Sunday, October 21, 2012
Market Outlook | October 22, 2012
“Power is so characteristically calm, that calmness in itself has the aspect of strength.” (Edward Bulwer-Lytton 1803-1873).
Composure required
Heading into this quarterly earning season, the ongoing question regarding corporate earnings’ sustainability was being asked with heightened curiosity. There already exists a jittery setup for stock prices, given an explosive multi-year upside run. At the same time, the debate over economic recovery resurfaces, given improving housing and consumer data. Yet, a slightly recovering economy might be easily confused with an extended stock market, but those assumptions are often costly and overly simplistic. Sustaining revenues for larger companies is surely a challenge, but that doesn’t ensure that the stock market appreciation is coming to a crisis mode, either.
Friday's stock market sell-offs captured recent disappointments in company earnings matching or exceeding expectations. Some earnings results reflected a cumulative impact of the slowdown in China and Europe that strongly influence multinational revenues. As anticipated, the inevitable slowdown from all-time highs in corporate earnings is more than reasonable. Similarly, the odds of pullbacks were much anticipated. As Bespoke Investment reminds us: “The Dow's 1.52% drop today [Friday October, 20] ended a streak of 81 trading days without a 1%+ decline. This was the longest streak without a 1%+ decline since the 94-trading day streak that occurred from July through November of 2006.”This was an amazing streak that showcases strength that’s been overlooked by most.
Lack of options
Plus, with interest rates this low, one has to wonder: What other alternatives present an attractive risk/reward? At this point, not many assets offer a liquid alterative. Thus, equities have not quite lost their relative luster despite ongoing fund outflows. Not to mention, even a 5-10% correction in broad indexes may not materially impact the current recovery mode. Sure, the growing list of bearish arguments of fragile markets is ready to unleash now. This paints the missed earnings targets as a clue for further doom. Yet, overreacting to these exhausted worries is as reckless as ignoring the earnings slowdown that has slowly persisted. Maintaining balance is the challenge for money managers for the next two or three quarters ahead.
Brewing suspense
Global growth and inflation are ongoing concerns that are pointed out by executives, investors and pundits. The recovery of emerging markets is not rapid but poised to resume. Thus, the recent correction was much needed and despite slower growth than last decade, there is strength in emerging markets that may be underappreciated. “Today, emerging market countries are the main driver of global growth. Emerging market economies will account for more than 70 per cent of the contribution to global growth in 2012 and are growing at a pace four times that of developed market economies.” (FundWeb, October 22, 2012). Inflation remains another debatable topic in terms of reported versus unofficial data. For now, inflation is not overly concerning. Growth is the bigger concern, as the economy is not close to “overheating.” Yet, passionate arguments and interpretation can shape investor mindsets.
In 2010 and 2011, volatility spiked to extreme levels (above 40s on VIX index). Perhaps, a similar pattern was anticipated this year, but in late October the calmness remains in place. Of course, there are market-moving events that can spark sudden turbulence – a thought circulating among financial professionals this weekend. Importantly, risk-aversion has been a dominant theme that has persisted during strong markets. Thus, claims that the rush to safety is a new phenomenon after weak earnings might be misleading. For now, emotional responses may play out, but overreacting to headlines is not a rewarding proposition.
Article Quotes:
“But there is a difference between expecting low returns due to reversion to long-term normal valuations and expecting low returns because something has fundamentally changed about the return-generating process for equities. Whether GDP growth in the U.S. and other developed economies is going to be slower in the future is not, in and of itself, a reason to expect a lower return to equities. Likewise, the fact that historic equity returns have been higher than GDP does not mean that the equity market has been some sort of long-term Ponzi scheme. Equities are an ugly asset class –one that is more likely than almost any other to lose investors a significant amount of money at those times when they can least afford it. That is, in a way, their charm. It is why equity is such an appealing form of capital for companies. It is the reason why equities have been priced to deliver good returns historically. And it is the reason why we believe equities are very likely to be priced to deliver strong returns into the indefinite future.” (GMO, White Paper August 2012)
“One possibility is that central banks are overestimating the scale of economic weakness, and keeping interest rates too low as a result. That might be good for corporate profits, but excessively loose monetary policy would also lead to higher inflation. So how are equity markets affected by inflation? In years when the annual inflation rate has been falling, the real return from American stocks has been 9.6%; in years when it has been rising, the real return has been minus 1.1%. So past experience suggests a sudden jump in inflation would not be great for the stock market. The other possibility is that central banks have not done enough: monetary policy is still too tight. In that case, the economy will be even weaker than is currently expected and profits will presumably be lower than forecast. It is hard to see how that scenario can be very bullish for equities either. Perhaps none of this would matter if the bad news was already reflected in share prices.” (The Economist, October 20, 2012)
Levels:
S&P 500 Index [1433.19] –Staying above 1400 seemed short-lived earlier this year (with a peak of 1422). Now, the 1420 level attracts some eager observers and any movement below 1400 can re-spark further sell-off potential. Nonetheless, the upside remains intact.
Crude [$90.05] – There has been a nearly $10 drop since peaking on September 14, 2012. We see strong evidence of bottoming around $90 over several weeks.
Gold [$1737.00] – In recent weeks, gold has held in a tight range between $1740-$1780. Interestingly, getting over the hurdle of $1750 remains a challenge for goldbugs.
DXY – US Dollar Index [79.62] – Mostly unchanged week over week. The index is 13% higher from all-time lows of March 2008.
US 10 Year Treasury Yields [1.76%] – The challenge is to surpass the 1.80% mark, as that range is tested for the third time in the last three months.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Sunday, October 14, 2012
Market Outlook | October 15, 2012
“The quality of expectations determines the quality of our action.” (A. Godin 1880-1938)
Reevaluating strength
The ongoing but subdued bullish stock cycle is constantly tested with familiar big-picture concerns. At this point, the fear-driven questions are tiresome but almost nothing new for this resilient market. The current wave of concerns is focused on companies’ ability to sustain the earning growth. A quick browse across traditional financial articles will quickly remind us that this earnings season is expected to underperform or set up to disappoint. This somewhat implies an intense and decisive outcome for risk managers who are now deeply digging in the third quarter earnings results. Certainly, this usually comes down to a game of meeting expectations. Perhaps, the emphasis is tilted toward shorter-term outcomes and can mislead the more patient investors.
Momentum vs. Fear
On one hand, improving labor and housing results showcase restoration out of fragile conditions. Interestingly, number crunchers and analytically minded economists are grappling with the bottoming process of a sluggish economy. In a subtle manner, there is momentum that’s building from jobless claims that were low and closer to numbers seen before the 2008 crisis. Similarly, consumer confidence (University of Michigan), hit a five-year high. Economic data is slowly catching up with established bullish stock markets. The evidence of growth is slowly piling up month after month for those willing to dig a bit deeper.
Banks are reshaping and strengthening their books, the US energy sector remains strong and other innovation-driven themes present a closer look. Sure, skepticism is healthy and needed. Nonetheless, data has pointed to the US edge in leading out of this recovery, regardless of directional debates.
Conversely, there is another school of thought. After the stock market run-up over three years, it may appear difficult to ignite additional enthusiasm. Thus, if the housing and labor recovery is confirmed further then the upside catalysts may face some limitations. It’s a legitimate concern that’s plaguing those who’ve increased risk exposure to risky assets. Plus, the element of waiting for another stimulus via quantitative easing is now less of an option. If further easing is not in sight, then many ask: Can the markets sustain its strength? This is a noteworthy but multifaceted point that lacks directional clarity.
Deliberating
In considering both set-ups, there is a disconnect between stock behavior, general economic performance and investor sentiment. Grasping this chaotic and not-always-logical message is more of an art than science. It is a statement and observation that many would not like to admit or decipher. As a start, when viewing the trading activity relative to last September (2011), one can make the case for low appetite for equity market participation:
“The New York Stock Exchange is off 30.9% from a year ago, at 1.2 billion shares. Its NYSE Arca and NYSE MKT exchanges are off 49.3%, to 219.0 million shares, according to SIFMA” (Traders Magazine, October 12, 2012).
Despite the low volume, the market strength has accelerated as a new cycle has formed since March 2009. In the near-term, there are few noises to settle. Heightened “uncertainty” has felt like the norm for a while, but a consensus view continues to anticipate turbulence in the months ahead. Of course, election results can provide some “clarity” for years ahead. Then there are the macro factors that have bombarded market participants, such as a Euro zone solution, slowdown in emerging markets and other thoughts related to escalating commodities prices. For now, digesting valuable data points is the key before making claims of changes in trends.
Article Quotes:
“The number of homes for sale has fallen back to its long-term average of 2m. Yes, there is a larger “shadow inventory” of homes that are in foreclosure or carry delinquent or defaulted mortgages. However, many of these are distressed, in that they have not been physically maintained. This means that the supply has become two-tiered – quality homes and distressed homes. For most buyers, only the first of these two markets is relevant and the supply there is approaching its lowest level since 1992. According to JP Morgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years.” (American Enterprise Institute, October 14, 2012).
“Blue-chip issuers such as AT&T, JPMorgan Chase and ExxonMobil will increasingly be vying for investor attention against the likes of América Móvil of Mexico, Banco do Brasil or Petrobras of Brazil and a host of other emerging markets companies. Dollar-denominated investment grade bonds from foreign issuers, known on Wall Street as ‘Yankee’ bonds, now account for about 40 per cent of all issuance by value and the figure will top 50 per cent by 2015. Three of the five largest investment grade bond issues in the US this year have come from foreign-owned companies, and American investors’ search for higher-yielding assets has encouraged issuers from Latin America and Asia to raise money in the US. High quality global journalism requires investment. … Investment-grade Yankee issuance has hit $330bn so far in 2012, according to Dealogic, putting it on course for the biggest year to date. Yankees accounted for 15 per cent of overall issuance in 2002, and have risen to average about 40 per cent for the past three years. UK borrowers remain the largest foreign issuers of US debt.” (Financial Times, October 14, 2012)
Levels:
S&P 500 Index [1428.59] – Following a 16% run from June to September, the start of this month has led to a pause. The index closed almost exactly at its 50-day moving average. A slight decline from annual highs of 1470 might stir early pullback concerns.
Crude [$91.86] – For more than two years, the trading range has formed between $84-$98. Now the price is stuck in between the common range, showcasing a lack of momentum.
Gold [$1766.75] – A step back reminds us that surpassing $1800 has been challenging for more than 12 months. The near-term focus is on the commodity’s ability to stir buyer demand at $1750.
DXY – US Dollar Index [79.66] – Unlike the summer months, staying above 80 remains a challenge. Yet, no noteworthy move will be seen in the near-term.
US 10 Year Treasury Yields [1.65%] –Like the currency, range-bound patterns persist. Since May, the trend reinforces a steady movement below 1.80%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Sunday, October 07, 2012
Market Outlook | October 8, 2012
“Vision is the art of seeing what is invisible to others.” (Jonathan Swift 1667-1745)
Re-confirming strength
The existing bull market continues its run while the US economy appears to reaffirm its slow recovery. Central banks’ implementation of stimulus plans may have accumulated enough doubters, but the success of raising inflation expectations is still questionable, so the tone has led to assets seeing a collective boost. Housing improvement has been long underestimated and its contribution to the GDP can create surprises in the quarters ahead. Confirmation of construction and manufacturing growth will be watched attentively to see if there is an actual broad-based recovery. At this point, as in prior decades, the US manufacturing sector is sluggish, but even minor improvement can contribute to further evidence of new cycle recovery.
