Market Outlook | August 8, 2011
“Anything you build on a large scale or with intense passion invites chaos.” - Francis Ford Coppola (1939-present)
Tension Released
Selling has unleashed in matter of a few days, because of the overdue debt ceiling resolution, currency adjustment by central bankers, depreciating Yen and Franc, and the ongoing Eurozone debt crisis, leading to the eventual S&P downgrade of the US credit rating. Digesting recent events over a month alone would have been too much to ask. Well, now we know what happens when the “bad news” events combust in a synchronized manner at a pace faster than expected. In an interlinked global equities market, shockwaves are felt uniformly.
Ironically, these same worrisome issues were indentified and causally debated in the first part of 2011. Of course, the magnitude of the sell-off was the great unknown, even for the most bearish managers who have lost faith in many assets, outside of hard assets. Meanwhile, bullish managers are quite surprised at the pace of deceleration, as the unraveling has yet to settle. Extreme results are followed up by extremes and surprises, so the suspense will live on for a little while. The unleashing of “fear” turned into quick liquidation as participants ran for safety in an absolute panic. As a quick reminder, the Volatility Index (VIX) jumped by 159% from its July 1st level. Yes, fear is trading at a premium for those opportunistic observers. In other words, this paints the magnitude of broad index reactions. For reference purposes, in 2008, the VIX spiked 380% from August to October. Nonetheless, this time around, calculating and understanding a risk-free return will puzzle models of all sorts, as emotions are the key driving force. Now the anxious question revolves around the end of the bleeding and the beginning of the post mortem to this cycle, as we settle in into new realities.
Scrambling for Substance
Reliance on policymakers’ resolutions in Europe or the US has failed to produce a recovery in the past year. As a start, the debt ceiling deal seems such a long while ago and still failed to produce a cheerful reaction. Clearly, quantitative easing II did not get a warm ovation, while failing to ignite some confidence. Nonetheless, the chatter of further stimulus (for QE3) is slowly picking up volume and support. Secondly, within the desperate weekend hours, the European Central Bank concluded a decision to purchase Italian and Spanish bonds as part of a rapid response. Perhaps, another attempt to restore further faith as good news is hard to find, and it seems further than one’s imagination.
In all fairness, S&P’s rating downgrade confirms the decade old struggle of fueling growth in US business, while attempting to address the debt issue. The rating serves as a confirmation on the known rather than as an awakening to investor perception. Some savvy veterans (including the secretary of treasury and former fed chairman) may argue the calculation methodology of the downgrade and overall creditability of the rating agencies. However, that’s a moot point for all to move along in the near-term. Arguing the rating now is as noisy and less effective as the political posturing and finger pointing witnessed over the past two weeks. Hence, the reality check that is long overdue. Surely, the impact of a series of harsh realizations will be reexamined and will naturally reach equilibrium.
Calmer Digestion
The relative attractiveness of the US has not vanished over a week, as endless coverage would have you believe. That said, a few bruises take some time to heal. Importantly, a downgrade is not to be confused as a default, and in due time, this obvious point will be factored in the thoughts of capital allocators. Interestingly, there are not many alternatives to US treasuries, which remain relatively liquid so far. Of course, many have stormed into Gold, which is hardly new and bound to even extend its all-time high movement. Similarly, Yen and Franc as safe havens have witnessed inflows. However, intervention impact is worth watching for weeks to come. As to the US Dollar, here is one view:
“ ‘In [the] global economic turmoil the world is going through, what other alternative do we have at the moment but to stick with the US government instruments?’ asked a senior Oman government official” (Reuters, August 7, 2011).
Rational minds can calmly stay the course even during chaos. The built-up fear and further excuse to sell is part of human nature. Even Friday’s better than expected jobs numbers only caused a positive response for less than an hour. Plus, emerging market inflation is on the radar and remains a critical aspect of the macro picture. For most managers, deciphering China’s slowdown was on the radar before the recent plunge. Thus, fundamental catalysts were building slowly. Perhaps, all the pent up “weakness stories” are being all flushed out, as old and new realities are confronted. Soon enough, all the sideline cash will need to be put to work. As risk is redefined, history suggests that sobered minds will notice that some value (long-term investments) is worth considering. The mind games between fear and greed will reinvent itself in a new cycle. Until then, timing will remain tricky. Clear thinking is required more than usual, and visionary thoughts will be challenged by general sentiment.
Article Quotes:
“It is undeniable that the mass printing of “virtual money”, so-called quantitative easing, amounts to a deliberate debasement of the dollar, the euro and the pound. QE not only rescues banks that are bust but politically connected. As our central banks churn out cyber-credits, using them to buy our own government bonds, we’re also imposing losses on our creditors at home and abroad. The truth, largely unspoken, is that inflation and currency debasement are at the heart of the West’s strategy for tackling our massive debts. Domestic ‘monetary stimulus,’ in addition, causes money to flee our shores, so the currencies of other nations rise, making their exports less competitive. That’s why Brazil has imposed a tax on holdings of the real, trying to make it unattractive. Japan is intervening to lower the yen. Even Switzerland, the ultimate neutralist, is now engaged in ‘currency war’ – with Berne complaining loudly about Western policies causing the Swiss franc to spiral.” (The Telegraph, August 6, 2011)
“As for the downgrade itself, it may just be an expression of the obvious, not unlike the shellacking the stock market took last week. The underlying logic—of both downgrade and downturn—has been plain to see for a while. Our economy is a mess—in the long term because we’ve spent too much, and in the short term, perhaps, because we won’t spend enough. The political and ideological arguments that arise out of this contradiction make for a dismal spectacle….We’re a little like a gambler deep in the hole. The only way out of the hole is to bet more. The problem is, the guys around the table aren’t as keen as they used to be to stake us the cash to stay in. Do we walk away broke, or sell our snakeskin boots for a shot at another hand? Either way, we’re facing ruin. But it’s the doing nothing—the dithering—that might just get us shot.” (The New Yorker, August 6, 2011)
Levels:
S&P 500 Index [1199.38] – Down 7.19% last week, following a very extreme move. The break below 1280 is noteworthy, as 1200 marks a fragile but new stabilization point.
Crude [$86.88] – Closed Friday above $85 range—a level last witnessed near the start of the year.
Gold [$1628.50] – Although slightly up for the week, the commodity did not make new highs, as seen several times in the past few years. Nonetheless, 1679 intra-day highs from August 4th, as uptrend remains intact.
DXY – US Dollar Index [74.59] – Held above annual lows and turned a positive weekly return. Implication of downgrade, currency adjustments and safe haven rotation will have a lot to say. However, for over four months, a bottoming and stabilizing pattern is visible.
US 10 Year Treasury Yields [2.55%] – Further decline in yields begs questions for key target rates. In the late 2008 era and in late fall 2010, yields stabilized around 2.40. Now, few percentage points removed from that level as the recent lows stand at 2.33%.
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, August 08, 2011
Monday, August 01, 2011
Market Outlook | August 1, 2011
“ We could never learn to be brave and patient, if there were only joy in the world.” - Helen Keller (1880-1968)
Sorting Out Messes
After a circus of a week, least to the surprise of most insiders’ expectation, congress has nearly reached a debt agreement. Perhaps, soon enough, we can resume back to issues related to job creation, weakening European condition, and rising skepticism by various participating parties. Now, with suspense cooling off, the market drivers can return to earnings season and currency reactions and patterns. Of course, the potential debt rating downgrade chatter is hovering as a political and risk management discussion.
It’s quite evident that a shortage of good news is a summer theme, just as much as a shortage of sustainable ideas. Perhaps, a shortage of common sense and brevity can be thrown in the mix as well—not to mention the overstated theme of a shortage in investable ideas. These are the thoughts that persisted last week, where volatility (measured by VIX) reached the second highest level this year, along with all-time highs in Gold prices last week. The previous highs in volatility were reached in mid-June and two weeks ago as an illustration of a turbulent summer. Meanwhile, the Gold story is too obvious, and it is sold as the “safety” barometer among casual and financial onlookers. Regardless of political messaging delays and disarray, these were minor clues from key indicators. Now, the level of panic might not have been as dramatic as desired by some political leaders in the debt ceiling crisis. Still, the question this week remains whether or not “risk” is trading at a premium, as hope is priced very “cheaply.” That is where visionaries can reexamine opportunities.
