“No river can return to its source, yet all rivers must have a beginning.” - Native American Proverb
Digesting Twelve Months
Taking a directional stock market view was rough given various swings throughout the year. Most sellers found plenty of reasons to sell when uncertainty triggered thoughts and sparked interlinked reactions of a rush to safety. Some buyers tried to pick bottoms here and there, but after all simply holding positions turned out to be as good as trading in and out. 2011 presented a clutter of events that are historical in nature and with glimpse of overreaction in between.
For writers and financial reporters who romanticized the collapse of empires, it certainly created exuberance, or at least a vindication of sorts for long-time bears. For policymakers flooded with endless pressure, the unfolding events simply accelerated the aging process with grief and misleading solutions. Truth seekers were glorified by eventual discoveries and unpleased by politics as usual, while the real truth was more confusing than glaring. For financial students, a few terms such as risk analysis, volatility and money management seemed theoretical in some instances yet too basic at times.
These were challenging and interesting times indeed. When considering the gloomy facts that we confronted in the past six month, the possibility of pent up demand is quietly brewing. Yet upsides moves are not always a declaration of comfort, but a fragile gauge of improving moods.
No Endings and Unclear Beginnings
In any cycle, it is safe to assume that greed and fear will persist as fundamental human traits. An age old discussion continues as these patterns get tiresome but their real merits live on. These days, more than greed, deciphering the justified fears is the challenge. Generally, the attitude toward business, and the government roles in stimulus matters have not been comforting. Plus, heated attitudes create a stalemate for moving ahead in most western countries. Ongoing deadlocks were not quite imaginable at times, but once the label “crisis” is thrown around then it surely turns into politics as usual.
Meanwhile, those evaluating assets, as they did for the last 30 years, will have to make adjustments or face consequences in this era. If we’ve reached an “end of financial services as we knew it” before 2008, then we are in the early innings of a new cycle of a cloudy outlook. At least in the near term, pending US elections, Eurozone resolution, chatter of bubble reform and emerging market momentum is in the minds of participants. While the changing landscape of the labor environment combined with rising commodities rapidly converts financial data into social unrest and further mass awakening.
Gearing Ahead
Yearly predictions are thought provoking, entertaining or noisy for some, but present a new spark of energy, whether good or bad. As stated by few, predictions usually end up being mostly wrong and even surprises turnout to be realities. Lots of time is spent by strategists deciphering the biggest themes and surprises. Clearly, the obvious event of high interest is the day to day coverage and speculation surrounding the US election. 2012 might finally suggest there is a fatigued crowd ready to march on after the electric 2011, which highlighted chatter of policymaking risks and crisis management banter.
In any given year, value seekers buy value like stocks, momentum chasers chase momentum, new money goes wild in new areas and short-sellers seek dismal setups. This largely remains business as usual for the most part. Yet, if politics and financial markets remain closely tied to day to day events, long-term holders will not be fully comforted. And now, in early 2012, the question to ask more than the big year-to-year themes is how to grasp the mindset of longer-term players.
Long-term Clarity
Based on escalating volatility some may argue markets are too short-term natured than usual, especially when policymakers think, or are forced to think, in narrow timeframes. Although this point seems glaringly obvious in certain conditions let us not forget that serious and influential capital finds a way to evaluate ideas from a 3-5 year outlook before deploying capital. That said, for long-term players, taking a few steps back may be as appropriate as making big bets. Examining, tracking and following these three areas can spearhead a framework for 2012:
1. Understanding the traits of the current and dynamic currency markets
2. Grasping the global landscape of capital inflow and outflow, while covering the less know mainstream facts
3. Clarity of the two points above can lead to selective buying in discounted assets or a bet against overvalued areas
Currency Shifts
For over a decade, observers have witnessed a depreciating dollar that peaked in mid 2001. Of course, decline in currency value is not to be confused with a loss of leadership as the dominant currency. Frankly, panicky moments demonstrated the global rush to hold US dollars. Now, a trend reversal is setting up, in which the dollar appreciates versus other major currencies. Any strength in the greenback does not erase the competing alternatives that range from Gold to the Euro to another emerging currency. On the other hand, the gap to overtake the dollar is not narrow; however, this year may jumpstart an era where the dollar strengthens while its dominance is tested from various angles. In addition, the Euro remains in an unsettled condition, but assuming a currency collapse might be premature at this stage.
Emerging Puzzle
The ongoing and heated debate circulates around the sustainability of emerging markets. China’s market is not quite understood and the mystery keeps many on the edge for now. Bubble-like traits in China have persisted since 2007, while by most accounts economic strength is visible, despite questionable reporting. The China 25 Index (FXI) is down 52% from its peak in 2007. Perhaps, those expecting demise should note that a slowdown is not a new trend but a potential continuation of an existing trend. Coming into last year, the inflation and housing worries in China were issues not only for pundits to address, but pointed out by government members as well.
Emerging market growth rates have attracted plenty of capital inflow last decade equaling $70 billion in investments to BRIC countries. (EPFR Global Data) At the same time, finding enthusiastic investors these days is not as easy as before, given the fragile nature of interconnected markets and increasing skepticism. On one hand, the US showcases a relative attractiveness, but that’s mainly for safety. Therefore, growth seekers will eventually continue looking into developing and frontier markets for higher returns. Eventually, the competition within the BRIC countries is bound to increase as much as the ongoing debate of developed versus emerging markets. In the long-term reward awaits for nations with the ability to engineer soft landing while maintain relative stability.
Selective Purchase
For larger money managers, buying “cheap” has been a theme in recent years. Distressed assets especially in Europe are trading at a discount as European banks continue to sell assets. Clearly, there are plenty of desperate sellers forced to meet liquidity needs. Simply, unfolding macro events have created an appealing marketplace for patient and aggressive buyers in a period where risk is less favorable. Buying at current levels may not be too appealing by consensus measures, but opportunistic players are taking note. Similarly, declining valuation in select sectors are known and expected to spark further merger & acquisitions. In fact, these trends are visible in technology and new media space.