The desired pace of the current recovery is debated in many ways, but the clues of a housing healing should not be easily ignored. A recent status update on homeowners’ condition provided some early clues:
“According to the scorecard homeowner equity has risen to its highest level since the third quarter of 2008 and 1.3 million borrowers have been lifted above water, largely due to rising home prices. Equity jumped $406 billion or 5.9 percent to $7,275 billion in the second quarter of 2012.” (Mortgage News Daily, October 5, 2012)
Not too foggy:
These days, convincing the gloom-and-doom crowd with endless data of improving or cheery messages is not an overnight task. The same way, turning risk-averse observers into optimistic risk-takers ends up taking significant time. Yet, markets move faster than economic factors and select entry points are offered in a narrow period. The increasing confusion in data digestion, political messaging and residues of the 2008 crisis have puzzled many minds. Simply, casual and seasoned observers have been challenged by and at times missed this relentless “silent bull market.” Glancing at the scoreboard today (year to date: S&P 500 +16.2%, Nasdaq 100 +23.5%, German DAX Equities +25.4% and US Bank Index +30.5%) shows healthy return numbers by any equity-based historic standards. Perhaps, this reality is aggregating the trailing fund managers who failed to bet enough on US stocks.
Obviously, if the message of economic strength is not fully transmitted to wider audiences, then confidence restoration remains a lengthy process. Anticipation of Washington’s policy and elections outcomes further confuse many to stay stagnant:
“Almost 79 percent of respondents cited uncertainties related to the political environment as their number-one challenge.” (National Association of Manufactures, September 13, 2012).
Adjusting vision:
Similarly, the lack of stock market participation is hard to dismiss. Highly intensified and politically charged opinions on the economy are less relevant for markets. This year revealed the slowness of emerging markets, improvements in US labor and redefinition and restoration of a fragile global financial system. Interestingly, hedge funds are buying debt of risky European nations. According to Bloomberg, last month witnessed the $104 billion purchase of Spanish bonds by foreign investors (October 7, 2012). Perhaps, this shows risk-taking by few in anticipation of improving Eurozone solutions. This is a though reality to envision given what’s transpired in the last five years. Whether this is right or wrong is one issue, but acting on courage is what keeps the spirit of financial markets alive. Frankly, betting on upside surprises is out of favor and partially neglected.
As the mild race to own stocks piles up, then the grim question asked will be whether a strong economic recovery ends up slowing the stock market’s upside potential. Although economic strength is not fully evident, the trend is slightly positive. Yet the laundry list of worries has grown if not stayed the same from the start of the year. That includes: further discovery on Eurozone crisis, magnitude of China slowdown and escalating regional tensions leading to potential spike in commodities. The so-called “inventory” for worrisome matters continues to appear excessive more than was imaginable. For example, when it comes to buying downside insurance, last month presented heightened fear of all sorts:
“In September, average daily volume (ADV) in VIX futures reached a new all-time high of 126,345 contracts, which surpassed the previous record ADV of 102,587 contracts during June 2012.” (HedgeWeek, October 2, 2012).
Thus far, high trading activity in volatility-related products has not translated to increased volatility. Rather, the opposite result has been seen, in which volatility is not quite as high as expected.
That said, to claim a blind-sided collapse that may loom around the corner is not a shock (yet again). Rampant attempts to avoid or minimize misunderstood risk remain a theme, but riskless instruments are unattainable – reinforcing the importance of emphasizing relative attractiveness. For now, a slowing US economic recovery attempting to catch up with the explosive stock market only demonstrates a new cycle formation and a new definition of “normal.” The search for a “new normal” remains unknown to all.
Article Quotes:
“June or July is usually the peak month for both total and full time employment. This year the numbers broke last July’s level in April. The economy was a couple months ahead of schedule in affirming the uptrend in jobs. That uptrend is still firmly entrenched, even in the full time jobs including the September decline. The gains have clearly accelerated in 2012 versus 2011. The idea that the economy slowed in 2012 is hogwash. With QE3, the Fed is adding more fuel to a fire that was already beginning to burn hot. … The withholding tax data shown below also suggested that something in the labor picture is still undergoing consistent gains, regardless of what the SA [seasonally adjusted] data says. Increasing withholding tax collections of 2% in real terms are growing at double the rate of population growth. … Economic pundits must face the fact that the 10 million fake jobs spawned by the bubble are not coming back. The 7.8% unemployment rate is probably ‘normal.’ The bubble unemployment rate of 5.5% was abnormal.” (The Wall Street Examiner, October 5, 2012)
“Chinese leaders have plenty of cash, so they can easily funnel resources into new industries. They are already directing funding toward strategic emerging industries such as green technology products and next-generation information technology equipment and software. Where they run into trouble, however, is in actually getting those new industries off the ground. That requires turning off the spigots of government support flowing toward the older and more inefficient industries and state-owned enterprises, a tough task when local government officials are fighting hard to keep them alive. In green energy, for example, Chinese leaders have directed substantial resources toward wind and solar. That has paid off in clean energy manufacturing: Chinese companies are using cost innovations to manufacture cheaper versions of wind and solar technologies developed abroad, and they are exporting those products all over the world. What Chinese leaders really want, however, is to develop their own technologies and sell more of them at home, and that is not going so well. Chinese leaders are doling out funds for clean energy R&D, but they distribute them through government channels, and government officials direct the money toward old friends instead of new prospects. Resources go to the well-connected instead of to the entrepreneurial. Many private enterprises cannot get financing, and private enterprises are more likely to generate the new ideas China needs.” (Center for American Progress, October 2012).
Levels:
S&P 500 Index [1460.93] – Closed last week a few points away from September 14 highs of 1474.51. The current strong recovery began in early June as the odds for near-term correction increase.
Crude [$89.88] – Interestingly, after making annual highs along with stocks in mid-September, the momentum for oil has slowed sharply. A notable move below $90 is worth watching and deciphering between a trend and a temporary pause.
Gold [$1784.00] – Continues to trade near annual highs. Surpassing $1800 remains a suspenseful event for some buyers and a mere test of strength for most observers.
DXY – US Dollar Index [79.32] – In line with its four-year and two-points below its ten-year moving averages. Both demonstrate the lack of noteworthy movements and the relative stability of a strong currency.
US 10 Year Treasury Yields [1.74%] – It was September 30, 1981 when rates peaked, and ever since, the downside has persisted over three decades. Now, attempting to dig out off all-time lows set in July at 1.37%. Over a 10-week period, stability is forming between 1.60%-1.80%.
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
Re-confirming strength
The existing bull market continues its run while the US economy appears to reaffirm its slow recovery. Central banks’ implementation of stimulus plans may have accumulated enough doubters, but the success of raising inflation expectations is still questionable, so the tone has led to assets seeing a collective boost. Housing improvement has been long underestimated and its contribution to the GDP can create surprises in the quarters ahead. Confirmation of construction and manufacturing growth will be watched attentively to see if there is an actual broad-based recovery. At this point, as in prior decades, the US manufacturing sector is sluggish, but even minor improvement can contribute to further evidence of new cycle recovery.
The desired pace of the current recovery is debated in many ways, but the clues of a housing healing should not be easily ignored. A recent status update on homeowners’ condition provided some early clues:
“According to the scorecard homeowner equity has risen to its highest level since the third quarter of 2008 and 1.3 million borrowers have been lifted above water, largely due to rising home prices. Equity jumped $406 billion or 5.9 percent to $7,275 billion in the second quarter of 2012.” (Mortgage News Daily, October 5, 2012)
Not too foggy:
These days, convincing the gloom-and-doom crowd with endless data of improving or cheery messages is not an overnight task. The same way, turning risk-averse observers into optimistic risk-takers ends up taking significant time. Yet, markets move faster than economic factors and select entry points are offered in a narrow period. The increasing confusion in data digestion, political messaging and residues of the 2008 crisis have puzzled many minds. Simply, casual and seasoned observers have been challenged by and at times missed this relentless “silent bull market.” Glancing at the scoreboard today (year to date: S&P 500 +16.2%, Nasdaq 100 +23.5%, German DAX Equities +25.4% and US Bank Index +30.5%) shows healthy return numbers by any equity-based historic standards. Perhaps, this reality is aggregating the trailing fund managers who failed to bet enough on US stocks.
Obviously, if the message of economic strength is not fully transmitted to wider audiences, then confidence restoration remains a lengthy process. Anticipation of Washington’s policy and elections outcomes further confuse many to stay stagnant:
“Almost 79 percent of respondents cited uncertainties related to the political environment as their number-one challenge.” (National Association of Manufactures, September 13, 2012).
Adjusting vision:
Similarly, the lack of stock market participation is hard to dismiss. Highly intensified and politically charged opinions on the economy are less relevant for markets. This year revealed the slowness of emerging markets, improvements in US labor and redefinition and restoration of a fragile global financial system. Interestingly, hedge funds are buying debt of risky European nations. According to Bloomberg, last month witnessed the $104 billion purchase of Spanish bonds by foreign investors (October 7, 2012). Perhaps, this shows risk-taking by few in anticipation of improving Eurozone solutions. This is a though reality to envision given what’s transpired in the last five years. Whether this is right or wrong is one issue, but acting on courage is what keeps the spirit of financial markets alive. Frankly, betting on upside surprises is out of favor and partially neglected.
As the mild race to own stocks piles up, then the grim question asked will be whether a strong economic recovery ends up slowing the stock market’s upside potential. Although economic strength is not fully evident, the trend is slightly positive. Yet the laundry list of worries has grown if not stayed the same from the start of the year. That includes: further discovery on Eurozone crisis, magnitude of China slowdown and escalating regional tensions leading to potential spike in commodities. The so-called “inventory” for worrisome matters continues to appear excessive more than was imaginable. For example, when it comes to buying downside insurance, last month presented heightened fear of all sorts:
“In September, average daily volume (ADV) in VIX futures reached a new all-time high of 126,345 contracts, which surpassed the previous record ADV of 102,587 contracts during June 2012.” (HedgeWeek, October 2, 2012).
Thus far, high trading activity in volatility-related products has not translated to increased volatility. Rather, the opposite result has been seen, in which volatility is not quite as high as expected.
That said, to claim a blind-sided collapse that may loom around the corner is not a shock (yet again). Rampant attempts to avoid or minimize misunderstood risk remain a theme, but riskless instruments are unattainable – reinforcing the importance of emphasizing relative attractiveness. For now, a slowing US economic recovery attempting to catch up with the explosive stock market only demonstrates a new cycle formation and a new definition of “normal.” The search for a “new normal” remains unknown to all.
