“A pessimist is a person who has had to listen to too many optimists.” - Don Marquis (1878-1937)
Buyer’s Fatigue
It was not too long ago, in the summer of 2007, when pessimism or a cautious outlook became too unpopular among general investors. Even in the post 2008 era, previous damages were not quite understood until a few months ago when the glaring European crisis reinforced the fundamental issue of debt management. These days, the majority of buyers appear too fatigued of holding onto shares, while becoming exhausted of “bad” news and frustrated with a lack of genuine good news. Even when buying relatively cheap, the rewards are small and short-lived gains are rapidly erased. The more this happens, participants will become quick to lose patience and willing to sell even faster based on sensitive headlines. Perhaps this not only explains the pattern for the second half of the year but it is also reflected in last week’s events. Simply, less of a willingness to hold assets goes hand in hand with high volatility and the increasing cost of default insurance.
For specific financial insiders, previous fundamental training is not as handy in the current environment. Traditional principles such as valuations, momentum, and assumptions on rates or credit ratings are pointing to abnormal. Clearly, government and social stability is a fragile topic without a manuscript. After all, the European reconstruction period is fully underway with nauseating talks of a Eurozone break up. Perhaps those consequences are hard to quantify, thus the ongoing risk aversion remains the prevailing theme.
Fragile Edge
The US relative edge, versus alternative markets, is still intact, for those willing to see. In some measures US banks appear in better shape, in terms of balance sheet clean up, when compared with European banks. Nonetheless, American banks’ stocks have seen more punishment than reward in the past few months. In a world where there is no escape from broad risk or varying geographic exposure, the frustration inevitably persists as rational thinking takes time to reestablish. Plus, the US bank exposure to European assets is a mystery that’s bound to unfold. Meanwhile, patience is challenged for any risk takers across asset classes. A manic pattern lingers as the recent turbulence echoes July and September lows.
A few breathers here and there have kept US broad indexes from a truly ugly and irrevocable place. We start the short holiday week with the S&P 500 index down only 1.5% for the year. That’s better than the EEM (Emerging Market Index), which is down nearly 19% since January. Interestingly, the daring crowd dwindles fast, but betting against markets after consecutive downside moves does not come with guarantees either. The concept of relative edge faces political risk as managers desperately place their chips for salvaging some hopeful year-end gains.
Surprise Elements
Elements of upside surprises remain scarce at the moment, not only in Europe or the US, but China as well. Basically, it is hard to locate glaring data for better sentiment or changes of current downtrend and deadlocks. This is a tough place to be for those looking to buy at a discount or at attractive prices. Rewriting rules, reforming old behaviors and endlessly walking in uncharted territory is a risk that’s hard to comprehend and accept collectively. Thus the brave must distinguish blind gambling with a favorable risk-reward profile. At the same time, mood swings are too common even when it all seems too bleak.
Article Quotes:
“Indeed, all the gold controlled by the US government, which has by far the world’s largest official reserves, equals just 3 per cent of America’s official debt, which just passed the $15,000bn mark. Even Italy, a particularly large holder of bullion (in third place globally with the 10th largest economy) would be able to retire less than 6 per cent of its enormous sovereign debt if it were to dump its 2,451 tonnes. But while the dollar amounts may be paltry, Mr Bernanke must grasp that the symbolism is anything but. It is a mark of creeping distrust in the unofficial reserve currency, which nervous central bankers see being printed by the trillions even as America’s political leadership shows no sign of dealing with its daunting fiscal challenges. Fiscal worries are even more acute for the number two and three reserve currencies, the euro and the yen. Central bankers are late to the gold party. Private buyers of ETFs alone have accumulated 15 times as much since their advent a decade ago as governments bought last quarter.” (Financial Times, November 17, 2011)
“Local [Chinese] government financing vehicles borrowed heavily to support an infrastructure construction spree under Beijing's four trillion yuan stimulus package introduced at the end of 2008. They are due to pay a total debt of 1 trillion yuan annually from this year until 2013 and an outbreak of defaults could peak during the period, China International Corp warned earlier. The local governments rely heavily on revenue from land sales to pay back their loans. As the property market has slowed under government policy tightening, and as it takes time for government-funded projects to generate returns, there are signs some local governments are finding it difficult to repay their loans. Local governments' 6,576 financing vehicles had debt of 10.72 trillion yuan at the end of 2010, amounting to 26.9% of China's gross domestic product accrued since the global financial crisis in 2008, the National Audit Office reported in its first audit of local government debt in June. Only 54 county governments out of nearly 2,800 in the country had zero debt, it said.” (Asian Times, November 19, 2011)
Levels:
S&P 500 Index [1215.65] – Retracing from 50 day moving average. Ability to stay above 1200 will be tested in next days ahead.
Crude [$97.41] – After a fast paced move to $100, there is early indication of a pause. The two month momentum may need a further catalyst to keep the run sustainable.
Gold [$1719.00] – Struggling to hold above $1750 as evidence of a stalling pattern continues to develop.
DXY – US Dollar Index [78.06] – Continuing its bottoming process since May 2011. The relative strength of the currency remains unharmed despite near-term swings.
US 10 Year Treasury Yields [2.01%] – Interestingly, the lows in 2008 crisis stood at 2.03%. Currently, a struggle to stay above 2.0% is further indication of risk aversion and lack of “safer” alternatives.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, November 21, 2011
Monday, November 14, 2011
Market Outlook | November 14, 2011
“Tug on anything at all and you'll find it connected to everything else in the universe.” - John Muir (1838 –1914)
Linked with Differences
There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.
In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.
Observer’s Dilemma
For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).
Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.
Down the Stretch
The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.
Article Quotes:
“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)
“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)
Levels:
S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.
Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.
Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.
DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.
US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.
--
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.
Linked with Differences
There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.
In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.
Observer’s Dilemma
For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).
Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.
Down the Stretch
The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.
Article Quotes:
“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)
“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)
Levels:
S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.
Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.
Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.
DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.
US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.
--
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, November 07, 2011
Market Outlook | November 7, 2011
“To begin with, our perception of the world is deformed, incomplete. Then our memory is selective. Finally, writing transforms.” - Claude Simon (1913-2005)
The Collective Feel
The back and forth market movements are overly focused on the latest rapid paced events. Meanwhile, the nucleus of these issues stems from the serious and inescapable damage, mostly revealed in the fall of 2008. Another week passed with the usual Eurozone drama, as fear rotates from one nation’s solvency to the next. Basically, for financial or social observers, the message is not only grim, but also fairly exhausting as similar themes keep repeating in a different form. In other words, the last three years illustrate the ongoing discussions on finding a balance between government involvement and potential resolutions, amidst conflicted political constraints.
As for navigating through investment ideas, here and there observers will point to better than expected numbers, which stimulate some momentary or illusionary hope. However, beyond the day to day noise, the consequences for the next three to five years are puzzling and even more humbling for traditional forecasters. Perhaps the bigger surprise might be the lengthy denial by policymakers to make critical and painful decisions. Others feel that pessimism evaporates in due time, but that crowd is becoming harder to find in this marketplace. Frankly, trust in forecasters is diminishing, as finger pointing is the reoccurring theme. Historians contemplate the results of globalization and the realities that have materialized in this “New World.” Yet, the changing perception of the financial system is turning to a political matter which goes beyond the realm of traditional finance. This is unchartered territory for the generations in charge (in US and Europe), who can hardly recall a manual for problem solving in the previous business cycle challenges.
Unshakeable Turbulence
With few exceptions, most trading days since early August witnessed the Volatility Index (VIX) above 30. This reiterates the lack of market stability, even after the strong broad market performance in October. Additionally, this reflects a shaky perception of governance risk and confidence in private business expansion. Interestingly, frenzied periods are not offering clarity, as edgy minds struggle to find reasonable policymaking. The majority of attention in the US is focused on the economic front in light of the jobs issue, which appears to be more talked about than resolved. Emerging markets are not as shiny as pictured in last decade either. For example, China is confronting a domestic credit crisis of some sorts, which may go ignored by some. “An estimated $580-billion in private loans were handed out in the first 10 months of this year, a number almost 10 per cent the size of the Chinese economy…China – rather than being the country that can lead the world out of its debt woes – may be the next one headed for a hard fall.” (The Globe & Mail, November 6, 2011). There is simply no escape in this environment, as other findings are bound to unfold before year-end. Interestingly, human greed, desire for new growth, or the ability to deny harsh reality appears to be one of the very few constants.
Balancing Act
It is easy to be confused, or lost, in this turbulence; one may prefer to sit on the sidelines, which is the choice for most. Currency and commodity market trends remain in limbo. Meanwhile, owning company specific shares might work on a very selective basis, as the focus is on sensitive news flow. Year-end bets have been placed, mostly last month, as optimists await a recovery for a cosmetic and minor moral boost on a positive finish. Clearly, the stakes remain too high for managers executing on investment ideas, as well as central banks implementing policies. Yet, the odds of a substantive recovery might take longer than desired, and remain cloudy to imagine.
Article Quotes:
“First, the lower the interest rate, the higher the interest rate risk. As Calabria notes, in future years, mortgage rates will certainly rise. That will make the relative value of mortgages originated at ultra-low interest rates lower. It could even cause the bank to lose money on the mortgage if its cost of funds rises above the low mortgage interest rate. Second, interest rates help to compensate banks for risk. If banks were getting higher interest rates, then they might be more willing to provide consumers more credit. But at rates like 4%, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives. Very low interest rates are a reason why banks aren't providing many mortgages these days. Banks would prefer if mortgage interest rates were higher. You can see this by their recent efforts to avoid interest risk by adjustable-rate mortgages reemerging. In the first half of 2011, they accounted for 13.4% of all originations, up from just 6.3% in 2009.” (The Atlantic, November 2011)
“Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital. We can argue over details, but the necessary formula – if they wish to save EMU -- undoubtedly entails some form of eurobonds, debt-pooling, fiscal transfers, and of course the constitutional revolution that goes with all of this. That would at least buy them time, though I doubt that even fiscal union can ever bridge the North-South gap. Italy’s travails have little to do with the parallel drama in Greece. This is not contagion in any meaningful sense. The country is suddenly under fire for the very simple reason that its economy is plunging back into deep recession, the predicable outcome of the EU’s 1930s fiscal and monetary contraction policies. The implications of a eurozone double-dip are dreadful for Italy, already grappling with a chronic loss of 40pc in labor competitiveness against Germany and a 70pc collapse in foreign direct investment since 2007.” (The Telegraph, November 6, 2011)
Levels:
S&P 500 Index [1253.23] – Holding above 1250 and facing a mild inflection point between now and year-end.
Crude [$94.26] – Facing resistance at the 200 day moving average ($94.84), as surpassing $95 is the next challenge for buyers.
Gold [$1749.00] – A tamed re-acceleration process at this point. Early fall highs above 1850 aspire buyers.
DXY – US Dollar Index [76.96] – Restoring some stability after sharp declines. It remains too early to declare a trend, given the ensuing macro events.
US 10 Year Treasury Yields [2.03%] – The 50 day average stands at 2.05% while the 5 day average equals 2.03%. Both emphasize the range bound trading in the past few days, while the big macro picture is less affected.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
The Collective Feel
The back and forth market movements are overly focused on the latest rapid paced events. Meanwhile, the nucleus of these issues stems from the serious and inescapable damage, mostly revealed in the fall of 2008. Another week passed with the usual Eurozone drama, as fear rotates from one nation’s solvency to the next. Basically, for financial or social observers, the message is not only grim, but also fairly exhausting as similar themes keep repeating in a different form. In other words, the last three years illustrate the ongoing discussions on finding a balance between government involvement and potential resolutions, amidst conflicted political constraints.
