these factors, the competition against traditional assets (stocks and bonds), is growing as some investors are frustrated by the lack of promised returns of the past decade. Meanwhile, the search for higher yields and increasing patterns of risk aversion persist in the minds of decision makers. Thus, an era of fragmented views among consensus and trust has yet recovered to conjure innovation and growth at a faster pace.
Grasping investor mindset is as challenging as predicting regulatory and policy makers’ outcome. Domestically, the tax rules are up for major changes this December. Speculators must add taxes to the mix of big picture themes that require time for higher conviction bets. The pending tax outcome can impact year-end trading as high net worth clients examine their moves. In turn, this is bound to reflect on flow patterns of liquid markets. In addition, new tax laws can give birth to new products and new sales pitches among money managers. In any case, this is another illustration of a new cycle that’s bringing new challenges and a reminder to adjust to a new playing field.
Article Quotes
"Still, if the recent turbulence has proven anything, it's that "shock and awe" measures are unlikely to appease investors for long, nor change their view that the bloc is fundamentally flawed because of a steep competitiveness gap that only a closer fiscal union may be able to solve. Going down this path is a non-starter for Germany, which has insisted instead that peripheral euro countries push through deflationary wage cuts and painful structural reforms to boost productivity, in line with its own successful economic model.” (Reuters, November 25, 2010)
“What then is productive debt? This is a question raised by a thought-provoking paper by Oxford University’s Dieter Helm, an expert in utility regulation. The kernel is the idea that all societies possess infrastructure assets, which should be thought of as systems. Transport, energy and water systems are examples. We also have education, health, market, financial, judicial, defence and political systems. The more complex the civilisation, the more complex are its systems.The creation and development of these assets usually involves the state, as provider, subsidiser or regulator. The reason is that they have “public good” characteristics. Thus, they would tend to be underprovided by competitive markets.” (Financial Times, November 25, 2010)
Levels
S&P 500 Index [1189.40] – Starting to trade in a near-term range between 1200 and 1180. Chartists are noticing the peak at 1200 of early spring and pondering the impact of the recent top in early November.
Crude [$83.76] – Buyers and sellers continue to wrestle between the $80-85 ranges. No major shift in recent weeks as a sideway pattern tells majority of the commodity’s story.
Gold [$1355] – Shows early and visible signs of short-term weakness around 1400. Most of this month witnessed a decline that might set up for an intermediate term consolidation.
DXY – US Dollar Index [80.35] – Since election lows, the US Dollar Index has gained 6.2%. This short term recovery is merely a digging out process from annual lows.
US 10 Year Treasury Yields [2.86%] – The past four months have demonstrated a consolidating process.
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.
Sunday, November 21, 2010
Market Outlook | November 22, 2010
“Man cannot discover new oceans unless he has the courage to lose sight of the shore.” - Andre Gide
As the holiday season begins to slowly resurface, the minds of investors will be occupied on looking ahead to the first quarter of 2011. It seems appropriate to revisit future outlook as analysts gather to make estimates. Importantly, it is a good time to map out possible surprises as well. As we learn, almost every year, the unfathomable elements, versus consensus thoughts, are worth examining. For instance, inflation expectations appear very high, and meeting those expectations is rather questionable. Similarly, the enthusiasm for existing themes can begin to dwindle, such as commodity run, strong dollar, and lower interest rates. Of course, these are not only annual themes but have been visible for multi-year trends offering various waves.
Meanwhile, investor excitement for new ideas is quietly resurfacing, even though, at times, it is not visible to the broader audience. Despite the mixed market read, it is hard for one to argue that global markets have lacked optimism, especially in the last few months. In fact, the second half for savvy investors has presented opportunities. So far this year, the S&P 500 Index is up 7.6% and Russell Small Cap Index has gained over 15%. Simple scorekeeping is not enough to cease skepticism surrounding the Federal Reserve decisions and restoration plans. To sum up, in certain periods, the market performance is not to be confused with economic performance or other rhetoric.