Truthful Imagination
For those plainly looking ahead, on the surface it is hard to envision improving growth numbers in earnings or economic numbers. Similarly, foreseeing a series of events to change the “beaten up” sentiment is quite challenging beyond a day or two. Simply, imagination is deeply required to see a recovery. For many weeks, the question has been: Is it bad news or is it stimulus tools that are deeply exhausted? Fatigue of hearing the message takes its toll, even if a dosage of truth is reiterated. At this point, one has to ask or seek the surprise element for upside gains, as previous crisis modes would suggest. The reward is in visualizing aggressive bets for the next 6-9 months, where markets get back to the usual illustration of perception.
Asset managers are forced to reflect to trends of the post 2008 crisis era. As a start, the lack of success in quantitative easing showcases that a stimulus package or comforting plan is not enough. At the same time, the inflationary pressures have led to rate hikes as few wonder about the promising outlook of emerging markets. This has Asian currencies rising to 14-year highs. For larger US firms, overseas earnings continue to play a bigger role. Therefore, the magnitude of Brazilian and Chinese slowdown is too interrelated, and it will have a big say in this second half.
Gearing Up
Pressure has mounted as to the feasibility of capitalism, which has entered a territory of too many unknowns this year (more than usual). Plus, one should not deny the new regulatory framework of the Dodd-Frank Act, which is still being digested and expected to revamp the asset management world. Yet, through all this, the US democratic system, although highly manipulated at times, continues to work, and it remains a welcoming system for debates (as witnessed again this weekend). That is perhaps a relative argument, which cannot be understated, despite a fragile state for America’s economy. In due time, when confidence is restored, this point can be viewed not as a bold statement but rather a sobering observation. As to the consequences of recent policies, that remains to be seen.
Wills are tested at periods of economic slowdown. Conviction on buy ideas is mostly low. Thus, it’s a good time to isolate the political negation tactics from the natural economic slowdown—a worthwhile exercise for the upcoming weeks. As a reminder, it was last July when stocks bottomed after a turbulent spring 2010. History rarely repeats itself exactly, but a quick look back addresses that fact. Importantly, an inflection point is deeply awaited in terms of commodity reversal and US dollar recovery. Similarly, near-term traders will have to isolate knee-jerk reactions from headline news versus sustainable runs backed by fundamentals. Let’s not forget that the S&P 500 Index was down 3.92% and that Crude declined by 4.12% coming into this week. Thus, a short-lived bounce is merely inevitable, especially at the start of a new month.
Article Quotes:
“The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners…As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall…. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.” (The Telegraph, July 28, 2011)
“The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts. But, so far, that gamble isn’t working as well or as rapidly as hoped. Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans. But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction. Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary. Banking systems need more capital. The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment. But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.” (Project Syndicate July 29, 2011)
Levels:
S&P 500 Index [1292.28] – Stalled at 1340, where sellers stepped in. The next noteworthy buy level is around 1280, where technical indicators would argue for a buy point. That’s near the 200-day moving average of 1284—a target worth a closer look.
Crude [$95.75] – In the well defined range between $95-100. A break below $94 can trigger further selling pressure.
Gold [$1628.50] – The reacceleration since July 1st has led to a nearly 10% appreciation. Established uptrend is making new highs.
DXY – US Dollar Index [73.89] – Barely holding above annual lows after the deceleration in recent weeks.
US 10 Year Treasury Yields [2.79%] – Unlike the dollar, yields have failed to stay above previous lows, as the below 3% trend lives on.
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.
Sorting Out Messes
After a circus of a week, least to the surprise of most insiders’ expectation, congress has nearly reached a debt agreement. Perhaps, soon enough, we can resume back to issues related to job creation, weakening European condition, and rising skepticism by various participating parties. Now, with suspense cooling off, the market drivers can return to earnings season and currency reactions and patterns. Of course, the potential debt rating downgrade chatter is hovering as a political and risk management discussion.
It’s quite evident that a shortage of good news is a summer theme, just as much as a shortage of sustainable ideas. Perhaps, a shortage of common sense and brevity can be thrown in the mix as well—not to mention the overstated theme of a shortage in investable ideas. These are the thoughts that persisted last week, where volatility (measured by VIX) reached the second highest level this year, along with all-time highs in Gold prices last week. The previous highs in volatility were reached in mid-June and two weeks ago as an illustration of a turbulent summer. Meanwhile, the Gold story is too obvious, and it is sold as the “safety” barometer among casual and financial onlookers. Regardless of political messaging delays and disarray, these were minor clues from key indicators. Now, the level of panic might not have been as dramatic as desired by some political leaders in the debt ceiling crisis. Still, the question this week remains whether or not “risk” is trading at a premium, as hope is priced very “cheaply.” That is where visionaries can reexamine opportunities.
Truthful Imagination
For those plainly looking ahead, on the surface it is hard to envision improving growth numbers in earnings or economic numbers. Similarly, foreseeing a series of events to change the “beaten up” sentiment is quite challenging beyond a day or two. Simply, imagination is deeply required to see a recovery. For many weeks, the question has been: Is it bad news or is it stimulus tools that are deeply exhausted? Fatigue of hearing the message takes its toll, even if a dosage of truth is reiterated. At this point, one has to ask or seek the surprise element for upside gains, as previous crisis modes would suggest. The reward is in visualizing aggressive bets for the next 6-9 months, where markets get back to the usual illustration of perception.
Asset managers are forced to reflect to trends of the post 2008 crisis era. As a start, the lack of success in quantitative easing showcases that a stimulus package or comforting plan is not enough. At the same time, the inflationary pressures have led to rate hikes as few wonder about the promising outlook of emerging markets. This has Asian currencies rising to 14-year highs. For larger US firms, overseas earnings continue to play a bigger role. Therefore, the magnitude of Brazilian and Chinese slowdown is too interrelated, and it will have a big say in this second half.
Gearing Up
Pressure has mounted as to the feasibility of capitalism, which has entered a territory of too many unknowns this year (more than usual). Plus, one should not deny the new regulatory framework of the Dodd-Frank Act, which is still being digested and expected to revamp the asset management world. Yet, through all this, the US democratic system, although highly manipulated at times, continues to work, and it remains a welcoming system for debates (as witnessed again this weekend). That is perhaps a relative argument, which cannot be understated, despite a fragile state for America’s economy. In due time, when confidence is restored, this point can be viewed not as a bold statement but rather a sobering observation. As to the consequences of recent policies, that remains to be seen.
Wills are tested at periods of economic slowdown. Conviction on buy ideas is mostly low. Thus, it’s a good time to isolate the political negation tactics from the natural economic slowdown—a worthwhile exercise for the upcoming weeks. As a reminder, it was last July when stocks bottomed after a turbulent spring 2010. History rarely repeats itself exactly, but a quick look back addresses that fact. Importantly, an inflection point is deeply awaited in terms of commodity reversal and US dollar recovery. Similarly, near-term traders will have to isolate knee-jerk reactions from headline news versus sustainable runs backed by fundamentals. Let’s not forget that the S&P 500 Index was down 3.92% and that Crude declined by 4.12% coming into this week. Thus, a short-lived bounce is merely inevitable, especially at the start of a new month.
Article Quotes:
“The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners…As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall…. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.” (The Telegraph, July 28, 2011)
“The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts. But, so far, that gamble isn’t working as well or as rapidly as hoped. Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans. But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction. Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary. Banking systems need more capital. The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment. But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.” (Project Syndicate July 29, 2011)
Levels:
S&P 500 Index [1292.28] – Stalled at 1340, where sellers stepped in. The next noteworthy buy level is around 1280, where technical indicators would argue for a buy point. That’s near the 200-day moving average of 1284—a target worth a closer look.
Crude [$95.75] – In the well defined range between $95-100. A break below $94 can trigger further selling pressure.