As for navigating through investment ideas, here and there observers will point to better than expected numbers, which stimulate some momentary or illusionary hope. However, beyond the day to day noise, the consequences for the next three to five years are puzzling and even more humbling for traditional forecasters. Perhaps the bigger surprise might be the lengthy denial by policymakers to make critical and painful decisions. Others feel that pessimism evaporates in due time, but that crowd is becoming harder to find in this marketplace. Frankly, trust in forecasters is diminishing, as finger pointing is the reoccurring theme. Historians contemplate the results of globalization and the realities that have materialized in this “New World.” Yet, the changing perception of the financial system is turning to a political matter which goes beyond the realm of traditional finance. This is unchartered territory for the generations in charge (in US and Europe), who can hardly recall a manual for problem solving in the previous business cycle challenges.
Unshakeable Turbulence
With few exceptions, most trading days since early August witnessed the Volatility Index (VIX) above 30. This reiterates the lack of market stability, even after the strong broad market performance in October. Additionally, this reflects a shaky perception of governance risk and confidence in private business expansion. Interestingly, frenzied periods are not offering clarity, as edgy minds struggle to find reasonable policymaking. The majority of attention in the US is focused on the economic front in light of the jobs issue, which appears to be more talked about than resolved. Emerging markets are not as shiny as pictured in last decade either. For example, China is confronting a domestic credit crisis of some sorts, which may go ignored by some. “An estimated $580-billion in private loans were handed out in the first 10 months of this year, a number almost 10 per cent the size of the Chinese economy…China – rather than being the country that can lead the world out of its debt woes – may be the next one headed for a hard fall.” (The Globe & Mail, November 6, 2011). There is simply no escape in this environment, as other findings are bound to unfold before year-end. Interestingly, human greed, desire for new growth, or the ability to deny harsh reality appears to be one of the very few constants.
Balancing Act
It is easy to be confused, or lost, in this turbulence; one may prefer to sit on the sidelines, which is the choice for most. Currency and commodity market trends remain in limbo. Meanwhile, owning company specific shares might work on a very selective basis, as the focus is on sensitive news flow. Year-end bets have been placed, mostly last month, as optimists await a recovery for a cosmetic and minor moral boost on a positive finish. Clearly, the stakes remain too high for managers executing on investment ideas, as well as central banks implementing policies. Yet, the odds of a substantive recovery might take longer than desired, and remain cloudy to imagine.
Article Quotes:
“First, the lower the interest rate, the higher the interest rate risk. As Calabria notes, in future years, mortgage rates will certainly rise. That will make the relative value of mortgages originated at ultra-low interest rates lower. It could even cause the bank to lose money on the mortgage if its cost of funds rises above the low mortgage interest rate. Second, interest rates help to compensate banks for risk. If banks were getting higher interest rates, then they might be more willing to provide consumers more credit. But at rates like 4%, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives. Very low interest rates are a reason why banks aren't providing many mortgages these days. Banks would prefer if mortgage interest rates were higher. You can see this by their recent efforts to avoid interest risk by adjustable-rate mortgages reemerging. In the first half of 2011, they accounted for 13.4% of all originations, up from just 6.3% in 2009.” (The Atlantic, November 2011)
“Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital. We can argue over details, but the necessary formula – if they wish to save EMU -- undoubtedly entails some form of eurobonds, debt-pooling, fiscal transfers, and of course the constitutional revolution that goes with all of this. That would at least buy them time, though I doubt that even fiscal union can ever bridge the North-South gap. Italy’s travails have little to do with the parallel drama in Greece. This is not contagion in any meaningful sense. The country is suddenly under fire for the very simple reason that its economy is plunging back into deep recession, the predicable outcome of the EU’s 1930s fiscal and monetary contraction policies. The implications of a eurozone double-dip are dreadful for Italy, already grappling with a chronic loss of 40pc in labor competitiveness against Germany and a 70pc collapse in foreign direct investment since 2007.” (The Telegraph, November 6, 2011)
Levels:
S&P 500 Index [1253.23] – Holding above 1250 and facing a mild inflection point between now and year-end.
Crude [$94.26] – Facing resistance at the 200 day moving average ($94.84), as surpassing $95 is the next challenge for buyers.
Gold [$1749.00] – A tamed re-acceleration process at this point. Early fall highs above 1850 aspire buyers.
DXY – US Dollar Index [76.96] – Restoring some stability after sharp declines. It remains too early to declare a trend, given the ensuing macro events.
US 10 Year Treasury Yields [2.03%] – The 50 day average stands at 2.05% while the 5 day average equals 2.03%. Both emphasize the range bound trading in the past few days, while the big macro picture is less affected.
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, October 31, 2011
Market Outlook | October 31, 2011
“Free will is an illusion. People always choose the perceived path of greatest pleasure.” - Scott Adams (1954 - Present)
Connecting Puzzles
Last week, lots of attention revolved around the temporary European deal. However, the recipe for increased risk tolerance and market uplift has been in the making, apparent when looking at recent trading days. Hints of an improving October go back to earlier in the month. October 4 presented a noteworthy minor trend which may extend into a larger intermediate-term trend. On that day, the Volatility (VIX) peaked from high turbulence, S&P 500 Index set a bottom after harsh September sell-offs, strength of the dollar broke to the usual downtrend, and finally the commodity index (CRB) rose from its lows. All these patterns accelerated to shiny headlines, illustrating a very strong month by historical measures. Ironically, this run is highlighted by the combination of a deprecating dollar and higher asset prices, which ends up revisiting the all too familiar theme of last decade. Puzzling indeed, if lessons from past cycles have yet to be fully learned in favor of near term pleasures.
As usual, the interrelation of macro indicators is driving the prevailing theme. Much of the month end discussion circles around the explosive stock market run, as the series of events are tilted to paint a positive picture. Quantitative Easing 3 discussion points may surface around the corner, and serving as recent momentum they can set the stage. Not to mention, an improving third quarter growth in consumer spending brought some relief as well. Market "catalysts" vary from cycle to cycle, but this type of recovery pattern and policymaking is typical. Specifically, the overly negative sentiment became quite at a rapid pace. The curiosity of observers will shift to impact on interest rates and inflation. Clearly, sentiment or market patterns are shifting at a rapid pace.
Grasping and Digesting
Taking a breather for a second, it is fair to rationalize that few issues contributed to the uncertainty. In a glaring way, the S&P 500 Index mirrored the Euro for several weeks. That reflected emphasis on the power of sentiment, rather than trading on fundamentals. “The 50 stocks that were down the most from July 7th through October 3rd are up an average of 35.3% since then! Conversely, the 50 stocks that held up the best during the summer correction are only up an average of 6.9% during the current rally, which is severe underperformance.” (Bespoke Investment Group, October 28, 2011) Similarly, the connection between the currency and stock markets feels more like a sentiment poll, as much as an index. Eventually, worn out money managers are caught in the usual state of confusion. Surprises seem uncommon, but who would've thought the S&P 500 would flirt with 1300? Perhaps some did but not many, especially not in the dark days of July or September’s worrisome lows. Again, fathoming the unfathomable is yet again the reoccurring lesson. Clearly, social debates or political quarrels dominate airwaves, but are not always reflected in broad index performance. These concepts are hard to grasp when applying logic while disregarding psychology. In fact, casual observers are confused by the discrepancy of downgrade implication, sluggish economic factors, bubble talks in China and political power shifts in key geographic areas. These issues remain mostly unresolved from a practical angle, but shrewd observes have acknowledged long ago it is a game of perception.
Deliberation
Finishing out the year on a positive note is commonly desired and witnessed. In fact, it appears to be in the minds of most, and can be easily converted into a self-fulfilling prophecy. Fatigue of bad news is only natural, but temporary urges may not cover up the existing pain. Within a few hours after the European solution, several skeptical opinions circulated stating that sustaining “comfort” will be daunting. Interestingly this week, the Federal Reserve will host a press conference at a time its members internally disagree on methods of fueling the economy through monetary policy. Balancing investment performance with reality is the internal dilemma that haunts long-term participants. An illusionary backdrop persists for fund managers to showcase net gains or to further cut into losses. Discomfort continues in formulating a thesis, but the mystery is in visualizing the magnitude of accumulated damages yet to play out.
Article Quotes:
“Since July, real disposable incomes have been declining. Although the decline in September was modest, it still helps to explain why consumers are so gloomy: their disposable incomes have been falling over the past three months. Really, they had been virtually stagnant all year leading up to July too. The income growth we saw from late-2009 through mid-2010 sort of just stopped. Now it has reversed. The September value was the lowest since April 2010. Prior to the recession, disposable income per capita hit and blew past its September 2011 level in September 2006. In other words, over the past five years Americans, on average, have seen no disposable income growth if you adjust for population and inflation. This also explains why they're spending like it's 2006 -- because they don't have more money to spend. No wonder the recovery continues to feel like a recession: that's an awfully long time to go without a raise.” (The Atlantic, October 2011)
“One of the curious paradoxes of population growth is that the more able people are to sustain large families, because they become wealthier, the less inclined they are to actually have more children. So, while greater affluence is often blamed for increasing the strains on the world's finite resources, it is possible that a richer world may be a more sustainable one because it will cause a natural leveling off in population growth. That is some way off, however. In the short term the number of people will continue to rise and this has a number of implications for investors. Three of the more important are related to food, urbanization and growth in consumption. It is estimated that food production will need to rise by 50pc by 2030… The solution cannot simply be to bring more land into cultivation because the most productive has already been used and industrialization and urbanization are eating into what is already under the plough.” (The Telegraph, October 29, 2011)
Levels:
S&P 500 Index [1285.09] – Notably breakout of the multi-month sluggish range. Next, key target sits at July’s peaks between 1300-1350.
Crude [$93.32] – Further reacceleration as the commodity nearly approaches the 200 day moving average of $94.76.
Gold [$1741.00] – Recovering from a short-lived pause in which 1600 showcased strong buyer enthusiasm.
DXY – US Dollar Index [75.06] – Dropped nearly 6% for the month so far. Resorting back to the well-known range $74-76 range which was seen in spring and summer months.
US 10 Year Treasury Yields [2.31%] – The trade away from risk aversion drove yields higher from historic lows. Ability to hold to surpass, and hold above 2.40%/2.50%, will be a key test in upcoming days.
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.
Connecting Puzzles
Last week, lots of attention revolved around the temporary European deal. However, the recipe for increased risk tolerance and market uplift has been in the making, apparent when looking at recent trading days. Hints of an improving October go back to earlier in the month. October 4 presented a noteworthy minor trend which may extend into a larger intermediate-term trend. On that day, the Volatility (VIX) peaked from high turbulence, S&P 500 Index set a bottom after harsh September sell-offs, strength of the dollar broke to the usual downtrend, and finally the commodity index (CRB) rose from its lows. All these patterns accelerated to shiny headlines, illustrating a very strong month by historical measures. Ironically, this run is highlighted by the combination of a deprecating dollar and higher asset prices, which ends up revisiting the all too familiar theme of last decade. Puzzling indeed, if lessons from past cycles have yet to be fully learned in favor of near term pleasures.
As usual, the interrelation of macro indicators is driving the prevailing theme. Much of the month end discussion circles around the explosive stock market run, as the series of events are tilted to paint a positive picture. Quantitative Easing 3 discussion points may surface around the corner, and serving as recent momentum they can set the stage. Not to mention, an improving third quarter growth in consumer spending brought some relief as well. Market "catalysts" vary from cycle to cycle, but this type of recovery pattern and policymaking is typical. Specifically, the overly negative sentiment became quite at a rapid pace. The curiosity of observers will shift to impact on interest rates and inflation. Clearly, sentiment or market patterns are shifting at a rapid pace.