Article Quotes:
“If the eurozone does not want to embrace capital controls, it has only two alternatives: make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure. The first option is the American way, which also demands that the buyers bear the risks inherent in public or private securities. The taxpayer is not called upon, even in extreme cases, and states can go bankrupt. The second option is the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt. Because all the member states provide one another with free credit guarantees, interest rates for government securities can no longer differ in accordance with creditworthiness or likelihood of repayment. The less sound a country is, the lower its effective expected interest rate. The socialist way follows necessarily from the free access to the printing press that has so far characterized the eurozone. As long as banks – and thus governments, which sell their debt to the banks – can draw cheap credit up to any amount from the European System of Central Banks, Europe will remain volatile. The exodus of capital will continue, and enormous compensation claims of the European core’s central banks, particularly the German Bundesbank and the Dutch central bank, will pile up.” (Project Syndicate, December 29, 2011)
“If Chinese perfidy should shut down the route through the South China Sea, Japanese crude carriers from the Middle East could simply swing south of Sumatra, cross the Lombok Strait, and sail up the east coast of the Philippines. Studies have concluded that the detour would add three days to sailing times and perhaps 13.5% to shipping costs; an annoying inconvenience, perhaps, but also not an energy or economic Armageddon. The bloviating about the vulnerability and critical importance of the South China Sea maritime route can probably be traced to the fact that it is an international waterway and therefore a suitable arena for the United States to flex its "freedom of the seas" muscle. Smaller nations bordering the South China Sea welcome the US as a counterweight to China in their sometimes bloody but low level conflicts over fishing and energy development issues. Any US attempt to lord it over the Lombok Strait in a similar fashion would presumably not be welcomed by Indonesia, which exercises full, unquestioned sovereignty over the waterway.” (Asian Times, December 22, 2011)
Levels:
S&P 500 Index [1257.60] – Staying above 1250 has proved to be difficult for a sustainable period. Near-term is hovering around a 200 day moving average.
Crude [$98.83] – An explosive fourth quarter rally showcases a resurgence in buyers’ demand.
Gold [$1531] – Cooling off from a multi-year run. Early September marked a turning point as the commodity enters a multi-week downtrend.
DXY – US Dollar Index [80.29] – The second half of 2011 saw the dollar bottom and strengthen while setting the stage as a key macro theme for months ahead.
US 10 Year Treasury Yields [1.87%] – Trading at the low end of a three decade decline. The next noticeable range stands at the intra-day lows of September 23rd at 1.67%.
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, January 03, 2012
Monday, December 19, 2011
Market Outlook | December 19, 2011
“The courage to imagine the otherwise is our greatest resource, adding color and suspense to all our life.” - Daniel J. Boorstin (1914-2004)
Suspense & Setbacks
Hopes for a recovery in the financial markets find a way to fade away after a few spurts in the day to day action. Marching to the tune of positive economic data has mostly failed to spark a rally. The reality, and perception, driving barometers are at a standstill where trepidation plays a bigger role than confidence restoration. Clearly, over the past three years debt concerns are slowly being understood as the discovery process reveals more complexities than imagined. Yet policymakers might be running out of tools or flexibility. That’s the question plaguing participants who feel the suspense of currencies, interest rates, stocks and elections.
As to the reaction of liquid markets, we can surmise that near-term disappointment explains the majority of the story. Firstly, the realization of the European summit resolution was hardly a declaration of victory which became too clear. Secondly, the desperate expectation of easing by the Federal Reserve did not quite deliver a message of further “medicine,” as desired by most. Perhaps the overreliance on a “fix” or “injection” is a problem in itself, but the short-term solution continues in seeking the cheers of the crowd. The mantra is to simply survive another month while delaying the inevitable crisis that has shaken, but not broken, the system.
Further attempts by leaders to “sweet talk" the markets has so far failed to muster the much publicized year-end rally. Plus, some would point out that a QE2 style stimulus is already priced into the market. Improving labor numbers remains the wildcard to take optimism from a thought to a believable trend. Either way, the stakes are high, as they’ve been elevated for several quarters, and sensitive reactions are bound to continue.
Currency Waves
The anticipated deciphering and speculation of the relationship in key currencies creates unease, which is looming as volatility is increasing, given the chatter over faith in the Euro. In addition, with over 46% of S&P 500 companies’ earnings coming from overseas, the impact of currencies is at center stage for decision makers in equity markets as well. Much focus on the currency markets is attributed to the messy Euro concerns. On the other hand, the Dollar bottomed and continues to appreciate in the second half of the year. The greenback reasserts its strength as the world’s reserve currency, at least for now, given its attractive liquidity and lack of competing options, not to mention the capital flight from euro-zone banks. Furthermore, this invokes existing doubts and mixed feeling for owners of Gold who are looking at the popular commodity as a tool for expressing a currency view.
Basically, Gold is commonly viewed as the alternative to paper assets, and even claimed a safe asset. For chart followers, it is the momentum of trade that captured further fans across key milestones. Generally, the assumed thought process suggested further easing policies by the Federal Reserve were viewed as a damaging blow to paper. In turn, that attracted several gold bulls ranging from retail to institutional investors. Perhaps this is another reason for Gold’s resurgence? The downtrend invites participants who waited for a discount. However, if the stimulus efforts do not come to fruition, others wonder if the selling in Gold will continue given its current downtrend.
Rotating Themes
Courage may pay more than imagined, even if talks of recession and political deadlock continue to reemerge in common conversations. The unknown is what scares and excites participants bracing to map out the first quarter. For a while themes around finding higher yields dominated the herd mindset, given the low rate environment. Then, paying up for safe haven assets became in high demand. The “do nothing” approach works for few, and some wait to buy on discounts based on a favorable valuation phrase thrown by long-term investors. Relying on the influential theme patterns may not answer long-term needs and has proved to be riskier than advertised. Of course, blindly accepting fear driven tools is a costly proposition, in case opportunities are missed. The puzzle continues, but the worst case scenarios have been pondered enough to overly shock observers. Nevertheless, upside surprises are available today on a selective basis, for those patient enough to dig deeper.
