“Courage is the art of being the only one who knows you're scared to death.” - Harold Wilson (1916 - 1995)
The rules of engagement, these days, are being redefined for investors, consumers, borrowers and lenders. For one, the turbulent conditions of the developing world are beyond finding growth and more related to establishing stability in the system. This weekend, the fear of a Greece bankruptcy looms; which is not a surprise to anyone. Rather, past denials and delays are catching up rapidly in this bitter but well known matter. Meanwhile, chatter of the downgrade of French banks serves as another addition to the “fear” menu. Similarly, money market mangers continue to adjust overall risk exposure, which contributes further to an abnormal period in financial systems. Secondly, through this unstable sentiment, the emerging market growth rate is being questioned by investors who piled on with high return expectations from recent years. Inflation worries might be overblown, but remain a topic of high interest. When combining the preceding interlinked issues, it becomes quite inevitable to foresee heavy government involvement in currency usage, demand for problem solving and coverage of ongoing stimulus efforts.
The gigantic challenges misinterpreted by most and dramatized by others, for a recovery, are not easy when adding political constraints and a depleted investor sentiment. Clearly, the confluence of macro issues paints the chaotic landscape of major stock price swings that are biased to the downside. A synchronized global resolution that appeases all key economies is not practical. That’s the harsh reality facing global markets and stakeholders. Therefore, the consequence of select compromises and future pain can fuel conflicts in international rulemaking. It is a very edgy environment in which negotiations are tense, especially in the Eurozone. It is quite clear there are more questions at hand that hint to the magnitude of pending declines. After all, for years human behaviors have showcased big capital favors momentum, along with a sense of calmness to reestablish a new wave of growth ideas. Unlike 2008, we are not correcting from a new bubble, but rather confronting the residues of over-borrowing. There is a cost to ignoring and delaying, and that’s where we stand these days.
Rush for Hideouts
The highly trending behavior is focused on perceived safe instruments. The pace of rotation into US treasuries, Gold and other safe currencies has picked up investor demand. Basically, seeking a temporary shelter does not necessarily translate to long-term growth prospects. This era can be rewritten as the great rush for hideouts, which has been fruitful from a return perspective.
The US dollar recovery is receiving some attention after a noticeable breakout in its chart pattern. The dollar index (DXY) is witnessing a revival, given this recent one month run which is moderately newsworthy. One of the few big themes to see is trend reversals which trigger a sense of excitement, for good or bad. Of course, spurts of upside runs in the greenback have been seen before; however, the multi-year decline is the real story when looking at the full picture. Now, a rising dollar is anticipated to inversely impact crude prices and make a competitive appeal versus other currencies (e.g. Franc and Yen). This should have eager currency traders intensely awaiting a follow through in the days and weeks ahead. Glaringly, this rotation to the dollar is a further emphasis of present safety concerns, which matches the overarching theme that is too dominant.
Digest and React
Hedge fund’s August returns demonstrated that investment models were not quite equipped for the turbulent summer months. Especially when considering the year to date numbers in which the small cap index is down 14%, and the Morgan Stanley cyclical index has declined by 21%. That is a significant dent that leaves an impact for momentum chasers and casual purchasers. In addition, the recent selling in financials is caused by adjustment to risk management, while others sold on all out panic.
Yet, there is some value to decipher in US markets, while a sense of urgency is not required to reinvest in the same old models. Instead, enterprising leaders will have to adjust to new business models and valuation methodology. Similarly, at some point portfolio managers will have to dive in to some buy ideas while managing the new era expectations. Interestingly, sell-orders continue to come in from Japan to Europe which delays the bottoming process. Awareness of hold ups and the extension of irrational behavior may be prized for cycle winners. Courageous moves are discouraged for now, due to high volatility, but rebuilding portfolios today while seeing beyond the temporary madness is the bigger reward for next decade.
Article Quotes:
“In theory, making the state into a purely financial investor rather than an operating partner…should be beneficial: entrepreneurs, not bureaucrats, run the business. Practice is rarely so neat. Cities back companies that provide local jobs. That affects acquisitions and disposals, where factories are built and where research takes place. Worse, China’s private-equity industry has become another lucrative billet for the children of powerful officials. It is also troubling that little is disclosed about the operations and returns of these public funds. Many may be managed cleverly and provide money for municipalities and jobs for their citizens; others, though, may turn out to be financial black holes. Equally troubling, they receive favourable attention from local governments, to the disadvantage of China’s most dynamic sector, its truly private companies. ..Taken collectively, these iterations of state engagement reflect how China’s government has not only held on to economic control but found subtle ways to extend it. (The Economist, September 3, 2011)
“One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade.” (Financial Times, September 9, 2011)
Levels:
S&P 500 Index [1154.23] – Over the last 20 days the index averaged around the 1175-1177 range. Yet, it was not long ago when the S&P 500 traded around 1300. Thus, it is a fragile state indeed, where a move below 1120 can open flood gates for further panic.
Crude [$87.40] – There is a recent struggle to reach above $90. The 50 day moving average stands at 91.10, and serves as a near-term hurdle for buyers.
Gold [$1851.00] – Flirted with 1900, while uptrend is intact. Buyer interest remains around 1750 in the recent reacceleration.
DXY – US Dollar Index [77.19] – Up by 5.10% since August 29, 2011. A break above 76 signals a positive technical signal.
US 10 Year Treasury Yields [1.91%] – Closed at annual lows. Well below the 15 month moving average of 2.88%. Investor mindset is adjusting to a new range below 2%.