Gold [$1628.50] – The reacceleration since July 1st has led to a nearly 10% appreciation. Established uptrend is making new highs.
DXY – US Dollar Index [73.89] – Barely holding above annual lows after the deceleration in recent weeks.
US 10 Year Treasury Yields [2.79%] – Unlike the dollar, yields have failed to stay above previous lows, as the below 3% trend lives on.
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, July 25, 2011
Market Outlook | July 25, 2011
“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” - Friedrich Nietzsche (1844-1900)
Theatrical Deal Sealing
Obsession and anticipation over deal making is a theme that keeps the summer lively, given this unavoidable topic. At face value, it is easy to say negotiations are ugly as the political spice makes it even uglier. One big weekend deal (or lack of) attempt does not seal other long-term issues. Generally, when a politician talks like a trader by warning of market behavior or when a trader speaks like a government official, then both are equally dangerous. Veterans and shrewd observers would attest to that. In fact, some are calling this debt ceiling event “a manufactured crisis” or simply “artificial,” or other Washingtonian insiders call it a “gimmick.” Bottom-line, running a deficit is nothing new that dates back to World War II, and the Treasury Secretary can steer clear of a default, if needed. The National Center of Policy Analysis reminds us of the following:
“There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit…. The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds” (NCPA, July 20, 2011).
Posturing methods and threat of a market collapse should be neutrally watched by market observers. In other words, the gloom-and-doom consequences are well laid out (especially with nauseating Eurozone discussions); therefore, a mellow approach is heavily required.
Sensationalism makes for good entertainment and not for a solid money management. Outside the tick-by-tick and day-by-day response to chatter, placing money with high convictions in the next 6 months is the objective and challenge on hand. After all this back and forth, one should seek the actionable ideas while prioritizing noteworthy global indicators beyond the current headline matter.
A Glaring Shine
Gold perceived as a “safer” instrument continues to attract votes via buyers, as showcased by shiny past and present performance. It was July 23, 1999, when Gold bottomed at $252.80. Of course, that was a period where America was infatuated with the tech boom. The 12-year anniversary of Gold’s bottom marks a different world today, with all-time highs at the end of last week at $1602. Importantly, soon after, at the turn of the millennium, interest rates and the dollar started multi-year declines. Clearly, that’s contributed to keeping the Gold party alive and well. Yet, at some point, Gold owners must ask, is this a safe asset to own against, anticipating the dollar collapse, stock market fragility, or alternation in capitalism. Or does it have a historical appeal and can be physically felt? Bringing up these doubts sounds rather unpopular today. For now, the defined reasoning behind the ongoing run is less of a discussion, and that’s too common when momentum is in full gear Nonetheless, few biases and facts need closer evaluation, especially for the next 6-12 months. In other words, safety was one of the catalysts to own Gold, but logic eventually catches up to a frenzy of patterns.
Borderless Index
As known to all by now, borderless-driven competition has redefined the way of evaluating an index. Recently, a report confirmed that companies in the S&P 500 received 46.3% of revenues outside the United States. Notably, US technology companies had the most exposure (56.3%) to foreign sales (S&P Indices, July 2011). These trends seem rather simple and obvious, but they paint one solid picture of today’s realities.
This certainly illustrates a look back into the weakening US growth rate, which by now, doesn’t require advanced quant models to figure out. Importantly, we can point out with confidence that the S&P 500 Index is not a reflection of US economy and clearly not an economic barometer (as stated many times before). At the same time, this reflects the much talked about emerging markets expansion as well as the interlinked nature of financial markets.
Then, there is the domestic social, but really political, matter. Multi-national companies, for the most part, don’t have an allegiance to borders in a globalized world. Rightly or wrongly, this becomes a vexing topic for some patriots, but it becomes a practically stifling issue for American leaders. Not to mention, these company-specific dynamics are powerful enough to alter the behavior of a money manager when it comes to capital allocation. Finally, non US revenue trend touches on key topics related to corporate taxes (to be paid in the US), flow of investment capital, and factors affecting growth rates.
Seeking Answers
For companies with exposure to China, some near-term suspense is warranted. This has many scrambling to decipher soft vs. hard landing matters to the Chinese economy. Inflationary matters have swept the emerging markets, and this certainly is a daily discussion topic for policymakers and investors alike.
Real estate “bubbles” are resurfacing again in China as well as Brazil. The real impact of the housing slowdown is not quite understood, and at times, it is unfairly compared to the US collapse. As for now, it is evident that emerging markets have some turbulence (or skepticism) to overcome in the next few months. Interestingly, the magnitude of any slowdown can provide guidance on two major questions:
1. What will be the impact of further slowdown on earnings of multi-national companies? 2. Will investors rotate to US markets on a relative basis, given increase in the sovereign debt crisis elsewhere?
For now, both are intriguing questions, and they are worth deciphering before placing aggressive bets.
Article Quotes:
“It has been argued that banks do not need to get funds from each other, since they are now awash in reserves; but these reserves are not equally distributed. The 25 largest US banks account for over half of aggregate reserves, with 21% of reserves held by just three banks; and the largest banks have cut back on small business lending by over 50%. Large Wall Street banks have more lucrative things to do with the very cheap credit made available by the Fed than to lend it to businesses and consumers, which has become a risky and expensive business with the imposition of higher capital requirements and tighter regulations…. Fourteen states have now initiated bills to establish state-owned banks or to study their feasibility. Besides serving local lending needs, state-owned banks can provide cash-strapped states with new revenues, obviating the need to raise taxes, slash services or sell off public assets.” (Asian Times, July 21, 2011)
“People on both sides of financing French banks say the cost of debt has not changed substantially, but rather, the availability has diminished and money market funds preferring to lend overnight. Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business. At the end of June, banks in the two countries had accounted for 0.8 percent of the $1,570bn assets in prime money market funds, calculates Fitch, down from 6.1 per cent in late 2009.The 10 largest US prime money market funds reduced their total exposure to European banks by 8.7 percent on a dollar basis in June, according to the rating agency. Owners of the money market funds, chastened by a rush of withdrawals during the financial crisis in 2008, have adopted an abundance of caution.” (Financial Times, July 24, 2011)
Levels:
S&P 500 Index [1345.02] – Breaking and staying above around 1340, which has been difficult, as witnessed in February, April, and earlier this month.
Crude [$99.87] – A trend reversal established on June 27 has triggered a recovery back to the $100 level. Doubters are questioning if elevation above $100 is sustainable. Earlier this year, buying severely stalled at $105 and $110.
Gold [$1602] – A 21% rally since the lows of late January registers yet another all-time high—the most profound and well-defined positive trend this year. Since the 2008 crisis in October (24), the commodity has rallied by 124.84%—clearly a declaration of negative sentiment for paper assets. Bubble-like pattern is hard to identify for now.
DXY – US Dollar Index [74.20] – Resumption of downtrend pattern and few points from annual lows, which is critical to watch at 7269. Last four months have showcased moderate stabilization, but conjuring an uptrend is hardly visible.
US 10 Year Treasury Yields [2.96%] – Attempting to break above 3% while staying above 2.80%. A step back further illustrates the established downtrend, which has been in full gear since peaking at 6.82% in 2ooo.
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.
Theatrical Deal Sealing
Obsession and anticipation over deal making is a theme that keeps the summer lively, given this unavoidable topic. At face value, it is easy to say negotiations are ugly as the political spice makes it even uglier. One big weekend deal (or lack of) attempt does not seal other long-term issues. Generally, when a politician talks like a trader by warning of market behavior or when a trader speaks like a government official, then both are equally dangerous. Veterans and shrewd observers would attest to that. In fact, some are calling this debt ceiling event “a manufactured crisis” or simply “artificial,” or other Washingtonian insiders call it a “gimmick.” Bottom-line, running a deficit is nothing new that dates back to World War II, and the Treasury Secretary can steer clear of a default, if needed. The National Center of Policy Analysis reminds us of the following:
“There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit…. The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds” (NCPA, July 20, 2011).
Posturing methods and threat of a market collapse should be neutrally watched by market observers. In other words, the gloom-and-doom consequences are well laid out (especially with nauseating Eurozone discussions); therefore, a mellow approach is heavily required.