Article Quotes:
“I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; ….. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain” (Richard Fisher, Federal Reserve Bank of Dallas speech, December 16, 2011)
“Back in 1951, the Fed minutes record central bankers discussing to what extent they should help the White House fund its growing deficit, what limit to set on long-term interest rates, and how much debt they should monetise. Go back to Greece. It is able to issue bills at such low yields by manipulating the banks – bankrupt without the help of the central bank, they have little choice but to do what it wants – and by ignoring the legal terms of its bonds. Greek bills and bonds should have equal status in the “voluntary” default being negotiated with European banks. But Greece has ruled that bills will not be subject to the losses being discussed for the bonds. The European Central Bank, perhaps the biggest holder of Greek debt, will also be excluded from losses, even as Europe’s commercial banks are pressured by their governments to take part. All of this manipulation amounts to different forms of taxation, often well-hidden. The bill issues are a tax on Greece’s savers, who could have earned far more if their bank bought similar-maturity bonds. Likewise, the Fed’s actions back in 1951 were a tax on bond buyers, who earned less than they would have done without Fed manipulation.” (Financial Times, December 18, 2011)
Levels:
S&P 500 Index [1219.66] – Attempting to hold a familiar 1220 range slightly below the 50 day moving average. If there is failure to hold above this point, technical observers will point to 1160 as the worst case near-term set up.
Crude [$93.53] – In a minor downtrend after failing to hold $100. First peak on November 18 at $103, and a recent on December 5 at $102, showcases the lack of further catalyst for an upside move.
Gold [$1594] – A four month decline remains in place. Buyers’ appetite at $1600 to be tested in the near-term. Any further break will spur doubts of a stalling momentum.
DXY – US Dollar Index [80.29] – The strength in the Dollar is a noticeable trend since last May with the index up around 10%.
US 10 Year Treasury Yields [1.84%] – Below 2% begs the question of the established downtrend combined with a reflection of risk aversion. Since the summer, the inverse relationship between the Dollar is noteworthy, setting the stage for early 2012.
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.
Suspense & Setbacks
Hopes for a recovery in the financial markets find a way to fade away after a few spurts in the day to day action. Marching to the tune of positive economic data has mostly failed to spark a rally. The reality, and perception, driving barometers are at a standstill where trepidation plays a bigger role than confidence restoration. Clearly, over the past three years debt concerns are slowly being understood as the discovery process reveals more complexities than imagined. Yet policymakers might be running out of tools or flexibility. That’s the question plaguing participants who feel the suspense of currencies, interest rates, stocks and elections.
As to the reaction of liquid markets, we can surmise that near-term disappointment explains the majority of the story. Firstly, the realization of the European summit resolution was hardly a declaration of victory which became too clear. Secondly, the desperate expectation of easing by the Federal Reserve did not quite deliver a message of further “medicine,” as desired by most. Perhaps the overreliance on a “fix” or “injection” is a problem in itself, but the short-term solution continues in seeking the cheers of the crowd. The mantra is to simply survive another month while delaying the inevitable crisis that has shaken, but not broken, the system.
Further attempts by leaders to “sweet talk" the markets has so far failed to muster the much publicized year-end rally. Plus, some would point out that a QE2 style stimulus is already priced into the market. Improving labor numbers remains the wildcard to take optimism from a thought to a believable trend. Either way, the stakes are high, as they’ve been elevated for several quarters, and sensitive reactions are bound to continue.
Currency Waves
The anticipated deciphering and speculation of the relationship in key currencies creates unease, which is looming as volatility is increasing, given the chatter over faith in the Euro. In addition, with over 46% of S&P 500 companies’ earnings coming from overseas, the impact of currencies is at center stage for decision makers in equity markets as well. Much focus on the currency markets is attributed to the messy Euro concerns. On the other hand, the Dollar bottomed and continues to appreciate in the second half of the year. The greenback reasserts its strength as the world’s reserve currency, at least for now, given its attractive liquidity and lack of competing options, not to mention the capital flight from euro-zone banks. Furthermore, this invokes existing doubts and mixed feeling for owners of Gold who are looking at the popular commodity as a tool for expressing a currency view.
Basically, Gold is commonly viewed as the alternative to paper assets, and even claimed a safe asset. For chart followers, it is the momentum of trade that captured further fans across key milestones. Generally, the assumed thought process suggested further easing policies by the Federal Reserve were viewed as a damaging blow to paper. In turn, that attracted several gold bulls ranging from retail to institutional investors. Perhaps this is another reason for Gold’s resurgence? The downtrend invites participants who waited for a discount. However, if the stimulus efforts do not come to fruition, others wonder if the selling in Gold will continue given its current downtrend.
Rotating Themes
Courage may pay more than imagined, even if talks of recession and political deadlock continue to reemerge in common conversations. The unknown is what scares and excites participants bracing to map out the first quarter. For a while themes around finding higher yields dominated the herd mindset, given the low rate environment. Then, paying up for safe haven assets became in high demand. The “do nothing” approach works for few, and some wait to buy on discounts based on a favorable valuation phrase thrown by long-term investors. Relying on the influential theme patterns may not answer long-term needs and has proved to be riskier than advertised. Of course, blindly accepting fear driven tools is a costly proposition, in case opportunities are missed. The puzzle continues, but the worst case scenarios have been pondered enough to overly shock observers. Nevertheless, upside surprises are available today on a selective basis, for those patient enough to dig deeper.
Article Quotes:
“I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; ….. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain” (Richard Fisher, Federal Reserve Bank of Dallas speech, December 16, 2011)
“Back in 1951, the Fed minutes record central bankers discussing to what extent they should help the White House fund its growing deficit, what limit to set on long-term interest rates, and how much debt they should monetise. Go back to Greece. It is able to issue bills at such low yields by manipulating the banks – bankrupt without the help of the central bank, they have little choice but to do what it wants – and by ignoring the legal terms of its bonds. Greek bills and bonds should have equal status in the “voluntary” default being negotiated with European banks. But Greece has ruled that bills will not be subject to the losses being discussed for the bonds. The European Central Bank, perhaps the biggest holder of Greek debt, will also be excluded from losses, even as Europe’s commercial banks are pressured by their governments to take part. All of this manipulation amounts to different forms of taxation, often well-hidden. The bill issues are a tax on Greece’s savers, who could have earned far more if their bank bought similar-maturity bonds. Likewise, the Fed’s actions back in 1951 were a tax on bond buyers, who earned less than they would have done without Fed manipulation.” (Financial Times, December 18, 2011)
Levels:
S&P 500 Index [1219.66] – Attempting to hold a familiar 1220 range slightly below the 50 day moving average. If there is failure to hold above this point, technical observers will point to 1160 as the worst case near-term set up.