Two years after the major crisis, the adjustment to a new era continues. In the United States, taxation impact, new policies, and persisting real estate worries can shape the overall trend. Interestingly, within this new cycle, periods of volatility are poised to be triggered by reactions related to central bank policy. In recent weeks, tension among economic leaders was displayed, which paints a prelude to testy global policies. This mainly relates to Europe’s economic and political troubles that require some time to shake off. Meanwhile, run up in asset prices and heating economy in emerging markets is bound to reach unsustainable levels. Like any topping process, identifying all risks is hard to quantify in advance. Thus, managing instincts and emotions will be vital for those deeply invested. In other words, money managers cannot justify selling due to an “unknown”, so at this point, observing is the practical, and occasionally painful, option.
Selective Approach
In terms of constructing a portfolio, a selective approach seems fruitful as there is a discrepancy between the broad index and specific ideas. The momentum of chasing commodities related investments has outpaced other areas. However, those owners of commodity related assets will have to look six months ahead. Therefore, innovative groups, such as healthcare and technology, present specific ideas. This serves as an alternative to pricey, valued, natural resources, given higher performance chasing by global investors.
In terms of healthcare, there is a trend in recent years of a growing number of hip and joint replacements. Specifically, Smith & Nephew (SNN) continues to see positive global growth and offers an attractive entry point. The company benefits from its advanced wound treatment as well as its core joint replacement business. In addition, a recovering economy can even tack on further gains to Smith & Nephew’s business model.
On the other hand, several technology stocks have lead this market recovery. Meanwhile, the intriguing area of personalized robots takes innovation a notch higher while presenting a cutting edge idea. Currently, the robot usage is applied for military use along with expanding products for consumers. One way to gain exposure to this theme is by owning shares of IRBT (iRobot), a publicly traded company that is showcasing strength and momentum. Importantly, the company is equipped for leadership in this niche sector.
Article & Research Quotes
“The average S&P 500 stock rose 18.43% from the start of September through November 5th. Since November 5th, the average stock has declined 2.75%. We broke the index into deciles (10 groups of 50 stocks each) based on performance during the rally and calculated the average performance of stocks in each decile since November 5th to see how the rally winners and losers have been doing during the recent pullback. It's almost always the case that the stocks that go up the most during rallies also pull back the most when the market corrects. Interestingly, this hasn't been the case during the current pullback. …The three deciles of stocks that did the worst during the rally have also done the worst since 11/5. Investors in the big winners over the past couple of months haven't really been hurt over the past two weeks. The losers, on the other hand, have remained losers.“ (Bespoke Investments, November 19, 2010)
“Greece is now under an EU protectorate, or the “Memorandum” as they call it. This has prompted pin-prick terrorist attacks against anybody associated with EU rule. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, but will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5pc to comply with EU demands made in May. All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.” (Telegraph, November 16, 2010)
Levels
S&P 500 Index [1199.73] – Basically, no major change since last week’s close. Trading pattern near 1200 will be watched and closely tracked for some additional hints.
Crude [$81.51] – Once again, there is less willingness among buyers around $85. A retest of $80 seems like a strong, short-term possibility.
Gold [$1342.50] – Staying above 1400 presents a near-term challenge after an explosive run, however, a longer-term trend.
DXY – US Dollar Index [78.50] – Stabilizing from annual lows driven by the recent run. The index is still significantly down from the summer as the downtrend remains in place.
US 10 Year Treasury Yields [2.87%] – Following a bottom at 2.40%, yields are noticeably rising this quarter. The next key range stands around 3%, which has not been seen since midyear.
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.
As the holiday season begins to slowly resurface, the minds of investors will be occupied on looking ahead to the first quarter of 2011. It seems appropriate to revisit future outlook as analysts gather to make estimates. Importantly, it is a good time to map out possible surprises as well. As we learn, almost every year, the unfathomable elements, versus consensus thoughts, are worth examining. For instance, inflation expectations appear very high, and meeting those expectations is rather questionable. Similarly, the enthusiasm for existing themes can begin to dwindle, such as commodity run, strong dollar, and lower interest rates. Of course, these are not only annual themes but have been visible for multi-year trends offering various waves.
Meanwhile, investor excitement for new ideas is quietly resurfacing, even though, at times, it is not visible to the broader audience. Despite the mixed market read, it is hard for one to argue that global markets have lacked optimism, especially in the last few months. In fact, the second half for savvy investors has presented opportunities. So far this year, the S&P 500 Index is up 7.6% and Russell Small Cap Index has gained over 15%. Simple scorekeeping is not enough to cease skepticism surrounding the Federal Reserve decisions and restoration plans. To sum up, in certain periods, the market performance is not to be confused with economic performance or other rhetoric.
