“There is no rule more invariable than that we are paid for our suspicions by finding what we suspect.” - Henry David Thoreau (1817-1862)
Simple and Obvious?
One would think that the purpose of business or investing is to enter with the objective of winning as measured by profits. As simple as that sounds, there is losing in asset depreciation, defaults, and bankruptcy, as recently witnessed. Most can agree that a loss exists, and as to the type of loss, well, that’s where legal expertise can sort out the distinction and details.
The rules of engagement state that an investment manager makes a long-term bet to win, while not being blinded to potential losses. In that process, an investor deciphers the risk, and regulators set the parameters for a fair game, while not overly tilting to any particular side. In between, you have rule breakers and deceivers, but veteran participants know that's the additional risk of being a speculator. Unfortunately, this logic is not necessarily all thought out prior to the date of purchase. In addition, those burned in the last bull market have to comfort the harsh outcome, while not deviating from the basic concept of competition and consequences. For some generations, “losing big” used to sound conceptual rather than real. The last four years emphasize that asset value erosion is part of the game, and it happens despite marketing slogans, hopeful mind games, feelings of entitlement, or historically driven bravado.
Eluding Defeat
In any game, no one likes a sore loser (we'd like to think), as it’s not an admirable quality to deny a fair defeat—a lesson hopefully learned early on in the competitive field or middle school playgrounds rather than larger stakes in financial markets. After all, markets are a collective reflection of human emotion. Surely, we all have our own biases on accepting losses. Clearly, these dynamics are illustrated in the European Central Bank and other regulatory debates over the sovereign debt crisis.
Specifically, saving bondholders for the sake of financial systems at the cost of the common people (via future taxes) puts a dent on all of the above mentioned points. In fact, this conceptually echoes the US banks in 2008, when the bailout debates surged with outrage, filled with little shame and eventual concession of "too big to fail." Obviously, the pros and cons of letting Greece default are well documented. Either way, these are desperate conditions. These hints of system breakdowns remind us that there are a different set of rules for select groups versus the casual investor. That said, confronting the truth, such as default, may hurt in the short term, but the long-term outcome might be surprising:
“But while countries that default do find themselves locked out of markets for some time, any growth penalty from a default tends to be short-lived. Argentina saw its GDP decline by 10.9% in the year after its December 2001 default. But its economy bounced back smartly in the years that followed” (Economist, June 20, 2011).
Murky Definitions
When winning or losing is distorted by complexity or neglected, then major trouble arises, and undoubtedly, whining increases from all sides. The lack of value placed on accountability bruises investor confidence and mindset. If losing is not enforced in special situations, then the lack of punishment encourages further irresponsibility. Not to mention, if policymakers postpone losing, then it’s known for bubbles to form and form again, as witnessed many times in the past.
Meanwhile, political spin (a natural human behavior) shifts to blame businesses for competitive political points, yet most small to mid-sized US businesses rather play to win within defined rules. The large and privileged companies, or select countries, have developed crafty negotiation skills to delay results of their mismanagement. If this spectacle of putting out the next fire (Spain or Italy) continues, then “trust” in markets becomes a lost art, and eventually leads to further risk aversion. This theme is visible and loudly stated, when viewing Gold prices, as paper assets (bonds, stocks, currencies, etc.) are being restructured and redefined. Clearly, this showcases a growing number of hesitant participants left to own an appreciating commodity, while not enticed at the alternatives. This thought asks if capitalism needs to be redefined and repacked, but in practical terms, this is not easy to reform. Bottom-line, the murky definition of wins and losses deflates the spirit of competition, and sourness disseminates rapidly.
Near-Term Attitude
Transactional participants would rather apply a short-term memory for bad news, and most have little patience to dissect these “nauseating” philosophical debates, especially in the summer months. Instead, allocators of larger capital are desperate for ideas, and they will seek to buy recognizable companies shares at cheap prices. As mid-year approaches, various money managers would look to salvage annual returns, while ramping up on riskier assets as the pressure mounts.
Noise and confusion pile up at perceived inflection points, but most buy demands are likely to focus on relative opportunity in US and some emerging market equities. Volatility has risen in the last few weeks, but not as high as mid March 2011. Recently, buy conviction in liquid markets has failed to follow through as up-days were short-lived. Perhaps, the wise approach is to balance the mindless day-to-day chatter while being cognizant of the mind-numbing theatrics.
Article Quotes:
“During the1995-2005 period, when China fixed the yuan-U.S. dollar exchange rate at 8.28, China’s overall inflation rate mirrored that of the U.S. and was relatively “low.” Once China caved in to misguided pressure – notably from the U.S., France and international institutions, like the International Monetary Fund – and allowed the yuan-U.S. dollar exchange rate to wobble around, problems arose. The money supply growth rate surged in the wake of the Panic of 2008-09. And as night follows day, inflation has raised its ugly head in China. The monetary authorities are scrambling to cool down the inflationary pressures by slowing monetary growth – from almost 30% per annum to 15%.” (Globe Asia, July 2011)
“In a series of ongoing experiments, Montague has studied what happens when people compete against each other in an investment game. While the subjects are making decisions about the stock market, Montague monitors their brain activity in two different fMRI machines. The first thing Montague discovered is that making more money than someone else is extremely pleasurable. When subjects “win” the investment game, Montague observes a large increase in activity in the striatum, a brain area typically associated with the processing of pleasurable rewards. (Montague refers to this as “cocaine brain,” as the striatum is also associated with the euphoric high of illicit drugs.) Unfortunately, this same urge to outperform others can also lead people to take reckless risks.” (Wired , June 16, 2011)
Levels:
S&P 500 Index [1268.45] – Slightly holding above a much watched 200-day moving average. The established downtrend is attempting and nearing a bottom.
Crude [$91.16] – In a correction phase, especially after breaking the $100 mark. Downside momentum seems legitimate since the spring correction.
Gold [$1514.75] – Since July 30, 2010, the commodity is up nearly 36%. Further evidence of buyer interest and no signs of selling in the near-term.
DXY – US Dollar Index [75.66] – Remains above annual lows of 72.69 yet a strengthening dollar is a frail argument now based on recent evidence.
US 10-Year Treasury Yields [2.86%] – A well defined downtrend as the next key level is around 2.60%-2.80%.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 27, 2011
Sunday, June 19, 2011
Market Outlook | June 20, 2011
“Crisis and deadlocks when they occur have at least this advantage: that they force us to think.” - Jawaharlal Nehru (1889-1964)
Illusionary Comfort
For several months, the fragile credit conditions were occasionally forgotten or dismissed on some participants’ agenda. A rising or stable performance in global indexes created some illusionary comfort, until May came around the corner for a quick gut check. Today, the “peace of mind” in financial markets is under severe questioning, in which emotional responses are too charged up. This worrisome credit pattern is all too familiar and simply nauseating to address for government officials faced with restructuring loans. Wishful thinking of Greece not defaulting may signal a denial or postponement of the harsh reality.
The bail-out and bubble prevention debate is resurfacing, in which risk is infectious for inter-linked markets. At times, it has investors wondering about this philosophical or political debate for European leaders. Clearly, bail-out and bubble prevention boldly hint at a deviation from normal business conduct. Importantly, in practical terms, this European resolution attempt translates to flimsy investor confidence, while the social unrest adds to jittery headlines. The rugged and witty investors will attempt to decipher a long-term opportunity from this mess. However, this Greece case is a daunting task (measured by high risk) ahead for the visionary looking to bet on turnarounds.
Reminders
Conceivably, we’re in an era where bad news carries lesser weight than prior years. These credit concerns are bound to profoundly persist and cannot easily vanish for both the Euro Zone and US. In an awkward manner, the credit markets disturbance in Europe is mirroring the US investment bank collapse of 2008. The definition of “safer assets” most likely requires some adjustment for years ahead. Those engrained with the thought that safe instruments include CD’s, US treasury bonds, or government bonds will have to rewire that thought process. In fact, claiming emerging markets as a riskier asset might be a misleading statement as well, given the changing global landscape. The unknowns are plenty, but most can agree that a transitory period in financial systems is in full effect.
Near-term Matters
The S&P 500 closed the week slightly up and barely positive for this year (up 1.1%). Of course, we are only around the midway point of 2011, but the last few weeks have produced a clear negative message in investor confidence. The volatility index (a panic barometer) has nearly doubled since April 28th in conjunction with the early May sell-offs.
As usual, the crowds seeking buying opportunities will reexamine purchasing US stocks, which still have some relative appeal (perception based) for now. Similarly, chart observers are bound to point out the favorable odds for diving in based on discounted pricing. Frankly, the “buy” crowd would strongly argue that interest rates continue to decline along with the dollar; thus, the macro picture has not changed dramatically from the “steady up days.”
Yet, a confirmation is needed to claim that the recent blending has fully played out. Meanwhile, a trend reversal in US rates or dollar, combined with fearful mindset, can create a painful buyer scenario.
Article Quotes:
“Some argue that both the US Dodd-Frank Act and Basel III capital requirements have now ended US bail-outs. But these efforts do not solve the fundamental flaw in the system: there are highly complex and opaque banking organizations engaged in a variety of non-core, high-risk activities while backed by a public safety net. The problem is not that banks take risk, but that some are too complex for anyone to assess and control that risk...These new regulatory changes actually extend, or make more complicated, what we have tried to do before. For example, Dodd-Frank requires enhanced prudential supervision and regulation that increases incrementally with the systemic risk of the largest financial companies. Yet that design simply cannot be effective if the risk cannot be monitored or assessed.” (Federal Reserve Bank of Kansas City, Financial Times, June 16, 2011)
“First, we were asked, ‘How would you describe the US economic and financial positions relative to the rest of the world?’ The (rounded) responses came back: Getting Better (16%), Stable (26%), Getting Worse (47%) and In Permanent Decline (11%) – yikes! Those reactions seemed unduly pessimistic. America may be struggling, but compared to what? Look around. The European periphery is teetering; Japan is reeling from a nuclear meltdown; China appears to be slowing; and the Middle East is in turmoil…. The BRICs are hardly a well-kept secret any longer. They are battling inflation and have proved vulnerable to market volatility. Does valuation count for nothing? Over five years, emerging markets are up 12.2% versus the S&P, which has gained just 2.73%. Mean reversion and contrarian sentiment would suggest it is time to consider buying those American stocks!” (Fundweb, June 14, 2011)
Levels:
S&P 500 Index [1271.50] – Attempting to bounce back after briefly touching the 200-day moving average (around 1258).
Crude [$93.01] – Steep decline continues and, like equities, approaching a key technical range around $92.
Gold [$1537.50] – Unlike other commodities, the uptrend is in tact. Flirting and not far removed from all-time highs of 1549.
DXY – US Dollar Index [74.98] – The May recovery is not convincing of dollar sustainability for now. Follow through is desperately awaited.
US 10-Year Treasury Yields [2.94%] – In the near-term, holding at current levels while defining annual lows.
http://markettakers.blogspot.com
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.
Illusionary Comfort
For several months, the fragile credit conditions were occasionally forgotten or dismissed on some participants’ agenda. A rising or stable performance in global indexes created some illusionary comfort, until May came around the corner for a quick gut check. Today, the “peace of mind” in financial markets is under severe questioning, in which emotional responses are too charged up. This worrisome credit pattern is all too familiar and simply nauseating to address for government officials faced with restructuring loans. Wishful thinking of Greece not defaulting may signal a denial or postponement of the harsh reality.
The bail-out and bubble prevention debate is resurfacing, in which risk is infectious for inter-linked markets. At times, it has investors wondering about this philosophical or political debate for European leaders. Clearly, bail-out and bubble prevention boldly hint at a deviation from normal business conduct. Importantly, in practical terms, this European resolution attempt translates to flimsy investor confidence, while the social unrest adds to jittery headlines. The rugged and witty investors will attempt to decipher a long-term opportunity from this mess. However, this Greece case is a daunting task (measured by high risk) ahead for the visionary looking to bet on turnarounds.
Reminders
Conceivably, we’re in an era where bad news carries lesser weight than prior years. These credit concerns are bound to profoundly persist and cannot easily vanish for both the Euro Zone and US. In an awkward manner, the credit markets disturbance in Europe is mirroring the US investment bank collapse of 2008. The definition of “safer assets” most likely requires some adjustment for years ahead. Those engrained with the thought that safe instruments include CD’s, US treasury bonds, or government bonds will have to rewire that thought process. In fact, claiming emerging markets as a riskier asset might be a misleading statement as well, given the changing global landscape. The unknowns are plenty, but most can agree that a transitory period in financial systems is in full effect.
Near-term Matters
The S&P 500 closed the week slightly up and barely positive for this year (up 1.1%). Of course, we are only around the midway point of 2011, but the last few weeks have produced a clear negative message in investor confidence. The volatility index (a panic barometer) has nearly doubled since April 28th in conjunction with the early May sell-offs.
As usual, the crowds seeking buying opportunities will reexamine purchasing US stocks, which still have some relative appeal (perception based) for now. Similarly, chart observers are bound to point out the favorable odds for diving in based on discounted pricing. Frankly, the “buy” crowd would strongly argue that interest rates continue to decline along with the dollar; thus, the macro picture has not changed dramatically from the “steady up days.”
Yet, a confirmation is needed to claim that the recent blending has fully played out. Meanwhile, a trend reversal in US rates or dollar, combined with fearful mindset, can create a painful buyer scenario.
Article Quotes:
“Some argue that both the US Dodd-Frank Act and Basel III capital requirements have now ended US bail-outs. But these efforts do not solve the fundamental flaw in the system: there are highly complex and opaque banking organizations engaged in a variety of non-core, high-risk activities while backed by a public safety net. The problem is not that banks take risk, but that some are too complex for anyone to assess and control that risk...These new regulatory changes actually extend, or make more complicated, what we have tried to do before. For example, Dodd-Frank requires enhanced prudential supervision and regulation that increases incrementally with the systemic risk of the largest financial companies. Yet that design simply cannot be effective if the risk cannot be monitored or assessed.” (Federal Reserve Bank of Kansas City, Financial Times, June 16, 2011)
“First, we were asked, ‘How would you describe the US economic and financial positions relative to the rest of the world?’ The (rounded) responses came back: Getting Better (16%), Stable (26%), Getting Worse (47%) and In Permanent Decline (11%) – yikes! Those reactions seemed unduly pessimistic. America may be struggling, but compared to what? Look around. The European periphery is teetering; Japan is reeling from a nuclear meltdown; China appears to be slowing; and the Middle East is in turmoil…. The BRICs are hardly a well-kept secret any longer. They are battling inflation and have proved vulnerable to market volatility. Does valuation count for nothing? Over five years, emerging markets are up 12.2% versus the S&P, which has gained just 2.73%. Mean reversion and contrarian sentiment would suggest it is time to consider buying those American stocks!” (Fundweb, June 14, 2011)
Levels:
S&P 500 Index [1271.50] – Attempting to bounce back after briefly touching the 200-day moving average (around 1258).
Crude [$93.01] – Steep decline continues and, like equities, approaching a key technical range around $92.
Gold [$1537.50] – Unlike other commodities, the uptrend is in tact. Flirting and not far removed from all-time highs of 1549.
DXY – US Dollar Index [74.98] – The May recovery is not convincing of dollar sustainability for now. Follow through is desperately awaited.
US 10-Year Treasury Yields [2.94%] – In the near-term, holding at current levels while defining annual lows.
http://markettakers.blogspot.com
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, June 12, 2011
Market Outlook | June 13, 2011
“No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.” (Isaac Asimov 1920-1992)
The puzzling market inflection point offers a touch for the hopeful, the skeptic, the bold, and the balanced. As a start, we can attempt to elaborate at each participant’s perspective. The merit of this exercise is to ask who is closer to the truth ? This serves as the intriguing global question for investors, regulators, business owners, and other stakeholders. Most likely, decision makers must understand the varying views to navigate in this landscape.
The Hopeful
Hopeful buyers will cling and claim that recent down moves are merely a sign of under pricing (oversold) and that we’re nearing bargain points. Usually, "it’s cheap" is the age-old, but simple, argument to reenter this market. After all, many banks have year-end targets higher than today’s levels. For example, the strategists of big banks have an average target of 1402 for the S&P 500 Index (Goldman Sachs 1450 and JP Morgan 1475). In some cases, much of the buy impulse is driven through eagerness to capture previously missed ideas, such as jackpots in some tech IPOs, partaking in potential M&A deals, and accumulating well-recognized larger cap companies. The danger here is to assume that markets continue to climb in the long term while underestimating the risk of complacency.