Sensationalism makes for good entertainment and not for a solid money management. Outside the tick-by-tick and day-by-day response to chatter, placing money with high convictions in the next 6 months is the objective and challenge on hand. After all this back and forth, one should seek the actionable ideas while prioritizing noteworthy global indicators beyond the current headline matter.
A Glaring Shine
Gold perceived as a “safer” instrument continues to attract votes via buyers, as showcased by shiny past and present performance. It was July 23, 1999, when Gold bottomed at $252.80. Of course, that was a period where America was infatuated with the tech boom. The 12-year anniversary of Gold’s bottom marks a different world today, with all-time highs at the end of last week at $1602. Importantly, soon after, at the turn of the millennium, interest rates and the dollar started multi-year declines. Clearly, that’s contributed to keeping the Gold party alive and well. Yet, at some point, Gold owners must ask, is this a safe asset to own against, anticipating the dollar collapse, stock market fragility, or alternation in capitalism. Or does it have a historical appeal and can be physically felt? Bringing up these doubts sounds rather unpopular today. For now, the defined reasoning behind the ongoing run is less of a discussion, and that’s too common when momentum is in full gear Nonetheless, few biases and facts need closer evaluation, especially for the next 6-12 months. In other words, safety was one of the catalysts to own Gold, but logic eventually catches up to a frenzy of patterns.
Borderless Index
As known to all by now, borderless-driven competition has redefined the way of evaluating an index. Recently, a report confirmed that companies in the S&P 500 received 46.3% of revenues outside the United States. Notably, US technology companies had the most exposure (56.3%) to foreign sales (S&P Indices, July 2011). These trends seem rather simple and obvious, but they paint one solid picture of today’s realities.
This certainly illustrates a look back into the weakening US growth rate, which by now, doesn’t require advanced quant models to figure out. Importantly, we can point out with confidence that the S&P 500 Index is not a reflection of US economy and clearly not an economic barometer (as stated many times before). At the same time, this reflects the much talked about emerging markets expansion as well as the interlinked nature of financial markets.
Then, there is the domestic social, but really political, matter. Multi-national companies, for the most part, don’t have an allegiance to borders in a globalized world. Rightly or wrongly, this becomes a vexing topic for some patriots, but it becomes a practically stifling issue for American leaders. Not to mention, these company-specific dynamics are powerful enough to alter the behavior of a money manager when it comes to capital allocation. Finally, non US revenue trend touches on key topics related to corporate taxes (to be paid in the US), flow of investment capital, and factors affecting growth rates.
Seeking Answers
For companies with exposure to China, some near-term suspense is warranted. This has many scrambling to decipher soft vs. hard landing matters to the Chinese economy. Inflationary matters have swept the emerging markets, and this certainly is a daily discussion topic for policymakers and investors alike.
Real estate “bubbles” are resurfacing again in China as well as Brazil. The real impact of the housing slowdown is not quite understood, and at times, it is unfairly compared to the US collapse. As for now, it is evident that emerging markets have some turbulence (or skepticism) to overcome in the next few months. Interestingly, the magnitude of any slowdown can provide guidance on two major questions:
1. What will be the impact of further slowdown on earnings of multi-national companies? 2. Will investors rotate to US markets on a relative basis, given increase in the sovereign debt crisis elsewhere?
For now, both are intriguing questions, and they are worth deciphering before placing aggressive bets.
Article Quotes:
“It has been argued that banks do not need to get funds from each other, since they are now awash in reserves; but these reserves are not equally distributed. The 25 largest US banks account for over half of aggregate reserves, with 21% of reserves held by just three banks; and the largest banks have cut back on small business lending by over 50%. Large Wall Street banks have more lucrative things to do with the very cheap credit made available by the Fed than to lend it to businesses and consumers, which has become a risky and expensive business with the imposition of higher capital requirements and tighter regulations…. Fourteen states have now initiated bills to establish state-owned banks or to study their feasibility. Besides serving local lending needs, state-owned banks can provide cash-strapped states with new revenues, obviating the need to raise taxes, slash services or sell off public assets.” (Asian Times, July 21, 2011)
“People on both sides of financing French banks say the cost of debt has not changed substantially, but rather, the availability has diminished and money market funds preferring to lend overnight. Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business. At the end of June, banks in the two countries had accounted for 0.8 percent of the $1,570bn assets in prime money market funds, calculates Fitch, down from 6.1 per cent in late 2009.The 10 largest US prime money market funds reduced their total exposure to European banks by 8.7 percent on a dollar basis in June, according to the rating agency. Owners of the money market funds, chastened by a rush of withdrawals during the financial crisis in 2008, have adopted an abundance of caution.” (Financial Times, July 24, 2011)
Levels:
S&P 500 Index [1345.02] – Breaking and staying above around 1340, which has been difficult, as witnessed in February, April, and earlier this month.
Crude [$99.87] – A trend reversal established on June 27 has triggered a recovery back to the $100 level. Doubters are questioning if elevation above $100 is sustainable. Earlier this year, buying severely stalled at $105 and $110.
Gold [$1602] – A 21% rally since the lows of late January registers yet another all-time high—the most profound and well-defined positive trend this year. Since the 2008 crisis in October (24), the commodity has rallied by 124.84%—clearly a declaration of negative sentiment for paper assets. Bubble-like pattern is hard to identify for now.
DXY – US Dollar Index [74.20] – Resumption of downtrend pattern and few points from annual lows, which is critical to watch at 7269. Last four months have showcased moderate stabilization, but conjuring an uptrend is hardly visible.
US 10 Year Treasury Yields [2.96%] – Attempting to break above 3% while staying above 2.80%. A step back further illustrates the established downtrend, which has been in full gear since peaking at 6.82% in 2ooo.
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, July 18, 2011
Market Outlook | July 18, 2011
“Wisdom is knowing what to do next, skill is knowing how to do it, and virtue is doing it.” -David Starr Jordan (1851-1931)
Collective Mystification
The past week has been a suspenseful one, in which global risk became ever harder to define, understand, and estimate—simply, an honest observation, which most should admit by now (if they have not already). Downtrends, downgrades, and pure “downers” stem from old wounds and mostly sum up the summer trading days. Importantly, healing methods via reactionary policies are too short-term oriented, and at some point, further misdiagnoses take its toll on fragile markets. Financial books will have to reassess previous teachings on the “true” safety of Treasuries and various sovereign debts. The textbook assumptions are severely challenged today, especially since a problem-solution manual is not available or agreeable. Therefore, we’re all forced to stay patient in this unwinding process.
The Federal Reserve chairman, as usual, attempted to calm participants. Unfortunately, the witty, sharp, and skeptical audience had heard this message before. Thus, this time, the cheerleading was toned down. The revival and stimulus efforts are nauseating (and recognized by Chairman Bernanke) for a crowd that is seeking fresh ideas. In other words, the initial reaction was for traders to expect more of the same: a declining dollar, rise in gold prices, and lower interest rate policies. Optimism (or further denial) is much needed as confidence creation is vital. However, identifying the substance behind the salesmanship is a demanded skill for investment officers. Thus, this leads one to ask this question: how many times can you cheer for a fundamentally flawed system? That’s a question circulating in the minds of causal or obsessed observers. In fact, the Federal Reserve of Dallas stated: “We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion 'might spook the marketplace’” (Bloomberg, July 14, 2011).
As for alternatives, China’s growth is noticeably (expectedly) slowing down, and the same applies for other emerging markets. After a decade of growth in developing countries, inflation monitoring haunts policymakers. As for the magnitude of this slowdown, that is for buyers and sellers to speculate. Yet, the long-term picture seems net positive for emerging nations as investor appetite seeks higher growth rates—a thought to keep in mind, even if near-term corrections can blur the vision of investors.