Crude [$93.53] – In a minor downtrend after failing to hold $100. First peak on November 18 at $103, and a recent on December 5 at $102, showcases the lack of further catalyst for an upside move.
Gold [$1594] – A four month decline remains in place. Buyers’ appetite at $1600 to be tested in the near-term. Any further break will spur doubts of a stalling momentum.
DXY – US Dollar Index [80.29] – The strength in the Dollar is a noticeable trend since last May with the index up around 10%.
US 10 Year Treasury Yields [1.84%] – Below 2% begs the question of the established downtrend combined with a reflection of risk aversion. Since the summer, the inverse relationship between the Dollar is noteworthy, setting the stage for early 2012.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, December 12, 2011
Market Outlook | December 12, 2011
“Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.” - Karl Von Clausewitz (1780-1831)
Reflective Period
We are counting down to close out a year that felt like 2008, in which all challenging setups were on the brink of happening. Meanwhile, the perception of a doomsday scenario did not fully materialize as scripted by the most fervent skeptics. The word “crisis” is appropriately used at times, while overused or misunderstood at some junctions. Notably, the July and September collapses this year were not overnight downturns, and the drivers of those shocks seem bound to resurface down the road.
Three years after the bailout of US banks, the historical pattern is glaringly revisited in Europe. This fragile period can be described as persistent global panic. In between, there are more than a few up days creating breathing room from the gloomy suffocation. Perhaps a glimpse of stability will begin to welcome early thoughts of a surprising and promising year in 2012. However, that’s an extreme and unconventional view as most anticipate further recession from Emerging Markets.
Investor’s Angle
An investor cannot afford to be a spectator during crucial inflection points, especially when buying opportunities loom in selective areas. In other words, the noise from political crowds, constant naysayers, and sensational headline creators is known to overstate the fear while understating the power of the unknown. Clearly, the sharp rise and fall of the volatility indexes showcases the disbelief in spurts. Thus, long-term implication risk may not be reflected in broad indexes, and the impact of good or bad policies are not quite measurable. Innovative driven ideas are desperately worth pursuing for those policies.
An edgy and fatigued financial crowd is now watching the S&P 500 index flirting with a positive finish for the year, a noteworthy result for scoreboard watchers. Most nations will struggle to claim a positive stock market return. So far this year, Brazil (EWZ) shows -22%, India (INP) is far worse at -34% and Emerging Markets (EEM) stands at -17%. The fact that the US is ahead of the crowd, and relatively attractive, might be one positive takeaway. Picturing any stability in broad indexes may not have been easy to visualize in early October, especially if thoughts were guided by headlines. However, there is no comfort in expecting the bad news to die down; yet resolutions are bound to be reached just enough to calm the screams of fear. Navigating quickly and dodging major falls is puzzling, and enhance the challenge for those managers measured on a monthly basis.
Governance & Confidence
During the debt ceiling saga, we learned bickering by government officials does not create a favorable market environment. In the summer, Congress’s resolution created a “super committee” which bought more time while failing to tackle the issue, given political constraints. Similar traits were echoed last week towards a resolution for Europe, where real fixing is postponed for now. Delay tactics are becoming business as usual; eventually, anticipating policymakers’ call ends up spooking or calming markets at different times. The debt crisis era provides plenty of reasons to trigger risk-aversion, but awaiting government decisions contribute to headaches for intermediate-term investors. Perhaps it is another reminder that government officials’ interests are too focused in the short-term. Not only that, money managers and the doubts of future consequences do not leave the minds of strategist and long-term investors.
The charged debate of government involvement has intensified and will live on, especially during election cycles. Yet, for any recovery there is a crowd willing to credit the stimulus to actions to the Federal Reserve. Perhaps the end of QE2, in the end of June, illustrated that wounds do not heal fast and “medication” is necessary. The recent operation twist or chatter of further easing contributes to dependence on interventions, whether direct or indirect. Meanwhile, the other camp yells “deception” to address the handling of sovereign debt concerns. Those lacking confidence in the policymakers’ decisions continue to buy into the Gold story. As convenient as it may be, Gold prices have slowed down in recent weeks and resurgence in momentum will be cautiously awaited as a vital macro event.
Article Quotes:
“Unlike the U.S. bubble, a bubble burst in China wouldn’t spell doom for the homeowner – in China, real estate investment is a vehicle for saving, not borrowing, and required down payments are 30 percent to 40 percent, limiting debt levels. Instead, local governments will take the brunt of the slowdown or bubble burst as result of their heavy reliance on real estate revenues. As mentioned, local governments will experience a significant loss of revenue, and not just from a decline in land sales: local governments also rely on income from construction and the production of raw materials that goes into construction. In 1994, fiscal decentralization reformed China’s revenue sharing system, effectively reducing local governments’ share of the central revenue stream while increasing their responsibility for providing social goods…. Though mortgage defaults would be rare, social discontent would likely blossom over lost equity. Social instability would also have political consequences for local governments. As important as growth rates are in promotion calculations, levels of social unrest may play an even bigger role – large and visible protests are a sure way to get demoted in the Chinese political system.” (The Diplomat, December 10, 2011)
“As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.” (Bloomberg, December 11, 2011)
Levels:
S&P 500 Index [1255.19] – Surpassing 1260, and around the 200 day moving average, serves as a short-term hurdle. The fall rallies have yet to showcase a sustainable breakout which remains a talking point from daily traders.
Crude [$99.41] – $95-100 range has become a familiar place in the past several weeks. It is hard to ignore the developing uptrend.
Gold [$1709] – Attempting to settle down before a potential reacceleration. Currently the commodity is in a 3+ month decline.
DXY – US Dollar Index [78.06] – Current pricing is in line with the 5 and 125 week moving averages, suggesting the lack of a major move despite currency discussions.
US 10 Year Treasury Yields [2.06%] – Barely moving week over week as the 2% range is becoming quite normal.
--
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.