The Skeptic
Skeptics have said and written plenty in regards to questioning the effectiveness of stimulus efforts, even as markets hit multi-year highs just few months ago. Thus, the scare in municipal bond default, weakening European economies, high unemployment rate, and weak real estate data all fail to be categorized as breaking news.
After all, daily market trading is sensitive and responsive to headlines. However, bureaucratic decisions are known to drag. During that deliberation period, the skeptic was dumfounded on how long it takes facts to significantly seep into market performance. For now, the VIX (Volatility Index) remains relatively calm, despite recent pullbacks with the growing list of bad news—a fuzzy picture that has short-sellers wondering if “fear” is in full effect. In this case, confirmation of worrisome trends is required.
The Bold
The daring seek extremes of neglected ideas, while examining the consensus view. On one end, you can wait to observe the magnitude of recent correction and look to buy smaller cap (higher volatility stocks). On the other hand, a bolder move is to create exposure to new growing markets, such as Turkey, Eastern Europe, and select parts of Africa. The idea here is to look beyond the BRICs while adjusting to differing rules of engagement.
Perhaps, the least imaginable and bold bet is to ignore inflation worries and not assume of rising rates, while accumulating cheap (toxic) US real estate related investments. Similarly, betting big on a recovering US Dollar strongly qualifies as contrarian when compared to consensus.
The Balanced
Calmer minds are focused on specific opportunities and look to grasp the fragmented parts of the market. A balanced view is reached by not neglecting the available facts and not dismissing a wide range of outcomes for years to come. The residue from the credit crisis takes up tons of pages to explain and numerous hours to digest. Opportunity, however, is found in niche areas within a limited timeframe—a cliché, but valuable, concept in a period of increased competition. Pragmatic observers will note that debt-structuring issues plague government lawmakers in Europe and the US. The mess of the last two decades is unresolved in credit markets, and recent regulation mostly adds layers of complexity. Thus, innovators will have to model a plan of staying compliant and profitable in this globally competitive climate. Identifying that handful of public companies can generate a fruitful, long-term return.
Looking Ahead
A verdict is equally needed in interest rates, which occupies central bankers’ daily tasks as members continue to feel pressure with increasing scrutiny in the mission of crisis avoidance. Both management of crisis and interest rate are interrelated issues, yet the actual impact is not fully assessable or reflected in the recent six-week decline.
Article Quotes:
“As I see it, the two [political] sides in the current disputes have each got hold of one half of the truth, which they proclaim to be the whole truth. It was the hard right that took the initiative by arguing that the government is the cause of all our difficulties, and the so-called left, in so far as it exists, has been forced to defend the need for regulating the private sector and providing government services…. I readily recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better. But I also continue to cling to the other half of the truth, namely that financial markets are inherently unstable and need to be regulated. Above all, I am profoundly worried that those who proclaim half truths as the whole truth, whether they are from the left or the right, are endangering our open society.” (George Soros, April 28, 2011 The Cato Institute event)
“The fact that private banks own considerable shares in European government bonds and risk a major share of their equity in this market makes a restructuring more difficult than otherwise. We understand why, under current conditions, banks have an interest in investing their assets in government bonds. Under current regulation, they need less equity to finance such investments than if they hand out loans to medium-size enterprises. This clearly is like a subsidy by which the governments distort banking decisions, making banks more inclined to finance government debt than engage in their core business.... But from the perspective of economy-wide efficiency, we do not see a convincing reason why banks should use (or should even be stimulated to use) their own funds to invest it in government bonds. They should leave this business to insurance companies, pension funds and small private investors and should turn to their core business as it is outlined in the textbooks about banking business.” (VOX Centre for Economic Policy Research, June 10, 2011)
Levels:
S&P 500 Index [1270.98] – Breaking 1300 (a minor milestone) and approaching 1253, which is the 200-day moving average.
Crude [$99.29] – Trading narrowly and very near the $100. Further clues needed to declare a trend.
Gold [$1540] – Slightly retracing from all-time highs. The ability to hold above $1500 should challenge and attract near-term traders.
DXY – US Dollar Index [74.79] – Showing very early signs of a recovery after a six-month erosion in the value of the Dollar.
US 10-Year Treasury Yields [2.96%] – Staying below 3.00% for another week. Approaching the lower end of a multi-year trend as the 2.80% is the next noteworthy point.
http://markettakers.blogspot.com
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 puzzling market inflection point offers a touch for the hopeful, the skeptic, the bold, and the balanced. As a start, we can attempt to elaborate at each participant’s perspective. The merit of this exercise is to ask who is closer to the truth ? This serves as the intriguing global question for investors, regulators, business owners, and other stakeholders. Most likely, decision makers must understand the varying views to navigate in this landscape.
The Hopeful
Hopeful buyers will cling and claim that recent down moves are merely a sign of under pricing (oversold) and that we’re nearing bargain points. Usually, "it’s cheap" is the age-old, but simple, argument to reenter this market. After all, many banks have year-end targets higher than today’s levels. For example, the strategists of big banks have an average target of 1402 for the S&P 500 Index (Goldman Sachs 1450 and JP Morgan 1475). In some cases, much of the buy impulse is driven through eagerness to capture previously missed ideas, such as jackpots in some tech IPOs, partaking in potential M&A deals, and accumulating well-recognized larger cap companies. The danger here is to assume that markets continue to climb in the long term while underestimating the risk of complacency.
The Skeptic
Skeptics have said and written plenty in regards to questioning the effectiveness of stimulus efforts, even as markets hit multi-year highs just few months ago. Thus, the scare in municipal bond default, weakening European economies, high unemployment rate, and weak real estate data all fail to be categorized as breaking news.
After all, daily market trading is sensitive and responsive to headlines. However, bureaucratic decisions are known to drag. During that deliberation period, the skeptic was dumfounded on how long it takes facts to significantly seep into market performance. For now, the VIX (Volatility Index) remains relatively calm, despite recent pullbacks with the growing list of bad news—a fuzzy picture that has short-sellers wondering if “fear” is in full effect. In this case, confirmation of worrisome trends is required.
The Bold
The daring seek extremes of neglected ideas, while examining the consensus view. On one end, you can wait to observe the magnitude of recent correction and look to buy smaller cap (higher volatility stocks). On the other hand, a bolder move is to create exposure to new growing markets, such as Turkey, Eastern Europe, and select parts of Africa. The idea here is to look beyond the BRICs while adjusting to differing rules of engagement.
Perhaps, the least imaginable and bold bet is to ignore inflation worries and not assume of rising rates, while accumulating cheap (toxic) US real estate related investments. Similarly, betting big on a recovering US Dollar strongly qualifies as contrarian when compared to consensus.
The Balanced
Calmer minds are focused on specific opportunities and look to grasp the fragmented parts of the market. A balanced view is reached by not neglecting the available facts and not dismissing a wide range of outcomes for years to come. The residue from the credit crisis takes up tons of pages to explain and numerous hours to digest. Opportunity, however, is found in niche areas within a limited timeframe—a cliché, but valuable, concept in a period of increased competition. Pragmatic observers will note that debt-structuring issues plague government lawmakers in Europe and the US. The mess of the last two decades is unresolved in credit markets, and recent regulation mostly adds layers of complexity. Thus, innovators will have to model a plan of staying compliant and profitable in this globally competitive climate. Identifying that handful of public companies can generate a fruitful, long-term return.
Looking Ahead
A verdict is equally needed in interest rates, which occupies central bankers’ daily tasks as members continue to feel pressure with increasing scrutiny in the mission of crisis avoidance. Both management of crisis and interest rate are interrelated issues, yet the actual impact is not fully assessable or reflected in the recent six-week decline.
Article Quotes:
“As I see it, the two [political] sides in the current disputes have each got hold of one half of the truth, which they proclaim to be the whole truth. It was the hard right that took the initiative by arguing that the government is the cause of all our difficulties, and the so-called left, in so far as it exists, has been forced to defend the need for regulating the private sector and providing government services…. I readily recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better. But I also continue to cling to the other half of the truth, namely that financial markets are inherently unstable and need to be regulated. Above all, I am profoundly worried that those who proclaim half truths as the whole truth, whether they are from the left or the right, are endangering our open society.” (George Soros, April 28, 2011 The Cato Institute event)
“The fact that private banks own considerable shares in European government bonds and risk a major share of their equity in this market makes a restructuring more difficult than otherwise. We understand why, under current conditions, banks have an interest in investing their assets in government bonds. Under current regulation, they need less equity to finance such investments than if they hand out loans to medium-size enterprises. This clearly is like a subsidy by which the governments distort banking decisions, making banks more inclined to finance government debt than engage in their core business.... But from the perspective of economy-wide efficiency, we do not see a convincing reason why banks should use (or should even be stimulated to use) their own funds to invest it in government bonds. They should leave this business to insurance companies, pension funds and small private investors and should turn to their core business as it is outlined in the textbooks about banking business.” (VOX Centre for Economic Policy Research, June 10, 2011)
Levels:
S&P 500 Index [1270.98] – Breaking 1300 (a minor milestone) and approaching 1253, which is the 200-day moving average.
Crude [$99.29] – Trading narrowly and very near the $100. Further clues needed to declare a trend.
Gold [$1540] – Slightly retracing from all-time highs. The ability to hold above $1500 should challenge and attract near-term traders.
DXY – US Dollar Index [74.79] – Showing very early signs of a recovery after a six-month erosion in the value of the Dollar.
US 10-Year Treasury Yields [2.96%] – Staying below 3.00% for another week. Approaching the lower end of a multi-year trend as the 2.80% is the next noteworthy point.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, June 06, 2011
Market Outlook | June 6, 2011
“The hopes of the Republic cannot forever tolerate either undeserved poverty or self-serving wealth.” -Franklin D. Roosevelt (1882-1945)
A New Month
Plenty of questions were raised in May and unclear answers will be found in June. For starters, both stocks and Crude peaked on May 2, 2011. As usual, this is a directional issue, making observers wonder if broad indexes are pausing or gearing for significant decline. A debate resurfaces, given the upcoming puzzle to the established uptrend, especially with the weakening economy. However, the major macro themes are hard to shake, and it’s even harder to know when things will change. In fact, the last few weeks have witnessed further deterioration in interest rates . This showcases more of the same, as the US 10 Year Treasury Yield is lower than it was at the start of the year, while breaking below 3%.
Self-serving Traits
Human behavior in market pattern should not be underestimated, despite rapid advancement in information technology, logic-based models and fast-paced trading platforms. Yet, the “human element” has a lot of say in shaping market trends. Beyond chatter, the reality points to an opaque approach to policymaking; this is far removed from being fully reformed. As usual, self-serving models persist and dominate the timing of a market trend or policy shift as well as news releases. These topics are magnified, especially during a well-documented election year.
Similarly, preserving the status quo benefits traditional money managers promoting buy-and-hold strategies and other larger firms aligned with the current revenue sharing plans. In other words, turbulence can easily tilt the existing fee model and revenue structure. Changing the existing market and political dynamics is a battle that takes an exorbitant amount of time.
For some media outlets, disappointing economic numbers are worth highlighting to stir up further fear (which is usually handy for the non-incumbent party). At the same time, emphasis on fund managers wrongdoings and European debt problems produce headlines at a rapid pace. In turn, sifting through key events can be misleading. Financial leaders and regulators are spending time on rebuilding previous mistakes rather than on encouraging new business activities. Yet, less publicized events related to the entrepreneurial spirit might have a bigger future impact on overall economic health, but they barely get equal attention unless a handful of new media based initial public offerings (i.e., LinkedIn and Groupon) address them.
Meanwhile, the Federal Reserve at certain points is forced to save face, build investor confidence, and show allegiance to the current administration. Skepticism alone can help discern some hype, but it can hurt the confidence-building exercise, especially in a fragile economic condition. Financial regulators are bombarded with a lot of cases from crisis fall outs and new complex rules to implement and ponder for years ahead. In all this, legal counseling is at a premium just as much as a solid public relation manager.
Basically, the motives of each participant are deeply interlinked. Therefore, investors will be tested on their ability to categorize each event. The real reward is in tracking meaningful events to eventually connecting the dots on big picture movements—perhaps, a valuable approach to a sideways market for the weeks ahead.
Article Quotes:
“Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last "boom"). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: "This is mine." The velveteen rabbit, in the eponymous children's story by Margery Williams, needs love to make it "real." In a similar sort of way, the banks need borrowers to make their money ‘real’.” (The Guardian, June 2 2011).
“No other country is now rising to challenge China's manufacturing power. Hence, it can pass cost increases to global consumers through higher prices. This gives China time to deal with the inflation problem. If exports were falling due to rising prices, China would be forced into pushing inflation down quickly, which would make a hard landing more likely. The slowdown may accelerate in the third quarter as local governments and developers give up hope that the central government may loosen policy again. They'll have to accept lower liquidity levels and cut expenditures accordingly. When that occurs, electricity consumption may drop below the 10 percent growth rate, possibly falling back to below 8 percent.” (Caixin, May 24, 2011)
Levels:
S&P 500 Index [1300.16] – In a corrective mood since May 2, 2011. Next noteworthy level is at 1280 followed by 1260. That’s where buyers would look to reconsider buying based on charts.
Crude [$100.22] – Sitting tight around the $100 range—a glaring trend in the last few weeks.
Gold [$1540] – Resurging after a pause in early May, now revisiting, and near all-time highs.
DXY – US Dollar Index [73.78] – Quite evident that the recent recovery is very short-term and not producing a major follow through.
US 10 Year Treasury Yields [2.98%] – Broke below 3% level, reemphasizing that the low rate environment is not shaken. The peak in February 2011 was a prelude to a four month decline.
http://markettakers.blogspot.com
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 New Month
Plenty of questions were raised in May and unclear answers will be found in June. For starters, both stocks and Crude peaked on May 2, 2011. As usual, this is a directional issue, making observers wonder if broad indexes are pausing or gearing for significant decline. A debate resurfaces, given the upcoming puzzle to the established uptrend, especially with the weakening economy. However, the major macro themes are hard to shake, and it’s even harder to know when things will change. In fact, the last few weeks have witnessed further deterioration in interest rates . This showcases more of the same, as the US 10 Year Treasury Yield is lower than it was at the start of the year, while breaking below 3%.
Self-serving Traits
Human behavior in market pattern should not be underestimated, despite rapid advancement in information technology, logic-based models and fast-paced trading platforms. Yet, the “human element” has a lot of say in shaping market trends. Beyond chatter, the reality points to an opaque approach to policymaking; this is far removed from being fully reformed. As usual, self-serving models persist and dominate the timing of a market trend or policy shift as well as news releases. These topics are magnified, especially during a well-documented election year.
Similarly, preserving the status quo benefits traditional money managers promoting buy-and-hold strategies and other larger firms aligned with the current revenue sharing plans. In other words, turbulence can easily tilt the existing fee model and revenue structure. Changing the existing market and political dynamics is a battle that takes an exorbitant amount of time.
For some media outlets, disappointing economic numbers are worth highlighting to stir up further fear (which is usually handy for the non-incumbent party). At the same time, emphasis on fund managers wrongdoings and European debt problems produce headlines at a rapid pace. In turn, sifting through key events can be misleading. Financial leaders and regulators are spending time on rebuilding previous mistakes rather than on encouraging new business activities. Yet, less publicized events related to the entrepreneurial spirit might have a bigger future impact on overall economic health, but they barely get equal attention unless a handful of new media based initial public offerings (i.e., LinkedIn and Groupon) address them.
Meanwhile, the Federal Reserve at certain points is forced to save face, build investor confidence, and show allegiance to the current administration. Skepticism alone can help discern some hype, but it can hurt the confidence-building exercise, especially in a fragile economic condition. Financial regulators are bombarded with a lot of cases from crisis fall outs and new complex rules to implement and ponder for years ahead. In all this, legal counseling is at a premium just as much as a solid public relation manager.
Basically, the motives of each participant are deeply interlinked. Therefore, investors will be tested on their ability to categorize each event. The real reward is in tracking meaningful events to eventually connecting the dots on big picture movements—perhaps, a valuable approach to a sideways market for the weeks ahead.
Article Quotes:
“Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last "boom"). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: "This is mine." The velveteen rabbit, in the eponymous children's story by Margery Williams, needs love to make it "real." In a similar sort of way, the banks need borrowers to make their money ‘real’.” (The Guardian, June 2 2011).