Article Quotes:
“June or July is usually the peak month for both total and full time employment. This year the numbers broke last July’s level in April. The economy was a couple months ahead of schedule in affirming the uptrend in jobs. That uptrend is still firmly entrenched, even in the full time jobs including the September decline. The gains have clearly accelerated in 2012 versus 2011. The idea that the economy slowed in 2012 is hogwash. With QE3, the Fed is adding more fuel to a fire that was already beginning to burn hot. … The withholding tax data shown below also suggested that something in the labor picture is still undergoing consistent gains, regardless of what the SA [seasonally adjusted] data says. Increasing withholding tax collections of 2% in real terms are growing at double the rate of population growth. … Economic pundits must face the fact that the 10 million fake jobs spawned by the bubble are not coming back. The 7.8% unemployment rate is probably ‘normal.’ The bubble unemployment rate of 5.5% was abnormal.” (The Wall Street Examiner, October 5, 2012)
“Chinese leaders have plenty of cash, so they can easily funnel resources into new industries. They are already directing funding toward strategic emerging industries such as green technology products and next-generation information technology equipment and software. Where they run into trouble, however, is in actually getting those new industries off the ground. That requires turning off the spigots of government support flowing toward the older and more inefficient industries and state-owned enterprises, a tough task when local government officials are fighting hard to keep them alive. In green energy, for example, Chinese leaders have directed substantial resources toward wind and solar. That has paid off in clean energy manufacturing: Chinese companies are using cost innovations to manufacture cheaper versions of wind and solar technologies developed abroad, and they are exporting those products all over the world. What Chinese leaders really want, however, is to develop their own technologies and sell more of them at home, and that is not going so well. Chinese leaders are doling out funds for clean energy R&D, but they distribute them through government channels, and government officials direct the money toward old friends instead of new prospects. Resources go to the well-connected instead of to the entrepreneurial. Many private enterprises cannot get financing, and private enterprises are more likely to generate the new ideas China needs.” (Center for American Progress, October 2012).
Levels:
S&P 500 Index [1460.93] – Closed last week a few points away from September 14 highs of 1474.51. The current strong recovery began in early June as the odds for near-term correction increase.
Crude [$89.88] – Interestingly, after making annual highs along with stocks in mid-September, the momentum for oil has slowed sharply. A notable move below $90 is worth watching and deciphering between a trend and a temporary pause.
Gold [$1784.00] – Continues to trade near annual highs. Surpassing $1800 remains a suspenseful event for some buyers and a mere test of strength for most observers.
DXY – US Dollar Index [79.32] – In line with its four-year and two-points below its ten-year moving averages. Both demonstrate the lack of noteworthy movements and the relative stability of a strong currency.
US 10 Year Treasury Yields [1.74%] – It was September 30, 1981 when rates peaked, and ever since, the downside has persisted over three decades. Now, attempting to dig out off all-time lows set in July at 1.37%. Over a 10-week period, stability is forming between 1.60%-1.80%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Sunday, September 30, 2012
Market Outlook | October 1, 2012
“The truest way to be deceived is to think oneself more knowing than others.” François de La Rochefoucauld ((1613-1680)
Seasonal deliberation
The four-year-cycle run in the stock markets mirrors the election season, which stirs up opinions and various thoughts. Interestingly, the fall season, including the month of October, is often feared, as pundits anticipate theatrical events. Certainly, sharp slowdowns have been displayed, most notably during the 2008 credit crisis and 1987 crash – not to mention most historians’ favorite: the 1929 crash resulting in the October panic ahead of the Depression. All sound quite familiar and rehashed in these cautious days and make for a thrilling documentary-like dialogue, but may not tell the full or exact story.
This financial market thus far has encountered various opinions, including some threats of gigantic regulations, or pending global collapse and lack of trust leading to a revisit of recent crises. Certainly, there is plenty that’s unsolved, but knowing where to focus one’s fear is the art that’s rewarding in this faster-paced market. Surely, noise and headline makers are eager for dull or theatrical events. Meanwhile, capital allocators have been punished for lagging broad indexes and simply cannot afford to live by popular or generic ideas. As the schedule has it, this week’s election-related events, along with early releases on labor conditions, combine to spark some talking points. In addition, further central bank and economic growth matters are awaited. Through all various data points, the impact to long-term implications will still remain a mystery to most.
Shaky feelings
This year has been more about accepting the slowing global growth and a collective recognition of various demographic and globalization challenges. At this point, one has to wonder how much ‘bad news’ remains in the tank for a market that has quietly risen while silencing various critics. According to the AAII investor sentiment data, the bearish reading is at a nine-month highs. Thus, it’s fair to assume that bubble-like levels regarding corporate growth are not overly concerning. It’s intriguing that the lack of enthusiasm continues despite the impressive year-to-date stock market returns. Simply, there is no shortage of doubters. Interestingly, other perceived “safe assets” persist in showcasing euphoric investor demand, such as Long US treasury and high-yield bonds.
For now, the appealing trade for broader audiences is to expect commodities to go higher. That's quite evident in speculators of crude that have increased their bets. Similarly, bank analysts have increased gold price estimates and the collective upbeat expert view lives on. Certainly, going against these forces is not easy and not natural to dismiss. Nonetheless, the risk of owning commodities has increased relative to other years, while the upside potential is unclear.
The Macro Reminders
The overly exhausted but never-ending Eurozone discussion may provide some jolt for volatility traders and some ammunition for those heavily entrenched in glooms-day scenarios. The fifth year of the Euro Crisis has rotated its focus between various countries, as Spain seeks a rescue plan. As the Spanish banks hold a $76.3 billion deficit (according to Bloomberg), the uncertainty cannot dissipate overnight as new discoveries unfold. Yet, the shock element is hardly news for a forward-looking market. Distinguishing social and political noise from market behavior remains the ultimate challenge in assessing Eurozone matters.
Finally, in the near-term, the impact of Middle East tension on oil prices and ongoing weaker Chinese growth (low PMI September data) will stimulate various minds to make strategic macro moves. Importantly, the link between oil demand and emerging market growth/slowdown is a puzzle that’s due for unlocking. Similarly, emerging markets are expected to reignite themselves out of the current slump, as demand for growth is desperately needed. Since 2010, the Emerging Market Fund (EEM) has underperformed compared to the S&P 500 index. This reinforces that the US banks, currency and financial system maintain their relative edge despite increased global uncertainty.
Article Quotes:
“The demand side is also dark and threatening for overpriced oil, very threatening. World oil demand, this year, may achieve a scary feat for the oil bulls: two straight years of near perfect stagnation of global demand. The EU27 countries are now in their sixth straight year of oil demand shrinkage, recession aiding, but they are now far from the only countries where oil demand shrinks – and shrinks. …. China's long-term growth rate of oil imports, which hit an average of more than 9 percent a year for 1999-2009 has been slashed in half. Indian oil demand growth, these days, is close to 3.5 percent per year, not the previous 5.5 percent average…. The US is now a large, ever growing net exporter of refined oil products. Domestic refiners are taking crude from wherever available and turning it into diesel, gasoline and other oil products for growing demand from Latin America, Asia, Africa and even Europe, where Europe's outdated, high cost, oversupplied and mismatched refinery output – relative to European refined product demand – creates a growing market for US exports.” (The Market Oracle, Andrew McKillop September 30, 2012)
“Jens Weidmann, president of the Bundesbank, last week said a banking union was a disguised transfer mechanism. On this point, he is right. A banking union would recapitalise Spanish banks at the expense of northern European taxpayers. This is the whole point of having it. It would be dishonest to deny that. A banking union, properly constructed, thus constitutes a fiscal union. This is not something you do before Christmas, or through a directive. I wrote earlier that a banking union is an even bigger deal than a eurozone bond. You can construct a eurozone bond with lots of safeguards. There are even proposals on the table that would turn a eurozone bond into an instrument to deliver austerity – a so-called debt redemption bond. I would rather have a banking union and no eurobonds, than the other way round. I would rather have nothing than a debt redemption bond. Judging from the political debate, Germany is not ready for a fiscal transfer mechanism of any kind. In particular, Germany is not ready for a banking union. Ms. Merkel never made a political case for a banking union in Germany. All she did was play down the implications. I would counsel readers against falling into the trap of thinking that next year’s German elections will miraculously clear all the hurdles. All the various probable outcomes favour a continuation of the present policy.” (Financial Times, Wolfgang Münchau Septmber 30, 2012)
Levels:
S&P 500 Index [1440.67] – Slightly retracing from intra-day highs of 1474.51. Increasing expectation for declines closer to 1400-1350. However, positive momentum remains intact. Since the lows of October 7, 2011, the index has risen by 34%.
Crude [$92.19] –Recent sharp declines are puzzling those expecting price appreciation due to some regional unrest. Interestingly, there is a record number of speculators who continue to bet on higher prices showcasing the already built-up expectations. At the same time, the slight decline below the 50- and 200-day moving averages are compelling to chartists who may make the case for further weakness. Holding above $90 will remain key for sensitive observers in days ahead.
Gold [$1776.00] – Growing suspense on gold’s ability to break above $1800 on the way to record highs will be tested yet again. Recent four-month upward movements have re-ignited confidence for analysts to increase targets while downplaying concerns of “bubbles”. Either way, hardly a fundamental play that’s heavily tilted toward momentum and increased speculation.
DXY – US Dollar Index [79.32] – Amazingly, the 12-month average stands at 79.91 and the four-year average stood at 79.25, which reminds us of the lack of any major changes.
US 10 Year Treasury Yields [1.63%] – In the last two months, struggling to hurdle past 1.80%, while showing resilience around 1.60%. Until there is a movement below or above this trend, the message remains that yields are very close to historic lows.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, September 24, 2012
Market Outlook | September 24, 2012
"Silence is a source of great strength." Lao Tzu, (600 B.C. – 531 B.C.)
A silent bull market
The much-anticipated announcement of further easing came and went mostly as expected. With this Quantitative Easing (QE3) announcement, the theme of synchronized uplift in all assets reminds us of 2007, or pre-crisis mode. It is fair to say that this summer, key markets were not quite caught up in the grim conditions of market hopelessness as experienced in late 2008. Neither did the Federal Reserve’s recent action feel like a desperate shock to get out of "intensive care" like the dull late winter of 2009. Yet, through all this repair and these confidence restoration attempts, it simply feels like a silent but powerful bull market. Amazingly enough, even the German stock market (DAX) is already up 26% in 2012. Not many openly glorify the recent market success. Perhaps, many are hesitant to fully relinquish the fearful mindset that’s commonly driven by too many unknowns. That said, de-leveraging is not so pleasant and restoring employment in the current landscape is not easy, but in many ways the market has explored and examined doomsday scenarios.
Growth in private sector jobs has been increasing slowly, corporate earnings are closer to all-time high levels and housing appears to be digging out of a deep ditch. All three fundamental points have backed this strong equity market that is looking ahead or at least for signs that indicate the stopping of the ongoing bleeding. For example, “A lack of inventory in the low-price segment of the market meant the average price of a home was up just because there were fewer low-priced homes in the mix. Adjusting for price, existing home sales were up a more impressive 16%, which is more in line with the growth we are seeing in new home sales.” (Morningstar, Robert Johnson, September 22, 2012). The expectation for continuously improving numbers is slowly building, which only enhances further sensitive responses.
Underestimated
Surely, when the thought of the S&P 500 index revisiting 2007 highs while Nasdaq hovers near its 12-year highs occurs, then it naturally stirs a knee-jerk reaction of a market that’s accelerating too quickly. It is understandable, but not necessarily wise, to take “overbought” statements at face value. Investment managers and participants are set to quarrel between the “gut feel” of day-to-day observation versus a mechanical but familiar set of circumstances that supports higher stock indexes
Through this upside move, there are instances of reality check that lead to a blurry vision when dissecting the testy social and foreign policy environment ahead of election season. Excessive diversion into these not-so-pretty but contentious social dynamics may have led some professionals to lose focus on trends and macro catalysts. Plus, the lack of clarity in regulatory policies and banks’ new revenue models enhance the list of uncertain items. Nonetheless, that’s not enough to depress a dynamic and evolving financial market.