Reflective Period
We are counting down to close out a year that felt like 2008, in which all challenging setups were on the brink of happening. Meanwhile, the perception of a doomsday scenario did not fully materialize as scripted by the most fervent skeptics. The word “crisis” is appropriately used at times, while overused or misunderstood at some junctions. Notably, the July and September collapses this year were not overnight downturns, and the drivers of those shocks seem bound to resurface down the road.
Three years after the bailout of US banks, the historical pattern is glaringly revisited in Europe. This fragile period can be described as persistent global panic. In between, there are more than a few up days creating breathing room from the gloomy suffocation. Perhaps a glimpse of stability will begin to welcome early thoughts of a surprising and promising year in 2012. However, that’s an extreme and unconventional view as most anticipate further recession from Emerging Markets.
Investor’s Angle
An investor cannot afford to be a spectator during crucial inflection points, especially when buying opportunities loom in selective areas. In other words, the noise from political crowds, constant naysayers, and sensational headline creators is known to overstate the fear while understating the power of the unknown. Clearly, the sharp rise and fall of the volatility indexes showcases the disbelief in spurts. Thus, long-term implication risk may not be reflected in broad indexes, and the impact of good or bad policies are not quite measurable. Innovative driven ideas are desperately worth pursuing for those policies.
An edgy and fatigued financial crowd is now watching the S&P 500 index flirting with a positive finish for the year, a noteworthy result for scoreboard watchers. Most nations will struggle to claim a positive stock market return. So far this year, Brazil (EWZ) shows -22%, India (INP) is far worse at -34% and Emerging Markets (EEM) stands at -17%. The fact that the US is ahead of the crowd, and relatively attractive, might be one positive takeaway. Picturing any stability in broad indexes may not have been easy to visualize in early October, especially if thoughts were guided by headlines. However, there is no comfort in expecting the bad news to die down; yet resolutions are bound to be reached just enough to calm the screams of fear. Navigating quickly and dodging major falls is puzzling, and enhance the challenge for those managers measured on a monthly basis.
Governance & Confidence
During the debt ceiling saga, we learned bickering by government officials does not create a favorable market environment. In the summer, Congress’s resolution created a “super committee” which bought more time while failing to tackle the issue, given political constraints. Similar traits were echoed last week towards a resolution for Europe, where real fixing is postponed for now. Delay tactics are becoming business as usual; eventually, anticipating policymakers’ call ends up spooking or calming markets at different times. The debt crisis era provides plenty of reasons to trigger risk-aversion, but awaiting government decisions contribute to headaches for intermediate-term investors. Perhaps it is another reminder that government officials’ interests are too focused in the short-term. Not only that, money managers and the doubts of future consequences do not leave the minds of strategist and long-term investors.
The charged debate of government involvement has intensified and will live on, especially during election cycles. Yet, for any recovery there is a crowd willing to credit the stimulus to actions to the Federal Reserve. Perhaps the end of QE2, in the end of June, illustrated that wounds do not heal fast and “medication” is necessary. The recent operation twist or chatter of further easing contributes to dependence on interventions, whether direct or indirect. Meanwhile, the other camp yells “deception” to address the handling of sovereign debt concerns. Those lacking confidence in the policymakers’ decisions continue to buy into the Gold story. As convenient as it may be, Gold prices have slowed down in recent weeks and resurgence in momentum will be cautiously awaited as a vital macro event.
Article Quotes:
“Unlike the U.S. bubble, a bubble burst in China wouldn’t spell doom for the homeowner – in China, real estate investment is a vehicle for saving, not borrowing, and required down payments are 30 percent to 40 percent, limiting debt levels. Instead, local governments will take the brunt of the slowdown or bubble burst as result of their heavy reliance on real estate revenues. As mentioned, local governments will experience a significant loss of revenue, and not just from a decline in land sales: local governments also rely on income from construction and the production of raw materials that goes into construction. In 1994, fiscal decentralization reformed China’s revenue sharing system, effectively reducing local governments’ share of the central revenue stream while increasing their responsibility for providing social goods…. Though mortgage defaults would be rare, social discontent would likely blossom over lost equity. Social instability would also have political consequences for local governments. As important as growth rates are in promotion calculations, levels of social unrest may play an even bigger role – large and visible protests are a sure way to get demoted in the Chinese political system.” (The Diplomat, December 10, 2011)
“As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.” (Bloomberg, December 11, 2011)
Levels:
S&P 500 Index [1255.19] – Surpassing 1260, and around the 200 day moving average, serves as a short-term hurdle. The fall rallies have yet to showcase a sustainable breakout which remains a talking point from daily traders.
Crude [$99.41] – $95-100 range has become a familiar place in the past several weeks. It is hard to ignore the developing uptrend.
Gold [$1709] – Attempting to settle down before a potential reacceleration. Currently the commodity is in a 3+ month decline.
DXY – US Dollar Index [78.06] – Current pricing is in line with the 5 and 125 week moving averages, suggesting the lack of a major move despite currency discussions.
US 10 Year Treasury Yields [2.06%] – Barely moving week over week as the 2% range is becoming quite normal.
--
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, December 05, 2011
Market Outlook | December 5, 2011
“The only limits are, as always, those of vision.” - James Broughton (1913-1999)
Desperate and Desired Actions
Last week resulted in major moves and clever interpretations, leading to a positive twist in global markets. Debatable as it may be, the move by the world’s central bankers to add liquidity has been highly influential on asset prices and temporarily relieves tension. Eventually, growing political and business pressure in Europe should force bold resolutions.
For now, the mindset regarding long-term consequences appears less relevant. Decision makers in powerful positions, and the majority of money managers, are too focused on survival mode or merely capitalizing near-term opportunities. The daunting task for a money manager is not to simply follow the suspense of the real economy or chase ideas as a headline observer. Similarly, the “politics as usual” tactics of leaders adds flavor to the news interpretation. Yet this is not a novel concept, which suggests increasing public frustration may continue and play out on political fronts, given the impending election year. Mystical or practical, a “leadership” move projecting confidence is desperately needed, and a glimpse of faith is usually welcomed by participants. The psychology of markets is quick to accept forces related to perception and quick to dismiss substantive facts. This is mind twisting indeed.