Deadlocks, Deadweights, and Dead Minds
Theatrical deliberation on mission critical issues is merely a common theme for Eurozone and congress leaders. Negotiations that are filled with deadlocks about saving dead weights, during an age-old political banter, produces some dead “minds.” Political posturing in the debt ceiling matter, combined with contemplation of rating changes by agencies, enhance the buzz (or scare). Perhaps, it’s a negotiation tactic, but it fails to add jobs or the perception of confidence. How can business run as usual without the clear guidance of major talks and hopes of a deal? The well-documented economic slowdown is a forefront political and social issue. Sadly, these restructuring topics are mostly backward looking, and they hardly create organic growth at a desired pace.
Mapping a Plan
Guts and some guesswork will be required by money managers in looking ahead for the next six months. For example, the guidelines to operate as a bank have adjusted significantly in which projecting earnings growth for the next three years is hard to predict. Similarly, the obvious deleveraging cycle in consumer markets makes housing and retail rather difficult in most markets. Near or long-term investment ideas are hard to bring back and, once identified, even harder to execute. Plus, the macro events are bound to tack on volatility, which has stayed relatively calm in the first half of the year. All this adds up for a synchronized hesitancy and occasional shocks in the weeks ahead.
Article Quotes:
“Dupont appears to be adapting nimbly to new 21st century strategies, by following a couple of key themes: global markets and agricultural industries. With its focus on emerging countries like China, Brazil and India, it projects a 10% compound increase in sales in those markets over the next five years. On the agricultural side, the company has identified the megatrend of expanding populations who demand increased food and other basic commodities, as well as the importance of genetically modified seeds and more efficient farming, to yield higher crops. This May, Dupont completed a tender offer for Danisco, a Danish maker of food and bioproducts. At the same time, the company preserves Pierre’s culture and legacy of scientific innovation. Out of about 60,000 employees, over 5,000 are scientists and engineers… It’s some comfort to remember that an industrial backbone can still drive the American economy, not just social networking enterprises that look like bubbles.” (Vanessa Drucker, Fundweb July 12, 2011)
“Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve… China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small…China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.” (The Telegraph, July 18, 2011)
Levels:
S&P 500 Index [1316. 14] – Slightly above its 50-day moving average, as near-term consolidation continues.
Crude [$97.24] – Multi-month range is between $95-100 and becoming well defined. Attempting to revisit early spring levels of trading above $100.
Gold [$1587 ] – After several previous attempts, the commodity broke above $1550 while establishing all-time highs. Momentum is intact along with it.
DXY – US Dollar Index [75.12] – Similar to Crude, trading in a tight range the last two months. Maintaining a few points above annul lows.
US 10 Year Treasury Yields [2.90%] – July 12 marked the lowest point of the year at 2.81% as a reflection of jittery broad markets. Yet, the next move appears to revisit and stall around 3%.
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.
Collective Mystification
The past week has been a suspenseful one, in which global risk became ever harder to define, understand, and estimate—simply, an honest observation, which most should admit by now (if they have not already). Downtrends, downgrades, and pure “downers” stem from old wounds and mostly sum up the summer trading days. Importantly, healing methods via reactionary policies are too short-term oriented, and at some point, further misdiagnoses take its toll on fragile markets. Financial books will have to reassess previous teachings on the “true” safety of Treasuries and various sovereign debts. The textbook assumptions are severely challenged today, especially since a problem-solution manual is not available or agreeable. Therefore, we’re all forced to stay patient in this unwinding process.
The Federal Reserve chairman, as usual, attempted to calm participants. Unfortunately, the witty, sharp, and skeptical audience had heard this message before. Thus, this time, the cheerleading was toned down. The revival and stimulus efforts are nauseating (and recognized by Chairman Bernanke) for a crowd that is seeking fresh ideas. In other words, the initial reaction was for traders to expect more of the same: a declining dollar, rise in gold prices, and lower interest rate policies. Optimism (or further denial) is much needed as confidence creation is vital. However, identifying the substance behind the salesmanship is a demanded skill for investment officers. Thus, this leads one to ask this question: how many times can you cheer for a fundamentally flawed system? That’s a question circulating in the minds of causal or obsessed observers. In fact, the Federal Reserve of Dallas stated: “We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion 'might spook the marketplace’” (Bloomberg, July 14, 2011).
As for alternatives, China’s growth is noticeably (expectedly) slowing down, and the same applies for other emerging markets. After a decade of growth in developing countries, inflation monitoring haunts policymakers. As for the magnitude of this slowdown, that is for buyers and sellers to speculate. Yet, the long-term picture seems net positive for emerging nations as investor appetite seeks higher growth rates—a thought to keep in mind, even if near-term corrections can blur the vision of investors.
Deadlocks, Deadweights, and Dead Minds
Theatrical deliberation on mission critical issues is merely a common theme for Eurozone and congress leaders. Negotiations that are filled with deadlocks about saving dead weights, during an age-old political banter, produces some dead “minds.” Political posturing in the debt ceiling matter, combined with contemplation of rating changes by agencies, enhance the buzz (or scare). Perhaps, it’s a negotiation tactic, but it fails to add jobs or the perception of confidence. How can business run as usual without the clear guidance of major talks and hopes of a deal? The well-documented economic slowdown is a forefront political and social issue. Sadly, these restructuring topics are mostly backward looking, and they hardly create organic growth at a desired pace.
Mapping a Plan
Guts and some guesswork will be required by money managers in looking ahead for the next six months. For example, the guidelines to operate as a bank have adjusted significantly in which projecting earnings growth for the next three years is hard to predict. Similarly, the obvious deleveraging cycle in consumer markets makes housing and retail rather difficult in most markets. Near or long-term investment ideas are hard to bring back and, once identified, even harder to execute. Plus, the macro events are bound to tack on volatility, which has stayed relatively calm in the first half of the year. All this adds up for a synchronized hesitancy and occasional shocks in the weeks ahead.
Article Quotes:
“Dupont appears to be adapting nimbly to new 21st century strategies, by following a couple of key themes: global markets and agricultural industries. With its focus on emerging countries like China, Brazil and India, it projects a 10% compound increase in sales in those markets over the next five years. On the agricultural side, the company has identified the megatrend of expanding populations who demand increased food and other basic commodities, as well as the importance of genetically modified seeds and more efficient farming, to yield higher crops. This May, Dupont completed a tender offer for Danisco, a Danish maker of food and bioproducts. At the same time, the company preserves Pierre’s culture and legacy of scientific innovation. Out of about 60,000 employees, over 5,000 are scientists and engineers… It’s some comfort to remember that an industrial backbone can still drive the American economy, not just social networking enterprises that look like bubbles.” (Vanessa Drucker, Fundweb July 12, 2011)
“Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve… China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small…China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.” (The Telegraph, July 18, 2011)
Levels:
S&P 500 Index [1316. 14] – Slightly above its 50-day moving average, as near-term consolidation continues.
Crude [$97.24] – Multi-month range is between $95-100 and becoming well defined. Attempting to revisit early spring levels of trading above $100.
Gold [$1587 ] – After several previous attempts, the commodity broke above $1550 while establishing all-time highs. Momentum is intact along with it.
DXY – US Dollar Index [75.12] – Similar to Crude, trading in a tight range the last two months. Maintaining a few points above annul lows.
US 10 Year Treasury Yields [2.90%] – July 12 marked the lowest point of the year at 2.81% as a reflection of jittery broad markets. Yet, the next move appears to revisit and stall around 3%.
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, July 11, 2011
Market Outlook | July 11, 2011
"Sometimes only a change of viewpoint is needed to convert a tiresome duty into an interesting opportunity.” - Alberta Flanders
Tiresome Matters
Negative news becomes tiresome even when concerns are legitimate and unwaveringly glaring from all directions. Somehow or another, market participation (via retirement or growth driven capital) is nearly inevitable and needed to keep the global engine running. For US market observers, nostalgic feelings of better days may get in the way of actually realizing the relative attractiveness of US equities, mainly in technology and healthcare. However, that is a tough argument to sell these days after a Friday’s weak job results along with weekend discussions of “debt limit.” At this point, we’re reaching uncharted territory of chatter related to potential US debt downgrade as a serious possibility. Some are even now calling for the third episode of quantitative easing. Perhaps, recent behaviors suggest that bailouts and stimulus plans are becoming a form of addiction.