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, September 12, 2011
Tuesday, September 06, 2011
Market Outlook | September 6, 2011
“There is nothing so strong or safe in an emergency of life as the simple truth.” - Charles Dickens (1812-1870)
At the start of the summer, very few ideas presented an excitement of innovation or growth. That did not change much throughout the season. The majority of the summer focused on the game of survival for investment managers. As August drew to an end it marked some relief for observers, after a month of discussions surrounding debt ceiling, downgrades, very sharp down days, escalated fears, system breakdown and rapid movement toward “safe havens.” The scramble away from risk is the glaring theme, and visible in lower treasury yields, for further shelter in Gold and rotation into the Swiss Franc. This shift is nauseating for the day to day news follower, but the currency, bond and commodity markets continue to point to the same message of seeking safety. Rather dull for those searching for growth ideas. Dreadfully, investors are adjusting to new realities and expectations.
The start of a new month and season does not erase all those fierce summer memories right away, or reignite confidence restoration at a desired pace. In fact, some are wondering if “safe” assets are forming a new bubble. Perhaps it is premature to declare that the obsession with risk-aversion is hitting extreme ranges. Importantly, traditional assets such as stocks and fixed income are failing to meet risk and return parameters. “In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.” (Reuters, September 5, 2011). Clearly, this is a period where the appetite for risk is declining and kneejerk recovery thoughts are taking longer than expected. More so, the change in behavior by fund managers alters some patterns, while opening up few alternative opportunities, due to pending legal or mandate shifts.
The inverse relationship between stock prices and volatility appears to set the framework between now and year-end. In terms of judging sentiment, a break below 1120 for the S&P 500 would spark worrisome selling pressure, at least from a chart observer’s perspective. At the same time, the volatility index (VIX) is hovering above 30 range, which is less inviting for buy and hold managers. This makes it even less stable for businesses leaders to plan ahead with any clarity. Clearly, this creates a troublesome environment for policymakers, who must stay nimble in their messaging. In other words, it is vital to avoid adding fuel to the fire. Similarly, staying idle is merely not an option when facing the pressure of election year.
Naturally, the thought stimulus (i.e. QE3), which comes up at times as skepticism, remains too high along with lower cooperation. The growing “annoyance” theme is picking up momentum when considering recent discussions of bailouts, currency wars, taxes, and other trends in international business. Thus, sideline observers sense no rush to buy traditional assets while having the convenience of waiting for even cheaper prices in the future.
Two sensitive themes that can spark early hints for any imminent recovery:
1) Fragile Banking Status
In Europe the sovereign debt crisis is affecting banks greatly. As usual, Financials lead on the way up or down. Over two years of Euro-zone troubles, combined with bailouts and interventions, contribute to the selling pressure. The frenzy and panic is in full force as crisis resolution continues to play out.
For a few trading days investors realized that the euro zone problem is not quite the same as that faced by American banks. Despite US banks’ clean-up efforts of 2008, the ongoing worries are hard to shake off. Large US banks feel the residue of greed and neglect driven practices that continue to persist through headline risk. This is highlighted by Bank of America's heavy stock price correction, and other recent legal risks, that deflate any confidence in an already depleted macro climate. Regardless of the low borrowing rate, the sentiment is too beaten up. Calmer minds point out that banks were profitable in the second quarter, and value investors will flirt with entry points.
2) Economic Enigma
On one hand, the job discussion is, as usual, back at the social and political forefront. Meanwhile, the US GDP growth (or lack thereof) is in the minds of economic projectors, influencers and decision makers. Various observers are struggling to “spin” a good story as to the job’s report, which continues to restate previously known information.
For a decade, much emphasis in emerging market growth kept earnings of larger companies intact. These days, the much anticipated global indicator is closely tied to China’s growth. Recently, a bank reduced the Chinese GDP estimates to 8.2% from 8.5%, sparking some early concerns. Inflation worries have lingered, but any slowdown here is cautiously tracked, given the tense global market. Any upside surprise element in this data can spark a hint of recovery. Otherwise, reemphasis of the weakening trend is all too common these days.
Article Quotes:
“The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro. That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime. Today, the logic of that strategy has become even more compelling. The benefits of euro membership are also clear to many other small economies. Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors…. The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.” (Project Syndicate, September 5, 2011)
“Economies usually need around $4 dollars of capital to produce $1 of output. On this basis, China needed to invest 40 per cent of its GDP to create the capital required for its 10 per cent growth. To increase the ratio of capital to output (which is part of the convergence story), China's investment had to grow even faster – which it did. …China's huge saving reflects the high retained profits of state-owned enterprises, giving room to absorb the bad debts within the overall government sector. Thus it's possible to map-out a set of adjustments which would keep China on a high-growth track. …But China's policy challenges (reducing savings, getting consumption up and the current account surplus down) seem infinitely easier than the challenges faced by America, which has to narrow the huge budget deficit by raising taxes and rein in the external deficit by expanding exports.” (Business Spectator, September 5, 2011)
Levels:
Prices based as of September 2, 2011.
S&P 500 Index [1173.97] – New range between 1150-1200. No major changes since last week. Heavy resistance around 1200, while breaking below 1120 can spark further selling.
Crude [$86.45] – After failing to hold $100, the commodity is trading between $85-90 as a long-term trend is fuzzy.
Gold [$1875.25] – Brief pause followed by an acceleration nearly testing the August 22 highs of 1877.
DXY – US Dollar Index [74.75] – Four month average continues to hover within the current tight range, around 74.
US 10 Year Treasury Yields [1.98%] – Closing at annual lows as breaking below 2.00%, significant yet another decline in trends. Previously, the lows of December 2008 stood at 2.03%.