Grasping and Digesting
Taking a breather for a second, it is fair to rationalize that few issues contributed to the uncertainty. In a glaring way, the S&P 500 Index mirrored the Euro for several weeks. That reflected emphasis on the power of sentiment, rather than trading on fundamentals. “The 50 stocks that were down the most from July 7th through October 3rd are up an average of 35.3% since then! Conversely, the 50 stocks that held up the best during the summer correction are only up an average of 6.9% during the current rally, which is severe underperformance.” (Bespoke Investment Group, October 28, 2011) Similarly, the connection between the currency and stock markets feels more like a sentiment poll, as much as an index. Eventually, worn out money managers are caught in the usual state of confusion. Surprises seem uncommon, but who would've thought the S&P 500 would flirt with 1300? Perhaps some did but not many, especially not in the dark days of July or September’s worrisome lows. Again, fathoming the unfathomable is yet again the reoccurring lesson. Clearly, social debates or political quarrels dominate airwaves, but are not always reflected in broad index performance. These concepts are hard to grasp when applying logic while disregarding psychology. In fact, casual observers are confused by the discrepancy of downgrade implication, sluggish economic factors, bubble talks in China and political power shifts in key geographic areas. These issues remain mostly unresolved from a practical angle, but shrewd observes have acknowledged long ago it is a game of perception.
Deliberation
Finishing out the year on a positive note is commonly desired and witnessed. In fact, it appears to be in the minds of most, and can be easily converted into a self-fulfilling prophecy. Fatigue of bad news is only natural, but temporary urges may not cover up the existing pain. Within a few hours after the European solution, several skeptical opinions circulated stating that sustaining “comfort” will be daunting. Interestingly this week, the Federal Reserve will host a press conference at a time its members internally disagree on methods of fueling the economy through monetary policy. Balancing investment performance with reality is the internal dilemma that haunts long-term participants. An illusionary backdrop persists for fund managers to showcase net gains or to further cut into losses. Discomfort continues in formulating a thesis, but the mystery is in visualizing the magnitude of accumulated damages yet to play out.
Article Quotes:
“Since July, real disposable incomes have been declining. Although the decline in September was modest, it still helps to explain why consumers are so gloomy: their disposable incomes have been falling over the past three months. Really, they had been virtually stagnant all year leading up to July too. The income growth we saw from late-2009 through mid-2010 sort of just stopped. Now it has reversed. The September value was the lowest since April 2010. Prior to the recession, disposable income per capita hit and blew past its September 2011 level in September 2006. In other words, over the past five years Americans, on average, have seen no disposable income growth if you adjust for population and inflation. This also explains why they're spending like it's 2006 -- because they don't have more money to spend. No wonder the recovery continues to feel like a recession: that's an awfully long time to go without a raise.” (The Atlantic, October 2011)
“One of the curious paradoxes of population growth is that the more able people are to sustain large families, because they become wealthier, the less inclined they are to actually have more children. So, while greater affluence is often blamed for increasing the strains on the world's finite resources, it is possible that a richer world may be a more sustainable one because it will cause a natural leveling off in population growth. That is some way off, however. In the short term the number of people will continue to rise and this has a number of implications for investors. Three of the more important are related to food, urbanization and growth in consumption. It is estimated that food production will need to rise by 50pc by 2030… The solution cannot simply be to bring more land into cultivation because the most productive has already been used and industrialization and urbanization are eating into what is already under the plough.” (The Telegraph, October 29, 2011)
Levels:
S&P 500 Index [1285.09] – Notably breakout of the multi-month sluggish range. Next, key target sits at July’s peaks between 1300-1350.
Crude [$93.32] – Further reacceleration as the commodity nearly approaches the 200 day moving average of $94.76.
Gold [$1741.00] – Recovering from a short-lived pause in which 1600 showcased strong buyer enthusiasm.
DXY – US Dollar Index [75.06] – Dropped nearly 6% for the month so far. Resorting back to the well-known range $74-76 range which was seen in spring and summer months.
US 10 Year Treasury Yields [2.31%] – The trade away from risk aversion drove yields higher from historic lows. Ability to hold to surpass, and hold above 2.40%/2.50%, will be a key test in upcoming days.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, October 24, 2011
Market Outlook | October 24, 2011
“Sentiment is the poetry of the imagination.” - Alphonse de Lamartine (1790-1869)
Inescapable
Key market forces cannot vanish or evaporate fast enough to revive a healthy uptrend. Eurozone suspense fails to create comfort for those betting on politicians reaching a resolution. Basically, “hope” is a risk that’s hard to quantify in a period of rapid sentiment shifts. Importantly, debt issues continue to prove that positive public messages are not sufficient. Meanwhile, the ongoing trend of downgrades by credit agencies is now a common persistent theme within the gloomy side of an inevitable cycle. As to the actual shock factor of further downgrades that's to be seen, and remains difficult for currency or bond market observers to gauge. In any case, participants have accepted the increased lack of uncertainty that is beyond the traditional asset management of recent generations. Clearly, the much discussed volatility index has remained in abnormal territory for longer than desired. Frankly, frantic patterns cause one to question the overall faith of the banking system as well as the readjustment in currency values.
Glimpse of Liveliness
In the past three weeks, a growing camp of optimists continues to emphasize “recovery,” especially in anticipation of quantitative easing. This is a puzzle in itself, since an operation twist is being digested in the recent Federal Reserve decision. The element of interventions finds a way to spark reversals, while skeptics view it as a plague to overall confidence. Yet, it is hard to deny the noticeable and mild resilience for scoreboard observers. Perhaps some will argue that a pause in the selling pressure leads to cosmetically appreciating global indexes. For example, the S&P 500 Index showcases adamant buyer interest between 1100 and 1150 levels. In some ways overall positive earnings, improving technical indicators and the presence of bargain hunters contributes to this psychological bottoming process. The market is betting on near/intermediate term mood swings rather than any long term clarity on fundamentals. Pursuing and executing profitable ideas on short-term biases are intriguing to some, frustrating to others and increasingly disinteresting to the rest. However, remaining open to surprises has proved to be valuable in making vital calls.
Untangling
The Federal Reserve’s active involvement continues to entertain buying further securities in a stimulus attempt. This leads to furious policy debates when mixing low historic rates along with the pending election year and weak economy. At the same time, short-term memory reminds us that when QE2 ended abruptly, it opened the doors for heavy sell-offs. It is fair to assume the stakes are high for stability, but clarity is hard to reach when a series of inflection points continue to accumulate. Among pundits, inflation is not viewed as a short-term concern in the US, but high inflation down the road cannot be dismissed. Similarly, an emerging market slowdown has arrived, but the magnitude of declines is not fully understood. Meanwhile, commodities have taken a breather in the past several weeks, yet now reappear set to retest buyers’ appetite. All points state that comfort zones of all sorts are indeed challenged, and risk takers can patiently begin to map out the current maze.
Article Quotes:
“In Europe, banks and investors advanced credit to countries lacking even a pulse. By this I mean that their population was known to be rapidly aging, that some were mired in black markets, had a happy-go-lucky preference for leisure and "apres-moi-le-deluge" mentality, and were subsidized by a legacy of entitlements based on the assumption that the demographic pyramid would have an expanding young base forever - never mind the demographic realities. What blinded Europe's politicians and bankers? Decades of easy living weakened many of the institutions that once built up Europeans' "character". Unfortunately, no financial engineering can offer short- or medium-range solutions to restore "character". It can take a generation or more. The uniqueness of the dozen Western type democracies after World War II and until 1990 permitted the continuous misallocation of capital and the destruction of character. The capital and talent flocking to their shores from the rest of the world, escaping dictatorship of one kind or another, helped cover the compounding mistakes.” (Asian Times, October 22, 2011)
“China’s government will be reluctant to ease monetary or fiscal policy while inflation remains high. That limits its scope to respond to a sharp slowdown in exports, if Europe and America continue to falter. But weakness in foreign sales will itself ease inflationary pressure, reducing the competition for men and materials. After exports fell off a cliff in 2008, Chinese prices began to drop. Thus the more the economy needs looser macroeconomic policy, the more scope the authorities will have to provide it. What about the bad debts left behind by past excesses? Although some homebuilders are heavily indebted, households are not. Even if the price of their home falls below what they paid for it, it will be worth more than the mortgage they took out on it. Since the central government’s explicit debt is low (about 20% of GDP) it can afford to bail out lower tiers of government and the banks they borrowed from. Because the banks have ample deposits, and savers have few other options, banks can also earn their way out of a hole by underpaying their depositors. And since the banking system is still dominated by the government, the banks will not refuse to offer new loans, even if old loans sour.” (The Economist, October 22, 2011)
Levels:
S&P 500 Index [1238.25] – Closed at the higher end of the recent range. A pending test to retest overall buyer appetite closer to 1250, followed by the 200 day moving average of 1274.70.
Crude [$87.40] – Several attempts to surpass $90 failed few times in the last two months. A third attempt is looming given the recent short-lived run.
Gold [$1642.50] – Following the correction from last month, the commodity has establish a vicarious range around 1620-1680.
DXY – US Dollar Index [76.39] – Further deterioration despite September’s appreciation. Setting up for a minor near-term recovery.
US 10 Year Treasury Yields [2.21%] – Trading above the 50 day moving average with no major change since last week.
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.
Inescapable
Key market forces cannot vanish or evaporate fast enough to revive a healthy uptrend. Eurozone suspense fails to create comfort for those betting on politicians reaching a resolution. Basically, “hope” is a risk that’s hard to quantify in a period of rapid sentiment shifts. Importantly, debt issues continue to prove that positive public messages are not sufficient. Meanwhile, the ongoing trend of downgrades by credit agencies is now a common persistent theme within the gloomy side of an inevitable cycle. As to the actual shock factor of further downgrades that's to be seen, and remains difficult for currency or bond market observers to gauge. In any case, participants have accepted the increased lack of uncertainty that is beyond the traditional asset management of recent generations. Clearly, the much discussed volatility index has remained in abnormal territory for longer than desired. Frankly, frantic patterns cause one to question the overall faith of the banking system as well as the readjustment in currency values.
Glimpse of Liveliness
In the past three weeks, a growing camp of optimists continues to emphasize “recovery,” especially in anticipation of quantitative easing. This is a puzzle in itself, since an operation twist is being digested in the recent Federal Reserve decision. The element of interventions finds a way to spark reversals, while skeptics view it as a plague to overall confidence. Yet, it is hard to deny the noticeable and mild resilience for scoreboard observers. Perhaps some will argue that a pause in the selling pressure leads to cosmetically appreciating global indexes. For example, the S&P 500 Index showcases adamant buyer interest between 1100 and 1150 levels. In some ways overall positive earnings, improving technical indicators and the presence of bargain hunters contributes to this psychological bottoming process. The market is betting on near/intermediate term mood swings rather than any long term clarity on fundamentals. Pursuing and executing profitable ideas on short-term biases are intriguing to some, frustrating to others and increasingly disinteresting to the rest. However, remaining open to surprises has proved to be valuable in making vital calls.
Untangling
The Federal Reserve’s active involvement continues to entertain buying further securities in a stimulus attempt. This leads to furious policy debates when mixing low historic rates along with the pending election year and weak economy. At the same time, short-term memory reminds us that when QE2 ended abruptly, it opened the doors for heavy sell-offs. It is fair to assume the stakes are high for stability, but clarity is hard to reach when a series of inflection points continue to accumulate. Among pundits, inflation is not viewed as a short-term concern in the US, but high inflation down the road cannot be dismissed. Similarly, an emerging market slowdown has arrived, but the magnitude of declines is not fully understood. Meanwhile, commodities have taken a breather in the past several weeks, yet now reappear set to retest buyers’ appetite. All points state that comfort zones of all sorts are indeed challenged, and risk takers can patiently begin to map out the current maze.