As usual, distinguishing between fear mongering and blind hope is vital as the truth falls somewhere in the middle. Yet, America’s developed (not perfected) financial system and refined legal structure provide some edge in a more turbulent junction of the global economy. For how long or short would this relative strength last? No one knows, but most financial systems will be tested, especially in upcoming months. Debates are bound to roar; markets are poised to swing; and opportunistic political party leaders will craft a profitable spin. Yet, judging from implied volatility, investors seem to have accounted for some of this turbulence, as anxiety has been mostly contained. Perhaps, negative expectations are already accounted for:
“Our net earnings revisions ratio [for companies in the S&P 1500] has now decreased for 10 consecutive weeks. Going back to the end of 2007, this is the longest such streak of declining analyst sentiment that we have seen, even surpassing the nine week streak that we saw in the aftermath of the Lehman bankruptcy.” (Bespoke Investment Group, July 8, 2011)
No Escape
Through this maze of bad news, one has to look around to grasp the relative attractiveness of US markets, at least in the intermediate-term. Clearly, the Euro-zone matters are hard to shake out and simply cannot vanish quickly. Case in point: Italy and Spain as the nations’ looming troubles are next on the menu for European policymakers. Meanwhile, the higher growth oriented China, as usual, is on the radar, but now emphasis is shifting from growth to the magnitude of the slowdown. Any global investor in China is closely contemplating the results of another interest rate hike as inflation level marks a three-year high. When glancing at Latin America, Brazil screams of credit worries issues as the cycle is cooling. Australia’s economy is contracting, along with weak retail sales and housing data. Importantly, any decline in emerging markets is usually closely tied to commodity prices and currency policies, which are worth monitoring. When considering these points, the alternatives are limited, while anxiety is known to increase, but much of this slowdown is not a major surprise. Simply, the “big blow” has yet to be seen in emerging markets; thus, it increases the skeptical suspense.
The Delicate Balance
Analysts are now becoming cautious by downgrading emerging markets and slashing US corporate earnings estimate as part of ongoing headline agitation. For one thing, layoffs in banks are a noticeable theme; thus, the mental anguish of fear seeps through professionals who have been bombarded with less promising facts in the last six months. As the earnings season is upon us, the bet is whether estimates are higher than expected. Solving this question is the opportunity presented for fundamental traders.
The macro climate points for more of the same: a fragile trading environment where capital preservation is the perceived “safe” way to operate. However, for those looking beyond 3-5 weeks, there are moments and ideas that should offer entry points in periods. In all this, managing the turbulence is art blended with skill, in which luck is needed to overcome an eventful calendar.
Article Quotes:
“Ultra-low interest rates in the west continue to flood faster-growing markets such as Brazil’s with capital, pushing their currencies higher. Allow for inflation and the trade-weighted Brazilian real is 40 percent more expensive now than in 2006. Since then, Brazilian imports have almost doubled. Export volumes have meanwhile grown just 5 percent. The only reason Brazil’s current account deficit has not exploded is thanks to high commodity prices. But that boom may not last forever. Abundant liquidity has also helped boost domestic credit. Yet Brazilian consumers now look over-stretched: households spend about a quarter of disposable income servicing their debts. That is more than pre-credit crunch levels in the US, so it is also probably a ceiling. Brazilian credit growth can only continue if real incomes continue to rise too.” (Financial Times, July 7 2011)
“The most commonly accepted way to value a company is to estimate its future cash flow, then discount it back to the present day based on expected inflation rates. That necessarily involves a lot of guesswork. But today's hot tech companies—Facebook, Twitter, Groupon, Zynga, and LinkedIn, to name a few—at least give investors some good reasons to make optimistic guesses. All of them have tens of millions of customers, positive cash flow, and fast growth. In contrast, the end of the dot-com bubble was characterized by bets on companies that had no fundamentals at all—no profit, no revenue, no customers, no cash flow. Just projections. By the end of the 1990s, there were about 360 million people on the Internet. Most of them were in the United States and other developed countries. … The promise of 15 years ago—that ‘the Internet changes everything’—is actually kind of true now.” (The New Republic, July 9, 2011)
Levels:
S&P 500 Index [1343.80] – Slightly extended in the near-term with 1340 signaling a technical selling point. However, buyers on pullbacks would look to accumulate closer to 1300 than 1280, which depends on the magnitude of the declines.
Crude [$96.20] – Ultimate test in the near-term is to revisit and potentially break $100. For now, positive trend is supported by prices stabilizing and staying over $90.00.
Gold [$1483] – Barely removed from all-times high ($1552 on June 22). A reacceleration process is building up as buyers’ demand is relatively healthy at this point.
DXY – US Dollar Index [75.66] – Stabilizing at current range as the pace of depreciation has slowed. A noteworthy macro event as the Dollar attempts to recover.
US 10 Year Treasury Yields [3.02%] – The last week of June sparked a spike in yields to propel a move above 3%. The explosive run is cooling off, and the downtrend is in effect.
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.
Tiresome Matters
Negative news becomes tiresome even when concerns are legitimate and unwaveringly glaring from all directions. Somehow or another, market participation (via retirement or growth driven capital) is nearly inevitable and needed to keep the global engine running. For US market observers, nostalgic feelings of better days may get in the way of actually realizing the relative attractiveness of US equities, mainly in technology and healthcare. However, that is a tough argument to sell these days after a Friday’s weak job results along with weekend discussions of “debt limit.” At this point, we’re reaching uncharted territory of chatter related to potential US debt downgrade as a serious possibility. Some are even now calling for the third episode of quantitative easing. Perhaps, recent behaviors suggest that bailouts and stimulus plans are becoming a form of addiction.
As usual, distinguishing between fear mongering and blind hope is vital as the truth falls somewhere in the middle. Yet, America’s developed (not perfected) financial system and refined legal structure provide some edge in a more turbulent junction of the global economy. For how long or short would this relative strength last? No one knows, but most financial systems will be tested, especially in upcoming months. Debates are bound to roar; markets are poised to swing; and opportunistic political party leaders will craft a profitable spin. Yet, judging from implied volatility, investors seem to have accounted for some of this turbulence, as anxiety has been mostly contained. Perhaps, negative expectations are already accounted for:
“Our net earnings revisions ratio [for companies in the S&P 1500] has now decreased for 10 consecutive weeks. Going back to the end of 2007, this is the longest such streak of declining analyst sentiment that we have seen, even surpassing the nine week streak that we saw in the aftermath of the Lehman bankruptcy.” (Bespoke Investment Group, July 8, 2011)
No Escape
Through this maze of bad news, one has to look around to grasp the relative attractiveness of US markets, at least in the intermediate-term. Clearly, the Euro-zone matters are hard to shake out and simply cannot vanish quickly. Case in point: Italy and Spain as the nations’ looming troubles are next on the menu for European policymakers. Meanwhile, the higher growth oriented China, as usual, is on the radar, but now emphasis is shifting from growth to the magnitude of the slowdown. Any global investor in China is closely contemplating the results of another interest rate hike as inflation level marks a three-year high. When glancing at Latin America, Brazil screams of credit worries issues as the cycle is cooling. Australia’s economy is contracting, along with weak retail sales and housing data. Importantly, any decline in emerging markets is usually closely tied to commodity prices and currency policies, which are worth monitoring. When considering these points, the alternatives are limited, while anxiety is known to increase, but much of this slowdown is not a major surprise. Simply, the “big blow” has yet to be seen in emerging markets; thus, it increases the skeptical suspense.
The Delicate Balance
Analysts are now becoming cautious by downgrading emerging markets and slashing US corporate earnings estimate as part of ongoing headline agitation. For one thing, layoffs in banks are a noticeable theme; thus, the mental anguish of fear seeps through professionals who have been bombarded with less promising facts in the last six months. As the earnings season is upon us, the bet is whether estimates are higher than expected. Solving this question is the opportunity presented for fundamental traders.
The macro climate points for more of the same: a fragile trading environment where capital preservation is the perceived “safe” way to operate. However, for those looking beyond 3-5 weeks, there are moments and ideas that should offer entry points in periods. In all this, managing the turbulence is art blended with skill, in which luck is needed to overcome an eventful calendar.