Lingering Residue
The significant one week rally is bound to face few challenges. First, mechanical market practitioners will point out the lack of volume to support the spurts of appreciation. Secondly, those assessing policies claim stimulus efforts are desperate measures by central banks and politicians. Thirdly, the lack of improvement in labor numbers and noteworthy changes in the key fundamentals contribute to the issue. Finally, the angst and loss of confidence are risk elements which are not quite common for the current generation of leaders. In other words, as public sentiment loses hope when applying the familiar psychological game of illusionary numbers, it becomes difficult to spur creativity. Let’s not forget that pessimism among investors has yet to reverse at this point. “Bearish sentiment [according to AAII survey], expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 39.4%. This is the highest level of pessimism since October 6, 2011. This is also the third consecutive week that bearish sentiment has been above its historical average of 30%.” (Forbes, December 2, 2011).
The Art of Facts
Mixed economic numbers, with favorable headline numbers, but with a fragile non-improving US labor market, left the crowd puzzled into the weekend. The post-Thanksgiving week began with trepidation as investors deciphered the consecutive down days from prior weeks. As a start, we were due for a stock market bounce, as a year-end push is up against the clock; while a practical resolution in the real economy cannot turn rosy on an overnight announcement. Regardless of working with illusion or facts, there is no real comfort in being a trend trader. Importantly, turbulence in equity markets has declined since October, despite all the crisis noise. Interestingly, the volatility index is not screaming of agitation and fear, unlike other barometers, as was seen in early July and late August of this year. The calming effect is being noted by outsiders who may look to chase returns while courageous risk-takers are trying to heal wounds.
Leaning on Surprises
The S&P 500 index is now barely positive for the year at 1.1%, as the surprise bet is to picture further upside moves that would extend into early to mid-2012. Presently, few observers wonder if financials and small cap indexes are able to climb into positive territory as well. Perhaps it is too much to ask for now. Of course, safety is scarce (nearly non-existent) as the confirmation of upside causes will be critical in weeks ahead. Actually, if bad news is truly exhausted this will be proven in the few days ahead.
Article Quotes:
“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe….Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.” (David Beckworth, Economonitor, December 4, 2011)
“The genesis of the recent funding problems for eurozone banks has come not from the euro markets, but from the dollar markets. In the boom years, these banks greatly increased their dollar assets (in the form of loans and securitised debt instruments), and funded these activities not by increasing bank deposits, but by short term borrowing in the interbank markets and the money markets. This is a vulnerable position, involving both a liquidity mismatch (long dated assets funded by short dated liabilities), and also the need for cross-border or cross-currency borrowing. In recent weeks, the deterioration in the eurozone debt crisis has undermined confidence in the solvency of eurozone banks, and dollar financing for them has dried up… This happened in a similar manner at the end of 2008, and at that time the Fed chose to alleviate the problem of dollar funding for foreign banks by increasing its swap facilities with foreign central banks, especially the ECB. This programme became very large, peaking at $580 billion, which represented about a quarter of the Fed’s total balance sheet at the time.” (The Financial Times, December 2, 2011)
Levels:
S&P 500 Index [1244.28] – Hovering near 1250 as the 200 day moving average stands at 1264.95. Signs of bottoming as the momentum shows early signs of turning.
Crude [$100.96] – Maintaining the uptrend established in early October. Flirting at the much talked about “$100” level, while confronting an infection point.
Gold [$1747.00] – After an autumn breather, the commodity is gearing up for a reacceleration. Climbing back to 1840 will be the next noteworthy point for buyers.
DXY – US Dollar Index [78.06] – Similar to 2008 and 2009, the dollar is attempting to recover. Previously, both periods of appreciation failed to hold. However, the dollar index is slightly positive for the year.
US 10 Year Treasury Yields [2.03%] – No major trend shift. Remains in a 30+ year downtrend while trading near the lows of the range.
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.
Desperate and Desired Actions
Last week resulted in major moves and clever interpretations, leading to a positive twist in global markets. Debatable as it may be, the move by the world’s central bankers to add liquidity has been highly influential on asset prices and temporarily relieves tension. Eventually, growing political and business pressure in Europe should force bold resolutions.
For now, the mindset regarding long-term consequences appears less relevant. Decision makers in powerful positions, and the majority of money managers, are too focused on survival mode or merely capitalizing near-term opportunities. The daunting task for a money manager is not to simply follow the suspense of the real economy or chase ideas as a headline observer. Similarly, the “politics as usual” tactics of leaders adds flavor to the news interpretation. Yet this is not a novel concept, which suggests increasing public frustration may continue and play out on political fronts, given the impending election year. Mystical or practical, a “leadership” move projecting confidence is desperately needed, and a glimpse of faith is usually welcomed by participants. The psychology of markets is quick to accept forces related to perception and quick to dismiss substantive facts. This is mind twisting indeed.
Lingering Residue
The significant one week rally is bound to face few challenges. First, mechanical market practitioners will point out the lack of volume to support the spurts of appreciation. Secondly, those assessing policies claim stimulus efforts are desperate measures by central banks and politicians. Thirdly, the lack of improvement in labor numbers and noteworthy changes in the key fundamentals contribute to the issue. Finally, the angst and loss of confidence are risk elements which are not quite common for the current generation of leaders. In other words, as public sentiment loses hope when applying the familiar psychological game of illusionary numbers, it becomes difficult to spur creativity. Let’s not forget that pessimism among investors has yet to reverse at this point. “Bearish sentiment [according to AAII survey], expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 39.4%. This is the highest level of pessimism since October 6, 2011. This is also the third consecutive week that bearish sentiment has been above its historical average of 30%.” (Forbes, December 2, 2011).
The Art of Facts
Mixed economic numbers, with favorable headline numbers, but with a fragile non-improving US labor market, left the crowd puzzled into the weekend. The post-Thanksgiving week began with trepidation as investors deciphered the consecutive down days from prior weeks. As a start, we were due for a stock market bounce, as a year-end push is up against the clock; while a practical resolution in the real economy cannot turn rosy on an overnight announcement. Regardless of working with illusion or facts, there is no real comfort in being a trend trader. Importantly, turbulence in equity markets has declined since October, despite all the crisis noise. Interestingly, the volatility index is not screaming of agitation and fear, unlike other barometers, as was seen in early July and late August of this year. The calming effect is being noted by outsiders who may look to chase returns while courageous risk-takers are trying to heal wounds.