Article Quotes:
“In Europe, banks and investors advanced credit to countries lacking even a pulse. By this I mean that their population was known to be rapidly aging, that some were mired in black markets, had a happy-go-lucky preference for leisure and "apres-moi-le-deluge" mentality, and were subsidized by a legacy of entitlements based on the assumption that the demographic pyramid would have an expanding young base forever - never mind the demographic realities. What blinded Europe's politicians and bankers? Decades of easy living weakened many of the institutions that once built up Europeans' "character". Unfortunately, no financial engineering can offer short- or medium-range solutions to restore "character". It can take a generation or more. The uniqueness of the dozen Western type democracies after World War II and until 1990 permitted the continuous misallocation of capital and the destruction of character. The capital and talent flocking to their shores from the rest of the world, escaping dictatorship of one kind or another, helped cover the compounding mistakes.” (Asian Times, October 22, 2011)
“China’s government will be reluctant to ease monetary or fiscal policy while inflation remains high. That limits its scope to respond to a sharp slowdown in exports, if Europe and America continue to falter. But weakness in foreign sales will itself ease inflationary pressure, reducing the competition for men and materials. After exports fell off a cliff in 2008, Chinese prices began to drop. Thus the more the economy needs looser macroeconomic policy, the more scope the authorities will have to provide it. What about the bad debts left behind by past excesses? Although some homebuilders are heavily indebted, households are not. Even if the price of their home falls below what they paid for it, it will be worth more than the mortgage they took out on it. Since the central government’s explicit debt is low (about 20% of GDP) it can afford to bail out lower tiers of government and the banks they borrowed from. Because the banks have ample deposits, and savers have few other options, banks can also earn their way out of a hole by underpaying their depositors. And since the banking system is still dominated by the government, the banks will not refuse to offer new loans, even if old loans sour.” (The Economist, October 22, 2011)
Levels:
S&P 500 Index [1238.25] – Closed at the higher end of the recent range. A pending test to retest overall buyer appetite closer to 1250, followed by the 200 day moving average of 1274.70.
Crude [$87.40] – Several attempts to surpass $90 failed few times in the last two months. A third attempt is looming given the recent short-lived run.
Gold [$1642.50] – Following the correction from last month, the commodity has establish a vicarious range around 1620-1680.
DXY – US Dollar Index [76.39] – Further deterioration despite September’s appreciation. Setting up for a minor near-term recovery.
US 10 Year Treasury Yields [2.21%] – Trading above the 50 day moving average with no major change since last week.
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, October 17, 2011
Market Outlook | October 17, 2011
“We are a people who do not want to keep much of the past in our heads. It is considered unhealthy in America to remember mistakes, neurotic to think about them, psychotic to dwell on them.” - Lillian Hellman (1905-1984)
Simple Concept - Complex Reality
Taking out large bank loans, deciding to bail out institutions, covering up and delaying previous losses, betting on complex products, or blindly investing in misunderstood instruments, leads to some sort of ugly outcome. Similarly, when governments borrow a lot the same principle holds true. Those are simply the basics, however, most fail to agree to accept or focus on mistakes. Plus, simple concepts are not so easy when considering complex political systems and agendas. Clearly the Eurozone is stuck debating the postmortem of failures, and deadlocked Washington illustrates this point further when short-term reelection efforts overshadow reasoning. Even the Federal Reserve is split on interest rate policies. Awkwardly enough, politicians are trying to reform the role of the central bank in a period where the government’s role in business is a contentious topic. Somehow the simple concept of borrowing and repayment leads to chaotic responses of all kinds. Perhaps it takes time to realize, accept and make sense of bitter facts.
At this point, we should mostly go beyond the ‘recognition’ phase, as a collective acceptance of mistakes is not as easy as it seems. Greedy and reckless practices are evenly spread across policymakers, regulators, investors, and consumers alike. After all, any seasoned money manager knows to contemplate mistakes rather than boast about two or three amazing trades. As markets teach us, one or two themes end up being cycle winners over the long-term (i.e. owning Apple shares, betting on declining rates and going long on Gold). Catching waves, like any simple concept, appears very difficult to time and execute.
In contemplating excess debt issues, some would argue that risky bet troubles are abated by issuing warning labels. Perhaps the words “risk management” are overused and grossly misunderstood or applied. Typically in bull markets, basic common sense appears blurry and is clearly a reoccurring human trait. The unfolding drama of a collapsing market ends up being a valuable lesson on “risk,” especially for those building new economies and gearing up for new cycles or financial systems. After all, the last three years provided basic lessons on the use of leverage, understanding inefficiencies in rules and systems, fragility of financial institutions and importantly how intervention is unavoidable.
Early Hints
The message from active markets today is to risk moderately trading at a discount, while fear is not as pricey as before. It is hard to visualize it this way, but if the playing field is not disrupted and financial institutions do not collapse then cycles would seek bargains through purchases of shares at cheap prices. The results from the current earnings season can refute or confirm the much discussed hazy macro environment. This upcoming week 1/3 of S&P 500 companies will showcase where they stood last quarter versus expectations. After several irrational trading levels and patterns this summer, quarterly results can provide a better read on market pricing. Thus, it is not an accident in the last two weeks, where participants repositioned investment ideas ahead of a long-awaited sentiment shift. In fact, October 4th marked a peak for volatility which has declined gradually. Similarly, that same day marked a bottom for US 10 Year Treasuries at 1.71%, which showcases a mild shift away from safer instruments.
The Search for Good
Typically markets find a way to constantly seek "good news" while remaining at times overly sensitive to bad news. Now, the hopeful are waiting for the European resolution combined with the jobs bill as well as bigger initiatives by the Federal Reserve. All this reflects anticipation of results or causes that spark good outcomes. While typically the argument of historical charts state that US equity markets end up higher. The common thought has been severely challenged in the ‘lost’ decade and potential system breakdown. Buying cheap is a familiar point that has backfired in previous months as the usual buyer revisits their luck.
On valuation basis, fundamentals appear favorable for buyers; for example, when looking at earnings yield. “The S&P 500’s earnings yield is 7.5 percent, close to the highest level since 2009.” (Bloomberg, October 17, 2011). Relative to other asset classes, buying stocks is not as bad when considering the low rate environment. That may work if earnings actually moderate and showcase some stability. In terms of inflation and interest rates, both are expected to stay low based on the recent Federal Reserve message. Now, looking into 3-5 year projections, this might change while surprising us with high inflation; but, most are focused on trying to survive the next few weeks.
The S&P 500 index turned slightly positive for the year as this feeds into the growing appetite for a year-end rally. Interestingly, the Nasdaq 100 is few percentages away from making 10 year highs. Two major sell-offs in spring and summer, reflected weakness of all sorts but indexes have an illusory feel to them. The buyer appetite is looming as early evidence of momentum picks up. “77% of S&P 500 stocks are now above their 50-day moving averages, which is the highest level seen since the April highs. Bulls have been waiting for a nice expansion in underlying breadth for confirmation of a rally, and now they seem to have it.” (Bespoke Investments, October 14, 2011). Yet many wonder if bad news is fully digested or merely tiresome. For example, Spain’s credit rating downgrade did not affect the market that much since it was the third occurrence in the past three years. The optimist will argue that we’ve been battle tested and bruised at this point. Rehashing false optimism is not that surprising, rather the duration of mild cheerfulness is the rewarding mystery.
Article Quotes:
“The Government Debt rose over $5.5 trillion since 2008, but the Private Debt declined by close to $5 trillion during the same period of time. This is the first time since the Great Depression that private debt declined at all-even a dime. A significant part of Private Debt came from Consumer Debt where the revolving and credit market debt declined about $140 billion (from $2.6 tn. to $2.45 tn. ) and the total household debt declined from $14 tn. to $13.3 tn. ……We find it incredible that there was not one quarterly decline in household debt since 1952 (as far back as we could find data) until the third quarter of 2008 from where we've had 12 consecutive quarterly declines. We didn't even have one quarter of decline during the worst recessions since the Great Depression (up until the recent Financial Crises in 2008) in 1973-74 and 1981-82-- NOT ONE!! During the period from the year 2000 to 2008 household debt rose from 68% of GDP to 100% of GDP. But, since the 3rd quarter of 2008 we had 12 consecutive quarterly declines as total household debt declined by almost $1 tn.” (Comstock Partners, Inc October 13, 2011)
“Qu Hongbin, chief economist for China at HSBC, said in a research note that the debt crises in the US and the eurozone had dampened global consumer confidence for Chinese goods, leading to a slower expansion of the nation's exports. In the first half, exports contributed nearly zero to the growth of China's economy, while gross domestic product (GDP) rose 9.7% in the period. GDP may grow by 8.5% to 9% this year, and stay at that level over the next few years, Qu estimated. This compares with 9.5% growth in this year's second quarter compared with a year earlier, 9.7% in the first three months and last year's 10.4%. Chinese exports grew 24% year-on-year to US$874.3 billion in the first half, compared with 35.2% growth during the same period of 2010, according to the General Administration of Customs. Year-on-year export growth has been declining month-by-month during the first half, dropping to 17.9% in June from 37.7% in January.” (Asian Times, October 14, 2011)
Levels:
S&P 500 Index [1224.58] – Trading at the higher end of recent consolidation range between 1100 and 1200
Crude [$86.80] – Bottoming phase builds mildly. Next key resistance level stands at $90.
Gold [$1678.00] – Early signs of re-acceleration after holding at $1650 range. Collective buyer showed interest around $1600 and mostly sold at $1800. A breakout or breakdown can spark a noteworthy trend for momentum traders.
DXY – US Dollar Index [76.63] – Struggling to sustain last months’ strength in US dollar. Perhaps this reinforces that the strengthened dollar theme has yet to develop.
US 10 Year Treasury Yields [2.24%] – Last few weeks are witnessing a rise in yields from annual lows. The current move appears stretched as confirmation is desperately required.
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 Concept - Complex Reality
Taking out large bank loans, deciding to bail out institutions, covering up and delaying previous losses, betting on complex products, or blindly investing in misunderstood instruments, leads to some sort of ugly outcome. Similarly, when governments borrow a lot the same principle holds true. Those are simply the basics, however, most fail to agree to accept or focus on mistakes. Plus, simple concepts are not so easy when considering complex political systems and agendas. Clearly the Eurozone is stuck debating the postmortem of failures, and deadlocked Washington illustrates this point further when short-term reelection efforts overshadow reasoning. Even the Federal Reserve is split on interest rate policies. Awkwardly enough, politicians are trying to reform the role of the central bank in a period where the government’s role in business is a contentious topic. Somehow the simple concept of borrowing and repayment leads to chaotic responses of all kinds. Perhaps it takes time to realize, accept and make sense of bitter facts.
At this point, we should mostly go beyond the ‘recognition’ phase, as a collective acceptance of mistakes is not as easy as it seems. Greedy and reckless practices are evenly spread across policymakers, regulators, investors, and consumers alike. After all, any seasoned money manager knows to contemplate mistakes rather than boast about two or three amazing trades. As markets teach us, one or two themes end up being cycle winners over the long-term (i.e. owning Apple shares, betting on declining rates and going long on Gold). Catching waves, like any simple concept, appears very difficult to time and execute.
In contemplating excess debt issues, some would argue that risky bet troubles are abated by issuing warning labels. Perhaps the words “risk management” are overused and grossly misunderstood or applied. Typically in bull markets, basic common sense appears blurry and is clearly a reoccurring human trait. The unfolding drama of a collapsing market ends up being a valuable lesson on “risk,” especially for those building new economies and gearing up for new cycles or financial systems. After all, the last three years provided basic lessons on the use of leverage, understanding inefficiencies in rules and systems, fragility of financial institutions and importantly how intervention is unavoidable.