Two years after the major crisis, the adjustment to a new era continues. In the United States, taxation impact, new policies, and persisting real estate worries can shape the overall trend. Interestingly, within this new cycle, periods of volatility are poised to be triggered by reactions related to central bank policy. In recent weeks, tension among economic leaders was displayed, which paints a prelude to testy global policies. This mainly relates to Europe’s economic and political troubles that require some time to shake off. Meanwhile, run up in asset prices and heating economy in emerging markets is bound to reach unsustainable levels. Like any topping process, identifying all risks is hard to quantify in advance. Thus, managing instincts and emotions will be vital for those deeply invested. In other words, money managers cannot justify selling due to an “unknown”, so at this point, observing is the practical, and occasionally painful, option.
Selective Approach
In terms of constructing a portfolio, a selective approach seems fruitful as there is a discrepancy between the broad index and specific ideas. The momentum of chasing commodities related investments has outpaced other areas. However, those owners of commodity related assets will have to look six months ahead. Therefore, innovative groups, such as healthcare and technology, present specific ideas. This serves as an alternative to pricey, valued, natural resources, given higher performance chasing by global investors.
In terms of healthcare, there is a trend in recent years of a growing number of hip and joint replacements. Specifically, Smith & Nephew (SNN) continues to see positive global growth and offers an attractive entry point. The company benefits from its advanced wound treatment as well as its core joint replacement business. In addition, a recovering economy can even tack on further gains to Smith & Nephew’s business model.
On the other hand, several technology stocks have lead this market recovery. Meanwhile, the intriguing area of personalized robots takes innovation a notch higher while presenting a cutting edge idea. Currently, the robot usage is applied for military use along with expanding products for consumers. One way to gain exposure to this theme is by owning shares of IRBT (iRobot), a publicly traded company that is showcasing strength and momentum. Importantly, the company is equipped for leadership in this niche sector.
Article & Research Quotes
“The average S&P 500 stock rose 18.43% from the start of September through November 5th. Since November 5th, the average stock has declined 2.75%. We broke the index into deciles (10 groups of 50 stocks each) based on performance during the rally and calculated the average performance of stocks in each decile since November 5th to see how the rally winners and losers have been doing during the recent pullback. It's almost always the case that the stocks that go up the most during rallies also pull back the most when the market corrects. Interestingly, this hasn't been the case during the current pullback. …The three deciles of stocks that did the worst during the rally have also done the worst since 11/5. Investors in the big winners over the past couple of months haven't really been hurt over the past two weeks. The losers, on the other hand, have remained losers.“ (Bespoke Investments, November 19, 2010)
“Greece is now under an EU protectorate, or the “Memorandum” as they call it. This has prompted pin-prick terrorist attacks against anybody associated with EU rule. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, but will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5pc to comply with EU demands made in May. All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.” (Telegraph, November 16, 2010)
Levels
S&P 500 Index [1199.73] – Basically, no major change since last week’s close. Trading pattern near 1200 will be watched and closely tracked for some additional hints.
Crude [$81.51] – Once again, there is less willingness among buyers around $85. A retest of $80 seems like a strong, short-term possibility.
Gold [$1342.50] – Staying above 1400 presents a near-term challenge after an explosive run, however, a longer-term trend.
DXY – US Dollar Index [78.50] – Stabilizing from annual lows driven by the recent run. The index is still significantly down from the summer as the downtrend remains in place.
US 10 Year Treasury Yields [2.87%] – Following a bottom at 2.40%, yields are noticeably rising this quarter. The next key range stands around 3%, which has not been seen since midyear.