First, it has become too common for politicians or pundits to bash the Federal Reserve’s actions these days. Secondly, there has been a growing fear movement that has led investors to purchase downside protection (insurance) in portfolio holdings. This is exhibited in various ways, as this summary showcases: “The CBOE saw more than 600,000 VIX contracts traded on Friday [September 14, 2012] for open interest of 7.66m, of which more than two-thirds represented calls, indicating that investors are positioning for volatility to increase in the near term.” (IFR Asia, September 23, 2012). Thirdly, the lack of retail investor participation is noteworthy and not needed to produce a solid year-to-date return. Interestingly, the majority of hedge fund managers did not participate or show strong convictions in the rally. At the end of August, when the S&P 500 index returned nearly 12%, hedge funds only produced 3.8% (Hennessey Group LLC). This is not overly alarming for longtime mutual fund observers who’re accustomed to underperformance by overhyped or larger managers. Similarly, few money managers may increase overall risk tolerance to chasing returns by accumulating winning stocks. That response potentially fuels further market upside movement (fairly or unfairly), especially if the real economy improves at least psychologically. Sure, pending pullbacks resurface here, but the positive momentum is hard to debate or ignore.
Suspenseful questions
Now that the anticipation of further central bank easing is nearly off the table, then what’s the next upside catalyst? It’s a question that’s being asked and an answer that will not be clear in the near-term. Are expectations going to escalate too high? And if the stimulus fails to produce growth, then what are the options and consequences?
These are all valid questions that will play out. Certainty, the Federal Reserve plan is now quite evident to decrease the suspense. The results of US elections and pending results from Eurzone solutions clearly will set the stage. Not to be missed in all headline-sensitive items is the potential resurgence of emerging markets, which contribute significantly to sales of larger multi-national firms. If the interconnected market operates in a coordinated recovery, then a collective strength may re-emerge. Any movement of collective strength can spark a much louder bull market as the odds for this are still underestimated.
Article Quotes:
“Americans have profited from China’s meteoric rise: China holds $1.15 trillion of the roughly $16 trillion total in federal debt, enabling deficit-popping tax cuts and government expenditures on social programs and the military. Nearly 160,000 Chinese students attended American universities last year, a 398 percent increase over the past 15 years, according to the Institute of International Education. Chinese firms invested more than $4.5 billion directly into the United States in each of the previous two years, through either mergers or opening new factories, according to the Rhodium Group. More than 1 million Chinese tourists came to the United States last year – each spending an average of about $6,500. The Commerce Department estimates 3.25 million Chinese will visit in 2016.” (The Fiscal Times, September 21, 2012)
“Much that could have gone wrong in the euro zone suddenly seems to be going right. Germany’s constitutional court in Karlsruhe has given the go-ahead for a new rescue fund. A banking union is taking shape. The ever-awkward Dutch have swung back to pro-EU mainstream parties in this week’s election. This builds on a recent pledge from the European Central Bank (ECB) to act to stop the break-up of the currency. Even angry talk of expelling the Greeks from the euro has died down. But don’t rejoice quite yet. The fine print of the Karlsruhe judgment may yet cause problems. Even Dutch centrists are wary of handing over cash and sovereignty. Nobody yet knows how to defuse the ticking bomb of Greece. The ECB’s commitment is untested. And nobody yet knows whether and when Spain will accept the offer of ECB help. Then there is the danger of complacency: debtor states might slow down reforms; creditors may lose the will to repair the euro’s fatal flaws.” (The Economist, September 15, 2012)
Levels:
S&P 500 Index [1465.77] – Trading at annual and multi-year highs while 7% above its 200-day moving average. Recent break above 1420 showcases some buyers’ appetite despite pending pullbacks.
Crude [$92.89] – Sharp near-term decline triggered after reaching the $100 level on September 14, 2012. Set to hold steady around $92 as participants decipher the reasons for recent declines.
Gold [$1784.50] – On one end, a break above $1750 demonstrates ongoing strength that aims to reach all-time highs of $1895 set last September. However, staying above $1750 for a considerable time has been challenging. In November 2011 gold peaked at $1795 and on March 2, 2012 the commodity stalled at $1781.
DXY – US Dollar Index [79.32] – Since late July, the dollar strength run has taken its familiar course of depreciation. In recent weeks, the dollar has been attempting to stabilize, but appears to trade around its multi-year average.
US 10 Year Treasury Yields [1.75%] – The last two months are establishing a new tight range between 1.60% and 1.80% as more clues are awaited for a noteworthy move.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, September 10, 2012
Market Outlook | September 10, 2012
“Society is always taken by surprise at any new example of common sense.” Ralph Waldo Emerson
Common sayings
The three common prevailing themes these days circle around re-accelerating gold prices, overvalued stock market and weakening Euro. As to how these themes materialize remains an art form that will play itself out. Deciphering the chances of all three themes having an unexpected or inverse result is even more appealing then the currently presented conventional thinking.
The thought process of high gold prices, lower stock market and weakening Euro stems from daily reminders of economic slowdown and ongoing efforts of easing by central banks. This collective growth concern has plagued large (especially China) and smaller nations in recent months. Thus, the inescapable nature of interconnected markets creates a gloomier outlook for those shaped by current events. These fragile growth related issues may reinstate further thoughts that all three themes will play out in a "logical" manner. At least, experience teach us the power of self-fulfilling prophecies should not be underestimated. However, accepting a gloomy outlook because it is a good or logical story is not prudent for a participant looking to capture trends.
A Multi-purpose idea
From a participants point of view, having clarity of the “instrument” is a good start. As in, is gold a commodity or a currency or both? Is it a speculative instrument or a long term investment? Perhaps all of the above is the sentiment that is being felt and those forces are unpredictable in their waves. Yet, staying weary of these so called "obvious" statements usually ends up rewarding the skeptical observer. These days gold is popular not only as an investment tool but a political tool as a commodity that has rustic appeal and historical appeal. Plus, gold is a hedge for gloomy outlook or system breakdowns that are pending. Perhaps, there is a comfort in holding in a perceived safe instrument.
Gold aficionados are sensing a bottoming process form over the summer. That encouragement is fueled by an 11% rise in gold prices since mid-July. A much anticipated gold rally lurked in the background and reawakening the gold bugs. Yet, the goal of diversification away from major currencies is not to be confused with gold price appreciation. In other words, fear of dollar and Euro depreciation might be compelling to look for some gold exposure. Sure, that’ s a portfolio management decision to hold some the same way central banks manage their balance sheet. Sometimes confusing a hedge with an investment does not have a pleasant outcome. In the near-term, the higher gold prices go the higher the conviction of those awaiting this commonly accepted expectation.
Sustainability doubted
Observers are noticing the rise in stock markets and ongoing strength of corporate earnings and asking the question: is this sustainable?
It is a logical question that begs for increased clarity, but the uptrend is too difficult to dismiss or ignore. Of course, some pundits remind us that The S&P 500 index keeps making its stride towards the 2007 highs led by technology but wide participation is visible – even banks are recovering. The well followed stock indices are up 14% for 2012 and if one was too busy reading the “slow down” headlines then these gains would’ve been harder to visualize. For a focused trader, all the noise of market concern has been the loudest distraction, but fundamentals have been solid.
Bank analysts (ie. Bank of America and RBC) are beginning to send out cautious forecasts for equity markets between now and year-end. This is hardly surprising and somewhat predictable for veteran observers. As volatility remains low these conditions invite the contrarian crowd to bet against all global markets. That bet has been mistaken several times this year in which some envisioned increase turbulence leading to stock demise. The set up for a stock market correction may be plausible but evidence is not quite as visible as desired by most naysayers. Thus, the positive momentum remains in place.
Undesirable challenge
Much of the discussions and cautious investor sentiment centers around a fragile European stability. Importantly, there is an ongoing assumption that Europe can not solve its problems and the Euro currency is bound to collapse. Yet, the preservation of the Euro appears to be a priority despite a mountain of complex challenges. For risk takers, the erosion of the Euro value has not materialized as expected. Obviously, the political mess for resolution and increasing unemployment is discomforting in the Eurozone. The emotional responses to these events is visible as Greece enters the fifth year of recession. Now, the contemplation of Greece leaving the Euro is on the table but impact on currency might be another story. As an editorial reminded us this weekend: “If Greece, the weakest link, is forced out of the monetary union, that would actually strengthen the currency. The result would be so chaotic for Greece that the other debtor countries, observing the wreckage, would do whatever it took to avoid the same fate, cutting their deficits even more quickly and accelerating other reforms.” (Washington Post, September 7, 2012). Thus, the fate of the Euro may not be as clear as some point out and, as usual, the timing is tricky for observers and costly for participants.
Stimulation continued
Intense anticipation of further easing by the Federal Reserve is understandable but the unintended consequences stir up additional suspense and colorful opinions. The unfolding events trigger this question: Does QE3 provide further economic spark or does it showcases further economic desperation?
Guessing how participants react from a psychological point of view is more noteworthy for speculators than QE3’s impact. The US jobs number translated to an overall weak result but sparked a curiosity in the pending easing announcement. The impact of all stimulus efforts seems mysterious to most and too early to tell its success. Importantly, tracking inflation expectation remains a vital barometer that will shape investors mindset. Closely watched indeed. Rising inflation most likely is set to reinforce that the recovery is taking place and potentially not fully recognized by the marketplace given the infestation of “gloomy” outlooks. If that’s the case then inflation expectation remains the rewarding surprise for those betting on increasing stock prices. Perhaps, then one would have a better idea on Gold, stocks and currencies.
Article Quotes:
“The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry…..Currently, the German economy is doing relatively well and the political situation is also relatively stable; the crisis is only a distant noise coming from abroad. Only something shocking would shake Germany out of its preconceived ideas and force it to face the consequences of its current policies. That is what a movement offering a workable alternative to German domination could accomplish. In short, the current situation is like a nightmare that can be escaped only by waking up Germany and making it aware of the misconceptions that are currently guiding its policies. We can hope Germany, when put to the choice, will choose to exercise benevolent leadership rather than to suffer the losses connected with leaving the euro” (George Soros, The New York Review of Books, September 7, 2012).
“The National Development and Reform Commission last week approved 25 urban rail and 13 highway construction projects, and a number of water schemes. The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent…. Urbanisation remains a long-term play. About 70 per cent of China’s 100-odd cities with a population of 5m or more do not have a metro, HSBC notes. But in today’s tougher funding environment, big spending announcements will not translate into guaranteed growth.” (Financial Times, September 9, 2012)
Levels:
S&P 500 Index [1437.92] – Broke above the spring highs of 1420 and now making new yearly highs. Positive momentum continues despite chatter of a peak that’s overly anticipated.
Crude [$96.42] – Last 15 days trading action suggest a narrow range between $95-97. Near-term momentum waning despite the explosive run from $80 to $96 in recent months. Appears that participants are waiting for a catalyst to dictate the next noteworthy move.
Gold [$1728.00] – For few months the commodity traded in a narrow range between $1550 and $1650. Now the recent lift above $1700, creates a momentum and increasing expectation to elevate above or to $1800.
DXY – US Dollar Index [82.59] – Noticeable downtrend since late July in which the index has fallen by nearly 5%. Some of the decline may be linked to anticipation of further easing.