Early Hints
The message from active markets today is to risk moderately trading at a discount, while fear is not as pricey as before. It is hard to visualize it this way, but if the playing field is not disrupted and financial institutions do not collapse then cycles would seek bargains through purchases of shares at cheap prices. The results from the current earnings season can refute or confirm the much discussed hazy macro environment. This upcoming week 1/3 of S&P 500 companies will showcase where they stood last quarter versus expectations. After several irrational trading levels and patterns this summer, quarterly results can provide a better read on market pricing. Thus, it is not an accident in the last two weeks, where participants repositioned investment ideas ahead of a long-awaited sentiment shift. In fact, October 4th marked a peak for volatility which has declined gradually. Similarly, that same day marked a bottom for US 10 Year Treasuries at 1.71%, which showcases a mild shift away from safer instruments.
The Search for Good
Typically markets find a way to constantly seek "good news" while remaining at times overly sensitive to bad news. Now, the hopeful are waiting for the European resolution combined with the jobs bill as well as bigger initiatives by the Federal Reserve. All this reflects anticipation of results or causes that spark good outcomes. While typically the argument of historical charts state that US equity markets end up higher. The common thought has been severely challenged in the ‘lost’ decade and potential system breakdown. Buying cheap is a familiar point that has backfired in previous months as the usual buyer revisits their luck.
On valuation basis, fundamentals appear favorable for buyers; for example, when looking at earnings yield. “The S&P 500’s earnings yield is 7.5 percent, close to the highest level since 2009.” (Bloomberg, October 17, 2011). Relative to other asset classes, buying stocks is not as bad when considering the low rate environment. That may work if earnings actually moderate and showcase some stability. In terms of inflation and interest rates, both are expected to stay low based on the recent Federal Reserve message. Now, looking into 3-5 year projections, this might change while surprising us with high inflation; but, most are focused on trying to survive the next few weeks.
The S&P 500 index turned slightly positive for the year as this feeds into the growing appetite for a year-end rally. Interestingly, the Nasdaq 100 is few percentages away from making 10 year highs. Two major sell-offs in spring and summer, reflected weakness of all sorts but indexes have an illusory feel to them. The buyer appetite is looming as early evidence of momentum picks up. “77% of S&P 500 stocks are now above their 50-day moving averages, which is the highest level seen since the April highs. Bulls have been waiting for a nice expansion in underlying breadth for confirmation of a rally, and now they seem to have it.” (Bespoke Investments, October 14, 2011). Yet many wonder if bad news is fully digested or merely tiresome. For example, Spain’s credit rating downgrade did not affect the market that much since it was the third occurrence in the past three years. The optimist will argue that we’ve been battle tested and bruised at this point. Rehashing false optimism is not that surprising, rather the duration of mild cheerfulness is the rewarding mystery.
Article Quotes:
“The Government Debt rose over $5.5 trillion since 2008, but the Private Debt declined by close to $5 trillion during the same period of time. This is the first time since the Great Depression that private debt declined at all-even a dime. A significant part of Private Debt came from Consumer Debt where the revolving and credit market debt declined about $140 billion (from $2.6 tn. to $2.45 tn. ) and the total household debt declined from $14 tn. to $13.3 tn. ……We find it incredible that there was not one quarterly decline in household debt since 1952 (as far back as we could find data) until the third quarter of 2008 from where we've had 12 consecutive quarterly declines. We didn't even have one quarter of decline during the worst recessions since the Great Depression (up until the recent Financial Crises in 2008) in 1973-74 and 1981-82-- NOT ONE!! During the period from the year 2000 to 2008 household debt rose from 68% of GDP to 100% of GDP. But, since the 3rd quarter of 2008 we had 12 consecutive quarterly declines as total household debt declined by almost $1 tn.” (Comstock Partners, Inc October 13, 2011)
“Qu Hongbin, chief economist for China at HSBC, said in a research note that the debt crises in the US and the eurozone had dampened global consumer confidence for Chinese goods, leading to a slower expansion of the nation's exports. In the first half, exports contributed nearly zero to the growth of China's economy, while gross domestic product (GDP) rose 9.7% in the period. GDP may grow by 8.5% to 9% this year, and stay at that level over the next few years, Qu estimated. This compares with 9.5% growth in this year's second quarter compared with a year earlier, 9.7% in the first three months and last year's 10.4%. Chinese exports grew 24% year-on-year to US$874.3 billion in the first half, compared with 35.2% growth during the same period of 2010, according to the General Administration of Customs. Year-on-year export growth has been declining month-by-month during the first half, dropping to 17.9% in June from 37.7% in January.” (Asian Times, October 14, 2011)
Levels:
S&P 500 Index [1224.58] – Trading at the higher end of recent consolidation range between 1100 and 1200
Crude [$86.80] – Bottoming phase builds mildly. Next key resistance level stands at $90.
Gold [$1678.00] – Early signs of re-acceleration after holding at $1650 range. Collective buyer showed interest around $1600 and mostly sold at $1800. A breakout or breakdown can spark a noteworthy trend for momentum traders.
DXY – US Dollar Index [76.63] – Struggling to sustain last months’ strength in US dollar. Perhaps this reinforces that the strengthened dollar theme has yet to develop.
US 10 Year Treasury Yields [2.24%] – Last few weeks are witnessing a rise in yields from annual lows. The current move appears stretched as confirmation is desperately required.
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, October 10, 2011
Market Outlook | October 10, 2011
“Truth can be stated in a thousand different ways, yet each one can be true.” - Swami Vivekananda (1863-1902)
Collective Confusion
Equal discomfort among buyers and sellers is becoming clearer in global stock and bond markets. This appears to make more sense since there are no major new bubbles to burst as we're still unbundling the remains of the 2008 crisis. Meanwhile, there are no significant booms or rallies to "die for" since March 2009. Even two years ago, the rally was a matter of an inevitable bounce, rather than a sustainable fundamental improvement. This is simply a directional deadlock combined with unsolved, yet well-known, worrisome topics.
Sanity Search
The last fifteen day moving average for the Volatility Index (VIX) sits at nearly 39. Basically, volatility is trading toward the higher end of the historical trend; although not quite at 2008 levels, it is still very high. Suspense builds as overall sentiment remains negative, without taking into account the growing political and social uprisings. Broad stock market indexes may consolidate around recent lows, but sideways patterns are not to be confused with a glaring shift in true growth. Even so, any minor move in labor data can be translated into a signal of hope at any given time. In addition, the much debated interventions and government plans are eagerly awaited as a catalyst for growth. Yet, the unwinding and de-risking era is felt from the consumer to the investor.
Meanwhile, consumers are bound to adjust for wage changes and other new spending realities which may resurface in this imbalanced global economy. One can observe and conclude the waning US consumption is seen in lower prices for crude, and eventually, along with a low rate environment. In practical terms, crude demand appears to decline, while mortgage rates are at historic lows. Frankly, this impacts long-term consumer and investor behavior, as the implications of weak economic conditions are obvious to spot. For now, sensitive day to day moves are too turbulent to make a calmer assessment or to project conclusions.
Mislabeling?
Perhaps the one bubble left to burst, or yet forming, is the recent shift to "safe assets.” US Treasuries may seem attractive for panic days but at some point foreign investors will have to reconsider alternatives. Commodities are retreating and Gold is taking a breather. Perhaps when the dust settles managers will reassess the meaning of safety. Importantly, the currency wars are alive and well, as the race to devalue currencies is the rapid fashionable statement facing countries’ leaders. Thus, the faith of emerging markets as a reliable growth story is too unclear, while inflation is the bigger discussion point. Through this temporary and mild chaos, the dollar recovery is the key mystery, especially to Gold owners. Last month served as an early wake-up call given the fragile relative strength of the dollar, which doesn’t provide strong enough of a statement for years ahead.
Desperate Calling
There are further downgrades of nations and banks, a quantitative easing announcement from the Bank of England and more short-selling bans in France. These obvious attempts to restore faith, while emphasizing the confirmation of weakness, are reminders that we’ve heard it all at this point. Panic alerts have been felt numerous times, and like it or not, the pressure is handed off to politicians. Even central bankers are suggesting that the solution is in the hands of policymakers. Unprecedented as it may be, that’s shocking and hard to accept for “pure capitalism.” Perhaps a positive perception can be created to stimulate the real economy, which takes a while. One fact is clear, problems do not go away overnight and economic growth requires more than posturing, especially when in unchartered territory.
Article Quotes:
“My impression is that the scare-mongering of self-serving financial "experts" on Wall Street is shortly about to become deafening. It would be catastrophe, utter catastrophe, no, Armageddon, to let the global financial system collapse - collapse! - because the world as we know it will indeed collapse, as day follows night, if bondholders, who knowingly and voluntarily take risk and invest at a spread, are actually allowed to lose anything! We cannot, in a thinking society, allow losses to befall risk-takers who make reckless loans and bad investments. We must, must at all costs, divert money away from health, education, and welfare, in order to save these companies from failure, because neither health, nor education, nor welfare are even possible unless we save the financial system from unthinkable meltdown. We have no choice. No choice at all. They are too big to fail, and we cannot hesitate - they must be saved, for the sake of our children, for our children's children, for our freedom, for the flag, and to honor the legacy of our forefathers, so that these Champions of Disfigured Capitalism can continue to do their vital work with impunity, unbound by any of the incentives or consequences that actually allow capitalism to work in practice.” (John Hussman, October 3, 2011)
“We have just had 30 years in which the ideology of the free market has been dominant. And yet, during that time, what has happened to the percentage of the British economy controlled by the Government? It has remained static, at around 45 per cent – or, by some calculations, increased slightly. The state, that is, has been able to increase its control even when there has been almost unanimous agreement that it would be far better if it were to control a much smaller slice of our collective wealth. What, then, is likely to happen now that free markets are going out of fashion, and state supervision is becoming an intellectually respectable alternative? The short answer is: a rapid increase in the portion of the economy controlled by the state. The process has its own momentum. It never stops of its own accord. Everyone should know what it will mean: permanent economic stasis, if not contraction; a lack of innovation and development; a diminution of opportunity for everyone; and an enormous increase in bureaucracy, waste and inefficiency. That has been the long-term legacy of state control everywhere it has been tried.” (The Telegraph, October 10, 2011)
Levels:
S&P 500 Index [1155.46] – Growing evidence of buyer interest around 1120 in the last few weeks. Interestingly, the 15 day average stands at 1153.85 as the consolidation phase continues to materialize.
Crude [$82.98] – Buyers appear to find value around $80 within the existing downtrend.
Gold [$1652.00] – Bottoming process between 1600 and 1650 as optimists seek price re-acceleration.
DXY – US Dollar Index [78.55] – Last month presented a glimpse of a recovery, yet the real test will be on the currency’s ability to surpass 80.
US 10 Year Treasury Yields [2.07%] – Back to 2% range after hitting multi-year lows of 1.67% on September 23, 2011.
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 Confusion
Equal discomfort among buyers and sellers is becoming clearer in global stock and bond markets. This appears to make more sense since there are no major new bubbles to burst as we're still unbundling the remains of the 2008 crisis. Meanwhile, there are no significant booms or rallies to "die for" since March 2009. Even two years ago, the rally was a matter of an inevitable bounce, rather than a sustainable fundamental improvement. This is simply a directional deadlock combined with unsolved, yet well-known, worrisome topics.