“No other country is now rising to challenge China's manufacturing power. Hence, it can pass cost increases to global consumers through higher prices. This gives China time to deal with the inflation problem. If exports were falling due to rising prices, China would be forced into pushing inflation down quickly, which would make a hard landing more likely. The slowdown may accelerate in the third quarter as local governments and developers give up hope that the central government may loosen policy again. They'll have to accept lower liquidity levels and cut expenditures accordingly. When that occurs, electricity consumption may drop below the 10 percent growth rate, possibly falling back to below 8 percent.” (Caixin, May 24, 2011)
Levels:
S&P 500 Index [1300.16] – In a corrective mood since May 2, 2011. Next noteworthy level is at 1280 followed by 1260. That’s where buyers would look to reconsider buying based on charts.
Crude [$100.22] – Sitting tight around the $100 range—a glaring trend in the last few weeks.
Gold [$1540] – Resurging after a pause in early May, now revisiting, and near all-time highs.
DXY – US Dollar Index [73.78] – Quite evident that the recent recovery is very short-term and not producing a major follow through.
US 10 Year Treasury Yields [2.98%] – Broke below 3% level, reemphasizing that the low rate environment is not shaken. The peak in February 2011 was a prelude to a four month decline.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Tuesday, May 31, 2011
Market Outlook | May 31, 2011
“I believe in the imagination. What I cannot see is infinitely more important than what I can see.” -Duane Michals
Flow and Rhythm
After a minor pause in commodities and stocks, there are early signs of further acceleration in both indicators. The established trend is uniform and appears to be comforting for trend followers. Each minor sell-off seems short-lived and the buyers’ momentum grows stronger, especially for larger cap companies. The lighter volume around the holiday weekend has not distorted much of the message from the first message in 2011. The obvious, but important, election season will have its influences either in market movement or shaping the outcome of the election—an intertwined phenomenon indeed. Thus, the market behavior will be watched attentively by forecasters as much as political pundits. Either the bad news is bound to be postponed for future years or a reality check can sneak up quickly.
The ‘Supply Shortage’ Theme
Supply shortage is a common theme in several areas of the marketplace. For example, investment options leave many with a lack of high growth ideas for the risks taken. Others leaning toward fixed income may not be quite pleased with lower yields of bonds or traditional CDs—thus, the movement into riskier assets, such as junk bonds. In the commodity world, much of the discussion revolves around scarcity of food, not to mention the long term constraint argument of Crude as reflected in several reports arguing for further appreciation ahead. In fact, Goldman’s and Morgan Stanley’s Crude upgrade contributed to a lift in pricing last week.
In terms of currency, the US Dollar continues to erode in value, but a lack of alternatives keeps the Dollar vibrant for international circulation. In Europe, the smaller economies are restructuring to recover from crisis mode, leaving few places such as Germany or France. The premise of limited availability may be a near-term matter in most cases. However, consensus has accepted and mostly agreed with these above points in making decisions. When these dynamics begin to change, then one can declare an attitude shift while preparing for the consequences.
The element of surprise is the suspenseful part of a lethargic period of a cycle. The last few weeks have slightly questioned the logic and merits of ongoing price appreciation. If there are mood swings, one should watch the fragile areas of the market: emerging markets, small caps, and interest rate sensitive groups. This synchronized upside move is partially fatiguing, yet, timing turbulence can be a costly task in a low rate environment fueled by policymakers.
Specific Ideas
SPTN (Spartan Stores): This grocery distributor offers favorable fundamentals as it raised its dividends by 30% as profitability remains healthy. Improvement in sales and economic recovery, especially in the Midwest, can further contribute to stock appreciation. Meanwhile, the technicals illustrate a bottoming process in stock price as it breaks above 200-day moving average.
HST (Host Hotels & Resorts, Inc): A real estate investment trust with exposure to high-end hotels continues to demonstrate profitability and further growth in its outlook. The company reinvested in several renovation projects while maintaining a steady room booking pace. First quarter earnings were net positive. The recent private placement transactions along with slight increase in dividends contribute to further investment interest.
ATVI ( Activision Blizzard): Relatively quiet and stagnant the last few weeks. In looking ahead, appealing entry point based on charts, especially ahead of the new game release in November 2011. Meanwhile, the recent quarterly earnings were mostly positive and set to beat expectation. Majority of the capital in the video gaming space has chased ERTS (Electronic Arts) in recent weeks, but a rotation back to ATVI (Activision) is appealing in the next 3-6 months.
Article Quotes:
“Another, and potentially more important in the long run, is the reduction in China’s competitive advantage over the U.S. real wages have been more or less stagnant in America, and several manufacturers are emerging from the recession with sharply increased productivity. Leading American companies are taking their next round of expansion at home rather than risk having their intellectual property filched by the Chinese, for which there is no redress; face the regime’s demand that they turn over technology in order to have access to the Chinese market; lose markets because of buy-China policies by government agencies; and cope with unusually severe energy shortages resulting from the government’s fear of allowing electricity prices to keep pace with mounting coal prices. So much for one of the dollar’s potential competitors.” (The Weekly Standard, May 28, 2011)
“Finance seems to be a polytheistic rather than a monotheistic faith. The objects of veneration change on a regular basis from emerging markets through internet companies to commodities. These enthusiasms often have a cult-like quality with adherents inclined to pour scorn on unbelievers who “just don’t get it.” It is striking that the cults often involve asset classes that do not deliver much in the way of immediate cashflow. Dividends will be paid far into the future, long after the likely holding period of the average investor. It is a little bit like the promise of an afterlife.” (The Economist, May 26, 2011)
Levels:
S&P 500 Index [1331.10] – Odds are setting up for near-term recovery while pausing between the 1300 and1340 range the past few weeks.
Crude [$100.59] – Attempting to re-accelerate after stalling in the past few weeks. Next key target stands at 50-day moving average of $105.
Gold [$1533] – Climbing back while approaching May 4th high of 1541. Overall, positive momentum is in full force.
DXY – US Dollar Index [74.95] – After a short-lived Dollar appreciation, the momentum is becoming stuck.
US 10 Year Treasury Yields [3.07%] – A four month decline is establishing a downtrend in yields. It’s trading at the 200-day moving average. The magnitude of further declines serves as a key macro indicator.
http://markettakers.blogspot.com
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.
Flow and Rhythm
After a minor pause in commodities and stocks, there are early signs of further acceleration in both indicators. The established trend is uniform and appears to be comforting for trend followers. Each minor sell-off seems short-lived and the buyers’ momentum grows stronger, especially for larger cap companies. The lighter volume around the holiday weekend has not distorted much of the message from the first message in 2011. The obvious, but important, election season will have its influences either in market movement or shaping the outcome of the election—an intertwined phenomenon indeed. Thus, the market behavior will be watched attentively by forecasters as much as political pundits. Either the bad news is bound to be postponed for future years or a reality check can sneak up quickly.
The ‘Supply Shortage’ Theme
Supply shortage is a common theme in several areas of the marketplace. For example, investment options leave many with a lack of high growth ideas for the risks taken. Others leaning toward fixed income may not be quite pleased with lower yields of bonds or traditional CDs—thus, the movement into riskier assets, such as junk bonds. In the commodity world, much of the discussion revolves around scarcity of food, not to mention the long term constraint argument of Crude as reflected in several reports arguing for further appreciation ahead. In fact, Goldman’s and Morgan Stanley’s Crude upgrade contributed to a lift in pricing last week.
In terms of currency, the US Dollar continues to erode in value, but a lack of alternatives keeps the Dollar vibrant for international circulation. In Europe, the smaller economies are restructuring to recover from crisis mode, leaving few places such as Germany or France. The premise of limited availability may be a near-term matter in most cases. However, consensus has accepted and mostly agreed with these above points in making decisions. When these dynamics begin to change, then one can declare an attitude shift while preparing for the consequences.
The element of surprise is the suspenseful part of a lethargic period of a cycle. The last few weeks have slightly questioned the logic and merits of ongoing price appreciation. If there are mood swings, one should watch the fragile areas of the market: emerging markets, small caps, and interest rate sensitive groups. This synchronized upside move is partially fatiguing, yet, timing turbulence can be a costly task in a low rate environment fueled by policymakers.
Specific Ideas
SPTN (Spartan Stores): This grocery distributor offers favorable fundamentals as it raised its dividends by 30% as profitability remains healthy. Improvement in sales and economic recovery, especially in the Midwest, can further contribute to stock appreciation. Meanwhile, the technicals illustrate a bottoming process in stock price as it breaks above 200-day moving average.
HST (Host Hotels & Resorts, Inc): A real estate investment trust with exposure to high-end hotels continues to demonstrate profitability and further growth in its outlook. The company reinvested in several renovation projects while maintaining a steady room booking pace. First quarter earnings were net positive. The recent private placement transactions along with slight increase in dividends contribute to further investment interest.
ATVI ( Activision Blizzard): Relatively quiet and stagnant the last few weeks. In looking ahead, appealing entry point based on charts, especially ahead of the new game release in November 2011. Meanwhile, the recent quarterly earnings were mostly positive and set to beat expectation. Majority of the capital in the video gaming space has chased ERTS (Electronic Arts) in recent weeks, but a rotation back to ATVI (Activision) is appealing in the next 3-6 months.
Article Quotes:
“Another, and potentially more important in the long run, is the reduction in China’s competitive advantage over the U.S. real wages have been more or less stagnant in America, and several manufacturers are emerging from the recession with sharply increased productivity. Leading American companies are taking their next round of expansion at home rather than risk having their intellectual property filched by the Chinese, for which there is no redress; face the regime’s demand that they turn over technology in order to have access to the Chinese market; lose markets because of buy-China policies by government agencies; and cope with unusually severe energy shortages resulting from the government’s fear of allowing electricity prices to keep pace with mounting coal prices. So much for one of the dollar’s potential competitors.” (The Weekly Standard, May 28, 2011)
“Finance seems to be a polytheistic rather than a monotheistic faith. The objects of veneration change on a regular basis from emerging markets through internet companies to commodities. These enthusiasms often have a cult-like quality with adherents inclined to pour scorn on unbelievers who “just don’t get it.” It is striking that the cults often involve asset classes that do not deliver much in the way of immediate cashflow. Dividends will be paid far into the future, long after the likely holding period of the average investor. It is a little bit like the promise of an afterlife.” (The Economist, May 26, 2011)
Levels:
S&P 500 Index [1331.10] – Odds are setting up for near-term recovery while pausing between the 1300 and1340 range the past few weeks.
Crude [$100.59] – Attempting to re-accelerate after stalling in the past few weeks. Next key target stands at 50-day moving average of $105.
Gold [$1533] – Climbing back while approaching May 4th high of 1541. Overall, positive momentum is in full force.
DXY – US Dollar Index [74.95] – After a short-lived Dollar appreciation, the momentum is becoming stuck.
US 10 Year Treasury Yields [3.07%] – A four month decline is establishing a downtrend in yields. It’s trading at the 200-day moving average. The magnitude of further declines serves as a key macro indicator.
http://markettakers.blogspot.com
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, May 23, 2011
Market Outlook | May 23, 2011
“There are things known and there are things unknown, and in between are the doors of perception.” - Aldous Huxley (1894-1963)
Picking Spots
Analyzing markets or specific ideas in broad terms are too tricky these days. For the most part, the first half in the US can be described as positive and favoring a recovery. When reverting to multi-month charts of broad indexes, one can quickly get the feeling of the market being too synchronized. However, select pockets of the economic sectors are more attractive than others. For example, “According to the Goldman Sachs study, some 47% of the aggregate equity assets of the hedge funds is invested in stocks with market capitalizations of more than $10 billion as of the first quarter of this year” (Forbes, May 20, 2011). Clearly, this points to a bias towards big cap and does not necessarily tell the full story.
Perhaps, making this adjustment is the challenge ahead. As the summer season is upon us, it might be easy to forget that the S&P 500 has declined for three consecutive weeks. On the surface, there are milder excitements building similar to the tech rally of 1999, and the welcoming of risk mirrors the 2007 era. Most notably, short-term profits appear feasible in recent private placement and public offerings in technology, as well as ongoing momentum in commodity related investments. As usual, the spin on the current climate can be simply applied by headline makers or politics alike. The trouble lies in trying to ignore the noise and map out a 6 -12 month plan, especially for those judged by the performance game. Sustainable ideas and themes are becoming scarce, which makes the next few weeks rather eventful. Meanwhile, piling on to winning ideas seems to serve as a short-term cure for those fearful of not participating in recent winners. It is only human nature to favor the working sectors, as contrarians have to take a brave angle to go against the trend.
Driving Forces
Most financial decision makers have (correctly so far) aligned with the central bank induced rally. Money managers have increased their risk appetite, and that has paid off. In addition, the crowd is relatively infatuated with Gold, which appears to make more sense in the fragile currency environment. Basically, it is hard to ignore the low rate environment that has propelled investors to move towards stock and junk bonds. The congruent message of global central banks has impacted investor behavior and remains the most prevailing theme impacting interest rates and the perception of risk. Simply, looking at the volatility index once can strongly argue that money managers are humming to the same tune of higher stock prices and low turbulence. Of course, surprises lie ahead, but the question is on the magnitude of any pending correction that may alter short-term behavior.
Article Quotes:
“The International Monetary Fund recently estimated that Iraq’s gross domestic product grew 2.6 percent last year — nearly as much as the struggling American economy did — and it projected astonishing increases, exceeding 11 percent this year and next. Some say Iraq’s economy — estimated at roughly $80 billion today — could expand six or seven times in the next decade as it increases oil production to a level rivaling Saudi Arabia’s….Today, in the new Iraq, the Shamara Holding Company builds power stations and steel mills. It is expanding into pipelines, refineries, and other services for the various multinational corporations that in 2009 won the first contracts to exploit Iraq’s oil and natural gas, in what was one of the single biggest energy auctions in history.” (New York Times, May 18, 2011)
“Adjusted for inflation, prices are close to their long-term trend after the bubble years of the 1990s and the first years of the 2000s….Vacancies for apartments tumbled in the first quarter of the year and are now at a three-year low. Rents have been rising, and analysts expect them to increase by over 4% this year and next. Rent rises typically support house prices by making home-ownership more attractive. The credit markets are healing. Mortgage borrowing actually rose in the first quarter, according to the Federal Reserve Bank of New York. New foreclosures were 17.7% lower in the first quarter than they had been at the end of 2010, and household delinquency improved for a fifth consecutive quarter. Mortgage rates have fallen back to historic lows, tracking declines in yields on American government bonds.” (The Economist, May 19, 2011)
Levels:
S&P 500 Index [1333.27] – Pausing between 1300 and 1340 range. This slight breather begs the question of an acceleration versus a further sideway pattern.
Crude [$99.49] – Stabilizing around $99 in the past few weeks. The early May correction has served as a significant blow to reignite buyer interest.
Gold [$1490.75] – Taking a breather after rising 16% from late January until early May 2011. Long awaited reacceleration will be tested.
DXY – US Dollar Index [75.43] – Slowly hinting at a recovery but failing to show significant movement from last week.
US 10 Year Treasury Yields [3.14%] – Continuing its downtrend from the early year peak of 3.76%. Approaching the 50-day moving average of 3.07%
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.
Picking Spots
Analyzing markets or specific ideas in broad terms are too tricky these days. For the most part, the first half in the US can be described as positive and favoring a recovery. When reverting to multi-month charts of broad indexes, one can quickly get the feeling of the market being too synchronized. However, select pockets of the economic sectors are more attractive than others. For example, “According to the Goldman Sachs study, some 47% of the aggregate equity assets of the hedge funds is invested in stocks with market capitalizations of more than $10 billion as of the first quarter of this year” (Forbes, May 20, 2011). Clearly, this points to a bias towards big cap and does not necessarily tell the full story.
Perhaps, making this adjustment is the challenge ahead. As the summer season is upon us, it might be easy to forget that the S&P 500 has declined for three consecutive weeks. On the surface, there are milder excitements building similar to the tech rally of 1999, and the welcoming of risk mirrors the 2007 era. Most notably, short-term profits appear feasible in recent private placement and public offerings in technology, as well as ongoing momentum in commodity related investments. As usual, the spin on the current climate can be simply applied by headline makers or politics alike. The trouble lies in trying to ignore the noise and map out a 6 -12 month plan, especially for those judged by the performance game. Sustainable ideas and themes are becoming scarce, which makes the next few weeks rather eventful. Meanwhile, piling on to winning ideas seems to serve as a short-term cure for those fearful of not participating in recent winners. It is only human nature to favor the working sectors, as contrarians have to take a brave angle to go against the trend.