US 10 Year Treasury Yields [1.68%] – Stuck in the familiar range below 2%. Increasing odds in days ahead where yields stay around the 1.60% to 1.80% zone.
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
Common sayings
The three common prevailing themes these days circle around re-accelerating gold prices, overvalued stock market and weakening Euro. As to how these themes materialize remains an art form that will play itself out. Deciphering the chances of all three themes having an unexpected or inverse result is even more appealing then the currently presented conventional thinking.
The thought process of high gold prices, lower stock market and weakening Euro stems from daily reminders of economic slowdown and ongoing efforts of easing by central banks. This collective growth concern has plagued large (especially China) and smaller nations in recent months. Thus, the inescapable nature of interconnected markets creates a gloomier outlook for those shaped by current events. These fragile growth related issues may reinstate further thoughts that all three themes will play out in a "logical" manner. At least, experience teach us the power of self-fulfilling prophecies should not be underestimated. However, accepting a gloomy outlook because it is a good or logical story is not prudent for a participant looking to capture trends.
A Multi-purpose idea
From a participants point of view, having clarity of the “instrument” is a good start. As in, is gold a commodity or a currency or both? Is it a speculative instrument or a long term investment? Perhaps all of the above is the sentiment that is being felt and those forces are unpredictable in their waves. Yet, staying weary of these so called "obvious" statements usually ends up rewarding the skeptical observer. These days gold is popular not only as an investment tool but a political tool as a commodity that has rustic appeal and historical appeal. Plus, gold is a hedge for gloomy outlook or system breakdowns that are pending. Perhaps, there is a comfort in holding in a perceived safe instrument.
Gold aficionados are sensing a bottoming process form over the summer. That encouragement is fueled by an 11% rise in gold prices since mid-July. A much anticipated gold rally lurked in the background and reawakening the gold bugs. Yet, the goal of diversification away from major currencies is not to be confused with gold price appreciation. In other words, fear of dollar and Euro depreciation might be compelling to look for some gold exposure. Sure, that’ s a portfolio management decision to hold some the same way central banks manage their balance sheet. Sometimes confusing a hedge with an investment does not have a pleasant outcome. In the near-term, the higher gold prices go the higher the conviction of those awaiting this commonly accepted expectation.
Sustainability doubted
Observers are noticing the rise in stock markets and ongoing strength of corporate earnings and asking the question: is this sustainable?
It is a logical question that begs for increased clarity, but the uptrend is too difficult to dismiss or ignore. Of course, some pundits remind us that The S&P 500 index keeps making its stride towards the 2007 highs led by technology but wide participation is visible – even banks are recovering. The well followed stock indices are up 14% for 2012 and if one was too busy reading the “slow down” headlines then these gains would’ve been harder to visualize. For a focused trader, all the noise of market concern has been the loudest distraction, but fundamentals have been solid.
Bank analysts (ie. Bank of America and RBC) are beginning to send out cautious forecasts for equity markets between now and year-end. This is hardly surprising and somewhat predictable for veteran observers. As volatility remains low these conditions invite the contrarian crowd to bet against all global markets. That bet has been mistaken several times this year in which some envisioned increase turbulence leading to stock demise. The set up for a stock market correction may be plausible but evidence is not quite as visible as desired by most naysayers. Thus, the positive momentum remains in place.
Undesirable challenge
Much of the discussions and cautious investor sentiment centers around a fragile European stability. Importantly, there is an ongoing assumption that Europe can not solve its problems and the Euro currency is bound to collapse. Yet, the preservation of the Euro appears to be a priority despite a mountain of complex challenges. For risk takers, the erosion of the Euro value has not materialized as expected. Obviously, the political mess for resolution and increasing unemployment is discomforting in the Eurozone. The emotional responses to these events is visible as Greece enters the fifth year of recession. Now, the contemplation of Greece leaving the Euro is on the table but impact on currency might be another story. As an editorial reminded us this weekend: “If Greece, the weakest link, is forced out of the monetary union, that would actually strengthen the currency. The result would be so chaotic for Greece that the other debtor countries, observing the wreckage, would do whatever it took to avoid the same fate, cutting their deficits even more quickly and accelerating other reforms.” (Washington Post, September 7, 2012). Thus, the fate of the Euro may not be as clear as some point out and, as usual, the timing is tricky for observers and costly for participants.
Stimulation continued
Intense anticipation of further easing by the Federal Reserve is understandable but the unintended consequences stir up additional suspense and colorful opinions. The unfolding events trigger this question: Does QE3 provide further economic spark or does it showcases further economic desperation?
Guessing how participants react from a psychological point of view is more noteworthy for speculators than QE3’s impact. The US jobs number translated to an overall weak result but sparked a curiosity in the pending easing announcement. The impact of all stimulus efforts seems mysterious to most and too early to tell its success. Importantly, tracking inflation expectation remains a vital barometer that will shape investors mindset. Closely watched indeed. Rising inflation most likely is set to reinforce that the recovery is taking place and potentially not fully recognized by the marketplace given the infestation of “gloomy” outlooks. If that’s the case then inflation expectation remains the rewarding surprise for those betting on increasing stock prices. Perhaps, then one would have a better idea on Gold, stocks and currencies.
Article Quotes:
“The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry…..Currently, the German economy is doing relatively well and the political situation is also relatively stable; the crisis is only a distant noise coming from abroad. Only something shocking would shake Germany out of its preconceived ideas and force it to face the consequences of its current policies. That is what a movement offering a workable alternative to German domination could accomplish. In short, the current situation is like a nightmare that can be escaped only by waking up Germany and making it aware of the misconceptions that are currently guiding its policies. We can hope Germany, when put to the choice, will choose to exercise benevolent leadership rather than to suffer the losses connected with leaving the euro” (George Soros, The New York Review of Books, September 7, 2012).
“The National Development and Reform Commission last week approved 25 urban rail and 13 highway construction projects, and a number of water schemes. The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent…. Urbanisation remains a long-term play. About 70 per cent of China’s 100-odd cities with a population of 5m or more do not have a metro, HSBC notes. But in today’s tougher funding environment, big spending announcements will not translate into guaranteed growth.” (Financial Times, September 9, 2012)
Levels:
S&P 500 Index [1437.92] – Broke above the spring highs of 1420 and now making new yearly highs. Positive momentum continues despite chatter of a peak that’s overly anticipated.
Crude [$96.42] – Last 15 days trading action suggest a narrow range between $95-97. Near-term momentum waning despite the explosive run from $80 to $96 in recent months. Appears that participants are waiting for a catalyst to dictate the next noteworthy move.
Gold [$1728.00] – For few months the commodity traded in a narrow range between $1550 and $1650. Now the recent lift above $1700, creates a momentum and increasing expectation to elevate above or to $1800.
DXY – US Dollar Index [82.59] – Noticeable downtrend since late July in which the index has fallen by nearly 5%. Some of the decline may be linked to anticipation of further easing.
US 10 Year Treasury Yields [1.68%] – Stuck in the familiar range below 2%. Increasing odds in days ahead where yields stay around the 1.60% to 1.80% zone.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 27, 2012
Market Outlook | August 27, 2012
“Quarrels would not last long if the fault were only on one side.” (François de la Rochefoucauld 1613-1680)
Disagreements:
A series of divided views remains visible in the actions of the Federal Reserve, congress, Euro-zone leaders and investors alike – a theme that continues to resurface among those credited with setting market tones. Surely, the contentious and passionate differences today have led to the following:
1) Increased difficulty in deciphering the “believable” data about the economy and stock market, given increasingly biased views.
2) Ongoing public and private disagreement among policy makers in a rebuilding era creates unneeded uncertainty, if not further confusion.
3) Confidence restoration is not easily achieved when adding more layers of difficulties in heated debates.
4) Unconvincing messages of longer-term sustainability and undesired results of increased risk aversion.
In a puzzling manner, the desire for collective success (of the global economy) seems less noticeable than imagined. Specifically in the case of the Federal Reserve, the debate over the need for stimulus has played out for a while in FOMC meetings. Thus far, the plan to ease has prevailed, but its results are under scrutiny, as usual. A new wave of uncertainty looms over the leadership of the central bank, driven by election chatter and speculative banter on the next quantitative easing. The question of further easing is debatable itself, which only confirms a genuinely confusing state of affairs rather than providing any answers.
Perspective mystified
It’s hard to tell if market success is feared more than fear itself. So far this year, investment success, when measured by continuing equity market appreciation, appears more acceptable than not. However, it has failed to drive away all legitimate and illegitimate fear mongering by pundits. Perhaps that’s business as usual, but it stands out in an unusual time.
For example, the view of the market today varies depending on whom you ask during a random stroll. The year-to-date numbers show 12% return for the S&P 500 index and 22% appreciation for the Nasdaq. For an outsider removed from the day-to-day noise, these numbers may reflect normal times. Even weak economic numbers did not fully destroy the market’s spirit, but revealed the disconnect between the real economy and stock prices – frustrating for the too-logical-minded participant and tricky for those with a gambler’s mindset. Nonetheless, the end result increases the challenge for prudent managers in charge of selecting profitable ideas.
Gold’s glory?
Euphoric supporters of gold appear to be reawakened, as sentiment is overwhelmingly positive. The following discovery was summarized on Bloomberg:
“Twenty-nine of 35 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further three were neutral, making the proportion of bulls the highest since Nov. 11. Investors bought 51.7 metric tons valued at $2.78 billion through gold-backed exchange-traded products this month, the most since November, overtaking France as the world’s fourth-largest hoard when compared with national reserves.” (Bloomberg August 23, 2012)
In digesting the fact above, one should not have a knee-jerk reaction on the bullish or contrarian side. Instead, understanding the landscape may tell the story better. Chart observers will point out increasing odds for price appreciation given a bottoming process that’s unfolded around $1550 (per ounce) for several months. At the same time, macro observers with a gloomier outlook for “everything else” are known to confidentially cling to a relatively mainstream view of buying gold ahead of further chaos. Sure, that point has its merits when considering uncertainty and inflation. Interestingly, the lack of chaotic market events and calming volatility levels this year may easily convince plenty to think that the worst is ahead in the second half. Yet, it is glaringly dangerous or at least intriguing that the consensus is overly optimistic in embracing gold as the investment solution.
Article Quotes:
“In 1962, one newspaper pushed that ‘it's about time you stopped worrying about layoffs and start thinking about security and the future.’ In 1983, another wrote about a rise in consumer confidence: ‘The nuclear threat still looms. Reports come in every week of further destruction of forests by acid rain. Unemployment is at a record high. But people seem to be tired of worrying.’ Then again in 1992: ‘People are saying, “I'm tired of this recession,” and they are spending again,’ wrote the Dallas Morning News.
It turns out there's more to this than anecdotes. There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones – a sort of natural aversion to unpleasant thoughts. In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.” (Morgan Housel, August 24, 2012 The Motley Fool)
“Despite cheaper labor abroad, currency manipulation, intellectual property theft, and subsidies to foreign competitors, these American manufacturers are winning. Many of them are small or medium-sized businesses that are family owned. Some are large corporations led by executives who still believe that America is the best place to set up a factory. … These manufacturers help explain why, against all odds, our nation held the global lead over China in manufacturing output until 2009. What's extraordinary is that our aggregate output remains competitive with China's, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China's or India's and significantly larger than Japan's or Germany's. Strong productivity has enabled the United States to increase its manufacturing output over the past 30 years to a greater extent than any other developed nation, more than doubling in size. American manufacturers often have an advantage over their competitors in more authoritarian or bureaucratic nations because participatory governance is preferable to top-down governance, even in the business world.” (Ro Khanna, Reuters, August 21, 2012)
Levels:
S&P 500 Index [1411.13] – After reaching annual highs of 1426 on August 21, there is a growing anticipation for a correction toward 1350. Despite these changing sentiments, in the near term, the uptrend remains in place.