Sanity Search
The last fifteen day moving average for the Volatility Index (VIX) sits at nearly 39. Basically, volatility is trading toward the higher end of the historical trend; although not quite at 2008 levels, it is still very high. Suspense builds as overall sentiment remains negative, without taking into account the growing political and social uprisings. Broad stock market indexes may consolidate around recent lows, but sideways patterns are not to be confused with a glaring shift in true growth. Even so, any minor move in labor data can be translated into a signal of hope at any given time. In addition, the much debated interventions and government plans are eagerly awaited as a catalyst for growth. Yet, the unwinding and de-risking era is felt from the consumer to the investor.
Meanwhile, consumers are bound to adjust for wage changes and other new spending realities which may resurface in this imbalanced global economy. One can observe and conclude the waning US consumption is seen in lower prices for crude, and eventually, along with a low rate environment. In practical terms, crude demand appears to decline, while mortgage rates are at historic lows. Frankly, this impacts long-term consumer and investor behavior, as the implications of weak economic conditions are obvious to spot. For now, sensitive day to day moves are too turbulent to make a calmer assessment or to project conclusions.
Mislabeling?
Perhaps the one bubble left to burst, or yet forming, is the recent shift to "safe assets.” US Treasuries may seem attractive for panic days but at some point foreign investors will have to reconsider alternatives. Commodities are retreating and Gold is taking a breather. Perhaps when the dust settles managers will reassess the meaning of safety. Importantly, the currency wars are alive and well, as the race to devalue currencies is the rapid fashionable statement facing countries’ leaders. Thus, the faith of emerging markets as a reliable growth story is too unclear, while inflation is the bigger discussion point. Through this temporary and mild chaos, the dollar recovery is the key mystery, especially to Gold owners. Last month served as an early wake-up call given the fragile relative strength of the dollar, which doesn’t provide strong enough of a statement for years ahead.
Desperate Calling
There are further downgrades of nations and banks, a quantitative easing announcement from the Bank of England and more short-selling bans in France. These obvious attempts to restore faith, while emphasizing the confirmation of weakness, are reminders that we’ve heard it all at this point. Panic alerts have been felt numerous times, and like it or not, the pressure is handed off to politicians. Even central bankers are suggesting that the solution is in the hands of policymakers. Unprecedented as it may be, that’s shocking and hard to accept for “pure capitalism.” Perhaps a positive perception can be created to stimulate the real economy, which takes a while. One fact is clear, problems do not go away overnight and economic growth requires more than posturing, especially when in unchartered territory.
Article Quotes:
“My impression is that the scare-mongering of self-serving financial "experts" on Wall Street is shortly about to become deafening. It would be catastrophe, utter catastrophe, no, Armageddon, to let the global financial system collapse - collapse! - because the world as we know it will indeed collapse, as day follows night, if bondholders, who knowingly and voluntarily take risk and invest at a spread, are actually allowed to lose anything! We cannot, in a thinking society, allow losses to befall risk-takers who make reckless loans and bad investments. We must, must at all costs, divert money away from health, education, and welfare, in order to save these companies from failure, because neither health, nor education, nor welfare are even possible unless we save the financial system from unthinkable meltdown. We have no choice. No choice at all. They are too big to fail, and we cannot hesitate - they must be saved, for the sake of our children, for our children's children, for our freedom, for the flag, and to honor the legacy of our forefathers, so that these Champions of Disfigured Capitalism can continue to do their vital work with impunity, unbound by any of the incentives or consequences that actually allow capitalism to work in practice.” (John Hussman, October 3, 2011)
“We have just had 30 years in which the ideology of the free market has been dominant. And yet, during that time, what has happened to the percentage of the British economy controlled by the Government? It has remained static, at around 45 per cent – or, by some calculations, increased slightly. The state, that is, has been able to increase its control even when there has been almost unanimous agreement that it would be far better if it were to control a much smaller slice of our collective wealth. What, then, is likely to happen now that free markets are going out of fashion, and state supervision is becoming an intellectually respectable alternative? The short answer is: a rapid increase in the portion of the economy controlled by the state. The process has its own momentum. It never stops of its own accord. Everyone should know what it will mean: permanent economic stasis, if not contraction; a lack of innovation and development; a diminution of opportunity for everyone; and an enormous increase in bureaucracy, waste and inefficiency. That has been the long-term legacy of state control everywhere it has been tried.” (The Telegraph, October 10, 2011)
Levels:
S&P 500 Index [1155.46] – Growing evidence of buyer interest around 1120 in the last few weeks. Interestingly, the 15 day average stands at 1153.85 as the consolidation phase continues to materialize.
Crude [$82.98] – Buyers appear to find value around $80 within the existing downtrend.
Gold [$1652.00] – Bottoming process between 1600 and 1650 as optimists seek price re-acceleration.
DXY – US Dollar Index [78.55] – Last month presented a glimpse of a recovery, yet the real test will be on the currency’s ability to surpass 80.
US 10 Year Treasury Yields [2.07%] – Back to 2% range after hitting multi-year lows of 1.67% on September 23, 2011.
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, October 03, 2011
Market Outlook | October 3, 2011
“We must embrace pain and burn it as fuel for our journey.” - Kenji Miyazawa (1896-1933)
Realignment and Realities
At this point of the cycle, the question is whether or not we have endured enough pain. Following a lost decade, triggered by the peak in 2000, the longer-term cycle supports a few ugly years ahead for traditional assets. It’s quite evident we are in a period of deleveraging, with a reassessment of sovereign risk and a makeover of financial systems. Through this cycle, Europe reminds us of the consequences of a fragile banking system and the interlinked nature of the debt crisis. For strategists, this fails to restore confidence in previous models designed to forecast the next five to ten years. There will indeed be reshuffling in sectors where unraveling constrains the pace of a recovery.
Beyond the political noise and radical financial resolutions, the markets themselves demonstratively showcase the lack of confidence coinciding with the failure of stimulus efforts. As usual, reacting to the truth is unfortunately more painful than the artful process plaguing fund managers. Of course, weak periods spark further emotional responses as frustration echoes in participants and even politicians. Usually an election year in the US has some relevance on market behavior; notably, the third year of a presidential cycle typically generates some optimism for a turnaround. However, this time the impact on the business cycle may be unlike previous years, given the growing list of financial and economic worries. The robust status of the developed world, or capitalism, is not too comforting for a global investor. This is entering unchartered territory for private and public decision makers and risk managers of this generation. The stakes are higher, while the experience to deal with crisis is rarely taught in business schools or banking training programs.
Essentially, more time is needed to accept the new realities before sparking a tangible change. Common bullish clichés have been nearly used up since February 2011. Examples include: valuations are cheap, faith in pending intervention, “Don’t fight the Fed,” and historical evidence of markets ending up higher. Those applying these concepts have noticed the market forces are too entrenched in lingering debt and economic issues. Therefore, when making timely trades one should stay cautious, so as to not lose the essence of this backdrop. Basically, denial was the mistake leading to and from the events of 2008. Thus, maybe now enough observers, consumers, and policymakers are begrudgingly adjusting overall expectations in line with truth. Before being washed up with growing negative sentiments, one should not forget that in its current state the US offers relative attractiveness, even in this secular bear market.
Safe for Now
Accumulating shocks forced investors to scramble for liquidity or safety. After all, when in crisis human nature dictates self-preservation behavior. It is simply a collective response to cling to basic investment approaches while deleveraging. Gold, Treasuries and the US dollar remind us that a “reset” of new realities translates into inflow toward the liquid assets which are perceived to be safe. In looking ahead, assuming that “safe” assets are immune to underperformance may be equally troublesome once the dust settles. In due time, tracking movement away from liquid instruments can provide some clues as to shifts in risk appetite. For now, shelter is in high demand while other benchmarks are not putting up a relative fight to attract risky capital.
Navigating Year-End
Entering a new season, and a new quarter, brings some hopeful thoughts for those with the ability to quickly erase memories. Last quarter damaged most equity and commodity managers. It was a historic July to September period, when considering annual lows in stock markets, very low yields, currency adjustments and interventions, low bond offerings and tense government deliberations. Interestingly, last month witnessed the Dollar higher, while Gold showed its first major dent in a while. Now, the S&P 500 and the commodity index (CRB) are down over 10% for the year. Managers are faced with either doubling down to play catch up before year-end or throwing in the towel with desperate macro conditions. Surely, both positions are discomforting in a period of liquidity, obsession and increased sensitivity. Therefore, in the near-term, closely watching the impact of currency adjustments, actual results of the European resolution and Federal Reserve action can serve as indicators for potential catalysts within this downturn.
Article Quotes:
“Why should we have any confidence that a deal can be done this year, given how badly the Greek support package has been handled? Since most of the public thinks a default has already taken place, would there really be that much of a shock from a ‘hard default’, as distinct from a negotiated exchange offer? Yes. It’s not the write-offs of Greek state debt as such that would be the problem, but the possible consequences to the stability of the euro area payments system. If the Greek government does not have the cash to pay for essential services as well as debt service, say in December, then it might have to resort to its powers under Article 65 of the latest version of the European treaty. Those allow for limits on the otherwise free movement of capital for the purposes of taxation, or ‘supervision of financial institutions’, as well as “public policy or public security.” (Financial Times, October 2, 2011)
“From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.” (Michael Lewis, Vanity Fair, November, 2011)
Levels:
S&P 500 Index [1131.42] – Flirting near annual lows and few points removed from 15 day moving average of 1171. Meanwhile, the glaring lows are being closely watched and sit at 1101.54.
Crude [$79.20] – Buyers in the past few weeks found $80 attractive after heavy selling at $92 and $100. Buyers’ patience is tested as the commodity continues its five month decline.
Gold [$1622.30] – Back to early August’s pre-frantic ranges, between 1600 and 1650. From September 6 peak to September 26, the commodity declined over 15%. The ultimate test will come in weeks ahead while the uptrend and positive annual return remains intact.
DXY – US Dollar Index [78.55] – Maintaining an uptrend that sparked last month, however the follow through is not fully convincing. Next key and previously familiar level stands around 80.
US 10 Year Treasury Yields [1.91%] – No major signs of a recovery while trading at the lower range of recent lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Realignment and Realities
At this point of the cycle, the question is whether or not we have endured enough pain. Following a lost decade, triggered by the peak in 2000, the longer-term cycle supports a few ugly years ahead for traditional assets. It’s quite evident we are in a period of deleveraging, with a reassessment of sovereign risk and a makeover of financial systems. Through this cycle, Europe reminds us of the consequences of a fragile banking system and the interlinked nature of the debt crisis. For strategists, this fails to restore confidence in previous models designed to forecast the next five to ten years. There will indeed be reshuffling in sectors where unraveling constrains the pace of a recovery.
Beyond the political noise and radical financial resolutions, the markets themselves demonstratively showcase the lack of confidence coinciding with the failure of stimulus efforts. As usual, reacting to the truth is unfortunately more painful than the artful process plaguing fund managers. Of course, weak periods spark further emotional responses as frustration echoes in participants and even politicians. Usually an election year in the US has some relevance on market behavior; notably, the third year of a presidential cycle typically generates some optimism for a turnaround. However, this time the impact on the business cycle may be unlike previous years, given the growing list of financial and economic worries. The robust status of the developed world, or capitalism, is not too comforting for a global investor. This is entering unchartered territory for private and public decision makers and risk managers of this generation. The stakes are higher, while the experience to deal with crisis is rarely taught in business schools or banking training programs.
Essentially, more time is needed to accept the new realities before sparking a tangible change. Common bullish clichés have been nearly used up since February 2011. Examples include: valuations are cheap, faith in pending intervention, “Don’t fight the Fed,” and historical evidence of markets ending up higher. Those applying these concepts have noticed the market forces are too entrenched in lingering debt and economic issues. Therefore, when making timely trades one should stay cautious, so as to not lose the essence of this backdrop. Basically, denial was the mistake leading to and from the events of 2008. Thus, maybe now enough observers, consumers, and policymakers are begrudgingly adjusting overall expectations in line with truth. Before being washed up with growing negative sentiments, one should not forget that in its current state the US offers relative attractiveness, even in this secular bear market.