Driving Forces
Most financial decision makers have (correctly so far) aligned with the central bank induced rally. Money managers have increased their risk appetite, and that has paid off. In addition, the crowd is relatively infatuated with Gold, which appears to make more sense in the fragile currency environment. Basically, it is hard to ignore the low rate environment that has propelled investors to move towards stock and junk bonds. The congruent message of global central banks has impacted investor behavior and remains the most prevailing theme impacting interest rates and the perception of risk. Simply, looking at the volatility index once can strongly argue that money managers are humming to the same tune of higher stock prices and low turbulence. Of course, surprises lie ahead, but the question is on the magnitude of any pending correction that may alter short-term behavior.
Article Quotes:
“The International Monetary Fund recently estimated that Iraq’s gross domestic product grew 2.6 percent last year — nearly as much as the struggling American economy did — and it projected astonishing increases, exceeding 11 percent this year and next. Some say Iraq’s economy — estimated at roughly $80 billion today — could expand six or seven times in the next decade as it increases oil production to a level rivaling Saudi Arabia’s….Today, in the new Iraq, the Shamara Holding Company builds power stations and steel mills. It is expanding into pipelines, refineries, and other services for the various multinational corporations that in 2009 won the first contracts to exploit Iraq’s oil and natural gas, in what was one of the single biggest energy auctions in history.” (New York Times, May 18, 2011)
“Adjusted for inflation, prices are close to their long-term trend after the bubble years of the 1990s and the first years of the 2000s….Vacancies for apartments tumbled in the first quarter of the year and are now at a three-year low. Rents have been rising, and analysts expect them to increase by over 4% this year and next. Rent rises typically support house prices by making home-ownership more attractive. The credit markets are healing. Mortgage borrowing actually rose in the first quarter, according to the Federal Reserve Bank of New York. New foreclosures were 17.7% lower in the first quarter than they had been at the end of 2010, and household delinquency improved for a fifth consecutive quarter. Mortgage rates have fallen back to historic lows, tracking declines in yields on American government bonds.” (The Economist, May 19, 2011)
Levels:
S&P 500 Index [1333.27] – Pausing between 1300 and 1340 range. This slight breather begs the question of an acceleration versus a further sideway pattern.
Crude [$99.49] – Stabilizing around $99 in the past few weeks. The early May correction has served as a significant blow to reignite buyer interest.
Gold [$1490.75] – Taking a breather after rising 16% from late January until early May 2011. Long awaited reacceleration will be tested.
DXY – US Dollar Index [75.43] – Slowly hinting at a recovery but failing to show significant movement from last week.
US 10 Year Treasury Yields [3.14%] – Continuing its downtrend from the early year peak of 3.76%. Approaching the 50-day moving average of 3.07%
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, May 16, 2011
Market Outlook | May 16, 2011
“Delay is the deadliest form of denial.” - Cyril Northcote Parkinson (1909-1993)
The quote above comes from Cyril Northcote Parkinson, a naval historian and author who wrote several books on bureaucracy, especially during a period where the British Empire began to lose its power. Generally, the denial of harsh truth is applicable for irresponsible behaviors and decisions. Interestingly enough, this witty statement applies to the current market behavior. For astute participants, delaying the inevitable might have its consequences heading into the second half of the year.
An observer notes, “Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity” (May 13, 2011, Minyanville). That said, the marketplace is not necessarily acknowledging this point.
Revisiting Old Lessons
In a mindboggling manner, history finds a way to reoccur in a different form. We are learning that one does not need to go back hundreds of years for previous lessons. It was only a few years ago in 2007 when the pending credit meltdown was fairly visible (to put it mildly) for insiders such as real estate executives, risk managers at banks, and manufactures of short-term products. The final result of the 2008 crisis left a major dent in the existing system for consumer activity and perception of paper assets.
These days, postponing reality is an art painted by policymakers in charge of the debt issues. Equally, key and large investment managers regurgitate this story to their investors—a risky proposition for those with long-term stake. However, transactional based players view this as means of paying short-term bills while capitalizing on certain incentives or fees. Clearly, politics are known to get in the way of logic and eventually lead to plenty of room for pitfalls. It is no accident that an election year is ahead of us, and the “going with the flow” market can produce positive year-to-date numbers for causal watchers. On the other hand, panicking and fear mongering is the opposing thought. If you read publications, fear of collapse is well documented and, at times, overblown. Perhaps, that’s a message with its own agenda as well. Yet again, the savvy investor has to carefully build a swift process. Ultimately, the market performance has the final say.
Fragile State of Mind
An early inflection point is quietly building some suspense on the actual magnitude. This month has seen a small recovery in US Dollar and stabilization in Yields which may trigger a macro change in investor mindset. Of course, the steep commodity declines sent a few shockwaves last week. For most, buying on weakness (stocks and commodities) has worked in the 2009-2011 cycle as comfort is setting in place. Clearly, an inflationary pressure persists globally, given food and energy prices—a topic that is hard to shy away from for central banks. At this point, the Federal Reserve might have injected enough stimuli into the system through quantitative easing (QE2). Refueling further confidence might be asking too much, but surprises are part of the game.
Article Quotes:
“What I want to say, then, is that trading equity derivatives is like playing a game written by programmers who got every mechanic exactly right. You might balk: "Of course they 'got it right' -- trading feels real because it is real!" But when you think about the bizarre circumstances of these electronic trades -- how they're simultaneously rooted in significant human commerce and yet so far abstracted from it -- and when you see your friend drag and drop real fortunes the way I might crop a Facebook photo, you come to believe that working on a modern trading desk is more like playing an excellent flight simulator than actually flying a plane…. Think of Predator missions in Iraq being controlled by joysticks in Southern California, or oil reserves being fractured and drilled by remote control.” (James Somers, The Atlantic May 9, 2011)
“The broader point made by critics of "shadow banking"-- that hedge fund managers are part of a vast, unregulated sector that threatens the stability of global financial markets -- is wrong too. Hedge funds do not inhabit the regulatory equivalent of the shadows. All the major jurisdictions where they operate -- whether in North America, Europe or Asia-Pacific -- regulate the industry rigorously. The only big jurisdiction that did not require managers to register with their regulator, the US, has now rectified that. Already significant levels of regulation are being further increased by legislation introduced since the financial crisis.” (Financial Times, May 15, 2011)
Levels:
S&P 500 Index [1377.77] – The recent hurdle is visible around the 1320 range, as the index continues to slightly stay above that mark. On a similar note, the 50-day moving average stands at 1323.20.
Crude [$99.65] – Turbulent movements in the past four months. For now, the majority of buyers seem willing to purchase, especially close to $95. If buyers lose steam at the $95 range, then further vulnerability ahead.
Gold [$1505.75] – Unshaken long-term momentum with no visible weakness at this junction. Further investor demand can elevate the commodity back to all-time highs of 1541 (May 4, 2011).
DXY – US Dollar Index [75.75] – Amidst a short-term recovery, sparked by a May 4th trend reversal. To claim the Dollar is recovering is a tiring story that many won’t buy into, especially after sharp declines. Slightly above the 50-day moving average, but not convincing yet.
US 10 Year Treasury Yields [3.17%] – An intriguing junction as Yields seem to bottom around 3.12%- 3.20%. A follow through in raising Yields can trigger macro shifts for a turbulent summer.
http://markettakers.blogspot.com
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 quote above comes from Cyril Northcote Parkinson, a naval historian and author who wrote several books on bureaucracy, especially during a period where the British Empire began to lose its power. Generally, the denial of harsh truth is applicable for irresponsible behaviors and decisions. Interestingly enough, this witty statement applies to the current market behavior. For astute participants, delaying the inevitable might have its consequences heading into the second half of the year.
An observer notes, “Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity” (May 13, 2011, Minyanville). That said, the marketplace is not necessarily acknowledging this point.
Revisiting Old Lessons
In a mindboggling manner, history finds a way to reoccur in a different form. We are learning that one does not need to go back hundreds of years for previous lessons. It was only a few years ago in 2007 when the pending credit meltdown was fairly visible (to put it mildly) for insiders such as real estate executives, risk managers at banks, and manufactures of short-term products. The final result of the 2008 crisis left a major dent in the existing system for consumer activity and perception of paper assets.
These days, postponing reality is an art painted by policymakers in charge of the debt issues. Equally, key and large investment managers regurgitate this story to their investors—a risky proposition for those with long-term stake. However, transactional based players view this as means of paying short-term bills while capitalizing on certain incentives or fees. Clearly, politics are known to get in the way of logic and eventually lead to plenty of room for pitfalls. It is no accident that an election year is ahead of us, and the “going with the flow” market can produce positive year-to-date numbers for causal watchers. On the other hand, panicking and fear mongering is the opposing thought. If you read publications, fear of collapse is well documented and, at times, overblown. Perhaps, that’s a message with its own agenda as well. Yet again, the savvy investor has to carefully build a swift process. Ultimately, the market performance has the final say.
Fragile State of Mind
An early inflection point is quietly building some suspense on the actual magnitude. This month has seen a small recovery in US Dollar and stabilization in Yields which may trigger a macro change in investor mindset. Of course, the steep commodity declines sent a few shockwaves last week. For most, buying on weakness (stocks and commodities) has worked in the 2009-2011 cycle as comfort is setting in place. Clearly, an inflationary pressure persists globally, given food and energy prices—a topic that is hard to shy away from for central banks. At this point, the Federal Reserve might have injected enough stimuli into the system through quantitative easing (QE2). Refueling further confidence might be asking too much, but surprises are part of the game.
Article Quotes:
“What I want to say, then, is that trading equity derivatives is like playing a game written by programmers who got every mechanic exactly right. You might balk: "Of course they 'got it right' -- trading feels real because it is real!" But when you think about the bizarre circumstances of these electronic trades -- how they're simultaneously rooted in significant human commerce and yet so far abstracted from it -- and when you see your friend drag and drop real fortunes the way I might crop a Facebook photo, you come to believe that working on a modern trading desk is more like playing an excellent flight simulator than actually flying a plane…. Think of Predator missions in Iraq being controlled by joysticks in Southern California, or oil reserves being fractured and drilled by remote control.” (James Somers, The Atlantic May 9, 2011)
“The broader point made by critics of "shadow banking"-- that hedge fund managers are part of a vast, unregulated sector that threatens the stability of global financial markets -- is wrong too. Hedge funds do not inhabit the regulatory equivalent of the shadows. All the major jurisdictions where they operate -- whether in North America, Europe or Asia-Pacific -- regulate the industry rigorously. The only big jurisdiction that did not require managers to register with their regulator, the US, has now rectified that. Already significant levels of regulation are being further increased by legislation introduced since the financial crisis.” (Financial Times, May 15, 2011)
Levels:
S&P 500 Index [1377.77] – The recent hurdle is visible around the 1320 range, as the index continues to slightly stay above that mark. On a similar note, the 50-day moving average stands at 1323.20.
Crude [$99.65] – Turbulent movements in the past four months. For now, the majority of buyers seem willing to purchase, especially close to $95. If buyers lose steam at the $95 range, then further vulnerability ahead.
Gold [$1505.75] – Unshaken long-term momentum with no visible weakness at this junction. Further investor demand can elevate the commodity back to all-time highs of 1541 (May 4, 2011).
DXY – US Dollar Index [75.75] – Amidst a short-term recovery, sparked by a May 4th trend reversal. To claim the Dollar is recovering is a tiring story that many won’t buy into, especially after sharp declines. Slightly above the 50-day moving average, but not convincing yet.
US 10 Year Treasury Yields [3.17%] – An intriguing junction as Yields seem to bottom around 3.12%- 3.20%. A follow through in raising Yields can trigger macro shifts for a turbulent summer.
http://markettakers.blogspot.com
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.
Saturday, May 07, 2011
Market Outlook | May 8, 2011
“Fiction reveals truths that reality obscures.” - Jessamyn West (1902-1984)
The curiosity continues to build as many wonder if the recent upside run is fully justified. As usual with any mild correction, the thoughts and concerns of a trend shift begin to resurface. Last week’s action emphasized a potential trend reversal, especially with some bottoming in US Dollar, and sharp commodity declines. At this junction, it only takes a few minor knocks to get heads turning towards a cautious state. The suspense is already brewing after the lackadaisical Volatility Index (VIX) got a wake-up call last week. The “turbulence” indicator witnessed its calmest point of 14.27 on April 28, 2011. Since that point, the Volatility Index ended the week at 18.40, following a noteworthy spike. Therefore, it is worth asking this question: Can a herd-like mentality of trend following sustain itself in the weeks ahead?
As a start, the momentum buying in the past few months can be categorized by the following three key themes:
1. Shift Towards Hard Assets
As witnessed for several years, there is an increased rotation to Gold and Silver while reducing exposure to paper assets in the developed world.
2. Demand for Higher Yields
Investors that are fed up with low interest rates are desperately searching for an alternative. Therefore, managers are forced to step up risk exposure with the hopes of the attainment of desired returns.
3. Search for Growth
Longer-term participants project higher growth potential in emerging markets.
These well-documented trends are interrelated and soon to be challenged. Interestingly, the low rates that are influenced by central bankers greatly contribute to the themes above. Similarly, these policy driven actions explain the synchronized pattern among asset classes. In addition, inflation worries are becoming a popular global discussion, and it is nearly inevitable for that to turn into a political matter. As central bankers begin to address the inflation issues, these dominant themes may fail to satisfy the consensus expectation. Basically, this current condition showcases that the pace of the market’s appreciation is not in-line with the economic recovery. For now, timing is the tricky part, but staying alert for a series of catalysts is essential for a risk manager. Meanwhile, value oriented investors may find that entering here is less enticing when reviewing the pricing of specific ideas. Perhaps, an 8-12% broad market correction can make the playing field more attractive to those looking to accumulate US stocks at reasonable to low prices.
Specific Ideas:
AWR (Amer States Water): Having stayed mostly idle in the recent 2009-2011 recovery, the stock price of this water company are far from being overpriced, at least on a relative basis. This conservatively managed company has paid dividends for 57 years while being in a less glossy industry. Growth-like returns may not be visible in the near-term, but bargain hunters are likely to take a closer look.
UMPQ (Umpqua Holdings): Technical indicators would argue for an attractive intermediate-term outlook for shareholders of this Portland, Oregon, based bank. UMPQ’s longer-term core business is appealing on a fundamental basis despite the fragile conditions of the financial service sector. Recovery in lending (desperately needed for business managers) bodes well for a company that’s cleaned up its balance sheet, while in the past few quarters.
ROCK (Gibraltar Industries): A profitable first quarter is barely hitting the radar of many observers. Owners of this stock gain exposure to a manufacturer of buildings as part of an infrastructure play. Cost reduction efforts contributed to a recent 12% (1st quarter) increase in sales growth. Any pending weakness around $11 per share offers an early look at a buying opportunity.
Article Quotes:
“As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise. But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.” (Project Syndicate, May 5, 2011)
“I take strong exception with Bernanke's framework. His analytical focus rests upon the policy response to a crisis, while the lessons of history point rather directly to uncontrolled credit expansion and attendant speculative excess as the root cause of major financial crises. It is crucial to have a framework—a doctrine of clearly defined "rules of the game"—that protects the integrity of the system against the type of excesses that risk a crisis of confidence and systemic collapse (such as massive federal deficits and a ballooning central bank balance sheet). This is foreign to current Federal Reserve doctrine…. We're in need of some rules. We need rules that would ensure that the Fed never again accommodates a doubling of mortgage credit in about six years. We need rules that ensure that the Fed is not complicit in double-digit-to-GDP federal deficits and a doubling of federal debt in less than four years.” (Asian Times, Doug Noland, May 3, 2011)
Levels:
S&P 500 Index [1340.20] – Charts point out early signs of vulnerability, especially above 1340. Day-to-day action should determine the magnitude of a pending pause. Yet, the overall trend is positive from longer-term indicators.
Crude [$97.18] – A sharp and ‘bubble’-like decline as the commodity fell from $110 to $97. The 3-month run is under pressure as the confirmation of recent moves is eagerly awaited in upcoming trading days.