Crude [$96.15] – Staying above $100 has been challenging in the last two years. In the springs of 2011 and 2012, the commodity peaked, then normalized to a sideways pattern.
Gold [$1618.50] – Odds for a bottoming process here appear high. The consensus is overwhelmingly positive here; however, a run above $1895 seems mysterious for now.
DXY – US Dollar Index [82.59] – Dollar strength has been slowing since late July. This pause does not trigger a significant move to reach a cycle conclusion.
US 10 Year Treasury Yields [1.68%] – A struggle to climb above 1.80% while not too far removed from the lows of 1.37%. Event-driven movements should make moves in yields rather sensitive.
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
Disagreements:
A series of divided views remains visible in the actions of the Federal Reserve, congress, Euro-zone leaders and investors alike – a theme that continues to resurface among those credited with setting market tones. Surely, the contentious and passionate differences today have led to the following:
1) Increased difficulty in deciphering the “believable” data about the economy and stock market, given increasingly biased views.
2) Ongoing public and private disagreement among policy makers in a rebuilding era creates unneeded uncertainty, if not further confusion.
3) Confidence restoration is not easily achieved when adding more layers of difficulties in heated debates.
4) Unconvincing messages of longer-term sustainability and undesired results of increased risk aversion.
In a puzzling manner, the desire for collective success (of the global economy) seems less noticeable than imagined. Specifically in the case of the Federal Reserve, the debate over the need for stimulus has played out for a while in FOMC meetings. Thus far, the plan to ease has prevailed, but its results are under scrutiny, as usual. A new wave of uncertainty looms over the leadership of the central bank, driven by election chatter and speculative banter on the next quantitative easing. The question of further easing is debatable itself, which only confirms a genuinely confusing state of affairs rather than providing any answers.
Perspective mystified
It’s hard to tell if market success is feared more than fear itself. So far this year, investment success, when measured by continuing equity market appreciation, appears more acceptable than not. However, it has failed to drive away all legitimate and illegitimate fear mongering by pundits. Perhaps that’s business as usual, but it stands out in an unusual time.
For example, the view of the market today varies depending on whom you ask during a random stroll. The year-to-date numbers show 12% return for the S&P 500 index and 22% appreciation for the Nasdaq. For an outsider removed from the day-to-day noise, these numbers may reflect normal times. Even weak economic numbers did not fully destroy the market’s spirit, but revealed the disconnect between the real economy and stock prices – frustrating for the too-logical-minded participant and tricky for those with a gambler’s mindset. Nonetheless, the end result increases the challenge for prudent managers in charge of selecting profitable ideas.
Gold’s glory?
Euphoric supporters of gold appear to be reawakened, as sentiment is overwhelmingly positive. The following discovery was summarized on Bloomberg:
“Twenty-nine of 35 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further three were neutral, making the proportion of bulls the highest since Nov. 11. Investors bought 51.7 metric tons valued at $2.78 billion through gold-backed exchange-traded products this month, the most since November, overtaking France as the world’s fourth-largest hoard when compared with national reserves.” (Bloomberg August 23, 2012)
In digesting the fact above, one should not have a knee-jerk reaction on the bullish or contrarian side. Instead, understanding the landscape may tell the story better. Chart observers will point out increasing odds for price appreciation given a bottoming process that’s unfolded around $1550 (per ounce) for several months. At the same time, macro observers with a gloomier outlook for “everything else” are known to confidentially cling to a relatively mainstream view of buying gold ahead of further chaos. Sure, that point has its merits when considering uncertainty and inflation. Interestingly, the lack of chaotic market events and calming volatility levels this year may easily convince plenty to think that the worst is ahead in the second half. Yet, it is glaringly dangerous or at least intriguing that the consensus is overly optimistic in embracing gold as the investment solution.
Article Quotes:
“In 1962, one newspaper pushed that ‘it's about time you stopped worrying about layoffs and start thinking about security and the future.’ In 1983, another wrote about a rise in consumer confidence: ‘The nuclear threat still looms. Reports come in every week of further destruction of forests by acid rain. Unemployment is at a record high. But people seem to be tired of worrying.’ Then again in 1992: ‘People are saying, “I'm tired of this recession,” and they are spending again,’ wrote the Dallas Morning News.
It turns out there's more to this than anecdotes. There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones – a sort of natural aversion to unpleasant thoughts. In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.” (Morgan Housel, August 24, 2012 The Motley Fool)
“Despite cheaper labor abroad, currency manipulation, intellectual property theft, and subsidies to foreign competitors, these American manufacturers are winning. Many of them are small or medium-sized businesses that are family owned. Some are large corporations led by executives who still believe that America is the best place to set up a factory. … These manufacturers help explain why, against all odds, our nation held the global lead over China in manufacturing output until 2009. What's extraordinary is that our aggregate output remains competitive with China's, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China's or India's and significantly larger than Japan's or Germany's. Strong productivity has enabled the United States to increase its manufacturing output over the past 30 years to a greater extent than any other developed nation, more than doubling in size. American manufacturers often have an advantage over their competitors in more authoritarian or bureaucratic nations because participatory governance is preferable to top-down governance, even in the business world.” (Ro Khanna, Reuters, August 21, 2012)
Levels:
S&P 500 Index [1411.13] – After reaching annual highs of 1426 on August 21, there is a growing anticipation for a correction toward 1350. Despite these changing sentiments, in the near term, the uptrend remains in place.
Crude [$96.15] – Staying above $100 has been challenging in the last two years. In the springs of 2011 and 2012, the commodity peaked, then normalized to a sideways pattern.
Gold [$1618.50] – Odds for a bottoming process here appear high. The consensus is overwhelmingly positive here; however, a run above $1895 seems mysterious for now.
DXY – US Dollar Index [82.59] – Dollar strength has been slowing since late July. This pause does not trigger a significant move to reach a cycle conclusion.
US 10 Year Treasury Yields [1.68%] – A struggle to climb above 1.80% while not too far removed from the lows of 1.37%. Event-driven movements should make moves in yields rather sensitive.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 20, 2012
Market Outlook | August 20, 2012
"By law of periodical repetition, everything which has happened once must happen again and again – and not capriciously, but at regular periods, and each thing in its own period, not another's and each obeying its own law." (Mark Twain, 1835-1910)
Calmness prevails
The trend of dwindling trading volume continues to match a very low volatility period in the late summer months. However, it is not slowing the overall positive market response so far in 2012. Beyond elections, the pending outcome of stimulus and interest rate policies sounds hopeful for some participants and vital for policy makers. Through this un-shuffling of sorts, the US dollar remains the most attractive currency by far, for now. Yet, economic growth is not a simple reading in this new era and is certainly open to interpretation, given opaque methodologies. Despite the salesman efforts by pundits and political advisors in key topics such as economic growth, the “fiscal cliff” and corporate earnings, growth generally fails to present a clear direction with any certainty. So if investors avoid being overly greedy while ignoring most of the fear mongering, then their odds of being lucky increase.
Repetition
The four-year cycle is intriguing to watch for market observers. After the technology bubble of the late 1990s, the S&P 500 index finally began to stand on solid ground in the spring of 2003. Back then, the index bottomed at 788 in March 2003, then began a smooth upside trend up all the way up to 1576 (all-time high) in October 2007. It was an impressive run between 2003-2007, in which the S&P 500 gained 99.78% right ahead of the credit meltdown. Similarly, we’re in another four-year cycle that sparked after the credit crisis of 2008. After the dismal and highly documented collapse, in the spring of 2009 a new revival re-emerged. One can easily notice a similar upside pattern. This time, there has been around a 100% appreciation for the S&P 500 index when measuring between 2003-August 2012. This showcases that cycles find a way to provoke similarities despite a rapidly changing world.
The mirroring pattern in both recent four-year cycles is noteworthy for observers but market facts are clouded by political views given the heavy focus on pending election results. As we approach October, this trend is rather suspenseful and the outcomes remain mysterious, even to the brave making daring directional bets.
Disconnect clarified
The broad market as measured by the share performances of 500 companies, tells a story that may not be fully descriptive of the world that’s visible to all. First, nearly half of the companies in the S&P 500 index earn their revenue from non-US markets. Secondly, the average results are tilted toward larger companies while not describing the story for smaller firms and regular small businesses, especially when it comes to access to cheaper capital. Thirdly, the stock market movement should not be confused with the general economy at all times, as that remains a tricky relationship. This is a lesson that keeps repeating for those willing to sift through noise and read through misleading presentations. Thus, developing a genuine opinion is becoming much harder, and pinpointing themes and ideas requires a demanding workload – not to mention the added risk, which is not quite well received in this risk-averse mainstream world.
Article Quotes:
“Mr. Goodhart used monetary history to test these competing theories. He examined the overthrow of Rome and a period in the tenth century when the Japanese government stopped minting coins. If the origin of money were purely private, these shocks should have had no monetary effects. But after Rome’s collapse, traders resorted to barter; in Japan they started to use rice instead of coins. There is a clear link between fiscal power and money. The evidence suggests that only ‘informal’ monies can spring up purely privately. But informal money can exist on the grandest scale. The dollar’s position as the world’s reserve currency is not mandated by any government, for example. Its pre-eminence outside America rests on it being the best option for international transactions. Once a competitor currency becomes preferable, firms and other governments will move on. The good news for the dollar is that the Chinese yuan is not yet widely accepted and suffers from higher inflation, reducing its usefulness. But a shift in the world’s reserve currency could be swifter than many assume. The dollar’s other competitor, the euro, has deeper problems. Its origins were not private. Nor is it a proper Cartalist money, backed by a nation state. This means it lacks a foundation in the power of either the market or the state.” (The Economist, August 18, 2012)
“So some may find it surprising that in a year when Europe's troubles have thrown the global economy into fits, gold has been a loser's bet. The price per ounce of everyone's favorite rock is down about 7 percent for the year and is off 15 percent from its September peak. According to a report released yesterday by the World Gold Council, total demand for gold fell 7 percent in the second quarter of 2012 compared to the year before. Let this be a reminder that, no matter how long it's been around, gold just isn't that special. It's a commodity that responds to the laws of supply and demand. Unlike commodities such as wheat or oil, which you can at least eat or burn for fuel, gold pretty much lacks any inherent value beyond what the market assigns to it. And in the past decade, much of the new demand that set gold off on a wild tear from around $300-an-ounce at the turn of the century to almost $1,900-an-ounce last year has come from two places: India and China. Combined, they account for 45 percent of the world's demand for gold jewelry and bars.” (The Atlantic, August 17, 2012)
Levels:
S&P 500 Index [1418.16] – Approaching annual highs from April (1422), a continued sign of strength in place. Although odds for a pullback are heavily discussed, the trend showcases a positive upward swing.
Crude [$96.01] – Attempting to climb back to $100. Interestingly, the much-followed 200-day average stands at $96.69; that can get a few chart observers to rethink their views.