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.
At the start of the summer, very few ideas presented an excitement of innovation or growth. That did not change much throughout the season. The majority of the summer focused on the game of survival for investment managers. As August drew to an end it marked some relief for observers, after a month of discussions surrounding debt ceiling, downgrades, very sharp down days, escalated fears, system breakdown and rapid movement toward “safe havens.” The scramble away from risk is the glaring theme, and visible in lower treasury yields, for further shelter in Gold and rotation into the Swiss Franc. This shift is nauseating for the day to day news follower, but the currency, bond and commodity markets continue to point to the same message of seeking safety. Rather dull for those searching for growth ideas. Dreadfully, investors are adjusting to new realities and expectations.
The start of a new month and season does not erase all those fierce summer memories right away, or reignite confidence restoration at a desired pace. In fact, some are wondering if “safe” assets are forming a new bubble. Perhaps it is premature to declare that the obsession with risk-aversion is hitting extreme ranges. Importantly, traditional assets such as stocks and fixed income are failing to meet risk and return parameters. “In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.” (Reuters, September 5, 2011). Clearly, this is a period where the appetite for risk is declining and kneejerk recovery thoughts are taking longer than expected. More so, the change in behavior by fund managers alters some patterns, while opening up few alternative opportunities, due to pending legal or mandate shifts.
The inverse relationship between stock prices and volatility appears to set the framework between now and year-end. In terms of judging sentiment, a break below 1120 for the S&P 500 would spark worrisome selling pressure, at least from a chart observer’s perspective. At the same time, the volatility index (VIX) is hovering above 30 range, which is less inviting for buy and hold managers. This makes it even less stable for businesses leaders to plan ahead with any clarity. Clearly, this creates a troublesome environment for policymakers, who must stay nimble in their messaging. In other words, it is vital to avoid adding fuel to the fire. Similarly, staying idle is merely not an option when facing the pressure of election year.
Naturally, the thought stimulus (i.e. QE3), which comes up at times as skepticism, remains too high along with lower cooperation. The growing “annoyance” theme is picking up momentum when considering recent discussions of bailouts, currency wars, taxes, and other trends in international business. Thus, sideline observers sense no rush to buy traditional assets while having the convenience of waiting for even cheaper prices in the future.
Two sensitive themes that can spark early hints for any imminent recovery:
1) Fragile Banking Status
In Europe the sovereign debt crisis is affecting banks greatly. As usual, Financials lead on the way up or down. Over two years of Euro-zone troubles, combined with bailouts and interventions, contribute to the selling pressure. The frenzy and panic is in full force as crisis resolution continues to play out.
For a few trading days investors realized that the euro zone problem is not quite the same as that faced by American banks. Despite US banks’ clean-up efforts of 2008, the ongoing worries are hard to shake off. Large US banks feel the residue of greed and neglect driven practices that continue to persist through headline risk. This is highlighted by Bank of America's heavy stock price correction, and other recent legal risks, that deflate any confidence in an already depleted macro climate. Regardless of the low borrowing rate, the sentiment is too beaten up. Calmer minds point out that banks were profitable in the second quarter, and value investors will flirt with entry points.
2) Economic Enigma
On one hand, the job discussion is, as usual, back at the social and political forefront. Meanwhile, the US GDP growth (or lack thereof) is in the minds of economic projectors, influencers and decision makers. Various observers are struggling to “spin” a good story as to the job’s report, which continues to restate previously known information.
For a decade, much emphasis in emerging market growth kept earnings of larger companies intact. These days, the much anticipated global indicator is closely tied to China’s growth. Recently, a bank reduced the Chinese GDP estimates to 8.2% from 8.5%, sparking some early concerns. Inflation worries have lingered, but any slowdown here is cautiously tracked, given the tense global market. Any upside surprise element in this data can spark a hint of recovery. Otherwise, reemphasis of the weakening trend is all too common these days.
Article Quotes:
“The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro. That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime. Today, the logic of that strategy has become even more compelling. The benefits of euro membership are also clear to many other small economies. Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors…. The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.” (Project Syndicate, September 5, 2011)
“Economies usually need around $4 dollars of capital to produce $1 of output. On this basis, China needed to invest 40 per cent of its GDP to create the capital required for its 10 per cent growth. To increase the ratio of capital to output (which is part of the convergence story), China's investment had to grow even faster – which it did. …China's huge saving reflects the high retained profits of state-owned enterprises, giving room to absorb the bad debts within the overall government sector. Thus it's possible to map-out a set of adjustments which would keep China on a high-growth track. …But China's policy challenges (reducing savings, getting consumption up and the current account surplus down) seem infinitely easier than the challenges faced by America, which has to narrow the huge budget deficit by raising taxes and rein in the external deficit by expanding exports.” (Business Spectator, September 5, 2011)
Levels:
Prices based as of September 2, 2011.
S&P 500 Index [1173.97] – New range between 1150-1200. No major changes since last week. Heavy resistance around 1200, while breaking below 1120 can spark further selling.
Crude [$86.45] – After failing to hold $100, the commodity is trading between $85-90 as a long-term trend is fuzzy.
Gold [$1875.25] – Brief pause followed by an acceleration nearly testing the August 22 highs of 1877.
DXY – US Dollar Index [74.75] – Four month average continues to hover within the current tight range, around 74.
US 10 Year Treasury Yields [1.98%] – Closing at annual lows as breaking below 2.00%, significant yet another decline in trends. Previously, the lows of December 2008 stood at 2.03%.