Gold [$1486.50] – Indication of pausing while the uptrend is setting up for a correction. Next noteworthy target is the 50-day moving average of $1454. A major move below $1400 may trigger worries of this run.
DXY – US Dollar Index [72.93] – The bleeding appears to have paused moderately. After making annual lows on May 4th, the week ended with a sharp spike.
US 10 Year Treasury Yields [3.28%] – Nearly a 3 month decline in yields is beginning to dampen the recovery above 3% that began in fall 2010.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
The curiosity continues to build as many wonder if the recent upside run is fully justified. As usual with any mild correction, the thoughts and concerns of a trend shift begin to resurface. Last week’s action emphasized a potential trend reversal, especially with some bottoming in US Dollar, and sharp commodity declines. At this junction, it only takes a few minor knocks to get heads turning towards a cautious state. The suspense is already brewing after the lackadaisical Volatility Index (VIX) got a wake-up call last week. The “turbulence” indicator witnessed its calmest point of 14.27 on April 28, 2011. Since that point, the Volatility Index ended the week at 18.40, following a noteworthy spike. Therefore, it is worth asking this question: Can a herd-like mentality of trend following sustain itself in the weeks ahead?
As a start, the momentum buying in the past few months can be categorized by the following three key themes:
1. Shift Towards Hard Assets
As witnessed for several years, there is an increased rotation to Gold and Silver while reducing exposure to paper assets in the developed world.
2. Demand for Higher Yields
Investors that are fed up with low interest rates are desperately searching for an alternative. Therefore, managers are forced to step up risk exposure with the hopes of the attainment of desired returns.
3. Search for Growth
Longer-term participants project higher growth potential in emerging markets.
These well-documented trends are interrelated and soon to be challenged. Interestingly, the low rates that are influenced by central bankers greatly contribute to the themes above. Similarly, these policy driven actions explain the synchronized pattern among asset classes. In addition, inflation worries are becoming a popular global discussion, and it is nearly inevitable for that to turn into a political matter. As central bankers begin to address the inflation issues, these dominant themes may fail to satisfy the consensus expectation. Basically, this current condition showcases that the pace of the market’s appreciation is not in-line with the economic recovery. For now, timing is the tricky part, but staying alert for a series of catalysts is essential for a risk manager. Meanwhile, value oriented investors may find that entering here is less enticing when reviewing the pricing of specific ideas. Perhaps, an 8-12% broad market correction can make the playing field more attractive to those looking to accumulate US stocks at reasonable to low prices.
Specific Ideas:
AWR (Amer States Water): Having stayed mostly idle in the recent 2009-2011 recovery, the stock price of this water company are far from being overpriced, at least on a relative basis. This conservatively managed company has paid dividends for 57 years while being in a less glossy industry. Growth-like returns may not be visible in the near-term, but bargain hunters are likely to take a closer look.
UMPQ (Umpqua Holdings): Technical indicators would argue for an attractive intermediate-term outlook for shareholders of this Portland, Oregon, based bank. UMPQ’s longer-term core business is appealing on a fundamental basis despite the fragile conditions of the financial service sector. Recovery in lending (desperately needed for business managers) bodes well for a company that’s cleaned up its balance sheet, while in the past few quarters.
ROCK (Gibraltar Industries): A profitable first quarter is barely hitting the radar of many observers. Owners of this stock gain exposure to a manufacturer of buildings as part of an infrastructure play. Cost reduction efforts contributed to a recent 12% (1st quarter) increase in sales growth. Any pending weakness around $11 per share offers an early look at a buying opportunity.
Article Quotes:
“As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise. But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.” (Project Syndicate, May 5, 2011)
“I take strong exception with Bernanke's framework. His analytical focus rests upon the policy response to a crisis, while the lessons of history point rather directly to uncontrolled credit expansion and attendant speculative excess as the root cause of major financial crises. It is crucial to have a framework—a doctrine of clearly defined "rules of the game"—that protects the integrity of the system against the type of excesses that risk a crisis of confidence and systemic collapse (such as massive federal deficits and a ballooning central bank balance sheet). This is foreign to current Federal Reserve doctrine…. We're in need of some rules. We need rules that would ensure that the Fed never again accommodates a doubling of mortgage credit in about six years. We need rules that ensure that the Fed is not complicit in double-digit-to-GDP federal deficits and a doubling of federal debt in less than four years.” (Asian Times, Doug Noland, May 3, 2011)
Levels:
S&P 500 Index [1340.20] – Charts point out early signs of vulnerability, especially above 1340. Day-to-day action should determine the magnitude of a pending pause. Yet, the overall trend is positive from longer-term indicators.
Crude [$97.18] – A sharp and ‘bubble’-like decline as the commodity fell from $110 to $97. The 3-month run is under pressure as the confirmation of recent moves is eagerly awaited in upcoming trading days.
Gold [$1486.50] – Indication of pausing while the uptrend is setting up for a correction. Next noteworthy target is the 50-day moving average of $1454. A major move below $1400 may trigger worries of this run.
DXY – US Dollar Index [72.93] – The bleeding appears to have paused moderately. After making annual lows on May 4th, the week ended with a sharp spike.
US 10 Year Treasury Yields [3.28%] – Nearly a 3 month decline in yields is beginning to dampen the recovery above 3% that began in fall 2010.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, May 02, 2011
Market Outlook | May 2, 2011
“The two most powerful warriors are patience and time.” - Leo Nikolaevich Tolstoy
Playing Field
Some point out the disconnect between economic health and stock behavior. This discrepancy is not easily visible as perception presents a positive story. A similar disconnect might exist between recent earnings optimism and current market pricing. Interestingly, a short-term oriented mindset is known to favor “momentum” and, in turn, reflect a lower volatility. Meanwhile, investors waiting for a better buy point will be required to exhibit patience and inquire on the influential themes. Similarly, those seeking to take profits from recent gains will have to show grit and fight greedy urges. At this junction, speculating on either side of the direction is not comforting for decision makers. Instead, most money managers are inclined to accept the trend while getting more clues from earnings chatter and monthly economic data.
Too Familiar Pattern
The acceleration of stock indexes mirrors commodity prices, which questions if risk aversion truly exists in this cycle. Instead, ‘fear’ has slowly subsided with each upside movement since March 2009. The skeptics fear that either a distorted message is transmitted or we’re entering a fragile state in this cycle. Yet, the S&P 500 Index is setting up to revisit the 1400 range as the next target. Perhaps, then can we measure the conviction of new buyers as it may serve as a vote of confidence.
The glaring aspect of this run is not the actual upside move but the continuation of an established and synchronized trend. Interestingly, the themes from most of the 2000’s remain dominant these days. The energy related run is reflected in Crude prices as well as the Oil Service index. On the same note, Gold is making new all-time highs in a well-documented explosive move. Finally, the US Dollar weakness is decelerating, and US interest rates are not moving significantly—a macro combination that is too familiar for experts as well as casual observers.
The Challenge
Finding distinct ideas in liquid markets is not easy, especially for bargain hunters. There is a risk of overpaying in a market (S&P 500 Index) that has risen by nearly 35% since July 1, 2010. Being a contrarian alone does not provide a full answer, especially for those seeking growth-like returns. Being selective in specific ideas is an approach worth considering, especially from a longer-term view. Importantly, traditional indicators may suggest overbought/overvalued conditions, while irrational behavior can persist longer than imagined. Thus, balancing the logical reality from the perceived reality is the challenge in weeks ahead.
Specific Ideas:
PSEC (Prospect Capital): A private equity firm that offers a small cap exposure in financial services. In this business cycle, the company is geared to capture opportunities related to venture capital, lending, and capital raising. The stock price is not stretched and removed from all-time highs of $18.97 in 2006.
VIVO (Meridian Bioscience): A profitable company in the diagnostic test kits for respiratory and gastrointestinal diseases. This is a small cap healthcare firm that pays out dividends and is run by highly rated management. A projected 16% growth rate appeals to long-term investors as any weakness closer to $22 offers an attractive entry point.
HWAY (Healthways, Inc.): After a sluggish 2 + years, early signs of a recovery were stirred in recent earnings announcement by increasing contracts from traditional health plans and employer markets. The short-term optimism is a sign of confidence in healthcare reform. In addition, pure fundamentals, such as the price/cash flow, are below industry average.
Article Quotes:
“Given the extraordinary fiscal and monetary indulgence that has been heaped upon the economy in recent years, it is tempting to believe that the world has changed in ways that make structured, historical, value-based analysis inappropriate. But in my view, this gives far too much long-term credit to short-term phenomena. It's certainly true that we ought to adapt to the possibility that valuation "norms" will be higher (and long-term return expectations will be lower) in the face of persistent policy efforts to elevate asset prices and foment bubbles. Still, our estimates of expected market returns have remained very accurate even in the most recent decade, so the lesson is not that valuations don't matter, or that 2+2 no longer equals 4 (our long-term return estimates are essentially basic algebra), but rather that policy makers may engender higher valuations and lower long-term return prospects more frequently in the years ahead than they have in the past.” (John P. Hussman, Ph.D, May 2, 2011)
“Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment. Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men.” (The Economist, April 28, 2011)
Levels:
S&P 500 Index [1363.61] – Ongoing multi-year recovery by making new highs. Breaking above 1350 to reaffirm further strength.
Crude [$113.93] – A surging run as the commodity is up 35% since late February 2011. Charts suggest that prices are stretched in the near-term.
Gold [$1535.50] – New all-time highs, yet again, for another week. Currently, the index is 14% removed from its 200-day moving average.
DXY – US Dollar Index [72.93] – Making new lows for the year as weakness persists at a faster pace than multi-year downtrend.
US 10 Year Treasury Yields [3.28%] – In 2011, yields have stayed within a range of 3.20-3.40%a sideways pattern that keeps fixed income investors in suspense.
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.
Playing Field
Some point out the disconnect between economic health and stock behavior. This discrepancy is not easily visible as perception presents a positive story. A similar disconnect might exist between recent earnings optimism and current market pricing. Interestingly, a short-term oriented mindset is known to favor “momentum” and, in turn, reflect a lower volatility. Meanwhile, investors waiting for a better buy point will be required to exhibit patience and inquire on the influential themes. Similarly, those seeking to take profits from recent gains will have to show grit and fight greedy urges. At this junction, speculating on either side of the direction is not comforting for decision makers. Instead, most money managers are inclined to accept the trend while getting more clues from earnings chatter and monthly economic data.
Too Familiar Pattern
The acceleration of stock indexes mirrors commodity prices, which questions if risk aversion truly exists in this cycle. Instead, ‘fear’ has slowly subsided with each upside movement since March 2009. The skeptics fear that either a distorted message is transmitted or we’re entering a fragile state in this cycle. Yet, the S&P 500 Index is setting up to revisit the 1400 range as the next target. Perhaps, then can we measure the conviction of new buyers as it may serve as a vote of confidence.
The glaring aspect of this run is not the actual upside move but the continuation of an established and synchronized trend. Interestingly, the themes from most of the 2000’s remain dominant these days. The energy related run is reflected in Crude prices as well as the Oil Service index. On the same note, Gold is making new all-time highs in a well-documented explosive move. Finally, the US Dollar weakness is decelerating, and US interest rates are not moving significantly—a macro combination that is too familiar for experts as well as casual observers.
The Challenge
Finding distinct ideas in liquid markets is not easy, especially for bargain hunters. There is a risk of overpaying in a market (S&P 500 Index) that has risen by nearly 35% since July 1, 2010. Being a contrarian alone does not provide a full answer, especially for those seeking growth-like returns. Being selective in specific ideas is an approach worth considering, especially from a longer-term view. Importantly, traditional indicators may suggest overbought/overvalued conditions, while irrational behavior can persist longer than imagined. Thus, balancing the logical reality from the perceived reality is the challenge in weeks ahead.
Specific Ideas:
PSEC (Prospect Capital): A private equity firm that offers a small cap exposure in financial services. In this business cycle, the company is geared to capture opportunities related to venture capital, lending, and capital raising. The stock price is not stretched and removed from all-time highs of $18.97 in 2006.
VIVO (Meridian Bioscience): A profitable company in the diagnostic test kits for respiratory and gastrointestinal diseases. This is a small cap healthcare firm that pays out dividends and is run by highly rated management. A projected 16% growth rate appeals to long-term investors as any weakness closer to $22 offers an attractive entry point.
HWAY (Healthways, Inc.): After a sluggish 2 + years, early signs of a recovery were stirred in recent earnings announcement by increasing contracts from traditional health plans and employer markets. The short-term optimism is a sign of confidence in healthcare reform. In addition, pure fundamentals, such as the price/cash flow, are below industry average.
Article Quotes:
“Given the extraordinary fiscal and monetary indulgence that has been heaped upon the economy in recent years, it is tempting to believe that the world has changed in ways that make structured, historical, value-based analysis inappropriate. But in my view, this gives far too much long-term credit to short-term phenomena. It's certainly true that we ought to adapt to the possibility that valuation "norms" will be higher (and long-term return expectations will be lower) in the face of persistent policy efforts to elevate asset prices and foment bubbles. Still, our estimates of expected market returns have remained very accurate even in the most recent decade, so the lesson is not that valuations don't matter, or that 2+2 no longer equals 4 (our long-term return estimates are essentially basic algebra), but rather that policy makers may engender higher valuations and lower long-term return prospects more frequently in the years ahead than they have in the past.” (John P. Hussman, Ph.D, May 2, 2011)
“Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment. Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men.” (The Economist, April 28, 2011)
Levels:
S&P 500 Index [1363.61] – Ongoing multi-year recovery by making new highs. Breaking above 1350 to reaffirm further strength.
Crude [$113.93] – A surging run as the commodity is up 35% since late February 2011. Charts suggest that prices are stretched in the near-term.
Gold [$1535.50] – New all-time highs, yet again, for another week. Currently, the index is 14% removed from its 200-day moving average.
DXY – US Dollar Index [72.93] – Making new lows for the year as weakness persists at a faster pace than multi-year downtrend.
US 10 Year Treasury Yields [3.28%] – In 2011, yields have stayed within a range of 3.20-3.40%a sideways pattern that keeps fixed income investors in suspense.
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, April 25, 2011
Market Outlook | April 25, 2011
“I am not afraid of storms, for I am learning how to sail my ship.” - Louisa May Alcott
When evaluating simple numbers, it somewhat feels like 2007 all over again, given the current cheerful market performance. The similarity between now and then are visible in several areas: low volatility, surging stock market, new highs in commodity prices, weakness in the US Dollar, and lower interest rates. The spring and summer of 2007 reflected this picture despite early hints of a soon-to-follow credit crisis. Today, similar patterns of optimism are showcased despite the worrisome topics discussed by headline makers and political members. For the non-emotional observer, it is evident that there is lack of alternatives for the following existing trends:
1. A competing currency to the US Dollar is not fully developed.
2. Stock market exposure remains attractive as liquid assets are in higher demand, especially with low rates.
3. Commodities are favored by new entrants, while previously invested participants have not relinquished winning stakes—a forceful momentum driven trend that has been in place for over a decade.
4. Policymakers have fueled the financial system by reigniting growth-like activity.
5. On a relative basis, the US economy is strong, and risk of default is highly publicized but easily overblown and misinterpreted.
For the casual or even frequent observer, it can be quite astonishing that short-term memory (the 2008 shock) can be erased so quickly. Intriguing financial stories for the last three years have focused on lingering credit issues, mismanagement of capital, European worries, and a fragile economic recovery. However, there is a vast disconnect between daily “cheap talk” and the perception drive reality known as markets. As stated many times, the market is not a barometer for social or economic health. Thus, it marches to its own beat—a point that is often forgotten by a wide range of participants. Importantly, the drivers of market behaviors are rarely headline writers or analysts. Instead, each cycle focuses on key macro issue(s), which inherently creates discrepancy in perception. That said, a tipping point cannot be dismissed, and a temporary breather is not necessarily a crisis. For now, a near-term correction would hardly serve as a surprise. As usual, tops occur in an unexpected fashion. Today, the comfort level is rising; thus, observing is more appealing than betting aggressively. Until then, the markets will march to the same rhythm.
Specific Ideas:
TUR (Turkey Index Fund) offers an attractive exposure beyond the established emerging markets. Turkey has a productive labor force, especially given the expanding middle class. The 17th largest economy can build on recent momentum while being less correlated to Western markets. The fund peaked on November 2010 and has moderately corrected. This presents a relatively attractive pricing as an early turnaround is visible in recent weeks.