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, November 15, 2010
Market Outlook |November 15, 2010
“Certainly, there are good and bad times, but our mood changes more often than our fortune.” - Jules Renard
A Perspective
It feels like 2007 all over again, when tracking price appreciation in stocks and commodities. Or maybe it feels like April 2010, in a period when the S&P 500 Index closed near 1200 and Crude was priced at $85. In both cases, that marked a peak for key asset classes. Interestingly, both macro indicators are near those spring 2010 ranges as well. Perhaps, that subtly suggests a set up that favors further declines. The slow and steady stock market appreciation appears murky, especially when blending discussion of quantitative easing. In other words, the comfort level among investors in the ability to grasp Federal Reserve actions is not quite clear and bound to create political chatter and further debates
Short-term Landscape
A much needed breather in broad stock market indexes took place last week as selling dominated global investor mindset. It did not take too long for the markets to cool off from recent optimism that was driven by new stimulus policy. Some odd-makers and chart pattern observers were hinting the strong possibility of minor retracements. Now, the question is how one mood swing can contribute to greater uncertainty and spark another down trending momentum. It is vital to note that the European credit worries contributed greatly as a catalyst to late April sell-offs. In digesting the similarities, one can observe that the worries in European country economic stability are resurfacing as well. In addition, the real estate bubble in Australia and overheated emerging markets are on the radar of decision makers in money management. Yet, the current declines, along with reiteration of previously known facts, might require more evidence to classify as new information. Therefore, daring investors will be challenged to avoid the noise of headlines.
A Closer Look
As moods find a way to shift quickly, the Dollar and Interest Rates are showcasing a noteworthy response in the last few weeks. Both indicators have remained in a downside, multi-year cycle. That said, it is quite intriguing that the Dollar and US 10 Year Treasury Yields have risen in the past two weeks, despite the general sentiment and expectations. Usually, at year-end, some trends go slightly unnoticed given minor hints and movements. However, the sustainability of a recovery in rates and appreciating Dollar should not be underestimated. Similarly, the multi-month trend of tamed volatility (as measured by VIX index) is at an early stage of showcasing freight, which showcases a potentially chaotic response. Market historians remind us that sentiment changes quickly, and those looking for attractive opportunities might have to react as fast as those looking to exit. Therefore, this week can provide further clues of key trends for longer-term and sideline observers.
Article Quotes:
“Junk yields are at their lowest levels since October 2007. And the leveraged buyout market is back to paying 2006 levels of EBITDA (earnings before interest, taxes, depreciation and amortization) of 6 to 8.5 times, with the recent announcement of Carlyle Group’s reported 11 times EBITDA purchase of Syniverse Holdings echoing the peak of the precrash craze. As you know, buyout people do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, rejigger balance sheets, and provide an attractive payback, usually in shorter time than under normal corporate horizons. And the corporations I talk to that are eyeing possible acquisitions with their surplus cash and ready access to the credit markets are not given to thinking of strategic acquisitions as a way to expand payrolls.” (Speech by Richard W. Fisher, Federal Reserve of Dallas, November 8, 2010)
“The suggestion that speculators deliberately manipulate markets to earn profits through bubbles and busts simply does not hold water. The explanation for the sudden spikes in the prices of many commodities in recent years lies in nothing more sinister than the laws of supply and demand. A ravenous China, underinvestment in mining and agriculture, tight markets and unexpected disruptions to production are usually to blame for rapid price movements. When supply is tight, a small increase in demand can have a disproportionately large effect on price. Even if speculators do sometimes push prices out of kilter the fundamentals soon regain the upper hand.” (The Economist, November 11, 2010)
Levels:
S&P 500 Index [1199.29] – Retracing from last week’s highs of 1227.08, after being stretched in this recent rally. The 1200 mark is vital, since that is near the level where the market peaked and declined in April 2010.
Crude [$84.88] – Prices have struggled to stay above $85 for a significant period. A step back reminds us that Crude prices are in a wide trading range between $75 and $85.
Gold [$1388.50] – The commodity is up over 20% since bottoming on July 28, 2010 and stands 15% higher than its 200-day moving average. In the near-term, observers will be watching any pending weakness in which investors might consider buying at 1350.
DXY – US Dollar Index [76.54] – It remains in a consolidation phase and slightly above annual lows. Interestingly, the index is up 3.77% in the past seven trading days.
US 10 Year Treasury Yields [2.78%] – There are early signs of rising rates, especially in the past two weeks. The surge closer to 3% can spark psychological and practical responses from global managers.