Safe for Now
Accumulating shocks forced investors to scramble for liquidity or safety. After all, when in crisis human nature dictates self-preservation behavior. It is simply a collective response to cling to basic investment approaches while deleveraging. Gold, Treasuries and the US dollar remind us that a “reset” of new realities translates into inflow toward the liquid assets which are perceived to be safe. In looking ahead, assuming that “safe” assets are immune to underperformance may be equally troublesome once the dust settles. In due time, tracking movement away from liquid instruments can provide some clues as to shifts in risk appetite. For now, shelter is in high demand while other benchmarks are not putting up a relative fight to attract risky capital.
Navigating Year-End
Entering a new season, and a new quarter, brings some hopeful thoughts for those with the ability to quickly erase memories. Last quarter damaged most equity and commodity managers. It was a historic July to September period, when considering annual lows in stock markets, very low yields, currency adjustments and interventions, low bond offerings and tense government deliberations. Interestingly, last month witnessed the Dollar higher, while Gold showed its first major dent in a while. Now, the S&P 500 and the commodity index (CRB) are down over 10% for the year. Managers are faced with either doubling down to play catch up before year-end or throwing in the towel with desperate macro conditions. Surely, both positions are discomforting in a period of liquidity, obsession and increased sensitivity. Therefore, in the near-term, closely watching the impact of currency adjustments, actual results of the European resolution and Federal Reserve action can serve as indicators for potential catalysts within this downturn.
Article Quotes:
“Why should we have any confidence that a deal can be done this year, given how badly the Greek support package has been handled? Since most of the public thinks a default has already taken place, would there really be that much of a shock from a ‘hard default’, as distinct from a negotiated exchange offer? Yes. It’s not the write-offs of Greek state debt as such that would be the problem, but the possible consequences to the stability of the euro area payments system. If the Greek government does not have the cash to pay for essential services as well as debt service, say in December, then it might have to resort to its powers under Article 65 of the latest version of the European treaty. Those allow for limits on the otherwise free movement of capital for the purposes of taxation, or ‘supervision of financial institutions’, as well as “public policy or public security.” (Financial Times, October 2, 2011)
“From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.” (Michael Lewis, Vanity Fair, November, 2011)
Levels:
S&P 500 Index [1131.42] – Flirting near annual lows and few points removed from 15 day moving average of 1171. Meanwhile, the glaring lows are being closely watched and sit at 1101.54.
Crude [$79.20] – Buyers in the past few weeks found $80 attractive after heavy selling at $92 and $100. Buyers’ patience is tested as the commodity continues its five month decline.
Gold [$1622.30] – Back to early August’s pre-frantic ranges, between 1600 and 1650. From September 6 peak to September 26, the commodity declined over 15%. The ultimate test will come in weeks ahead while the uptrend and positive annual return remains intact.
DXY – US Dollar Index [78.55] – Maintaining an uptrend that sparked last month, however the follow through is not fully convincing. Next key and previously familiar level stands around 80.
US 10 Year Treasury Yields [1.91%] – No major signs of a recovery while trading at the lower range of recent lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, September 26, 2011
Market Outlook | September 26, 2011
“Considering how dangerous everything is, nothing is really very frightening.” - Gertrude Stein (1874-1946)
When weakening economic realities are mirrored in financial markets, then there is not much debate as to the current conditions. In other words, previous stimulus efforts may have held up equity markets while failing to inspire tangible growth. The low rate policy and other stimulus efforts are not deceiving those involved, as the truth is slowly being discovered. In short, when reality harshly confronts subjective perception the outcome is profound. That’s the daunting downtrend in nearly all asset classes and developed economies. Importantly, the financial system is less welcoming for those mapping out plans from six months to three years. Price declines tend to flush out existing fears and “deflate” prior hopeful estimates. Of course, this is an ugly but necessary process that’s taking place as the S&P 500 Index attempts to hold 1120, while other international indexes sit at annual lows.
Fragile Banking
Through this puzzle, the central banks are trying to restore confidence against an less forgiving crowd. When Quantitative Easing 2 ended in June of this year, a dose of uncertainty was already looming, and clearly contributed to July’s explosive negative market response. Perhaps, medication creates more side effects, and the rest is more about clinging to survival. This theory will be tested especially after the disappointing result of QE2, which has augmented the number of skeptical observers. Thus, participants will digest the pending results of further low rates, along with the potential Quantitative Easing part 3. Let’s not forget, three Federal Reserve officials dissented last week, showcasing lack of agreement. It remains a tense period in which the central bank can hardly afford to lose credibility from participants or political establishments. However, the verdict of recent Fed actions remains too early to judge.
Simply put, it’s hard to dismiss bank downgrades (US and Europe), and ongoing legal and balance sheet pressures persisting daily. Interestingly, Bank Index (BKX) peaked on February 18, 2011 a few months ahead of the rest of the broad and emerging markets. Thus, this negative sentiment in place has been noticed by insiders. Clearly, the environment is beyond bubble bursting, or reshuffling of risk appetite by investors. Basically, the current banking environment remains too tricky to deal with and fragile.
Directional Discomfort
There is enough discomfort to go around for buyers and sellers of various asset classes. As a start, Gold owners feel slightly shaken by the recent pause within the well-defined upside momentum. Plus, fund redemptions are forcing mangers to sell winners, with Gold being one of the few winners in recent months. Thus, selling pressure in the commodity (i.e., quasi currency) is triggering some questions for future trends. At the same time, the US dollar uptick is now a mild trend that is slowly making a strong macro statement against other currencies, as well as the “inverse Gold” trade.
In terms of global equities, heavy betters against emerging markets or US stocks fear a potential sharp recovery heading into year-end. There is not much comfort in doubling down on downtrend moves after the Emerging Market index (EEM) has already dropped nearly 30 percent since May 2, 2011. Although it has been a profitable trade to go against markets, reversals are inevitable which can test even the strongest convictions. This seems comforting to those who envision a sustainable downside move that would take us back to 2008 ranges. However, this remains a rather aggressive point to claim, even with a battered sentiment.
On the other side, buyers looking for “cheap” value are contemplating the realities behind improving fundamentals. The pace of M&A deals has slowed, and hesitancy has increased in business decisions. Therefore, sticking to previous estimates leads to mismatched expectations. Value seekers sway between deciding if prices are cheap enough and exercising further patience. Waiting for confirmations seems like the easier path, but with year-end approaching risk takers may look to jump in ahead of the fourth quarter. To add further spice, a slowing China, increasing volatility and an unresolved Europe can drive many more to the sidelines or hunting for “safe” assets. Yet, cash does not pay much with low rates, equities have not paid due to weak performance and momentum themes such as commodities are slowing. Thus, pent up demands for new investments are bound to light up soon enough.
Types of Sellers
1. Profit takers on previous positions
2. Unenthused by fundamentals and earning potentials
3. Forced to sell based on fund redemptions or liquidation
4. Reducing overall exposure due to a lack of faith in the financial system
For any participant, understanding the nature of sellers in each asset might provide the next clue for when to buy, or the magnitude of the selling pressure. During jittery periods, investment models will have to adjust to these dynamics, as emotional responses are leading decisions. Most can agree that comfort is a scarce commodity, discomfort appears relatively normal, and fear is in abundance.
Article Quotes:
“The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return. … A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.” (The Economist, September 24, 2011)
“Although China may look like a rising economic and political competitor today, that situation could quickly reverse. The wildly erroneous predictions of "Japan as Number 1" three decades ago should warn the outside world not to over-react to the "China threat". Punitive US measures in response to China's mercantilist trade and currency policies and disregard for intellectual property rights, however justifiable on the merits, could create the impression in China that the US has created, or at least hastened and deepened, its economic stagnation. The United States should avoid providing the CPC regime any excuse to claim the United States is the cause of China's woes. If the Chinese people as a whole ever adopt that view, US-China relations could be poisoned for decades… The United States and the international community should also recognize that, as China's economy deteriorates, any confrontational military maneuvers are likely to be met with escalation rather than compromise. (Asia Times, September 15, 2011)
Levels:
S&P 500 Index [1136.43] – Barely holding above early August lows, while attempting to bottom out above 1120. It closed at the lower end of the recent range.
Crude [$80] – Along with global equities, the commodity topped out in early spring. Currently the challenge is to stay above $80.
Gold [$1689] – Previously, 1750 marked a key level for buyers to reenter. Yet, the selling pressure is mounting in the near-term, as it remains above its 200 day moving average of 1520.
DXY – US Dollar Index [78.50] – April to August provided a dull and neutral period. There has since been an explosive upside move of 7% as of August 29.
US 10 Year Treasury Yields [1.83%] – Multi-generational lows. 1.67% marks the intraday lows reached on September 23.
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.
When weakening economic realities are mirrored in financial markets, then there is not much debate as to the current conditions. In other words, previous stimulus efforts may have held up equity markets while failing to inspire tangible growth. The low rate policy and other stimulus efforts are not deceiving those involved, as the truth is slowly being discovered. In short, when reality harshly confronts subjective perception the outcome is profound. That’s the daunting downtrend in nearly all asset classes and developed economies. Importantly, the financial system is less welcoming for those mapping out plans from six months to three years. Price declines tend to flush out existing fears and “deflate” prior hopeful estimates. Of course, this is an ugly but necessary process that’s taking place as the S&P 500 Index attempts to hold 1120, while other international indexes sit at annual lows.
Fragile Banking
Through this puzzle, the central banks are trying to restore confidence against an less forgiving crowd. When Quantitative Easing 2 ended in June of this year, a dose of uncertainty was already looming, and clearly contributed to July’s explosive negative market response. Perhaps, medication creates more side effects, and the rest is more about clinging to survival. This theory will be tested especially after the disappointing result of QE2, which has augmented the number of skeptical observers. Thus, participants will digest the pending results of further low rates, along with the potential Quantitative Easing part 3. Let’s not forget, three Federal Reserve officials dissented last week, showcasing lack of agreement. It remains a tense period in which the central bank can hardly afford to lose credibility from participants or political establishments. However, the verdict of recent Fed actions remains too early to judge.
Simply put, it’s hard to dismiss bank downgrades (US and Europe), and ongoing legal and balance sheet pressures persisting daily. Interestingly, Bank Index (BKX) peaked on February 18, 2011 a few months ahead of the rest of the broad and emerging markets. Thus, this negative sentiment in place has been noticed by insiders. Clearly, the environment is beyond bubble bursting, or reshuffling of risk appetite by investors. Basically, the current banking environment remains too tricky to deal with and fragile.
Directional Discomfort
There is enough discomfort to go around for buyers and sellers of various asset classes. As a start, Gold owners feel slightly shaken by the recent pause within the well-defined upside momentum. Plus, fund redemptions are forcing mangers to sell winners, with Gold being one of the few winners in recent months. Thus, selling pressure in the commodity (i.e., quasi currency) is triggering some questions for future trends. At the same time, the US dollar uptick is now a mild trend that is slowly making a strong macro statement against other currencies, as well as the “inverse Gold” trade.
In terms of global equities, heavy betters against emerging markets or US stocks fear a potential sharp recovery heading into year-end. There is not much comfort in doubling down on downtrend moves after the Emerging Market index (EEM) has already dropped nearly 30 percent since May 2, 2011. Although it has been a profitable trade to go against markets, reversals are inevitable which can test even the strongest convictions. This seems comforting to those who envision a sustainable downside move that would take us back to 2008 ranges. However, this remains a rather aggressive point to claim, even with a battered sentiment.