BX (The Blackstone Group) is the asset management firm that has established positive momentum since the summer of 2010. The fundamental strength is driven by recovery in real estate related investments . In looking ahead, successful capital raising efforts can bolster further private equity investments. Finally, the stock price closed at $19.10, which remains quite removed from its IPO price of $38—a mark that serves us the next vital benchmark.
PDLI (PDL Biopharma Inc) shares have declined significantly for the last 10 years. For bargain hunters, this biotech firm is worth a look as a long-term investment, given its attractive dividend yield. In addition, PDLI owns patents and receives royalties. Further declines at current prices ($6.28) can trigger buying opportunities.
Article Quotes:
“The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies. So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt? The truth is that these prices are “made” by herd behavior. John Maynard Keynes pointed out the reason many years ago: “The extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” When you don’t know what to do, you do what the next person does… The tension between democracy and finance is at the root of today’s rising discontent in Europe. Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.” (Project Syndicate, April 21, 2011)
“A Fed rule of thumb is that buying an extra $200bn of assets is the same as taking 25 basis points off the funds rate. That means current interest rates are, in effect, about minus 2 percent. The question is when they need to move higher. In making that judgment, the basic guideline for most officials will be some kind of policy rule that links interest rates to the amount of spare capacity in the economy and how far inflation is off target. Much depends on circumstances, and policy rules come in many different flavours, but simple examples used by the Fed suggest a need to tighten policy by the time the unemployment rate reaches 8 percent and core inflation hits 1.5 percent—and probably somewhat sooner. Many differences between policymakers rest on how soon they think the economy will reach this point (Financial Times, April 19, 2011)
Levels:
S&P 500 Index [1337.38] – Recent trend suggests that a trend is forming between 1300 -1320. Interestingly, in February, the 1344 range proved to be a top. That said, the next wave of moves will showcase if buyers are interested to accumulate above 1300.
Crude [$112.29] – Mid-February 2011 marked an explosive run as buyers jumped in the $85-90 range. The momentum is picking up strength and awaiting a catalyst for a noteworthy move.
Gold [$1504] – Directly up without major bumps as the commodity has appreciated nearly 5x’s since July 1999.
DXY – US Dollar Index [73.99] – Finished the week at a 3 year low as below 76 marks a new territory.
US 10 Year Treasury Yields [3.39%] – Trading in between the 50-day (3.45%) and 5-day (3.38%) moving averages.
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 evaluating simple numbers, it somewhat feels like 2007 all over again, given the current cheerful market performance. The similarity between now and then are visible in several areas: low volatility, surging stock market, new highs in commodity prices, weakness in the US Dollar, and lower interest rates. The spring and summer of 2007 reflected this picture despite early hints of a soon-to-follow credit crisis. Today, similar patterns of optimism are showcased despite the worrisome topics discussed by headline makers and political members. For the non-emotional observer, it is evident that there is lack of alternatives for the following existing trends:
1. A competing currency to the US Dollar is not fully developed.
2. Stock market exposure remains attractive as liquid assets are in higher demand, especially with low rates.
3. Commodities are favored by new entrants, while previously invested participants have not relinquished winning stakes—a forceful momentum driven trend that has been in place for over a decade.
4. Policymakers have fueled the financial system by reigniting growth-like activity.
5. On a relative basis, the US economy is strong, and risk of default is highly publicized but easily overblown and misinterpreted.
For the casual or even frequent observer, it can be quite astonishing that short-term memory (the 2008 shock) can be erased so quickly. Intriguing financial stories for the last three years have focused on lingering credit issues, mismanagement of capital, European worries, and a fragile economic recovery. However, there is a vast disconnect between daily “cheap talk” and the perception drive reality known as markets. As stated many times, the market is not a barometer for social or economic health. Thus, it marches to its own beat—a point that is often forgotten by a wide range of participants. Importantly, the drivers of market behaviors are rarely headline writers or analysts. Instead, each cycle focuses on key macro issue(s), which inherently creates discrepancy in perception. That said, a tipping point cannot be dismissed, and a temporary breather is not necessarily a crisis. For now, a near-term correction would hardly serve as a surprise. As usual, tops occur in an unexpected fashion. Today, the comfort level is rising; thus, observing is more appealing than betting aggressively. Until then, the markets will march to the same rhythm.
Specific Ideas:
TUR (Turkey Index Fund) offers an attractive exposure beyond the established emerging markets. Turkey has a productive labor force, especially given the expanding middle class. The 17th largest economy can build on recent momentum while being less correlated to Western markets. The fund peaked on November 2010 and has moderately corrected. This presents a relatively attractive pricing as an early turnaround is visible in recent weeks.
BX (The Blackstone Group) is the asset management firm that has established positive momentum since the summer of 2010. The fundamental strength is driven by recovery in real estate related investments . In looking ahead, successful capital raising efforts can bolster further private equity investments. Finally, the stock price closed at $19.10, which remains quite removed from its IPO price of $38—a mark that serves us the next vital benchmark.
PDLI (PDL Biopharma Inc) shares have declined significantly for the last 10 years. For bargain hunters, this biotech firm is worth a look as a long-term investment, given its attractive dividend yield. In addition, PDLI owns patents and receives royalties. Further declines at current prices ($6.28) can trigger buying opportunities.
Article Quotes:
“The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies. So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt? The truth is that these prices are “made” by herd behavior. John Maynard Keynes pointed out the reason many years ago: “The extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” When you don’t know what to do, you do what the next person does… The tension between democracy and finance is at the root of today’s rising discontent in Europe. Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.” (Project Syndicate, April 21, 2011)
“A Fed rule of thumb is that buying an extra $200bn of assets is the same as taking 25 basis points off the funds rate. That means current interest rates are, in effect, about minus 2 percent. The question is when they need to move higher. In making that judgment, the basic guideline for most officials will be some kind of policy rule that links interest rates to the amount of spare capacity in the economy and how far inflation is off target. Much depends on circumstances, and policy rules come in many different flavours, but simple examples used by the Fed suggest a need to tighten policy by the time the unemployment rate reaches 8 percent and core inflation hits 1.5 percent—and probably somewhat sooner. Many differences between policymakers rest on how soon they think the economy will reach this point (Financial Times, April 19, 2011)
Levels:
S&P 500 Index [1337.38] – Recent trend suggests that a trend is forming between 1300 -1320. Interestingly, in February, the 1344 range proved to be a top. That said, the next wave of moves will showcase if buyers are interested to accumulate above 1300.
Crude [$112.29] – Mid-February 2011 marked an explosive run as buyers jumped in the $85-90 range. The momentum is picking up strength and awaiting a catalyst for a noteworthy move.
Gold [$1504] – Directly up without major bumps as the commodity has appreciated nearly 5x’s since July 1999.
DXY – US Dollar Index [73.99] – Finished the week at a 3 year low as below 76 marks a new territory.
US 10 Year Treasury Yields [3.39%] – Trading in between the 50-day (3.45%) and 5-day (3.38%) moving averages.
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, April 18, 2011
Market Outlook | April 18, 2011
“A lie gets halfway around the world before the truth has a chance to get its pants on.” - Winston Churchill
As usual, at an early glance, US markets are up for the year; interest rates are low; commodities are higher; and the economy is mixed (open to interpretation). The dominant themes above are recreating an established trend in which the fundamentals or perceptions are accepted as truth. There is plenty of skepticism among pundits, but capital is buying into risk. In other words, the current stimulus driven market finds a way to go higher, while demand from resource based groups is not declining. This is understandable, since parking money at the bank through traditional means does not yield much. Thus, the appeal of investing in risky assets is an easily sellable point, and by nature, ‘growth’ ideas are favored as long as they’ve been working. Perhaps, this is one explanation to why the Small Cap Index (Russell 2000) made new highs earlier this month. On a similar point, volatility is pointing to a calmer state, while nearing comfortable levels last seen before the 2008 crisis. The final piece to this puzzle looks ahead to the nearing presidential election, which is known to find ways of prolonging an optimistic trend or cleverly highlighting convenient data points. In fact, monetary reform can become a bigger political slogan than previously witnessed in recent elections
At a deeper stare, this positive set up invites contrarians to look in and question the accuracy of the picture reflected. The dollar weakness is well documented, like the debt issues of Western economies. The word “bubble” is commonly used by writers and editorial contributors. Perhaps, the phrase is losing some authenticity from the casual observer. For example, the bubble related issues are discussed relating to commodities, Chinese real estate, and even higher education. For money managers, having a suspicious view is not as important as being on the right side of a self-fulfilling prophecy. After all, most managers are measured by performance, especially in a period of higher investor demands and increased competition for asset management. Thus, staying focused between perception and truth is vital but even harder these days. Near-term breathers should not be confused with cycle downturns—a lesson that was clear last decade as correction can be short-lived. Nonetheless, the message from skeptics is worth tracking and questioning.
A few back up plans may be required for participants. If this “smooth sailing” current trend changes its course, then one should look at not the images that are currently presented but adjusting for what’s ahead. Mainly, most liquid assets remain mostly correlated and vulnerable. Holding cash alone seems less favorable when evaluating risk-return models. Importantly, tax policies, along with regulatory outcome, take a while to seep through the system. Equally, improvements or changes in inflation continue to vary based on interpretation. Given increased government investigations and deliberation, it may be wise to hold on to high conviction bets. That said, a major shift in attitude has yet to take place. Interestingly enough, liquid markets have resorted back to pre-crisis-like behavior, despite all the chatter of reform. Therefore, seeking investments in alternative asset classes and frontier markets appear to make sense. At least, that is one back-up plan.
Article Quotes:
“For a start, many analysts over-estimate Germany’s economic dynamism. Although it has enjoyed strong recent performance in economic growth and exports, its longer-term record is unimpressive. Germany has a strong export sector, but its domestic economy has performed poorly in the two decades since reunification. A related problem is that in effect Germany has subsidised purchases of goods by the weaker countries. Low interest rates made it cheaper for peripheral nations to buy German exports, while the existence of the eurozone helped them to tap the capital markets. In effect, there was a vendor financing relationship between the core of the eurozone and much of its periphery (Ireland was different from the others). …At the root of the problem were the difficulties that the whole region was suffering, to a greater or lesser extent, in generating new rounds of growth. (Fundweb, April 11, 2011)
“Permanent jobs are created by the private sector. Businesses, large and small, publicly or privately held, have a duty to earn a return on investment for their shareholders. In a globalized, cyber-ized world, they need not invest or expand their payrolls in the United States; they are free to go practically anywhere on the planet. This is the result of one of our greatest accomplishments as a nation: We won the Cold War. Before the demise of the Soviet Union and the death of Mao, we lived in a world of mutually assured destruction; today, we live in a world of mutually assured competition. This is what we spent an entire generation of blood and national treasure to achieve. Now, those with the power to levy taxes and direct spending must get with it and adjust to the new world as they seek to incentivize job creation through businesses that, thanks to monetary policy, now have the financial means to put Americans back to work right here at home.” (Federal Reserve of Dallas, April 8, 2011)
Levels:
S&P 500 Index [1319.68] – Hovering around the 50-day moving average. In the short-term, the index is setting up to challenge the 1300 range.
Crude [$109.66] – Recent behavior suggests growing buyers’ interest at $105 as momentum remains intact.
Gold [$1476.00] – After holding at $1420, another explosive run showcasing the herd-like following and lack of sellers, even at escalated levels.
DXY – US Dollar Index [74.61] – Further weakness in recent weeks, highlighted by breaking below 76. This recent downtrend wave is a continuation of a decline that began in the summer of 2010.
US 10 Year Treasury Yields [3.40%] – Showing shades of stabilization, as evidenced by the 50-day moving average of 3.47%.
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 usual, at an early glance, US markets are up for the year; interest rates are low; commodities are higher; and the economy is mixed (open to interpretation). The dominant themes above are recreating an established trend in which the fundamentals or perceptions are accepted as truth. There is plenty of skepticism among pundits, but capital is buying into risk. In other words, the current stimulus driven market finds a way to go higher, while demand from resource based groups is not declining. This is understandable, since parking money at the bank through traditional means does not yield much. Thus, the appeal of investing in risky assets is an easily sellable point, and by nature, ‘growth’ ideas are favored as long as they’ve been working. Perhaps, this is one explanation to why the Small Cap Index (Russell 2000) made new highs earlier this month. On a similar point, volatility is pointing to a calmer state, while nearing comfortable levels last seen before the 2008 crisis. The final piece to this puzzle looks ahead to the nearing presidential election, which is known to find ways of prolonging an optimistic trend or cleverly highlighting convenient data points. In fact, monetary reform can become a bigger political slogan than previously witnessed in recent elections
At a deeper stare, this positive set up invites contrarians to look in and question the accuracy of the picture reflected. The dollar weakness is well documented, like the debt issues of Western economies. The word “bubble” is commonly used by writers and editorial contributors. Perhaps, the phrase is losing some authenticity from the casual observer. For example, the bubble related issues are discussed relating to commodities, Chinese real estate, and even higher education. For money managers, having a suspicious view is not as important as being on the right side of a self-fulfilling prophecy. After all, most managers are measured by performance, especially in a period of higher investor demands and increased competition for asset management. Thus, staying focused between perception and truth is vital but even harder these days. Near-term breathers should not be confused with cycle downturns—a lesson that was clear last decade as correction can be short-lived. Nonetheless, the message from skeptics is worth tracking and questioning.
A few back up plans may be required for participants. If this “smooth sailing” current trend changes its course, then one should look at not the images that are currently presented but adjusting for what’s ahead. Mainly, most liquid assets remain mostly correlated and vulnerable. Holding cash alone seems less favorable when evaluating risk-return models. Importantly, tax policies, along with regulatory outcome, take a while to seep through the system. Equally, improvements or changes in inflation continue to vary based on interpretation. Given increased government investigations and deliberation, it may be wise to hold on to high conviction bets. That said, a major shift in attitude has yet to take place. Interestingly enough, liquid markets have resorted back to pre-crisis-like behavior, despite all the chatter of reform. Therefore, seeking investments in alternative asset classes and frontier markets appear to make sense. At least, that is one back-up plan.
Article Quotes:
“For a start, many analysts over-estimate Germany’s economic dynamism. Although it has enjoyed strong recent performance in economic growth and exports, its longer-term record is unimpressive. Germany has a strong export sector, but its domestic economy has performed poorly in the two decades since reunification. A related problem is that in effect Germany has subsidised purchases of goods by the weaker countries. Low interest rates made it cheaper for peripheral nations to buy German exports, while the existence of the eurozone helped them to tap the capital markets. In effect, there was a vendor financing relationship between the core of the eurozone and much of its periphery (Ireland was different from the others). …At the root of the problem were the difficulties that the whole region was suffering, to a greater or lesser extent, in generating new rounds of growth. (Fundweb, April 11, 2011)
“Permanent jobs are created by the private sector. Businesses, large and small, publicly or privately held, have a duty to earn a return on investment for their shareholders. In a globalized, cyber-ized world, they need not invest or expand their payrolls in the United States; they are free to go practically anywhere on the planet. This is the result of one of our greatest accomplishments as a nation: We won the Cold War. Before the demise of the Soviet Union and the death of Mao, we lived in a world of mutually assured destruction; today, we live in a world of mutually assured competition. This is what we spent an entire generation of blood and national treasure to achieve. Now, those with the power to levy taxes and direct spending must get with it and adjust to the new world as they seek to incentivize job creation through businesses that, thanks to monetary policy, now have the financial means to put Americans back to work right here at home.” (Federal Reserve of Dallas, April 8, 2011)
Levels:
S&P 500 Index [1319.68] – Hovering around the 50-day moving average. In the short-term, the index is setting up to challenge the 1300 range.
Crude [$109.66] – Recent behavior suggests growing buyers’ interest at $105 as momentum remains intact.
Gold [$1476.00] – After holding at $1420, another explosive run showcasing the herd-like following and lack of sellers, even at escalated levels.
DXY – US Dollar Index [74.61] – Further weakness in recent weeks, highlighted by breaking below 76. This recent downtrend wave is a continuation of a decline that began in the summer of 2010.
US 10 Year Treasury Yields [3.40%] – Showing shades of stabilization, as evidenced by the 50-day moving average of 3.47%.