Gold [$1618.50] – The ongoing and slow bottoming process continues to drag on. The 50-day moving average tells the story at $1597.00.
DXY – US Dollar Index [82.59] –Although mostly trendless, it is fair to say dollar weakness has not been visible in the last year or recent days. However, the multi-month strength continues to lack meaningful follow-through.
US 10 Year Treasury Yields [1.81%] – After making all-time lows last month, yields are somewhat recovering, but climbing back to 2% remains challenging.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 13, 2012
Market Outlook | August 13, 2012
“In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists.” (Eric Hoffer 1902-1983).
Revisiting cycles
It was four years ago when the crux of the financial crisis ferociously shocked the system and quick decisions had to be made to avoid a crumbling series of events. The residues of bailouts and distrust continue to re-ignite the day-to-day trading patterns. In the historic collapse of 2008, it was hard to visualize where we would be today. In hindsight, there are a few points to consider. For one, markets have stabilized despite low volume. Secondly, performance in major indexes is not as bad as was thought. Thirdly, the relative strength of the US stands out despite well-publicized lists of worries filling up pundits’ time.
On the other hand, the stability of banks is still a fragile discussion point as the Federal Resereve continues to demand “recovery plans” from the largest banks. Although less discussed, disaster aversion remains a common practice and occasional worry. Lessons from the 2008 crisis continue to force the regulators to require contingency plans with the hopes of avoiding controversial “bailouts.” Perhaps, confidence restoration is an ongoing challenge.
Meanwhile, calming banks’ vulnerability was intended to restore the system where lending can drive up economic activity. Mild as it may be, lending activity appears to pick up for now:
“Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy burdened by 8.3 percent unemployment. Fed policy makers including Chairman Ben S. Bernanke weighed the results of the survey at their July 31- Aug. 1 meeting at which they said they “will provide additional accommodation as needed” to support the economy.” (Bloomberg, August 6, 2012)
Reassessing
A year ago, the US downgrade awakened the markets while hardly altering the contentious political landscape. Yet, for those who bailed on equity markets, there was 27% appreciation in the S&P 500 Index. A year later, the strength of broad markets is less talked about, especially in a period of low yields. Instead, attention is consumed with endless discussions of a pending downfall, especially by those incentivized to use markets for a political barometer rather than a pure ‘money-making’ instrument. Thus, one must be meticulous in not mixing real returns with cheap talk when it comes to US markets. At the same time, seeking attractive alternatives is not easy to spot, either.
In looking ahead, the challenge begins. For example, if asked today, “Where is attractive growth?” many would stumble to answer with a high or any level of certainty. The global slowdown has been revealed in emerging markets as well as Europe in recent months. Thus, the ongoing slump is not news anymore, as the search for solutions and specific viable ideas continues.
Pricing courage:
The wild card may be in figuring out how much downside is already priced-in in this risk-sensitive environment. As usual, information is processed faster than headlines would have one imagine. Of course, it seems a little strange (in terms of odds) for one to predict the anticipated events of further easing, election results and corporate earnings growth. Three vital unknowns linger for the upcoming weeks. Believers in an ongoing rally are less visible and not loudly portraying their convictions. Not surprisingly, plenty take the safer route in deferring to election results for reexamination of risk taking. Amazingly enough at this junction, the continuation of the status quo (rising equity markets) might end up being the courageous move.
Article Quotes:
“There are a number of questions now confronting London's status as a financial center: firstly, it is clear that politicians in continental Europe would like nothing better than destroying the city's pre-eminent position in financial services. Partly this effort is so that European politicians could push through certain anti-market principles such as the financial transactions tax (the so-called Tobin tax being promulgated by the French) and a ban on certain types of financial transactions such as sovereign credit default swaps that they believe are centered in London. There is of course the deep envy that German regulators feel about the sheer irrelevance of Frankfurt as a global financial center, not to mention the deep resentment felt in France that even banks that survive due to government bailouts end up having significant operations, particularly those involving higher-paying jobs out of London. Then there is the whole question of how financial regulators have operated in the UK, essentially being accused by their colleagues elsewhere in the world (Switzerland, the US, Germany, Italy to mention a few) of allowing roguish behavior from bankers peddling fairly dangerous financial instruments …” (Asian Times, August 11, 2012)
“If one has to take a position, it may be reasonable to argue that the Beijing Olympics in 2008 symbolically marked the peaking of Chinese power. Everything began to go downhill afterwards. Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum. To be sure, Beijing's stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010. For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved.” (The Diplomat, August 9, 2012)
Levels:
S&P 500 Index [1405.87] – Revisiting the 1400-1420 range last reached in April. Interestingly, that marked the previous peak, which begs the question of a repeat or a stall.
Crude [$92.87] – Since bottoming on June 28, 2012, the commodity has managed to spark an uptrend. The ability to stay above $95 will determine the near-term buyers’ momentum.
Gold [$1618.50] – For over three months, the narrow trading range has been clearly defined between $1560-$1620. A breakout above $1620 could restore a long-awaited enthusiasm among gold aficionados. Yet, it’s safe to say an inflection point is here.
DXY – US Dollar Index [82.70] – The dollar strength theme has been alive and well for over a year. In recent months, an anticipated pause around 82.
US 10 Year Treasury Yields [1.65%] – Some visible relief since the extreme lows of July 25 (1.37%). Hints of rising rates, but a follow-through is desperately needed to reach above 2%.
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
Revisiting cycles
It was four years ago when the crux of the financial crisis ferociously shocked the system and quick decisions had to be made to avoid a crumbling series of events. The residues of bailouts and distrust continue to re-ignite the day-to-day trading patterns. In the historic collapse of 2008, it was hard to visualize where we would be today. In hindsight, there are a few points to consider. For one, markets have stabilized despite low volume. Secondly, performance in major indexes is not as bad as was thought. Thirdly, the relative strength of the US stands out despite well-publicized lists of worries filling up pundits’ time.
On the other hand, the stability of banks is still a fragile discussion point as the Federal Resereve continues to demand “recovery plans” from the largest banks. Although less discussed, disaster aversion remains a common practice and occasional worry. Lessons from the 2008 crisis continue to force the regulators to require contingency plans with the hopes of avoiding controversial “bailouts.” Perhaps, confidence restoration is an ongoing challenge.
Meanwhile, calming banks’ vulnerability was intended to restore the system where lending can drive up economic activity. Mild as it may be, lending activity appears to pick up for now:
“Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy burdened by 8.3 percent unemployment. Fed policy makers including Chairman Ben S. Bernanke weighed the results of the survey at their July 31- Aug. 1 meeting at which they said they “will provide additional accommodation as needed” to support the economy.” (Bloomberg, August 6, 2012)
Reassessing
A year ago, the US downgrade awakened the markets while hardly altering the contentious political landscape. Yet, for those who bailed on equity markets, there was 27% appreciation in the S&P 500 Index. A year later, the strength of broad markets is less talked about, especially in a period of low yields. Instead, attention is consumed with endless discussions of a pending downfall, especially by those incentivized to use markets for a political barometer rather than a pure ‘money-making’ instrument. Thus, one must be meticulous in not mixing real returns with cheap talk when it comes to US markets. At the same time, seeking attractive alternatives is not easy to spot, either.
In looking ahead, the challenge begins. For example, if asked today, “Where is attractive growth?” many would stumble to answer with a high or any level of certainty. The global slowdown has been revealed in emerging markets as well as Europe in recent months. Thus, the ongoing slump is not news anymore, as the search for solutions and specific viable ideas continues.
Pricing courage:
The wild card may be in figuring out how much downside is already priced-in in this risk-sensitive environment. As usual, information is processed faster than headlines would have one imagine. Of course, it seems a little strange (in terms of odds) for one to predict the anticipated events of further easing, election results and corporate earnings growth. Three vital unknowns linger for the upcoming weeks. Believers in an ongoing rally are less visible and not loudly portraying their convictions. Not surprisingly, plenty take the safer route in deferring to election results for reexamination of risk taking. Amazingly enough at this junction, the continuation of the status quo (rising equity markets) might end up being the courageous move.
Article Quotes:
“There are a number of questions now confronting London's status as a financial center: firstly, it is clear that politicians in continental Europe would like nothing better than destroying the city's pre-eminent position in financial services. Partly this effort is so that European politicians could push through certain anti-market principles such as the financial transactions tax (the so-called Tobin tax being promulgated by the French) and a ban on certain types of financial transactions such as sovereign credit default swaps that they believe are centered in London. There is of course the deep envy that German regulators feel about the sheer irrelevance of Frankfurt as a global financial center, not to mention the deep resentment felt in France that even banks that survive due to government bailouts end up having significant operations, particularly those involving higher-paying jobs out of London. Then there is the whole question of how financial regulators have operated in the UK, essentially being accused by their colleagues elsewhere in the world (Switzerland, the US, Germany, Italy to mention a few) of allowing roguish behavior from bankers peddling fairly dangerous financial instruments …” (Asian Times, August 11, 2012)
“If one has to take a position, it may be reasonable to argue that the Beijing Olympics in 2008 symbolically marked the peaking of Chinese power. Everything began to go downhill afterwards. Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum. To be sure, Beijing's stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010. For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved.” (The Diplomat, August 9, 2012)
Levels:
S&P 500 Index [1405.87] – Revisiting the 1400-1420 range last reached in April. Interestingly, that marked the previous peak, which begs the question of a repeat or a stall.
Crude [$92.87] – Since bottoming on June 28, 2012, the commodity has managed to spark an uptrend. The ability to stay above $95 will determine the near-term buyers’ momentum.
Gold [$1618.50] – For over three months, the narrow trading range has been clearly defined between $1560-$1620. A breakout above $1620 could restore a long-awaited enthusiasm among gold aficionados. Yet, it’s safe to say an inflection point is here.
DXY – US Dollar Index [82.70] – The dollar strength theme has been alive and well for over a year. In recent months, an anticipated pause around 82.
US 10 Year Treasury Yields [1.65%] – Some visible relief since the extreme lows of July 25 (1.37%). Hints of rising rates, but a follow-through is desperately needed to reach above 2%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 06, 2012
Market Outlook | August 6, 2012
“Confusion is a word we have invented for an order which is not yet understood.” (Henry Miller, 1891-1980)
Stalled in transition
Broadly speaking, for those looking to bet on the direction of stock indexes, it is not quite a clear-cut entry point. If you sense others are too fearful, then the contrarian view has some appeal, at least at first glance. In other words, why not buy in a fear-obsessed and not-so-cheerful environment? However, dissecting that thought leads one to simple arithmetic, which shows the S&P 500 index trading closer to the highs of 2007 than the lows of late 2008. Basically, we are not even close to a “collapsing” market, at least in terms of pricing. If you're a fundamental observer, then the corporate earnings growth makes one relatively optimistic. Yet, it has been an impressive trend for a while and this impressive run is bound to stall, from odds makers’ perspectives. Plus, value investors cannot claim things are too cheap for comfort, either. A conundrum, indeed.
Based on day-to-day anxiousness, one can easily state that volatility is very high, but the answer to that intuitive thought is simply: No. Actually, the truth is to the contrary: Perceived turbulence has declined significantly for several months in a calming manner, along with a slowing participation rate. This combination showcases the much-discussed growing disinterest in or temporary pause from risk-taking. However, barometers indicate we are far removed from any extreme panic. Not to mention last week’s trading glitch, which does not boost the confidence of the financial system, especially after the “flash crash” which only lets the commoner conclude that this market is too complex and highly vulnerable. Yet, as we’ve learned, like all crises, a solution follows despite debates and opinions.