Article Quotes:
“Ultra-low interest rates in the west continue to flood faster-growing markets such as Brazil’s with capital, pushing their currencies higher. Allow for inflation and the trade-weighted Brazilian real is 40 percent more expensive now than in 2006. Since then, Brazilian imports have almost doubled. Export volumes have meanwhile grown just 5 percent. The only reason Brazil’s current account deficit has not exploded is thanks to high commodity prices. But that boom may not last forever. Abundant liquidity has also helped boost domestic credit. Yet Brazilian consumers now look over-stretched: households spend about a quarter of disposable income servicing their debts. That is more than pre-credit crunch levels in the US, so it is also probably a ceiling. Brazilian credit growth can only continue if real incomes continue to rise too.” (Financial Times, July 7 2011)
“The most commonly accepted way to value a company is to estimate its future cash flow, then discount it back to the present day based on expected inflation rates. That necessarily involves a lot of guesswork. But today's hot tech companies—Facebook, Twitter, Groupon, Zynga, and LinkedIn, to name a few—at least give investors some good reasons to make optimistic guesses. All of them have tens of millions of customers, positive cash flow, and fast growth. In contrast, the end of the dot-com bubble was characterized by bets on companies that had no fundamentals at all—no profit, no revenue, no customers, no cash flow. Just projections. By the end of the 1990s, there were about 360 million people on the Internet. Most of them were in the United States and other developed countries. … The promise of 15 years ago—that ‘the Internet changes everything’—is actually kind of true now.” (The New Republic, July 9, 2011)
Levels:
S&P 500 Index [1343.80] – Slightly extended in the near-term with 1340 signaling a technical selling point. However, buyers on pullbacks would look to accumulate closer to 1300 than 1280, which depends on the magnitude of the declines.
Crude [$96.20] – Ultimate test in the near-term is to revisit and potentially break $100. For now, positive trend is supported by prices stabilizing and staying over $90.00.
Gold [$1483] – Barely removed from all-times high ($1552 on June 22). A reacceleration process is building up as buyers’ demand is relatively healthy at this point.
DXY – US Dollar Index [75.66] – Stabilizing at current range as the pace of depreciation has slowed. A noteworthy macro event as the Dollar attempts to recover.
US 10 Year Treasury Yields [3.02%] – The last week of June sparked a spike in yields to propel a move above 3%. The explosive run is cooling off, and the downtrend is in effect.
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, July 05, 2011
Market Outlook | July 5, 2011
“Faith begins where Reason sinks exhausted.” - Albert Pike (1809-1891)
Endings and Beginnings
A series of endings and new starts is a fitting description over a reflective holiday weekend. For one thing, the first half of the year reached closure with the S&P 500 Index up 6.52% for the year, following an impressive 5.6% run last week. Yet, since midwinter, we've seen suspenseful events of lingering debt issues and gut-wrenching realities of the global system filled with minor down hours and negative days.
Secondly, Quantitative Easing 2 (QE2) ended last Friday. Of course, that's the government stimulus program designed to spark a recovery (avoid further disaster) by mainly keeping interest rates lower after the 2008 crisis. Skeptics in the early stages warned of eventual inflation and dollar devaluation. Either way, it’s too early to judge, as inflation is reported not too high and the dollar has declined but not collapsed. However, that stimulus plan has expired, and investor reaction is eagerly awaited. In the meantime, the end of QE2 naturally raises questions on consequences of ungluing a sense of stability. The debate centers around intervention versus facing painful short-term measures. Yes! This is all too familiar to the financial and political world—yet again. Now, money managers ponder if the ending of the Fed policy will propel the beginning of rising interest rates and the strengthened dollar (anticipated incorrectly for many years now). Basically, a trend reversal in these two key macro indicators may not only impact the currency markets, but it also questions if this ends the momentum in Gold prices.
Finally, last week marked a minor closure or temporary relief to the Greece matter—a much needed pause to the glaring suspense and intense debate. For policymakers, the resolution gives much needed breathing room from a topic to be revisited and scrutinized in months ahead. Interestingly, the US Treasury Secretary appears ready for an exit while June marked the beginning of a new IMF chief—not to mention, the retirement of the Secretary of Defense, Robert Gates. These events are happening as we approach the early stages of the US elections. Clearly, much of the day-to-day news can shape perceived policy changes and sensitive response to near-term sentiment. Similarly, Europe’s mood for bailouts is bound to change, due to increasing political pressure, given recent decisions. How this plays out in Germany and other nations will have a say in regards to global financial stability.
Bad News Exhausted
By this point, the fatigued and battered investment crowd is into recreating some positive mental tune. Savvy front line money movers visualized a pent up upside move about a week ago, as June 17 marked a recovery point in which volatility reversed, while broad indexes found bottom. There is a difference between accumulating bad news and a sharp collapse.
Like a kid punished until he is remorseful for his bad behaviors, markets go through a correction and a taste of harsh reality. Then, shamelessly, we're temporarily back to humming the same tune driven by human nature, capital chasing growth, and paying up at debatable prices. The clouded directional view does not fully stop opportunistic players from making bets or having guts. Thus, a pure argument for logic may fail to explain the rationale in which systemic problems (i.e. sovereign debt) suddenly vanish, as outraged pundits are quickly silenced. Importantly, surviving this wobbly landscape requires one to quickly connect dots while accepting and playing the cards dealt. For now, economic and corporate earnings might not deliver an uplifting message, but selective opportunities are worth scrambling for, given scarcity in quality ideas.
Within this fragile macro climate, there is a boom in technology venture-backed IPOs— somewhat herding in Gold investments and an eagerness to restock into risky assets. This signals that few found robust ideas in the first half. Importantly, in planning forward, one can begin to selectively pick entry points to attractively valued themes.
Irrational Logic
At this point, it’s only normal to ask this question: how can these not-so-logical patterns re-occur? Some wonder if financial markets are a venue where the participant comes in saying, “I have money to burn!” Basically, this suggests that speculation is borderline entertainment on real events or alternative to traditional saving schemes. If this is too blunt of a description, then there is another approach. A buyer goes through a self convincing process in which he or she cleverly justifies actions in the name of long-term wealth creation. Others are limited by investor mandate or knowledge, and they prefer to stick to traditional investment patterns.
At least veterans know (or should know) that there is a tragic ending to too much hopefulness if not monitored correctly. Again, these greed-driven stories are glaringly obvious and easier to comprehend in the post mortem analysis of hyped investments—yet rarely are the mistakes not repeated. If the majority of account holders did not have clever self-justification processes, then surely the market dynamics would be drastically different than we know it. Therefore, savvy or lucky money managers have accounted and adjusted for the constraints of available ideas while emphasizing the human psychological response—a note worth applying to the quarter ahead.
Article Quotes:
“We have seen how "inflation hedger" investors aiming to avoid inflation have actually caused the very inflation they sought to avoid. The game-changing intervention by the IEA increases the supply of oil relative to the dollar, and therefore, it can be expected to deflate the price, at least temporarily. The most potent effect of what might be termed "quantitative greasing" with oil was—and was intended to—to deter speculators, and hedge funds are already licking their wounds and adjusting their strategy. But this action will also in all probability act to limit the inflationary expectations of the billions of dollars of "inflation hedge" investment also in the market, and will in all probability lead to a market collapse… So perhaps the dysfunctional and increasingly sociopathic oil market may at last be open to a new collaborative and transparent settlement, involving new market architecture; and new market instruments.” (Asian Times, July 1, 2011)
“Six years ago, when I first started writing about the credit markets, I often heard US financiers praise America’s capital markets as the most developed system of free market finance in the world. Indeed, techniques such as securitization were presented as a natural outcome of American enthusiasm for free market ideals. ..But the dirty secret behind this rhetoric was that government-backed institutions such as Fannie and Freddie were playing an important role in the modern financial system, even before the credit crisis erupted. And what is remarkable now, given that the role of Fannie and Freddie has swelled, is just how little debate this patter continues to generate. After all, with the US remaining wedded to free market ideals, it is uncomfortable to admit that “capital markets in the US have become reliant on government guarantees,” says Viral Acharya, an economist and co-author of a thought-provoking book.” (Financial Times, June 30, 2011)
Levels:
S&P 500 Index [1339.67] – An accelerated rally from 1260 level, which showcased a heavy buy-interest near the 200-day moving average. Meanwhile, 1320-1340 serves as a near-term range for a pause.