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 29, 2011
Market Outlook | August 29, 2011
“Courage is not the absence of fear, but rather the judgment that something else is more important than fear.” Ambrose Redmoon (1933–1996)
A minor breather to the summer turmoil, as the market held from hitting another new low. Overall, there transpired a desperately needed relief, with a near 5% weekly rally in the S&P 500 Index. Again, this upside move is part of a short-lived bounce, and not necessarily reflective of improving fundamentals. The long-term picture is too fuzzy for policymakers who are consumed with handling damage control. Crisis management includes European debt crisis that affects the Euro banking system while adjusting the currency imbalances. Speculating might be thrilling for some, or very costly for others, while investing requires no major rush.
The current realities still showcase fragile sentiment and waning trust in US and European policymakers. That’s difficult (but possible) to shake off with lack of visible growth, which makes owning shares not vastly appealing for less involved and longer-term participants. Increasing sensitivity, in the response to data points, can be frustrating especially with overall bias favoring declines. Surely, the downside risks maybe overhyped at times, or unknown, as an all-out panic continues to linger since late July. Of course, sentiment is hard to change overnight but known to sway in due time. At least for now, the focus is on “repairing” as much as “building;” a painful process that requires patience for growth seekers.
Even the optimist cannot deny the challenges of business cycle growth and policymaking constraints to reach a trending setup. When removing sensationalism and pending elections (at least for a second), the economic numbers paint a grim perspective. An estimate around 1% GDP growth in the US can trigger rude confirmation or surprises. Basically, the odds and definition of a recession are bound to be thrown around. These days, reigniting quick cheers by central bankers is not as easy, and political limits are less inviting for creativity as well. At some point, accumulating bad news becomes overly exhausted, yet it may take longer than envisioned.
Investment themes appear limited, given extreme behaviors in gold prices, yields, volatility, stocks, and sentiment. If the big picture is murky for the majority, and fear is priced at a premium, then an opportunity lingers for big risk takers. For now, three themes are worth watching between now and year-end.
I. Emerging Market Discomfort - For the last several months, inflation worries in China and Brazil have been a dominant, popular and pragmatic discussion points. More recently, long-term investors are reexamining the projected growth rate expectations, especially in China. If there are disappointments, then the relative argument is bound to benefit US markets to some degree. Clearly, it is not simple to overweigh one country versus another, given an interlinked global stock market. Many wonder if the slowness is already priced in, and a bottoming process is due. Again, the macro indicators will have a bigger influence in shaping the bias of this theme.
II. Currency and Commodity Patterns - The sustainability of Gold prices are on the list of suspenseful matters, after other commodities began their correction since the Spring. Minor pullbacks were witnessed last week in Gold. As usual, any decline in the metal begs many to ask “is this the top?” Premature as it might be, there will be lots of chatter on Gold’s ability to hold above $1800, versus achieving the next psychological landmark of $2000. Inversely, a recovering Dollar can readjust the mindset of stale consensus belief. Recent rotation into Swiss Franc needs to calm down, as well as concerns in the Yen. The macro clues can become clearer once the scrambling for a “safe haven” is fully established. For now, it remains too speculative with no trend reversal, as interest rates will play a role in this puzzle.
III. Bargain Hunting - In terms of picking up value, it may take time for ideas to materialize, as the pressure mounts to identify the right companies and catalysts. On the other hand, few trading ideas present themselves for the active participant. Banks recuperating from irrational sell-offs and some consumer based sectors (i.e. retailers) are poised to follow. This stems from overly depressed expectations of consumer driven areas. The Bank Index (BKX), at one point, traded 41% below its winter 2011 highs. Early signs of a recovery took place, as value oriented buyers debated the merits of the early recovery.
At this junction, if one is to take a bullish outlook for the rest of the year, then a very selective approach is required, along with close monitoring. Let’s say the conservative best case scenario is to make up the summer loses, then the broad indexes are about 6%-10 removed (1250-1300 on S&P 500 index). Of course, the odds for an upside surprise increases if volatility peaks at current levels. That can provide an extra boost for a much higher move. Therefore, it may be wise (from a reward perspective) to find unique ideas, as opposed to blindly betting on broad markets to capitalize on the limited opportunities.
Article Quotes:
“One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes.” (Interview with David Graeber, August 26, 2011)
“From America's perspective, what may be the most important distinction between Japan then and China now is that Japan was a lever against which global pressure could be exerted on the Soviet Union as an ideological and economic opposite. This same rationale, that China could be leverage against the Soviet Union in the midst of the Cold War, was very much what initially motivated Henry Kissinger and Nixon to begin their dialogue with China. But now China's economic growth alone has made it the closest near-peer competitor to the US, and its ongoing embrace of authoritarian politics make it an easy proxy for the role of ideological foe which the Soviet Union long held. A country once used as leverage by the United States is now the country against which the United States most needs leverage.” (Asian Times, August 27, 2011)
Levels:
S&P 500 Index [1176.80] – Early pattern of stabilization developing between 1150-1200. Any significant move below 1120 can reignite a new wave of panic selling.
Crude [$85.37] – Revisiting ranges from late February around $85. Further evidence needed for the downtrend to slow down.
Gold [$1788.00] – Establishing a new mark around $1740-1800. This run appears extended in the near-term and due for some correction. On Friday, it closed 9% above the 50 day moving average.
DXY – US Dollar Index [73.81] – Around 74 marks a multi-month trading range. Barely any noteworthy activity for trend followers.
US 10 Year Treasury Yields [2.18%] – At the low end of its historic pattern. The yields today were last seen during the shock of 2008 and 1949-50 eras.