On the other side, buyers looking for “cheap” value are contemplating the realities behind improving fundamentals. The pace of M&A deals has slowed, and hesitancy has increased in business decisions. Therefore, sticking to previous estimates leads to mismatched expectations. Value seekers sway between deciding if prices are cheap enough and exercising further patience. Waiting for confirmations seems like the easier path, but with year-end approaching risk takers may look to jump in ahead of the fourth quarter. To add further spice, a slowing China, increasing volatility and an unresolved Europe can drive many more to the sidelines or hunting for “safe” assets. Yet, cash does not pay much with low rates, equities have not paid due to weak performance and momentum themes such as commodities are slowing. Thus, pent up demands for new investments are bound to light up soon enough.
Types of Sellers
1. Profit takers on previous positions
2. Unenthused by fundamentals and earning potentials
3. Forced to sell based on fund redemptions or liquidation
4. Reducing overall exposure due to a lack of faith in the financial system
For any participant, understanding the nature of sellers in each asset might provide the next clue for when to buy, or the magnitude of the selling pressure. During jittery periods, investment models will have to adjust to these dynamics, as emotional responses are leading decisions. Most can agree that comfort is a scarce commodity, discomfort appears relatively normal, and fear is in abundance.
Article Quotes:
“The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return. … A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.” (The Economist, September 24, 2011)
“Although China may look like a rising economic and political competitor today, that situation could quickly reverse. The wildly erroneous predictions of "Japan as Number 1" three decades ago should warn the outside world not to over-react to the "China threat". Punitive US measures in response to China's mercantilist trade and currency policies and disregard for intellectual property rights, however justifiable on the merits, could create the impression in China that the US has created, or at least hastened and deepened, its economic stagnation. The United States should avoid providing the CPC regime any excuse to claim the United States is the cause of China's woes. If the Chinese people as a whole ever adopt that view, US-China relations could be poisoned for decades… The United States and the international community should also recognize that, as China's economy deteriorates, any confrontational military maneuvers are likely to be met with escalation rather than compromise. (Asia Times, September 15, 2011)
Levels:
S&P 500 Index [1136.43] – Barely holding above early August lows, while attempting to bottom out above 1120. It closed at the lower end of the recent range.
Crude [$80] – Along with global equities, the commodity topped out in early spring. Currently the challenge is to stay above $80.
Gold [$1689] – Previously, 1750 marked a key level for buyers to reenter. Yet, the selling pressure is mounting in the near-term, as it remains above its 200 day moving average of 1520.
DXY – US Dollar Index [78.50] – April to August provided a dull and neutral period. There has since been an explosive upside move of 7% as of August 29.
US 10 Year Treasury Yields [1.83%] – Multi-generational lows. 1.67% marks the intraday lows reached on September 23.
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 19, 2011
Market Outlook | September 19, 2011
“Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgment, repeated every day.” - Jim Rohn (1930-2009)
Much attention is consumed on the “failure” of various systems, plans and policies. The European banking system is in shambles, and the residues of the sovereign debt crisis have not fully played out. These are tiresome topics desperately needing resolution, as the era of postponement is no longer viable. The pain felt from the real economy contributes to a lack of patience in the audience.
In the near term, the Federal Reserve is already providing dollar liquidity to European banks. In a sensitive environment bad news is magnified (downgrades or weak growth), while infecting or at least influencing other economies at a rapid pace. There is no escape from this matter, even for the strongest economy in Europe. “Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital” (Reuters, September 18, 2011). This is a historic period where the Eurozone is being redefined, with desperate times leading to ugly and unimaginable results.
Harsh Landscape
Overnight scrambles, quick solutions and projection of confidence are required by European leaders during this “reconstruction” period. Plus, the details of the current banking procedures, along with consequences of alternative solutions, are sensitive just as much as complex. In other words, the pressing problems are too cumbersome for any political slogans in Europe or the US. Obviously, the nature of governing and conducting markets inevitably includes political and stimulus constraints. This theme merely sums up most of this year, especially in Europe when dealing with various nations. Interestingly, the bailout debate (similar to the US banks in 2008) is not erasable from near term memories, and heated debates are only normal at this point.
Relative Realities
Despite the backdrop of worries, the downtrend message took a brief breather in broad index performance. The S&P 500 index appreciated, by more than 5% last week. Major indexes are climbing back in an attempt to break even for the year. Albeit, it’s a slow and “temporary” recovery process, after the severe August demise. The relative argument of the US is on the radar for investment managers. Clearly, a significant shift to treasuries, as well as the Dollar, in recent months reiterates that message loudly. Select investors can afford to be choosy in purchasing as majority managers flirt with safer positions.
After the entire saga, the relative argument reminds us that the leadership in financial markets is in the US, at least for now. Growth seekers are not too impressed in this setup, as much as distressed, along with value asset buyers who can find opportune ideas. Further clues lie in the next few days, as to the faith of quantitative easing, and intermediate term interest rate policy. Curious minds have wondered if central bank tools are overly exhausted, especially with low historic rates. Others wonder if the summer sell-offs created such a deeply beaten up sentiment, in which a bottoming process formed in mid to late autumn. Continued stabilization in pricing, along with declining volatility, can provide an upside surprise in the fourth quarter.
Finally, emerging markets have not distinguished themselves in terms of absorbing the stock market in recent risk aversion. Brazilian Index (EWZ) is down 24% and the Chinese index (FXI) dropped by 20.4% since April 8. 2011. Interestingly, both countries are cooling off from multi-decade run, especially in housing. Meanwhile, during the same period, the S&P 500 Index lost 8.4%. That said, Brazil and China’s influential role for upcoming years is a vital macro mystery. However, the investor response showcases that many are not piling capital to developed markets. Instead, capital allocators are glued in on the survival tactics of the developed world.
Article Quotes:
“In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller. In an apparent paradox, the same Census Bureau database that told us that median household income was essentially unchanged in 2007 versus 2000 also tells us that the middle class enjoyed a higher income growth rate than did either the overall economy or the rich—and therefore that their income gap versus the rich had actually decreased… The key lies in the difference between the “median household” versus the “middle class.” The median household is a single theoretical household exactly in the middle of the entire income-ranked list of U.S. households. Conversely, the “middle class” has no official definition, but it is certainly tens of millions of households in size and presumably centered around the median household.” (The Journal of American Enterprise Institute, September 16, 2011)
“Local [Chinese] governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. ‘The inflation rate and the growth rate are conflicting with each other: it is very troubling,’ he said, describing what is known to economists as the Phillips Curve dilemma. (The Telegraph, September 17, 2011)
Levels:
S&P 500 Index [1216.01] – Climbing back to 1200 within a new define range of 1160-1220. A consolidation period following the sharp and recent sell-offs.
Crude [$87.96] – Hardly any changes from last week, as the commodity remains fragile below the $90 range.
Gold [$1794] – Early phase of consolidation, as 1750 is the next worthwhile point to test investors’ buying appetite. For now, there are no signs of alteration to the long-term uptrend.
DXY – US Dollar Index [76.59] – The follow through to the recent rally is not yet fully determined. Uptrend is intact, as the index is above its 200 day moving average.
US 10 Year Treasury Yields [2.04%] – Slight breather from risk aversion has yields back up to 2%. The 15 day moving average stands at 2.06%.
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.
Much attention is consumed on the “failure” of various systems, plans and policies. The European banking system is in shambles, and the residues of the sovereign debt crisis have not fully played out. These are tiresome topics desperately needing resolution, as the era of postponement is no longer viable. The pain felt from the real economy contributes to a lack of patience in the audience.
In the near term, the Federal Reserve is already providing dollar liquidity to European banks. In a sensitive environment bad news is magnified (downgrades or weak growth), while infecting or at least influencing other economies at a rapid pace. There is no escape from this matter, even for the strongest economy in Europe. “Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital” (Reuters, September 18, 2011). This is a historic period where the Eurozone is being redefined, with desperate times leading to ugly and unimaginable results.
Harsh Landscape
Overnight scrambles, quick solutions and projection of confidence are required by European leaders during this “reconstruction” period. Plus, the details of the current banking procedures, along with consequences of alternative solutions, are sensitive just as much as complex. In other words, the pressing problems are too cumbersome for any political slogans in Europe or the US. Obviously, the nature of governing and conducting markets inevitably includes political and stimulus constraints. This theme merely sums up most of this year, especially in Europe when dealing with various nations. Interestingly, the bailout debate (similar to the US banks in 2008) is not erasable from near term memories, and heated debates are only normal at this point.
Relative Realities
Despite the backdrop of worries, the downtrend message took a brief breather in broad index performance. The S&P 500 index appreciated, by more than 5% last week. Major indexes are climbing back in an attempt to break even for the year. Albeit, it’s a slow and “temporary” recovery process, after the severe August demise. The relative argument of the US is on the radar for investment managers. Clearly, a significant shift to treasuries, as well as the Dollar, in recent months reiterates that message loudly. Select investors can afford to be choosy in purchasing as majority managers flirt with safer positions.
After the entire saga, the relative argument reminds us that the leadership in financial markets is in the US, at least for now. Growth seekers are not too impressed in this setup, as much as distressed, along with value asset buyers who can find opportune ideas. Further clues lie in the next few days, as to the faith of quantitative easing, and intermediate term interest rate policy. Curious minds have wondered if central bank tools are overly exhausted, especially with low historic rates. Others wonder if the summer sell-offs created such a deeply beaten up sentiment, in which a bottoming process formed in mid to late autumn. Continued stabilization in pricing, along with declining volatility, can provide an upside surprise in the fourth quarter.
Finally, emerging markets have not distinguished themselves in terms of absorbing the stock market in recent risk aversion. Brazilian Index (EWZ) is down 24% and the Chinese index (FXI) dropped by 20.4% since April 8. 2011. Interestingly, both countries are cooling off from multi-decade run, especially in housing. Meanwhile, during the same period, the S&P 500 Index lost 8.4%. That said, Brazil and China’s influential role for upcoming years is a vital macro mystery. However, the investor response showcases that many are not piling capital to developed markets. Instead, capital allocators are glued in on the survival tactics of the developed world.
Article Quotes:
“In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller. In an apparent paradox, the same Census Bureau database that told us that median household income was essentially unchanged in 2007 versus 2000 also tells us that the middle class enjoyed a higher income growth rate than did either the overall economy or the rich—and therefore that their income gap versus the rich had actually decreased… The key lies in the difference between the “median household” versus the “middle class.” The median household is a single theoretical household exactly in the middle of the entire income-ranked list of U.S. households. Conversely, the “middle class” has no official definition, but it is certainly tens of millions of households in size and presumably centered around the median household.” (The Journal of American Enterprise Institute, September 16, 2011)
“Local [Chinese] governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. ‘The inflation rate and the growth rate are conflicting with each other: it is very troubling,’ he said, describing what is known to economists as the Phillips Curve dilemma. (The Telegraph, September 17, 2011)
Levels:
S&P 500 Index [1216.01] – Climbing back to 1200 within a new define range of 1160-1220. A consolidation period following the sharp and recent sell-offs.
Crude [$87.96] – Hardly any changes from last week, as the commodity remains fragile below the $90 range.
Gold [$1794] – Early phase of consolidation, as 1750 is the next worthwhile point to test investors’ buying appetite. For now, there are no signs of alteration to the long-term uptrend.
DXY – US Dollar Index [76.59] – The follow through to the recent rally is not yet fully determined. Uptrend is intact, as the index is above its 200 day moving average.
US 10 Year Treasury Yields [2.04%] – Slight breather from risk aversion has yields back up to 2%. The 15 day moving average stands at 2.06%.
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
Market Outlook | September 12, 2011
“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.
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.
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.
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