Crude [$94.94] – In late 2010, the $90 range has served as an attractive buying point. Similarly, the commodity bottomed on June 27, 2011 at $89.61. Attempting to break above $95 as investors debate the appropriate pricing and pending fundamental factors.
Gold [$1483] – Failed below 1500 after prices hit new highs of $1552 on June 22—the third time in the past few months where Gold struggled to stay above $1540 as a point where buyers’ momentum fades.
DXY – US Dollar Index [75.66] – Several days of trading don’t showcase a major trend shift. Avoiding new lows since May 6 but the follow through is not that explosive. Interestingly, the 50-day and 200-day moving average sit at or around 78.
US 10 Year Treasury Yields [3.18%] – Sharp spike above 3% caught the attention of near-term traders, given the downtrend established in early February 2011. A follow through is awaited, and the technical pattern suggests a rise in yields.
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.
Endings and Beginnings
A series of endings and new starts is a fitting description over a reflective holiday weekend. For one thing, the first half of the year reached closure with the S&P 500 Index up 6.52% for the year, following an impressive 5.6% run last week. Yet, since midwinter, we've seen suspenseful events of lingering debt issues and gut-wrenching realities of the global system filled with minor down hours and negative days.
Secondly, Quantitative Easing 2 (QE2) ended last Friday. Of course, that's the government stimulus program designed to spark a recovery (avoid further disaster) by mainly keeping interest rates lower after the 2008 crisis. Skeptics in the early stages warned of eventual inflation and dollar devaluation. Either way, it’s too early to judge, as inflation is reported not too high and the dollar has declined but not collapsed. However, that stimulus plan has expired, and investor reaction is eagerly awaited. In the meantime, the end of QE2 naturally raises questions on consequences of ungluing a sense of stability. The debate centers around intervention versus facing painful short-term measures. Yes! This is all too familiar to the financial and political world—yet again. Now, money managers ponder if the ending of the Fed policy will propel the beginning of rising interest rates and the strengthened dollar (anticipated incorrectly for many years now). Basically, a trend reversal in these two key macro indicators may not only impact the currency markets, but it also questions if this ends the momentum in Gold prices.
Finally, last week marked a minor closure or temporary relief to the Greece matter—a much needed pause to the glaring suspense and intense debate. For policymakers, the resolution gives much needed breathing room from a topic to be revisited and scrutinized in months ahead. Interestingly, the US Treasury Secretary appears ready for an exit while June marked the beginning of a new IMF chief—not to mention, the retirement of the Secretary of Defense, Robert Gates. These events are happening as we approach the early stages of the US elections. Clearly, much of the day-to-day news can shape perceived policy changes and sensitive response to near-term sentiment. Similarly, Europe’s mood for bailouts is bound to change, due to increasing political pressure, given recent decisions. How this plays out in Germany and other nations will have a say in regards to global financial stability.
Bad News Exhausted
By this point, the fatigued and battered investment crowd is into recreating some positive mental tune. Savvy front line money movers visualized a pent up upside move about a week ago, as June 17 marked a recovery point in which volatility reversed, while broad indexes found bottom. There is a difference between accumulating bad news and a sharp collapse.
Like a kid punished until he is remorseful for his bad behaviors, markets go through a correction and a taste of harsh reality. Then, shamelessly, we're temporarily back to humming the same tune driven by human nature, capital chasing growth, and paying up at debatable prices. The clouded directional view does not fully stop opportunistic players from making bets or having guts. Thus, a pure argument for logic may fail to explain the rationale in which systemic problems (i.e. sovereign debt) suddenly vanish, as outraged pundits are quickly silenced. Importantly, surviving this wobbly landscape requires one to quickly connect dots while accepting and playing the cards dealt. For now, economic and corporate earnings might not deliver an uplifting message, but selective opportunities are worth scrambling for, given scarcity in quality ideas.
Within this fragile macro climate, there is a boom in technology venture-backed IPOs— somewhat herding in Gold investments and an eagerness to restock into risky assets. This signals that few found robust ideas in the first half. Importantly, in planning forward, one can begin to selectively pick entry points to attractively valued themes.
Irrational Logic
At this point, it’s only normal to ask this question: how can these not-so-logical patterns re-occur? Some wonder if financial markets are a venue where the participant comes in saying, “I have money to burn!” Basically, this suggests that speculation is borderline entertainment on real events or alternative to traditional saving schemes. If this is too blunt of a description, then there is another approach. A buyer goes through a self convincing process in which he or she cleverly justifies actions in the name of long-term wealth creation. Others are limited by investor mandate or knowledge, and they prefer to stick to traditional investment patterns.
At least veterans know (or should know) that there is a tragic ending to too much hopefulness if not monitored correctly. Again, these greed-driven stories are glaringly obvious and easier to comprehend in the post mortem analysis of hyped investments—yet rarely are the mistakes not repeated. If the majority of account holders did not have clever self-justification processes, then surely the market dynamics would be drastically different than we know it. Therefore, savvy or lucky money managers have accounted and adjusted for the constraints of available ideas while emphasizing the human psychological response—a note worth applying to the quarter ahead.
Article Quotes:
“We have seen how "inflation hedger" investors aiming to avoid inflation have actually caused the very inflation they sought to avoid. The game-changing intervention by the IEA increases the supply of oil relative to the dollar, and therefore, it can be expected to deflate the price, at least temporarily. The most potent effect of what might be termed "quantitative greasing" with oil was—and was intended to—to deter speculators, and hedge funds are already licking their wounds and adjusting their strategy. But this action will also in all probability act to limit the inflationary expectations of the billions of dollars of "inflation hedge" investment also in the market, and will in all probability lead to a market collapse… So perhaps the dysfunctional and increasingly sociopathic oil market may at last be open to a new collaborative and transparent settlement, involving new market architecture; and new market instruments.” (Asian Times, July 1, 2011)
“Six years ago, when I first started writing about the credit markets, I often heard US financiers praise America’s capital markets as the most developed system of free market finance in the world. Indeed, techniques such as securitization were presented as a natural outcome of American enthusiasm for free market ideals. ..But the dirty secret behind this rhetoric was that government-backed institutions such as Fannie and Freddie were playing an important role in the modern financial system, even before the credit crisis erupted. And what is remarkable now, given that the role of Fannie and Freddie has swelled, is just how little debate this patter continues to generate. After all, with the US remaining wedded to free market ideals, it is uncomfortable to admit that “capital markets in the US have become reliant on government guarantees,” says Viral Acharya, an economist and co-author of a thought-provoking book.” (Financial Times, June 30, 2011)
Levels:
S&P 500 Index [1339.67] – An accelerated rally from 1260 level, which showcased a heavy buy-interest near the 200-day moving average. Meanwhile, 1320-1340 serves as a near-term range for a pause.
Crude [$94.94] – In late 2010, the $90 range has served as an attractive buying point. Similarly, the commodity bottomed on June 27, 2011 at $89.61. Attempting to break above $95 as investors debate the appropriate pricing and pending fundamental factors.
Gold [$1483] – Failed below 1500 after prices hit new highs of $1552 on June 22—the third time in the past few months where Gold struggled to stay above $1540 as a point where buyers’ momentum fades.
DXY – US Dollar Index [75.66] – Several days of trading don’t showcase a major trend shift. Avoiding new lows since May 6 but the follow through is not that explosive. Interestingly, the 50-day and 200-day moving average sit at or around 78.
US 10 Year Treasury Yields [3.18%] – Sharp spike above 3% caught the attention of near-term traders, given the downtrend established in early February 2011. A follow through is awaited, and the technical pattern suggests a rise in yields.
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
Market Outlook | June 27, 2011
“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.
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.
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.
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