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 Perspective
It feels like 2007 all over again, when tracking price appreciation in stocks and commodities. Or maybe it feels like April 2010, in a period when the S&P 500 Index closed near 1200 and Crude was priced at $85. In both cases, that marked a peak for key asset classes. Interestingly, both macro indicators are near those spring 2010 ranges as well. Perhaps, that subtly suggests a set up that favors further declines. The slow and steady stock market appreciation appears murky, especially when blending discussion of quantitative easing. In other words, the comfort level among investors in the ability to grasp Federal Reserve actions is not quite clear and bound to create political chatter and further debates
Short-term Landscape
A much needed breather in broad stock market indexes took place last week as selling dominated global investor mindset. It did not take too long for the markets to cool off from recent optimism that was driven by new stimulus policy. Some odd-makers and chart pattern observers were hinting the strong possibility of minor retracements. Now, the question is how one mood swing can contribute to greater uncertainty and spark another down trending momentum. It is vital to note that the European credit worries contributed greatly as a catalyst to late April sell-offs. In digesting the similarities, one can observe that the worries in European country economic stability are resurfacing as well. In addition, the real estate bubble in Australia and overheated emerging markets are on the radar of decision makers in money management. Yet, the current declines, along with reiteration of previously known facts, might require more evidence to classify as new information. Therefore, daring investors will be challenged to avoid the noise of headlines.
A Closer Look
As moods find a way to shift quickly, the Dollar and Interest Rates are showcasing a noteworthy response in the last few weeks. Both indicators have remained in a downside, multi-year cycle. That said, it is quite intriguing that the Dollar and US 10 Year Treasury Yields have risen in the past two weeks, despite the general sentiment and expectations. Usually, at year-end, some trends go slightly unnoticed given minor hints and movements. However, the sustainability of a recovery in rates and appreciating Dollar should not be underestimated. Similarly, the multi-month trend of tamed volatility (as measured by VIX index) is at an early stage of showcasing freight, which showcases a potentially chaotic response. Market historians remind us that sentiment changes quickly, and those looking for attractive opportunities might have to react as fast as those looking to exit. Therefore, this week can provide further clues of key trends for longer-term and sideline observers.
Article Quotes:
“Junk yields are at their lowest levels since October 2007. And the leveraged buyout market is back to paying 2006 levels of EBITDA (earnings before interest, taxes, depreciation and amortization) of 6 to 8.5 times, with the recent announcement of Carlyle Group’s reported 11 times EBITDA purchase of Syniverse Holdings echoing the peak of the precrash craze. As you know, buyout people do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, rejigger balance sheets, and provide an attractive payback, usually in shorter time than under normal corporate horizons. And the corporations I talk to that are eyeing possible acquisitions with their surplus cash and ready access to the credit markets are not given to thinking of strategic acquisitions as a way to expand payrolls.” (Speech by Richard W. Fisher, Federal Reserve of Dallas, November 8, 2010)
“The suggestion that speculators deliberately manipulate markets to earn profits through bubbles and busts simply does not hold water. The explanation for the sudden spikes in the prices of many commodities in recent years lies in nothing more sinister than the laws of supply and demand. A ravenous China, underinvestment in mining and agriculture, tight markets and unexpected disruptions to production are usually to blame for rapid price movements. When supply is tight, a small increase in demand can have a disproportionately large effect on price. Even if speculators do sometimes push prices out of kilter the fundamentals soon regain the upper hand.” (The Economist, November 11, 2010)
Levels:
S&P 500 Index [1199.29] – Retracing from last week’s highs of 1227.08, after being stretched in this recent rally. The 1200 mark is vital, since that is near the level where the market peaked and declined in April 2010.
Crude [$84.88] – Prices have struggled to stay above $85 for a significant period. A step back reminds us that Crude prices are in a wide trading range between $75 and $85.
Gold [$1388.50] – The commodity is up over 20% since bottoming on July 28, 2010 and stands 15% higher than its 200-day moving average. In the near-term, observers will be watching any pending weakness in which investors might consider buying at 1350.
DXY – US Dollar Index [76.54] – It remains in a consolidation phase and slightly above annual lows. Interestingly, the index is up 3.77% in the past seven trading days.
US 10 Year Treasury Yields [2.78%] – There are early signs of rising rates, especially in the past two weeks. The surge closer to 3% can spark psychological and practical responses from global managers.
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.
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