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 minor breather to the summer turmoil, as the market held from hitting another new low. Overall, there transpired a desperately needed relief, with a near 5% weekly rally in the S&P 500 Index. Again, this upside move is part of a short-lived bounce, and not necessarily reflective of improving fundamentals. The long-term picture is too fuzzy for policymakers who are consumed with handling damage control. Crisis management includes European debt crisis that affects the Euro banking system while adjusting the currency imbalances. Speculating might be thrilling for some, or very costly for others, while investing requires no major rush.
The current realities still showcase fragile sentiment and waning trust in US and European policymakers. That’s difficult (but possible) to shake off with lack of visible growth, which makes owning shares not vastly appealing for less involved and longer-term participants. Increasing sensitivity, in the response to data points, can be frustrating especially with overall bias favoring declines. Surely, the downside risks maybe overhyped at times, or unknown, as an all-out panic continues to linger since late July. Of course, sentiment is hard to change overnight but known to sway in due time. At least for now, the focus is on “repairing” as much as “building;” a painful process that requires patience for growth seekers.
Even the optimist cannot deny the challenges of business cycle growth and policymaking constraints to reach a trending setup. When removing sensationalism and pending elections (at least for a second), the economic numbers paint a grim perspective. An estimate around 1% GDP growth in the US can trigger rude confirmation or surprises. Basically, the odds and definition of a recession are bound to be thrown around. These days, reigniting quick cheers by central bankers is not as easy, and political limits are less inviting for creativity as well. At some point, accumulating bad news becomes overly exhausted, yet it may take longer than envisioned.
Investment themes appear limited, given extreme behaviors in gold prices, yields, volatility, stocks, and sentiment. If the big picture is murky for the majority, and fear is priced at a premium, then an opportunity lingers for big risk takers. For now, three themes are worth watching between now and year-end.
I. Emerging Market Discomfort - For the last several months, inflation worries in China and Brazil have been a dominant, popular and pragmatic discussion points. More recently, long-term investors are reexamining the projected growth rate expectations, especially in China. If there are disappointments, then the relative argument is bound to benefit US markets to some degree. Clearly, it is not simple to overweigh one country versus another, given an interlinked global stock market. Many wonder if the slowness is already priced in, and a bottoming process is due. Again, the macro indicators will have a bigger influence in shaping the bias of this theme.
II. Currency and Commodity Patterns - The sustainability of Gold prices are on the list of suspenseful matters, after other commodities began their correction since the Spring. Minor pullbacks were witnessed last week in Gold. As usual, any decline in the metal begs many to ask “is this the top?” Premature as it might be, there will be lots of chatter on Gold’s ability to hold above $1800, versus achieving the next psychological landmark of $2000. Inversely, a recovering Dollar can readjust the mindset of stale consensus belief. Recent rotation into Swiss Franc needs to calm down, as well as concerns in the Yen. The macro clues can become clearer once the scrambling for a “safe haven” is fully established. For now, it remains too speculative with no trend reversal, as interest rates will play a role in this puzzle.
III. Bargain Hunting - In terms of picking up value, it may take time for ideas to materialize, as the pressure mounts to identify the right companies and catalysts. On the other hand, few trading ideas present themselves for the active participant. Banks recuperating from irrational sell-offs and some consumer based sectors (i.e. retailers) are poised to follow. This stems from overly depressed expectations of consumer driven areas. The Bank Index (BKX), at one point, traded 41% below its winter 2011 highs. Early signs of a recovery took place, as value oriented buyers debated the merits of the early recovery.
At this junction, if one is to take a bullish outlook for the rest of the year, then a very selective approach is required, along with close monitoring. Let’s say the conservative best case scenario is to make up the summer loses, then the broad indexes are about 6%-10 removed (1250-1300 on S&P 500 index). Of course, the odds for an upside surprise increases if volatility peaks at current levels. That can provide an extra boost for a much higher move. Therefore, it may be wise (from a reward perspective) to find unique ideas, as opposed to blindly betting on broad markets to capitalize on the limited opportunities.
Article Quotes:
“One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes.” (Interview with David Graeber, August 26, 2011)
“From America's perspective, what may be the most important distinction between Japan then and China now is that Japan was a lever against which global pressure could be exerted on the Soviet Union as an ideological and economic opposite. This same rationale, that China could be leverage against the Soviet Union in the midst of the Cold War, was very much what initially motivated Henry Kissinger and Nixon to begin their dialogue with China. But now China's economic growth alone has made it the closest near-peer competitor to the US, and its ongoing embrace of authoritarian politics make it an easy proxy for the role of ideological foe which the Soviet Union long held. A country once used as leverage by the United States is now the country against which the United States most needs leverage.” (Asian Times, August 27, 2011)
Levels:
S&P 500 Index [1176.80] – Early pattern of stabilization developing between 1150-1200. Any significant move below 1120 can reignite a new wave of panic selling.
Crude [$85.37] – Revisiting ranges from late February around $85. Further evidence needed for the downtrend to slow down.
Gold [$1788.00] – Establishing a new mark around $1740-1800. This run appears extended in the near-term and due for some correction. On Friday, it closed 9% above the 50 day moving average.
DXY – US Dollar Index [73.81] – Around 74 marks a multi-month trading range. Barely any noteworthy activity for trend followers.
US 10 Year Treasury Yields [2.18%] – At the low end of its historic pattern. The yields today were last seen during the shock of 2008 and 1949-50 eras.