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, April 04, 2011
Market Outlook | April 4, 2011
“Facts do not cease to exist because they are ignored.” - Aldous Huxley (1894 - 1963)
Understanding the Cycle
Following the late winter breather, we’re nearing the same dilemma as witnessed in mid February. Investors were faced with the question of whether to jump on the existing trend or to be wary of trending patterns. Similarly, the interest rate conditions are lingering with moderate suspense. Meanwhile, overall economic improvement is somewhat evident when presented through government reports. Now, the broad indexes are re-drumming to an upbeat tune. As a result, complacency is in full gear after a short-lived hiccup. The Volatility Index (VIX) spiked to 31 on March 16th and now stands at 17.40. That sends a loud message as to how fear vanished at a rapid pace. Basically, the less than 4-week correction period was much needed.
This can hint at scarcity of quality, investable ideas as managers seem to redeploy capital to known themes in liquid asset classes, such as stocks. A reversion to a herd-like mentality is seen as most managers don’t look to fight the trend. In hammering this point home, we can see how “safety” is easily translated to chasing winners, such as Gold and Oil. Simply, this argument is rationalized by a quick glance at charts, a browse of headlines, or even a read through of a long-term strategy from a research house. Once again, doubting the actual substance of the fundamentals and duration are bluntly deemphasized during trending markets. Interestingly, the Russell 2000 Index is near its 2007 all-time highs, which can paint misleading optimism. Of course, let us not forget that the third year of a presidential cycle is generally known to produce favorable returns for buyers. This is mostly due to a biased maneuvering towards political points being in full gear. However, this ‘maneuvering’ may be difficult this year when the market is already operating through a few injections as the existing wounds attempt to heal. For now, the stock market performance can be manipulated as a selling point to drive in more capital info.
Tracking Clues
To differentiate oneself, a participant is forced to find a disconnect between consensus thoughts and actual results from market performance and investor rationalization. In other words, the discrepancy in varying views can create an illusion that can last for a while. Some can suggest that managing one’s timing and conviction levels is a market filled with mixed feelings. These days, pundits are not fully ignoring the glaring concerns of economic sustainability and unclear growth drivers. In a media driven world, the management of public relation plays an even bigger role in directional pattern. For this evidence, we don’t need to go further than the Federal Reserve’s announcement of a press conference on a quarterly basis. This further emphasizes the short-term nature of markets, especially with enhanced technology and abundance of hedging tools currently offered for investors. Finally, skeptics point out that these frequent press conferences are a way to artificially cheerlead gloomy facts. In due time, the truth with unravel.
Article Quotes:
“Whether Beijing succeeds or not in reining in informal fund flows is important, since the fate of these restrictions provides clues to the future direction of China’s economy. If credit growth became too great, China would face more inflation in the short term and possible excess capacity in the longer term. That could lead to a resumption of the profitless growth that China is trying to leave behind. If inflation remained high, social unrest would become increasingly likely. If, conversely, China slammed the monetary brakes on too hard, it would have a big contractionary impact both at home and abroad, given that Chinese imports have become an important source of global growth. Monetary policy matters more in China than it does in most developed markets, because the ability to allocate capital remains largely the preserve of the state. It is where financial power and political power intersect.” (Financial Times, March 31, 2011)
“We then turn to our main investigation of what happens to the portfolio of men and women, respectively, after moving together or apart. We find that women who get married on average choose to hold a higher fraction of financial wealth in stocks after the marriage, compared to those women who do not get married. After divorce, women on average reduce the fraction held in stocks, compared to women who do not get divorced. For men, it is the other way around: single men reduce the fraction of wealth in stocks after they get married, whereas they increase this fraction after divorce. Hence, marriage acts as a financial risk-reducer for men, whereas it acts as financial risk-increaser for women.” (Christiansen, Joensen and Rangvidz, September 1, 2010)
Levels:
S&P 500 Index [1332.41] – Revisiting February highs as 1340 presents a retest of strength and positive momentum.
Crude [$107.94] – Early confirmation of strength above $105, showcasing further traction with buyers.
Gold [$1418.00] – Interestingly, another struggle at 1420 range, which suggests a positive long-term but shaky near-term confidence.
DXY – US Dollar Index [75.83] – Noticeable decline for the quarter. It remains at a fragile range.
US 10 Year Treasury Yields [3.44%] – Closing in line with the 50-day moving average of 3.44%. Currently, trading in line with the four-month pattern.
Please note: There will be no weekly Market Takers next week due to travel schedule.
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.
Understanding the Cycle
Following the late winter breather, we’re nearing the same dilemma as witnessed in mid February. Investors were faced with the question of whether to jump on the existing trend or to be wary of trending patterns. Similarly, the interest rate conditions are lingering with moderate suspense. Meanwhile, overall economic improvement is somewhat evident when presented through government reports. Now, the broad indexes are re-drumming to an upbeat tune. As a result, complacency is in full gear after a short-lived hiccup. The Volatility Index (VIX) spiked to 31 on March 16th and now stands at 17.40. That sends a loud message as to how fear vanished at a rapid pace. Basically, the less than 4-week correction period was much needed.
This can hint at scarcity of quality, investable ideas as managers seem to redeploy capital to known themes in liquid asset classes, such as stocks. A reversion to a herd-like mentality is seen as most managers don’t look to fight the trend. In hammering this point home, we can see how “safety” is easily translated to chasing winners, such as Gold and Oil. Simply, this argument is rationalized by a quick glance at charts, a browse of headlines, or even a read through of a long-term strategy from a research house. Once again, doubting the actual substance of the fundamentals and duration are bluntly deemphasized during trending markets. Interestingly, the Russell 2000 Index is near its 2007 all-time highs, which can paint misleading optimism. Of course, let us not forget that the third year of a presidential cycle is generally known to produce favorable returns for buyers. This is mostly due to a biased maneuvering towards political points being in full gear. However, this ‘maneuvering’ may be difficult this year when the market is already operating through a few injections as the existing wounds attempt to heal. For now, the stock market performance can be manipulated as a selling point to drive in more capital info.
Tracking Clues
To differentiate oneself, a participant is forced to find a disconnect between consensus thoughts and actual results from market performance and investor rationalization. In other words, the discrepancy in varying views can create an illusion that can last for a while. Some can suggest that managing one’s timing and conviction levels is a market filled with mixed feelings. These days, pundits are not fully ignoring the glaring concerns of economic sustainability and unclear growth drivers. In a media driven world, the management of public relation plays an even bigger role in directional pattern. For this evidence, we don’t need to go further than the Federal Reserve’s announcement of a press conference on a quarterly basis. This further emphasizes the short-term nature of markets, especially with enhanced technology and abundance of hedging tools currently offered for investors. Finally, skeptics point out that these frequent press conferences are a way to artificially cheerlead gloomy facts. In due time, the truth with unravel.
Article Quotes:
“Whether Beijing succeeds or not in reining in informal fund flows is important, since the fate of these restrictions provides clues to the future direction of China’s economy. If credit growth became too great, China would face more inflation in the short term and possible excess capacity in the longer term. That could lead to a resumption of the profitless growth that China is trying to leave behind. If inflation remained high, social unrest would become increasingly likely. If, conversely, China slammed the monetary brakes on too hard, it would have a big contractionary impact both at home and abroad, given that Chinese imports have become an important source of global growth. Monetary policy matters more in China than it does in most developed markets, because the ability to allocate capital remains largely the preserve of the state. It is where financial power and political power intersect.” (Financial Times, March 31, 2011)
“We then turn to our main investigation of what happens to the portfolio of men and women, respectively, after moving together or apart. We find that women who get married on average choose to hold a higher fraction of financial wealth in stocks after the marriage, compared to those women who do not get married. After divorce, women on average reduce the fraction held in stocks, compared to women who do not get divorced. For men, it is the other way around: single men reduce the fraction of wealth in stocks after they get married, whereas they increase this fraction after divorce. Hence, marriage acts as a financial risk-reducer for men, whereas it acts as financial risk-increaser for women.” (Christiansen, Joensen and Rangvidz, September 1, 2010)
Levels:
S&P 500 Index [1332.41] – Revisiting February highs as 1340 presents a retest of strength and positive momentum.
Crude [$107.94] – Early confirmation of strength above $105, showcasing further traction with buyers.
Gold [$1418.00] – Interestingly, another struggle at 1420 range, which suggests a positive long-term but shaky near-term confidence.
DXY – US Dollar Index [75.83] – Noticeable decline for the quarter. It remains at a fragile range.
US 10 Year Treasury Yields [3.44%] – Closing in line with the 50-day moving average of 3.44%. Currently, trading in line with the four-month pattern.
Please note: There will be no weekly Market Takers next week due to travel schedule.
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, March 28, 2011
Market Outlook | March 28, 2011
“A weak man has doubts before a decision; a strong man has them afterwards.” - Karl Kraus (1874 - 1936)
Barely Surprising
Plenty of topics are floating as headline issues, but that is hardly news these days. Interestingly, Japan was facing de-leveraging matters for several months prior to the tragic events. Similarly, the European Union has struggled to reach a resolution since last summer. Whether US broad indexes go up or down is merely a reflection of select companies and not a barometer for business health. In this context, the stock market rise should not be confused with positive economic feel or job expansion. Importantly, when trying to assess the next 2-3 years, managers are asking where to find quality ideas, given scarcity in innovation, pending regulations in an era of overreliance in policymakers. Investors have focused on finding liquid based investments and sticking with working ideas. Perhaps, both contribute to further upside momentum, mainly when bad news is not necessarily breaking news. Clearly, the much needed breather took place, but buyers were eager to step back in. Is this impulse buying or bargain hunting? This is a question that traders will ponder in seeking timely entry points.
Evaluating Success
For the casual observer, an up day can paint an even more confusing picture while reiterating the disconnect between the market and real economy. That said, the stimulus efforts through low interest rates were designed to serve as a temporary solution. We are approaching a period in which the Federal Reserve efforts can be questioned if economic growth is less evident. In other words, the success of these measures to rekindle the efforts will be judged. In addition, a glaring disagreement among officials on interest rate views can stir additional concern. For others, a third year of a presidential cycle makes a strong buying case based on historical data. This plays into the mindsets of investors, and the net effect can play a bigger role in the second half of 2011.
Near-term Factors
The recent and minor correction symbolizes the first phase of a price adjustment. As usual, down days are followed up by sharp recovery in risky assets while coinciding with a sudden decline in volatility. This sudden shift was felt last week as the S&P 500 Index rose +2.70% while the Volatility Index declined 26.72%. This back and forth is not convincing of stable footing. For some, it might be too premature to declare the end of a natural correction. In the days ahead, the suspense will play out, given job data. Meanwhile, commodity prices are flirting with an inflection point, and this is bound to test conviction levels.
Article Quotes:
“As for finance, China’s objectives must be: first, to create a domestic system capable of supporting its own economic development; second, to help promote a global system that supports a tolerably stable world economy; and, third, to protect the former from the excesses of the latter. In achieving this difficult reconciliation China’s policies should be guided by the understanding that, in the long run, its financial system will be the hub of global finance. Yet the transition to full integration will be not only lengthy but also complex and fraught, with full integration of banking particularly dangerous….One aim should be to ensure that commodity-exporting countries – particularly poor ones, with limited capacity for governance – benefit from foreign investment and exports of natural resources. China will be a central player in securing such agreements.” (Financial Times, March 22, 2011)
“In 2000, the Federal Reserve migrated from the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics to a re-jiggered PCE index. The BLS, the official American government agency, had already been tinkering - quite candidly - with its methodologies. The move gathered steam in the early 1990s, when politicians determined to reduce the CPI inflation rate, as a gimmick to lower CPI-linked payments to Social Security pensioners. They argued that substitutions in goods, as well as hedonic improvements (benefits derived from new technologies like safety features) justified an overhaul of the index of about 80,000 goods. Switching from an arithmetic to a geometric weighting lowered the year-over-year CPI by about 2.7%, and the effects have compounded ever since.” (Fundweb, March 21, 2011)
Levels:
S&P 500 Index [1313.80] – Recovering from recent correction and facing a near-term hurdle at 1320. The behavior between 1300 and 1320 can signal some directional conviction this week.
Crude [$105.40] – Attempting to revisit March 7th highs of $106.95. The jolting upside run appears to stall for now, but the uptrend is well established at these levels
Gold [$1436] – Broke above key $1420 level. Yet, it’s early to claim that a re-acceleration is taking place.
DXY – US Dollar Index [76.21] – Barely holding on after making new lows around 76. Interestingly, that was a bottoming point in late fall/early winter.
US 10 Year Treasury Yields [3.43%] – Generally, stabilizing around 3.45% especially in the past two months.
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.
Barely Surprising
Plenty of topics are floating as headline issues, but that is hardly news these days. Interestingly, Japan was facing de-leveraging matters for several months prior to the tragic events. Similarly, the European Union has struggled to reach a resolution since last summer. Whether US broad indexes go up or down is merely a reflection of select companies and not a barometer for business health. In this context, the stock market rise should not be confused with positive economic feel or job expansion. Importantly, when trying to assess the next 2-3 years, managers are asking where to find quality ideas, given scarcity in innovation, pending regulations in an era of overreliance in policymakers. Investors have focused on finding liquid based investments and sticking with working ideas. Perhaps, both contribute to further upside momentum, mainly when bad news is not necessarily breaking news. Clearly, the much needed breather took place, but buyers were eager to step back in. Is this impulse buying or bargain hunting? This is a question that traders will ponder in seeking timely entry points.
Evaluating Success
For the casual observer, an up day can paint an even more confusing picture while reiterating the disconnect between the market and real economy. That said, the stimulus efforts through low interest rates were designed to serve as a temporary solution. We are approaching a period in which the Federal Reserve efforts can be questioned if economic growth is less evident. In other words, the success of these measures to rekindle the efforts will be judged. In addition, a glaring disagreement among officials on interest rate views can stir additional concern. For others, a third year of a presidential cycle makes a strong buying case based on historical data. This plays into the mindsets of investors, and the net effect can play a bigger role in the second half of 2011.
Near-term Factors
The recent and minor correction symbolizes the first phase of a price adjustment. As usual, down days are followed up by sharp recovery in risky assets while coinciding with a sudden decline in volatility. This sudden shift was felt last week as the S&P 500 Index rose +2.70% while the Volatility Index declined 26.72%. This back and forth is not convincing of stable footing. For some, it might be too premature to declare the end of a natural correction. In the days ahead, the suspense will play out, given job data. Meanwhile, commodity prices are flirting with an inflection point, and this is bound to test conviction levels.
Article Quotes:
“As for finance, China’s objectives must be: first, to create a domestic system capable of supporting its own economic development; second, to help promote a global system that supports a tolerably stable world economy; and, third, to protect the former from the excesses of the latter. In achieving this difficult reconciliation China’s policies should be guided by the understanding that, in the long run, its financial system will be the hub of global finance. Yet the transition to full integration will be not only lengthy but also complex and fraught, with full integration of banking particularly dangerous….One aim should be to ensure that commodity-exporting countries – particularly poor ones, with limited capacity for governance – benefit from foreign investment and exports of natural resources. China will be a central player in securing such agreements.” (Financial Times, March 22, 2011)
“In 2000, the Federal Reserve migrated from the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics to a re-jiggered PCE index. The BLS, the official American government agency, had already been tinkering - quite candidly - with its methodologies. The move gathered steam in the early 1990s, when politicians determined to reduce the CPI inflation rate, as a gimmick to lower CPI-linked payments to Social Security pensioners. They argued that substitutions in goods, as well as hedonic improvements (benefits derived from new technologies like safety features) justified an overhaul of the index of about 80,000 goods. Switching from an arithmetic to a geometric weighting lowered the year-over-year CPI by about 2.7%, and the effects have compounded ever since.” (Fundweb, March 21, 2011)
Levels:
S&P 500 Index [1313.80] – Recovering from recent correction and facing a near-term hurdle at 1320. The behavior between 1300 and 1320 can signal some directional conviction this week.
Crude [$105.40] – Attempting to revisit March 7th highs of $106.95. The jolting upside run appears to stall for now, but the uptrend is well established at these levels
Gold [$1436] – Broke above key $1420 level. Yet, it’s early to claim that a re-acceleration is taking place.
DXY – US Dollar Index [76.21] – Barely holding on after making new lows around 76. Interestingly, that was a bottoming point in late fall/early winter.
US 10 Year Treasury Yields [3.43%] – Generally, stabilizing around 3.45% especially in the past two months.