Leaning on Surprises
The S&P 500 index is now barely positive for the year at 1.1%, as the surprise bet is to picture further upside moves that would extend into early to mid-2012. Presently, few observers wonder if financials and small cap indexes are able to climb into positive territory as well. Perhaps it is too much to ask for now. Of course, safety is scarce (nearly non-existent) as the confirmation of upside causes will be critical in weeks ahead. Actually, if bad news is truly exhausted this will be proven in the few days ahead.
Article Quotes:
“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe….Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.” (David Beckworth, Economonitor, December 4, 2011)
“The genesis of the recent funding problems for eurozone banks has come not from the euro markets, but from the dollar markets. In the boom years, these banks greatly increased their dollar assets (in the form of loans and securitised debt instruments), and funded these activities not by increasing bank deposits, but by short term borrowing in the interbank markets and the money markets. This is a vulnerable position, involving both a liquidity mismatch (long dated assets funded by short dated liabilities), and also the need for cross-border or cross-currency borrowing. In recent weeks, the deterioration in the eurozone debt crisis has undermined confidence in the solvency of eurozone banks, and dollar financing for them has dried up… This happened in a similar manner at the end of 2008, and at that time the Fed chose to alleviate the problem of dollar funding for foreign banks by increasing its swap facilities with foreign central banks, especially the ECB. This programme became very large, peaking at $580 billion, which represented about a quarter of the Fed’s total balance sheet at the time.” (The Financial Times, December 2, 2011)
Levels:
S&P 500 Index [1244.28] – Hovering near 1250 as the 200 day moving average stands at 1264.95. Signs of bottoming as the momentum shows early signs of turning.
Crude [$100.96] – Maintaining the uptrend established in early October. Flirting at the much talked about “$100” level, while confronting an infection point.
Gold [$1747.00] – After an autumn breather, the commodity is gearing up for a reacceleration. Climbing back to 1840 will be the next noteworthy point for buyers.
DXY – US Dollar Index [78.06] – Similar to 2008 and 2009, the dollar is attempting to recover. Previously, both periods of appreciation failed to hold. However, the dollar index is slightly positive for the year.
US 10 Year Treasury Yields [2.03%] – No major trend shift. Remains in a 30+ year downtrend while trading near the lows of the range.
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 28, 2011
Market Outlook | November 28, 2011
“The most important American addition to the World Experience was the simple surprising fact of America. We have helped prepare mankind for all its later surprises.” - Daniel J. Boorstin (1914-2004)
The General Feel
Most of the second of half of the year, there have been screams of a further rush to safer assets. This is typical when markets digest the alarming discovery of causes and effects of the credit crisis. Those results have adversely played out in various assets. Inflection points were overly anticipated and discussed by pundits, but the clear message is a global downturn. The selling floodgates that opened in July 2011 persist and stick in the minds of those contemplating investment.
As usual, jittery participants and confused pundits are most likely to blend the European issues with US political deadlocks and other social displeasures. Images can influence collective thoughts, but at some point the existing wounds open up wider, or heal faster, than expected. In fathoming the least visible, the European crisis is somewhat progressing since the harsh reality is being confronted. Eventually pending measures to stop the bleeding are inevitable, as the ECB attempts to provide liquidity. Yet for a buy and hold investor, the cost (based on perception) may seem very hefty when assessed by present behaviors. Perhaps unconventional thought of a recovery will be tested in the next few weeks, starting early this week. After all, further downgrades of sovereign rates, combined with the lowering of growth projections is to be expected. Both are barely a shock or new discovery.
Message Heard
October’s market appreciation was followed up by a mass exodus by previous holders. Simply, sellers dominate the daily market action and news flow is overly focused on the accumulated challenges of the credit crisis. At this junction of the year, the S&P 500 index is down nearly 8% for the year. Along with poor broad index performance, the themes causing disruption have resurfaced in various forms.
Investors have voiced their displeasure:
• Demanding more liquidity: Staying liquid is even more appealing during escalating volatility, and widening European sovereign spreads. All year, observers witnessed a continual rotation to US Dollar and US treasures, especially in periods when “all hell breaks loose” (relatively speaking of course). This relative US edge argument seems mystical at times, but has proven to be real in several panic sessions.
• Favoring liquidity over yield: The recent investor attitude suggests that earning very small gains in cash is better than get burnt by hope. Basically, the average investor’s conclusion is that it’s too blurry for comfort when speculative grade bonds are linked with default fears.
• Hesitancy in illiquid assets. Investors are not at ease with duration risk in long-term assets, given the uncertainty and scarcity in capital. Unless there are deeply discounted prices, larger firms are less willing to navigate value oriented opportunities in less liquid areas. Plus, an increased capital requirement for banks, (i.e., Basil III) allows less flexibility.
Little Room for Surprises
These weak points above are poised for turnout to reverse into upside contrarian play. This dislocated environment has dismissed traditional patterns, while reversals continue to fail. Interestingly, there is an eager crowd willing to buy cheap or desperately looking for catalysts that can capture collective minds.
For one, the talks of quantitative easing 3 (purchase of treasuries or mortgage backed securities) are resurfacing at times. In the months ahead, further stimulus is not off the table. Secondly, value investors who have watched for a better entry point are weighing the bargains after the declining month of November. In addition, the commodity/dollar relationship is displaying early shifts as well. Finally, deadlocks find a way to disentangle. If Eurozone leaders, key members in Congress, or Federal Reserve decision makers reach a bold agreement then the results can seep through financial markets. Yet despite the daily dose of fear projections, it’s in the best interest of powers that be to restore calmness to this inevitable reform. Basically, surprises ahead are easier to visualize than betting on surprises, which is a courageous and highly neglected theme.