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 22, 2011
Market Outlook | August 22, 2011
“If everyone is thinking alike, then somebody isn't thinking.” - George S. Patton (1885-1945)
As the last days of summer approach, they may provide a breather to participants from the ongoing negative sentiment. There aren’t many magical descriptions to summarize the sharply fallen markets, which continue to witness a frenzy like behavior. The S&P 500 is nearly down 11% for the year. This somewhat reflects the slowdown in global economy, along with waning investor expectations of future earnings. As usual on price declines, the correlation between various sectors is high in a period where volatility increases. That's simply a textbook setup, and reiterated the obvious, in which irrational behaviors are quite vibrant. As Birinyi Associates reminds us, that stock correlations are at all-time highs. “The average 50-day correlation of S&P 500 members to the index has risen to the highest levels since the market bottomed in 1987.” (August 19, 2011).
Navigating the Mess
Unfortunately, it is only natural to lump all bad news into one big “fire.” Specifically, when political matters are blended into market behaviors, it can be confusing and lost in translation. Similarly, grasping the ongoing finger pointing of economic decisions should not be confused with a nostalgic reflection of past economic policies. The subsequent kneejerk response fails to address the richness of the current multilayered mess. Frankly, debating the merits of the recent correction is not a fruitful practice for an investor, given that we’ve already established weakness from all angles (at times nauseating). At this point, blindly picking broad market bottoms is rather bold even for the seasoned observer. Yet, stashing away cash or over reliance on “safe assets” should present worries itself to those feeling too comfortable.
Importantly, isolating the magnitude of each worrisome item shall be the artful skill needed for weeks ahead. Staying firm and not making definitive statements is the challenge for any participant. Distinguishing labor weakness from European bank risks, to visionary long-term growth stories, is vital. Of course, all themes have their own place, and each carry a varying risk and reward. For example, US banks are underestimated for the cleaner balance sheet, as compared to 2008. Yet, the European bank noise makes it blurry, and leading some companies to trade cheaply. For example, the US Bank index (BKX) is down over 36% since February 2011, as the declines are at a much more rapid pace than any other sector. “At the moment, the Financial sector has the lowest trailing 12-month P/E of the ten sectors at 10.62” (Bespoke Investments, August 19, 2011). In due time, rational drivers can overtake emotional responses. Today, that is not visible in the trading patterns, and further fear can linger through the fall.
Digging Through the Maze
In extreme periods, such as the current market state, it becomes easy to conclude or muddle along with consensus. As volatility declines and perception normalizes, the hunt for fundamental ideas is bound to resurface. Even in the heart of this turmoil there are selective companies that held in on a relative basis. For example, retailers such as BJ Wholesale (BJ) have demonstrated increased revenue in their grocery stores and specialty services. Similarly, the pharmaceutical researcher, Pharmaceutical Product (PPDI), showcased solid fundamentals last quarter while a potential takeover is being discussed. Thus, few companies, from Consumer Staples to Utilities, can offer dividends and longer-term appreciations for those who are patient and slightly imaginative.
Clearly, picking “growth stories” is very spotty and frustrating. Yet, given the limitation of investment ideas, it helps to prepare purchasing ideas to fully benefit from pending momentum. To reach that point, broad indexes would need to showcase price stabilization. For now, the attention on stimulus plans by the Federal Reserve, and slowdown rate in emerging markets, will serve center stage.
Article Quotes:
“One of the most striking aspects of the eurozone crisis is that bond markets have not discriminated between causes of excessive debt. Greece was denied credit and had to go begging to Brussels for a bailout, not because it had taken part in the real estate bubble but because it had abused entry to the eurozone to enjoy a public borrowing spree. Ireland was denied credit because, even though its public finances were in solid shape, it had allowed its banks to overwhelm them. Italy is perhaps the most remarkable case of all. It is now threatened with loss of credit, not because of any post-euro borrowing, nor because of its current budget deficit (which is not much higher than Germany's). Rather, it is being punished for sins committed in the 1980s and early 1990s when it built up its public debt to levels that the markets have suddenly decided are unsustainable. What we are seeing, in other words, is a wholesale revision of the rules about debt that have held true for decades.” (Foreign Policy, August 18, 2011)
“The only quantitative evidence offered for this is that stock market turnover is now 150%, which, after a quick piece of mental arithmetic, implies that investors are holding stocks for an average period of only 8 months. So over the last ten years there seems to have been no discernible move to shorter holding periods – indeed the numbers are if anything a little higher at the end of the decade than at the beginning. And where turnover does increase this is unsurprisingly during the highly turbulent times of the dot.com crash from 2001 to 2003, and the credit crunch in 2008 and 2009. That apart, holding periods are pretty steady at around 3-4 years. And that of course doesn’t mean that managers only stay invested in companies for that length of time: a lot of turnover is because of investors coming in and out of the fund, or decisions by the manager to increase or reduce holdings, rather than to sell up and walk away. (Fundweb, August 5, 2011)
Levels:
S&P 500 Index [1123.53] – Trying to hold 1120 while approaching intra-day lows of August 6 at 1101.54.
Crude [$82.26] – Since May 2, the commodity has decreased by 28%. Failing below $85 signifies a new era of weakness.
Gold [$1848.00] – Since January 25, Gold has risen by nearly 40%. Uptrend intact as a shelter against paper assets.
DXY – US Dollar Index [74.24] – Barely above annual lows reached on May 6, 2011 at 72.96. Interestingly, since that period the Dollar has mostly hovered around 74 as the 50 day moving average stands at 74.71.