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, March 21, 2011
Market Outlook | March 21, 2011
“Unthinking respect for authority is the greatest enemy of truth.” - Albert Einstein
Digesting Thoughts
The natural and inevitable market correction took place at a rapid pace last week. Seasonal changes once again find a way to alter existing trends while shifting the moods of investors. The ability to navigate through this turbulence is what distinguishes a money manager in finding or protecting solid returns. Short-term memory can influence linking earthquakes and global unrest as the major drivers of this downtrend. However, it helps to acknowledge that internal financial issues were brewing even before the external worries. Even after this mild correction, it is not too comforting to place heavy directional bets. Importantly, we are recovering from the panic of 2008 in which several intervention and relief programs were needed for stabilization. Last decade’s bubbles have hardly evaporated and still linger in the fundamentals. That simply explains the low rates desperately needed to fuel the economy and ongoing hesitancy for risk among money managers.
Days Ahead
The intervention by finance ministers can fuel markets for a limited period of time, but the question is in its sustainability. Generally, during inflection points, the biggest down days of a cycle are followed up by significant up days. That’s the nature of market movement. In addition, these fallouts can be short-lived, while attractive, for volatility traders, especially given the spike and share moves in the past few days. Now that the rosy picture has been tested, the economic and corporate health will focus back to some data points. A little skepticism serves as a reality check and resets the playing field.
Unavoidable Trends
The following are prevailing themes that are worth noting for upcoming years:
• Aging population in developed countries
• Shift in some wealth towards emerging economies
• Increased regulatory climates in Western nations
These are well-documented social and political issues. These trends are relatively tangible when compared to other financial market estimates. Demographics and regulation cannot be easily dismissed as it eventually shapes the mindset of investors. For instance, “By 2030, the number of people older than 65 is expected to increase to almost 20%, up from about 12.4% in 2003” (SF Gate, March 19, 2011). Therefore, long-term investors have to stay cognizant of how demographics and regulation impact the balance sheets of companies at a faster or slower pace than previously imagined.
The less tangible issues are centered on interest rates and currencies. After all, both are highly impacted by perception and confidence. However, in upcoming quarters, interest rate behavior will provide a vital clue, while influencing risk and investment patterns. Japan, as the third holder of US treasuries, will be on the radar. Central banks will get a chance to respond under severe pressure. Importantly, let’s not forget that interest rates were on the radar at the start of this year.
Article Quotes:
“Businesses, like any other economic actor, will respond to immediate tax and regulatory incentives. But to make long-term investment decisions that create permanent, remunerative jobs, they must have confidence in the long-term prospects of where they invest. In my judgment, it will be hard to secure that needed comfort until Congress makes clear it will refrain from the errant fiscal ways of the past, changes the way it taxes and spends and regulates, and places the nation demonstrably, and unalterably, on a path of fiscal rectitude…. A large and growing government debt inevitably places pressure on the Federal Reserve to hold interest rates too low for too long, making it more difficult for the Fed to fulfill its dual mandate of price stability and full employment.” (Federal Reserve of Dallas, March 7, 2011)
“Fortunately for the world's poor, the speculative dynamic that has created a massive surge in commodity prices appears very close to running its course, as we see very similar "microdynamics" in agricultural commodities as we saw with oil in 2008. That's not to say that we have a good idea of precisely how high prices will move over the short term. The blowoff phase of a bubble tends to be steep, but so short-lived that it affords little opportunity to exit. As prices advance in an uncorrected parabola, the one-sided nature of the speculation typically gives way to a frantic effort of speculators to exit simultaneously. Crashes are always a reflection of illiquidity in two-sided trading - the inability of sellers to find eager buyers at nearby prices” (John P. Hussman, March 14, 2011)
Levels:
S&P 500 Index [1304.28] – A short-term hurdle closer to 1300 on a pending recovery bounce.
Crude [$101.07] – Pre-global political unrest, crude established a basing level between $85-90. In the past 20 trading sessions, the average is around $100. The near-term spike is unclear if justified by fundamentals; however, the violent swings have yet to subside.
Gold [$1420] – Interestingly, the commodity is reaching a critical level of 1420—a point that has been hard to break above for several months. For now, the all-time highs stand at 1437, which is not too far away. This set up suggests a critical turning point and a chance to read investors’ true feel.
DXY – US Dollar Index [75.71] – Broke below 76 and now entering a fragile point that reiterates further weakness.
US 10 Year Treasury Yields [3.26%] – Since early February, rates have declined significantly. Interestingly, the 200-day average sits at 3%--a key psychological level.
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.
Digesting Thoughts
The natural and inevitable market correction took place at a rapid pace last week. Seasonal changes once again find a way to alter existing trends while shifting the moods of investors. The ability to navigate through this turbulence is what distinguishes a money manager in finding or protecting solid returns. Short-term memory can influence linking earthquakes and global unrest as the major drivers of this downtrend. However, it helps to acknowledge that internal financial issues were brewing even before the external worries. Even after this mild correction, it is not too comforting to place heavy directional bets. Importantly, we are recovering from the panic of 2008 in which several intervention and relief programs were needed for stabilization. Last decade’s bubbles have hardly evaporated and still linger in the fundamentals. That simply explains the low rates desperately needed to fuel the economy and ongoing hesitancy for risk among money managers.
Days Ahead
The intervention by finance ministers can fuel markets for a limited period of time, but the question is in its sustainability. Generally, during inflection points, the biggest down days of a cycle are followed up by significant up days. That’s the nature of market movement. In addition, these fallouts can be short-lived, while attractive, for volatility traders, especially given the spike and share moves in the past few days. Now that the rosy picture has been tested, the economic and corporate health will focus back to some data points. A little skepticism serves as a reality check and resets the playing field.
Unavoidable Trends
The following are prevailing themes that are worth noting for upcoming years:
• Aging population in developed countries
• Shift in some wealth towards emerging economies
• Increased regulatory climates in Western nations
These are well-documented social and political issues. These trends are relatively tangible when compared to other financial market estimates. Demographics and regulation cannot be easily dismissed as it eventually shapes the mindset of investors. For instance, “By 2030, the number of people older than 65 is expected to increase to almost 20%, up from about 12.4% in 2003” (SF Gate, March 19, 2011). Therefore, long-term investors have to stay cognizant of how demographics and regulation impact the balance sheets of companies at a faster or slower pace than previously imagined.
The less tangible issues are centered on interest rates and currencies. After all, both are highly impacted by perception and confidence. However, in upcoming quarters, interest rate behavior will provide a vital clue, while influencing risk and investment patterns. Japan, as the third holder of US treasuries, will be on the radar. Central banks will get a chance to respond under severe pressure. Importantly, let’s not forget that interest rates were on the radar at the start of this year.
Article Quotes:
“Businesses, like any other economic actor, will respond to immediate tax and regulatory incentives. But to make long-term investment decisions that create permanent, remunerative jobs, they must have confidence in the long-term prospects of where they invest. In my judgment, it will be hard to secure that needed comfort until Congress makes clear it will refrain from the errant fiscal ways of the past, changes the way it taxes and spends and regulates, and places the nation demonstrably, and unalterably, on a path of fiscal rectitude…. A large and growing government debt inevitably places pressure on the Federal Reserve to hold interest rates too low for too long, making it more difficult for the Fed to fulfill its dual mandate of price stability and full employment.” (Federal Reserve of Dallas, March 7, 2011)
“Fortunately for the world's poor, the speculative dynamic that has created a massive surge in commodity prices appears very close to running its course, as we see very similar "microdynamics" in agricultural commodities as we saw with oil in 2008. That's not to say that we have a good idea of precisely how high prices will move over the short term. The blowoff phase of a bubble tends to be steep, but so short-lived that it affords little opportunity to exit. As prices advance in an uncorrected parabola, the one-sided nature of the speculation typically gives way to a frantic effort of speculators to exit simultaneously. Crashes are always a reflection of illiquidity in two-sided trading - the inability of sellers to find eager buyers at nearby prices” (John P. Hussman, March 14, 2011)
Levels:
S&P 500 Index [1304.28] – A short-term hurdle closer to 1300 on a pending recovery bounce.
Crude [$101.07] – Pre-global political unrest, crude established a basing level between $85-90. In the past 20 trading sessions, the average is around $100. The near-term spike is unclear if justified by fundamentals; however, the violent swings have yet to subside.
Gold [$1420] – Interestingly, the commodity is reaching a critical level of 1420—a point that has been hard to break above for several months. For now, the all-time highs stand at 1437, which is not too far away. This set up suggests a critical turning point and a chance to read investors’ true feel.
DXY – US Dollar Index [75.71] – Broke below 76 and now entering a fragile point that reiterates further weakness.
US 10 Year Treasury Yields [3.26%] – Since early February, rates have declined significantly. Interestingly, the 200-day average sits at 3%--a key psychological level.
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, March 14, 2011
Market Outlook | March 14, 2011
“Acting is illusion, as much illusion as magic is, and not so much a matter of being real.” - Laurence Olivier
Beyond Events
The global markets were poised for minor corrections before external political or natural events. In the shuffle of events, these points are easy to forget. The appetite for risk-aversion changes at a rapid pace, and thus, observers will stay plugged in to the day-to-day news. Yet another reminder, it was only two years ago when key US indexes bottomed and reignited the post crisis recovery. Heading into this spring, the set up has quietly warned of a natural market breather. After all, the S&P 500 is up 95% since the lows of March 2009. Of course, this does not necessarily suggest a major downside move as seen in the late 2008 crisis. However, this leaves us pondering the magnitude of near-term moves and the required next steps for risk adjustment.
Technical indicators are mildly stretched, and there are fewer positive surprises—both create short-term hurdles in continuing this run. Some will argue the uptrend is shaken and not broken. That view is valid for now, since fundamentals are not overleveraged or as deeply overvalued as they were in 2007. In fact, the worry of being reckless is less applied to the private sectors these days. Instead, the attention is centered on new financial regulation and government officials’ abilities to manage policies. The current political climate sets the tone on taxes and attitude towards business. These factors are not as easy to identify, but the details are being examined by longer-term investors.
Looking Ahead
Most analysts would point to interest rate behavior along with the Federal Reserves’ policy as the next major catalysts. It is evident that business models are changing in the current cycle, and revenue expectations are difficult to gauge. Meanwhile, fund managers are searching for innovative ideas for growth, while investors are desperate for higher yielding instruments. From a decision maker’s perspective, the challenge is finding quality ideas, which appear scarce at the moment. This task is challenging especially in isolating the noise from the existing macroeconomic chatter. Clearly, the Bank of Japan’s attempt to stimulate the economy along with euro zone’s solution for debt crisis can spark noticeable trends. Importantly, this will raise questions about the sustainability of a stimulus driven market. This can change the market feel towards fear based responses as we all eagerly await.
Article Quotes:
“Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons, I think local governments will resist ferociously any further corporate governance reform. …The most obvious major countries in the region that can help the process of RMB internationalization—Japan, Russia, India, Korea and to a lesser extent Vietnam and at least one or two others—have a deep mistrust of China and are unlikely to assist the process beyond some minimum level. Remember that one of the reasons sterling never achieved the dominance that the dollar has today is that the French and the Germans, not to mention some other European powers, actively undermined its role in favor of their own currencies. I don’t see why this won’t happen again.” (CreditWritedown.com, March 12, 2011)
“The attractive home price and mortgage rate situation has not resulted in the typical improvement of housing market conditions largely due to a worrisome employment situation. The gains in hiring recorded in February raise expectations of a near term improvement in the housing market. But, other reports from the housing market raise the level of concern. According to CoreLogic, 11.1 million homes or 23.1% of residential mortgages outstanding had negative equity in the fourth quarter of 2010, up slightly from the third quarter. This problematic situation combined with the existence of numerous foreclosed residential properties makes a strong case for the Fed to maintain the current easy monetary policy stance in the months ahead.” (Northern Trust, March 9, 2011)
Levels:
S&P 500 Index [1304.28] – Declined for the week by 1.29%. It’s barely holding its 50-day moving average as near-term investors watch the resilience around 1300.
Crude [$101.16] – After a speculative event driven explosion, a retracement to rational levels is taking place. Betting that this sharp uptrend continues might not be sustainable. The March 7, 2011, intra-day high of $106.95 is the new high. Meanwhile, the 50-day moving average is at $92.
Gold [$1411] – Once again, maintaining a trend above 1400 seems to be a difficult challenge.
DXY – US Dollar Index [76.40] – It stands at a fragile state as a move below 76 signals a deteriorating dollar.
US 10 Year Treasury Yields [3.40%] – Revisiting 3.40% highlights a key inflection point. Interestingly, the 5 and 50-day moving averages are at 3.45%.
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.
Beyond Events
The global markets were poised for minor corrections before external political or natural events. In the shuffle of events, these points are easy to forget. The appetite for risk-aversion changes at a rapid pace, and thus, observers will stay plugged in to the day-to-day news. Yet another reminder, it was only two years ago when key US indexes bottomed and reignited the post crisis recovery. Heading into this spring, the set up has quietly warned of a natural market breather. After all, the S&P 500 is up 95% since the lows of March 2009. Of course, this does not necessarily suggest a major downside move as seen in the late 2008 crisis. However, this leaves us pondering the magnitude of near-term moves and the required next steps for risk adjustment.
Technical indicators are mildly stretched, and there are fewer positive surprises—both create short-term hurdles in continuing this run. Some will argue the uptrend is shaken and not broken. That view is valid for now, since fundamentals are not overleveraged or as deeply overvalued as they were in 2007. In fact, the worry of being reckless is less applied to the private sectors these days. Instead, the attention is centered on new financial regulation and government officials’ abilities to manage policies. The current political climate sets the tone on taxes and attitude towards business. These factors are not as easy to identify, but the details are being examined by longer-term investors.
Looking Ahead
Most analysts would point to interest rate behavior along with the Federal Reserves’ policy as the next major catalysts. It is evident that business models are changing in the current cycle, and revenue expectations are difficult to gauge. Meanwhile, fund managers are searching for innovative ideas for growth, while investors are desperate for higher yielding instruments. From a decision maker’s perspective, the challenge is finding quality ideas, which appear scarce at the moment. This task is challenging especially in isolating the noise from the existing macroeconomic chatter. Clearly, the Bank of Japan’s attempt to stimulate the economy along with euro zone’s solution for debt crisis can spark noticeable trends. Importantly, this will raise questions about the sustainability of a stimulus driven market. This can change the market feel towards fear based responses as we all eagerly await.
Article Quotes:
“Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons, I think local governments will resist ferociously any further corporate governance reform. …The most obvious major countries in the region that can help the process of RMB internationalization—Japan, Russia, India, Korea and to a lesser extent Vietnam and at least one or two others—have a deep mistrust of China and are unlikely to assist the process beyond some minimum level. Remember that one of the reasons sterling never achieved the dominance that the dollar has today is that the French and the Germans, not to mention some other European powers, actively undermined its role in favor of their own currencies. I don’t see why this won’t happen again.” (CreditWritedown.com, March 12, 2011)
“The attractive home price and mortgage rate situation has not resulted in the typical improvement of housing market conditions largely due to a worrisome employment situation. The gains in hiring recorded in February raise expectations of a near term improvement in the housing market. But, other reports from the housing market raise the level of concern. According to CoreLogic, 11.1 million homes or 23.1% of residential mortgages outstanding had negative equity in the fourth quarter of 2010, up slightly from the third quarter. This problematic situation combined with the existence of numerous foreclosed residential properties makes a strong case for the Fed to maintain the current easy monetary policy stance in the months ahead.” (Northern Trust, March 9, 2011)
Levels:
S&P 500 Index [1304.28] – Declined for the week by 1.29%. It’s barely holding its 50-day moving average as near-term investors watch the resilience around 1300.
Crude [$101.16] – After a speculative event driven explosion, a retracement to rational levels is taking place. Betting that this sharp uptrend continues might not be sustainable. The March 7, 2011, intra-day high of $106.95 is the new high. Meanwhile, the 50-day moving average is at $92.
Gold [$1411] – Once again, maintaining a trend above 1400 seems to be a difficult challenge.
DXY – US Dollar Index [76.40] – It stands at a fragile state as a move below 76 signals a deteriorating dollar.
US 10 Year Treasury Yields [3.40%] – Revisiting 3.40% highlights a key inflection point. Interestingly, the 5 and 50-day moving averages are at 3.45%.
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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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