Article Quotes:
“The strategic nature of competition between China and the US in the Asia-Pacific will be murky for the time being. However, China has gained more stakes when dealing with the US. It is hard to say whether the US holds more advantages in China's neighboring area. The potential for economic cooperation between China and its neighboring countries is great…. Naval disputes are only a small part of East Asian affairs. The US and other countries seek to defend private interests by taking advantage of them. As long as China increases its input, it will make countries either pay the price for their decision or make them back the doctrine of solving maritime disputes through cooperation…. No one dominant force is wanted. China has more resources to oppose the US ambition of dominating the region than US has to fulfill it. As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security.” (Global Times China, November 18, 2011)
“Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges….European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat…. European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator…The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and dessert.” (Financial Times, November 27, 2011)
Levels:
S&P 500 Index [1158.67] – Several down days in a row showcase a severe selling period this month. The peak of 1277 on November 8, 2011 established a noteworthy downturn.
Crude [$97.41] – An explosive two month run is slowing. Consolidation around the 200 day moving average creates a near-term tug of war between buyers and sellers.
Gold [$1685.50] – It is fair to conclude that the momentum run is facing a mild pause. Buyers seemed interested at $1600, and their appetite to purchase is soon to be tested.
DXY – US Dollar Index [78.06] – Nearly up 10% since the lows of May 2011. An explosive rise in the dollar is noticeable especially in early September,
US 10 Year Treasury Yields [1.96%] – Below 2%, but not quite 1.67% as seen in late September. Trading at deeply oversold levels, suggesting a near-term recovery in yields.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
The General Feel
Most of the second of half of the year, there have been screams of a further rush to safer assets. This is typical when markets digest the alarming discovery of causes and effects of the credit crisis. Those results have adversely played out in various assets. Inflection points were overly anticipated and discussed by pundits, but the clear message is a global downturn. The selling floodgates that opened in July 2011 persist and stick in the minds of those contemplating investment.
As usual, jittery participants and confused pundits are most likely to blend the European issues with US political deadlocks and other social displeasures. Images can influence collective thoughts, but at some point the existing wounds open up wider, or heal faster, than expected. In fathoming the least visible, the European crisis is somewhat progressing since the harsh reality is being confronted. Eventually pending measures to stop the bleeding are inevitable, as the ECB attempts to provide liquidity. Yet for a buy and hold investor, the cost (based on perception) may seem very hefty when assessed by present behaviors. Perhaps unconventional thought of a recovery will be tested in the next few weeks, starting early this week. After all, further downgrades of sovereign rates, combined with the lowering of growth projections is to be expected. Both are barely a shock or new discovery.
Message Heard
October’s market appreciation was followed up by a mass exodus by previous holders. Simply, sellers dominate the daily market action and news flow is overly focused on the accumulated challenges of the credit crisis. At this junction of the year, the S&P 500 index is down nearly 8% for the year. Along with poor broad index performance, the themes causing disruption have resurfaced in various forms.
Investors have voiced their displeasure:
• Demanding more liquidity: Staying liquid is even more appealing during escalating volatility, and widening European sovereign spreads. All year, observers witnessed a continual rotation to US Dollar and US treasures, especially in periods when “all hell breaks loose” (relatively speaking of course). This relative US edge argument seems mystical at times, but has proven to be real in several panic sessions.
• Favoring liquidity over yield: The recent investor attitude suggests that earning very small gains in cash is better than get burnt by hope. Basically, the average investor’s conclusion is that it’s too blurry for comfort when speculative grade bonds are linked with default fears.
• Hesitancy in illiquid assets. Investors are not at ease with duration risk in long-term assets, given the uncertainty and scarcity in capital. Unless there are deeply discounted prices, larger firms are less willing to navigate value oriented opportunities in less liquid areas. Plus, an increased capital requirement for banks, (i.e., Basil III) allows less flexibility.
Little Room for Surprises
These weak points above are poised for turnout to reverse into upside contrarian play. This dislocated environment has dismissed traditional patterns, while reversals continue to fail. Interestingly, there is an eager crowd willing to buy cheap or desperately looking for catalysts that can capture collective minds.
For one, the talks of quantitative easing 3 (purchase of treasuries or mortgage backed securities) are resurfacing at times. In the months ahead, further stimulus is not off the table. Secondly, value investors who have watched for a better entry point are weighing the bargains after the declining month of November. In addition, the commodity/dollar relationship is displaying early shifts as well. Finally, deadlocks find a way to disentangle. If Eurozone leaders, key members in Congress, or Federal Reserve decision makers reach a bold agreement then the results can seep through financial markets. Yet despite the daily dose of fear projections, it’s in the best interest of powers that be to restore calmness to this inevitable reform. Basically, surprises ahead are easier to visualize than betting on surprises, which is a courageous and highly neglected theme.
Article Quotes:
“The strategic nature of competition between China and the US in the Asia-Pacific will be murky for the time being. However, China has gained more stakes when dealing with the US. It is hard to say whether the US holds more advantages in China's neighboring area. The potential for economic cooperation between China and its neighboring countries is great…. Naval disputes are only a small part of East Asian affairs. The US and other countries seek to defend private interests by taking advantage of them. As long as China increases its input, it will make countries either pay the price for their decision or make them back the doctrine of solving maritime disputes through cooperation…. No one dominant force is wanted. China has more resources to oppose the US ambition of dominating the region than US has to fulfill it. As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security.” (Global Times China, November 18, 2011)
“Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges….European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat…. European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator…The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and dessert.” (Financial Times, November 27, 2011)
Levels:
S&P 500 Index [1158.67] – Several down days in a row showcase a severe selling period this month. The peak of 1277 on November 8, 2011 established a noteworthy downturn.
Crude [$97.41] – An explosive two month run is slowing. Consolidation around the 200 day moving average creates a near-term tug of war between buyers and sellers.
Gold [$1685.50] – It is fair to conclude that the momentum run is facing a mild pause. Buyers seemed interested at $1600, and their appetite to purchase is soon to be tested.
DXY – US Dollar Index [78.06] – Nearly up 10% since the lows of May 2011. An explosive rise in the dollar is noticeable especially in early September,
US 10 Year Treasury Yields [1.96%] – Below 2%, but not quite 1.67% as seen in late September. Trading at deeply oversold levels, suggesting a near-term recovery in yields.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, November 21, 2011
Market Outlook | November 21, 2011
“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.
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 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.
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