US 10 Year Treasury Yields [2.06%] – The intra-day lows of 1.97% on August 11 were a few points below the 2008 mark of 2.o3%. An illustration of the rush to treasuries as yields has declined from annual highs of 3.76% in February 2011. Basically, from a historical perspective this is an unchartered territory.
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 15, 2011
Market Outlook | August 15, 2011
"Courage is fire, and bullying is smoke" - Benjamin Disraeli (1804-1881)
Volatility like fire burns the fearful dangerously or feeds the daring sizably. The outcome depends on the participants’ firm stance especially in periods where rational thinking has taken a major backseat. These panic driven periods have been shown to favor the cool headed, who’ve adequately geared up for looming surprises. Officially, we've moved from a bombardment of bad news to all out frenzy, resulting in an undue responsiveness to the headline noise. Beyond policy makers, gimmicks, snap back rallies, and a lack of feasible alternatives, it is awfully hard to find a positive substantive argument. Moreover, last week provided wild swings as desperate observers awaited market stabilization. As usual, executing on the unthinkable might be the most rewarding as one extreme follows an opposite extreme (rising stock prices) while understanding that some extremes last longer than imagined.
Throughout history, autumn has produced memorable hysterias, notably in 1929, 1987 and 2008. Despite this history, many speculate the summer turmoil collectively captured the majority of this year’s grief. On the other hand, the S&P 500 index declined 18% from July 21 to August 9. That is a dramatic move in and of itself relative to past performance, which may prove a simple and effective catalyst to tempt buyers. Value seekers argue for "cheap" timely entry into areas of fundamental strength, including selected technology and banking stocks. Meanwhile, cycle examiners remind us that shareholders may benefit during the run-up to the U.S. presidential election. Importantly, the current state of safety and risk are consciously being reassessed. Yet, it remains a tricky period to evaluate risk, and safer investment options remain in U.S. debt and Gold which continue to experience inflow.
More Politics than Usual:
It’s quite convenient to draw direct links between market behavior and political sentiment. Typically, the largest market fluctuations tend to stir up popular conversation. Of course, the U.S. sovereign debt downgrade raised questions of political leadership. Consequently, the U.S. “political risk” is higher than usual, reflecting the underlying bitterness and stalemate. To be fair, this was equally reflected in the rise of volatility and poor sentiment. Similarly, when leaders attempt to calm markets it backfired, especially during trading hours. This was especially apparent when examining the remarks by the President and Fed chairman last week. Thus, there are some financial professionals requesting less government involvement in U.S. and European markets. Unfortunately, that's mostly wishful thinking, and makes for better political rhetoric than confidence restoration. Practically, the political constraints are a growing risk for asset managers. Navigating shrewdly is the only option for risk allocators.
Further Disruptions
A series of interventions has added further suspense to the ongoing turbulence. First, the ban on short selling by various global regulators revisits the knee jerk reaction of U.S. equities in 2008 (SEC ban of shorting financials). The countries, among others enacting this practice, include South Korea, Turkey and Greece. Although, disallowing investors from betting on declines does not necessary translate to stopping price declines. It leads to less liquid markets, while asset managers scramble for near-term solutions. Secondly, the more substantial intervention is related to currency depreciation, encapsulated in the larger “currency wars”. The U.S. Dollar Index has stayed above annual lows since May 4, 2011, and for macro observers this is a noteworthy inflection point as the much feared demise of the greenback has not materialized. However, the plot has thickened, as central bankers used their influence to weaken the Yen and Franc. At the same time, significant correction in Gold prices may contribute to further instability in the currency markets. This may not be enough to claim a 6-9 month trend, but it certainly underscores a potentially developing macro shift.
Finally, the much heated debate of quantitative easing is bound to resurface. The mixed message from the Federal Reserve of targeting lower rates is being contemplated, but skepticism of pending plans is growing rapidly. Generally, the saying goes “Don’t fight the Fed!” However, with the lack of trust in intervening parties and the failure of QE2, a daunting task lies ahead for all involved parties. For now, the observer is left to speculate on outcomes, as policy makers dig to find a positive spin in various data releases. It certainly makes for a sensitive and tense period.
Article Quotes:
“Our main finding is that outward spillovers from Germany’s growth to other countries have been low and have remained modest in recent years. In contrast, spillovers, especially from the US, followed by the UK as a distant second, have been larger and have increased over time, even after controlling for the effect of outsized spillovers during the crisis. Based on full sample estimates including a crisis dummy, the effect of a 1% growth shock in Germany measured by the peak cumulative response of other countries is about 0.1%, the lowest of all the large countries. Moreover, spillovers from Germany have decreased in recent years, halving to only 0.05%. Japan’s impact on the rest of the world has similarly decreased. The analysis suggests that countries reliant on external rather than domestic sources of growth generate smaller spillovers. This is the case with Germany, whose growth is powered by global growth, which implies that inward spillovers are large but the outward spillovers are small.” (VOX Centre for Economic Policy Research, August 15, 2011)
“Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said that they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries. But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%. Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates.” (The Carnegie Asia Program, August 12, 2011)
Levels:
S&P 500 Index [1178.81] – Attempting to stabilize at 1150-1200. It was deeply oversold, and remains in a fragile zone.
Crude [$85.38] – The commodity peaked on May 2, 2011 around a period where the Dollar bottomed. Once again, the $85-90 range can define a new trending range.
Gold [$1742.60] – Taking a breather after sharper moves towards historic highs. In the near-term, the narrow range resides somewhere between $1740 and 1780, while maintaining a well defined uptrend.
DXY – US Dollar Index [74.59] – A bottoming process developing around $74 in the past three months.
US 10 Year Treasury Yields [2.25%] – Rush to safety has driven yields to levels last seen around December 2008. For now, gains hold slightly above the lowest point of the year at 2.03%.
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.
Volatility like fire burns the fearful dangerously or feeds the daring sizably. The outcome depends on the participants’ firm stance especially in periods where rational thinking has taken a major backseat. These panic driven periods have been shown to favor the cool headed, who’ve adequately geared up for looming surprises. Officially, we've moved from a bombardment of bad news to all out frenzy, resulting in an undue responsiveness to the headline noise. Beyond policy makers, gimmicks, snap back rallies, and a lack of feasible alternatives, it is awfully hard to find a positive substantive argument. Moreover, last week provided wild swings as desperate observers awaited market stabilization. As usual, executing on the unthinkable might be the most rewarding as one extreme follows an opposite extreme (rising stock prices) while understanding that some extremes last longer than imagined.
Throughout history, autumn has produced memorable hysterias, notably in 1929, 1987 and 2008. Despite this history, many speculate the summer turmoil collectively captured the majority of this year’s grief. On the other hand, the S&P 500 index declined 18% from July 21 to August 9. That is a dramatic move in and of itself relative to past performance, which may prove a simple and effective catalyst to tempt buyers. Value seekers argue for "cheap" timely entry into areas of fundamental strength, including selected technology and banking stocks. Meanwhile, cycle examiners remind us that shareholders may benefit during the run-up to the U.S. presidential election. Importantly, the current state of safety and risk are consciously being reassessed. Yet, it remains a tricky period to evaluate risk, and safer investment options remain in U.S. debt and Gold which continue to experience inflow.
More Politics than Usual:
It’s quite convenient to draw direct links between market behavior and political sentiment. Typically, the largest market fluctuations tend to stir up popular conversation. Of course, the U.S. sovereign debt downgrade raised questions of political leadership. Consequently, the U.S. “political risk” is higher than usual, reflecting the underlying bitterness and stalemate. To be fair, this was equally reflected in the rise of volatility and poor sentiment. Similarly, when leaders attempt to calm markets it backfired, especially during trading hours. This was especially apparent when examining the remarks by the President and Fed chairman last week. Thus, there are some financial professionals requesting less government involvement in U.S. and European markets. Unfortunately, that's mostly wishful thinking, and makes for better political rhetoric than confidence restoration. Practically, the political constraints are a growing risk for asset managers. Navigating shrewdly is the only option for risk allocators.
Further Disruptions
A series of interventions has added further suspense to the ongoing turbulence. First, the ban on short selling by various global regulators revisits the knee jerk reaction of U.S. equities in 2008 (SEC ban of shorting financials). The countries, among others enacting this practice, include South Korea, Turkey and Greece. Although, disallowing investors from betting on declines does not necessary translate to stopping price declines. It leads to less liquid markets, while asset managers scramble for near-term solutions. Secondly, the more substantial intervention is related to currency depreciation, encapsulated in the larger “currency wars”. The U.S. Dollar Index has stayed above annual lows since May 4, 2011, and for macro observers this is a noteworthy inflection point as the much feared demise of the greenback has not materialized. However, the plot has thickened, as central bankers used their influence to weaken the Yen and Franc. At the same time, significant correction in Gold prices may contribute to further instability in the currency markets. This may not be enough to claim a 6-9 month trend, but it certainly underscores a potentially developing macro shift.
Finally, the much heated debate of quantitative easing is bound to resurface. The mixed message from the Federal Reserve of targeting lower rates is being contemplated, but skepticism of pending plans is growing rapidly. Generally, the saying goes “Don’t fight the Fed!” However, with the lack of trust in intervening parties and the failure of QE2, a daunting task lies ahead for all involved parties. For now, the observer is left to speculate on outcomes, as policy makers dig to find a positive spin in various data releases. It certainly makes for a sensitive and tense period.
Article Quotes:
“Our main finding is that outward spillovers from Germany’s growth to other countries have been low and have remained modest in recent years. In contrast, spillovers, especially from the US, followed by the UK as a distant second, have been larger and have increased over time, even after controlling for the effect of outsized spillovers during the crisis. Based on full sample estimates including a crisis dummy, the effect of a 1% growth shock in Germany measured by the peak cumulative response of other countries is about 0.1%, the lowest of all the large countries. Moreover, spillovers from Germany have decreased in recent years, halving to only 0.05%. Japan’s impact on the rest of the world has similarly decreased. The analysis suggests that countries reliant on external rather than domestic sources of growth generate smaller spillovers. This is the case with Germany, whose growth is powered by global growth, which implies that inward spillovers are large but the outward spillovers are small.” (VOX Centre for Economic Policy Research, August 15, 2011)
“Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said that they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries. But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%. Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates.” (The Carnegie Asia Program, August 12, 2011)
Levels:
S&P 500 Index [1178.81] – Attempting to stabilize at 1150-1200. It was deeply oversold, and remains in a fragile zone.
Crude [$85.38] – The commodity peaked on May 2, 2011 around a period where the Dollar bottomed. Once again, the $85-90 range can define a new trending range.
Gold [$1742.60] – Taking a breather after sharper moves towards historic highs. In the near-term, the narrow range resides somewhere between $1740 and 1780, while maintaining a well defined uptrend.
DXY – US Dollar Index [74.59] – A bottoming process developing around $74 in the past three months.
US 10 Year Treasury Yields [2.25%] – Rush to safety has driven yields to levels last seen around December 2008. For now, gains hold slightly above the lowest point of the year at 2.03%.
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
Market Outlook | August 8, 2011
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.
“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 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.
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