Re-grouping
Emerging markets have boasted long-term cycle returns dating back to turn of the last decade. During that period, those runs were rewarding for investors and select countries’ GDP growth. Now, both investment themes have slowed, while cooling the excitement and momentum run. In looking ahead, many observers have asked, when is growth resuming in emerging markets? Some may view that turnaround point as sooner than others. Yet, most point out that the long-term prospects are what keep optimists alive in the short-term. For example, “Leading companies in the developed world earn just 17% of total revenues from emerging markets, even though these markets represent 36% of global GDP.” (McKinsey Quarterly, August 2012). Certainly, the long-term trend in emerging countries cannot be neglected, but timing the nature of the re-acceleration is tricky. Plus, identifying nations beyond the BRIC’s is a puzzle worth pursuing. That’s where patience may be rewarding, while a dose of healthy skepticism in future projections is worth a closer look.
Unanswerable – for now
Questions related to job growth, the success of quantitative easing and stabilization of the Eurozone are too big and difficult to answer for anyone. Time after time, these noisy macro issues engulf the minds of large and small investors. Basically, trying to predict the outcome of these issues may lead to more mistakes than accurate stock or commodity picking. Perhaps, investor frustration deals with the extra work needed to adjust to a new cycle with varying dynamics related to speedy information and increased competition. While it’s certainly not for the casual observer, to claim “buy and hold” is dead would be grossly misleading, as well. After all, since July 2010, the S&P 500 index is up nearly 38% despite the back-and-forth unknowns. Thus, focusing on big-picture answers to determine entry points is not unique and definitely not certain, either.
Article Quotes:
“The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the US was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of remaining workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains. The result was that China's rise came largely at Europe's expense. Since 2004 China has gained market share in the export of goods and of manufactured goods, while Europe's share is falling and the US share has held steady. After losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change. … Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 80 percent, due to increasing production of oil and particularly natural gas.” (The Atlantic, August, 3 2012)
“It is not just America’s Treasury that is benefiting from ultra-low borrowing costs. On July 30th Unilever, an Anglo-Dutch consumer-goods group, borrowed $1 billion in the bond markets, in two tranches: 0.45% for three-year money and 0.85% over five years, both record lows for corporate debt. A week earlier IBM had raised ten-year money at a rate of just 1.875%. The Spanish and Italian governments can only dream of funding at such a low cost. Multinational companies have some advantages over governments. Although they can be subject to punitive taxation, they have the potential to move their operations to more welcoming jurisdictions. Their revenues are not dependent on the fortunes of an individual economy. And large companies have been able to strengthen their balance-sheets over the past five years, whereas governments have been forced deep into deficit to prop up their economies.” (The Economist, August 4, 2012)
Levels:
S&P 500 Index [1390.99] – Knocking on the door of 1400 and marching higher from the lows established on June 4, 2012. Trend remains positive despite neutral developing patterns.
Crude [$91.40] – Signs of bottoming visible at $84 as shown in recent weeks, and re-acceleration around $90.
Gold [$1602.00] – Over the last three months, gold has seen plenty of trendless action. For example, the 50-day moving average stands at $1592, illustrating the continued zig-zag and narrow movements around $1600.
DXY – US Dollar Index [82.70] – For over a year, the dollar index has shown signs of strengthening. However, the current strength doesn’t match the peak levels seen in late 2008 (88.46), early 2009 (89.62) and mid 2010 (88.70). Potential pause looming in the near-term.
US 10 Year Treasury Yields [1.54%] – It was last August when yields were closer to 3% before a profound drop. Then, April 2012 marked another defining point, where yields struggled to move above 2%. Now, tiptoeing around all-times lows seems more normal than outrageous.
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.
Stalled in transition
Broadly speaking, for those looking to bet on the direction of stock indexes, it is not quite a clear-cut entry point. If you sense others are too fearful, then the contrarian view has some appeal, at least at first glance. In other words, why not buy in a fear-obsessed and not-so-cheerful environment? However, dissecting that thought leads one to simple arithmetic, which shows the S&P 500 index trading closer to the highs of 2007 than the lows of late 2008. Basically, we are not even close to a “collapsing” market, at least in terms of pricing. If you're a fundamental observer, then the corporate earnings growth makes one relatively optimistic. Yet, it has been an impressive trend for a while and this impressive run is bound to stall, from odds makers’ perspectives. Plus, value investors cannot claim things are too cheap for comfort, either. A conundrum, indeed.
Based on day-to-day anxiousness, one can easily state that volatility is very high, but the answer to that intuitive thought is simply: No. Actually, the truth is to the contrary: Perceived turbulence has declined significantly for several months in a calming manner, along with a slowing participation rate. This combination showcases the much-discussed growing disinterest in or temporary pause from risk-taking. However, barometers indicate we are far removed from any extreme panic. Not to mention last week’s trading glitch, which does not boost the confidence of the financial system, especially after the “flash crash” which only lets the commoner conclude that this market is too complex and highly vulnerable. Yet, as we’ve learned, like all crises, a solution follows despite debates and opinions.
Re-grouping
Emerging markets have boasted long-term cycle returns dating back to turn of the last decade. During that period, those runs were rewarding for investors and select countries’ GDP growth. Now, both investment themes have slowed, while cooling the excitement and momentum run. In looking ahead, many observers have asked, when is growth resuming in emerging markets? Some may view that turnaround point as sooner than others. Yet, most point out that the long-term prospects are what keep optimists alive in the short-term. For example, “Leading companies in the developed world earn just 17% of total revenues from emerging markets, even though these markets represent 36% of global GDP.” (McKinsey Quarterly, August 2012). Certainly, the long-term trend in emerging countries cannot be neglected, but timing the nature of the re-acceleration is tricky. Plus, identifying nations beyond the BRIC’s is a puzzle worth pursuing. That’s where patience may be rewarding, while a dose of healthy skepticism in future projections is worth a closer look.
Unanswerable – for now
Questions related to job growth, the success of quantitative easing and stabilization of the Eurozone are too big and difficult to answer for anyone. Time after time, these noisy macro issues engulf the minds of large and small investors. Basically, trying to predict the outcome of these issues may lead to more mistakes than accurate stock or commodity picking. Perhaps, investor frustration deals with the extra work needed to adjust to a new cycle with varying dynamics related to speedy information and increased competition. While it’s certainly not for the casual observer, to claim “buy and hold” is dead would be grossly misleading, as well. After all, since July 2010, the S&P 500 index is up nearly 38% despite the back-and-forth unknowns. Thus, focusing on big-picture answers to determine entry points is not unique and definitely not certain, either.
Article Quotes:
“The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the US was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of remaining workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains. The result was that China's rise came largely at Europe's expense. Since 2004 China has gained market share in the export of goods and of manufactured goods, while Europe's share is falling and the US share has held steady. After losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change. … Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 80 percent, due to increasing production of oil and particularly natural gas.” (The Atlantic, August, 3 2012)
“It is not just America’s Treasury that is benefiting from ultra-low borrowing costs. On July 30th Unilever, an Anglo-Dutch consumer-goods group, borrowed $1 billion in the bond markets, in two tranches: 0.45% for three-year money and 0.85% over five years, both record lows for corporate debt. A week earlier IBM had raised ten-year money at a rate of just 1.875%. The Spanish and Italian governments can only dream of funding at such a low cost. Multinational companies have some advantages over governments. Although they can be subject to punitive taxation, they have the potential to move their operations to more welcoming jurisdictions. Their revenues are not dependent on the fortunes of an individual economy. And large companies have been able to strengthen their balance-sheets over the past five years, whereas governments have been forced deep into deficit to prop up their economies.” (The Economist, August 4, 2012)
Levels:
S&P 500 Index [1390.99] – Knocking on the door of 1400 and marching higher from the lows established on June 4, 2012. Trend remains positive despite neutral developing patterns.
Crude [$91.40] – Signs of bottoming visible at $84 as shown in recent weeks, and re-acceleration around $90.
Gold [$1602.00] – Over the last three months, gold has seen plenty of trendless action. For example, the 50-day moving average stands at $1592, illustrating the continued zig-zag and narrow movements around $1600.
DXY – US Dollar Index [82.70] – For over a year, the dollar index has shown signs of strengthening. However, the current strength doesn’t match the peak levels seen in late 2008 (88.46), early 2009 (89.62) and mid 2010 (88.70). Potential pause looming in the near-term.
US 10 Year Treasury Yields [1.54%] – It was last August when yields were closer to 3% before a profound drop. Then, April 2012 marked another defining point, where yields struggled to move above 2%. Now, tiptoeing around all-times lows seems more normal than outrageous.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 30, 2012
Market Outlook | July 30, 2012
“Your neighbor's vision is as true for him as your own vision is true for you.” Miguel de Unamuno (1864-1936)
Neutrality beloved
The notion of "wait and see" remains a common saying in casual investor talk. Summer days pass by with one crowd waiting for elections while others sit back, awaiting clarity on the latest job numbers and sustainability of corporate earnings. It’s fair to say: Observing is preferred over speculating on the revival of the fragile financial system. Most US technical forecasters appear to subscribe to “range-bound” movements. More or a less a dull pattern is anticipated as we continue to witness calmer volatility in stocks. This reflects the limited directional conviction for the next 2-3 years. To no one’s surprise, risk-aversion is deeply rooted and interlocked in the minds of market participants as measured by some sentiment barometers.
However, getting comfortable with too much observation and resorting to narrower views may lead to opportunities missed. Surely, there’s no denying of deflated moods and lack of motivation for risk taking. Yet, nearly an ideal setup exists for a patient investor – even more intriguing for the few overcoming the clogged up and fatigued chatter around fear. In between the ramblings, one may stumble on themes such as cyber security, infrastructure and deeply discounted emerging markets, which present an attractive entry point. Certainly, with notable macro-related announcements this week, one can expect emotionally based reactions, but separating facts from noise is the challenge ahead.
Digesting opinions
Emphasis on the various sovereign challenges will remain part of the daily banter. Most of the catalyst of shorter-term market movements is credited to the heads of central banks or policy influencers.
If Germany promoted herself as Europe's top economy, then the recent downgrade is a mild wakeup call to stir thought-provoking points. Does saving the Euro make Germany more risky? At least leaders know that stability by all means is desperately needed. Perhaps, rating agencies opinion is usually leads to shorted-lived responses. However, the recent "downgrade" of Germany and her banks finds a way to play more into the existing uncertainty mania. Last summer, markets quickly got over the much-hyped (debatable) US downgrade faster than imagined. History does not exactly repeat itself, but the notion of credit agencies setting the tone for the long term remains questionable. On the other hand, the results of rating agent opinions shape investors’ mindset. Perhaps the week ahead will present another clue as the ECB faces pressure to deliver decisions.
Soft commodities clues
Hard commodity supporters are puzzled and disappointed despite the increasing hopes of a trend reversal, which has yet to materialize. For example, gold is nearly unchanged for the year, and the long-awaited recovery struggles to find a noteworthy pace. Similarly, silver and copper remain in a downtrend. Yet, the commodity index (CRB) is showing very minor and early sings of bottoming that began in late June. It’s hardly a definitive or a clear trend, but the driver of this trend circulates around agricultural-related commodities, which remain in high demand. Food prices (mainly wheat and corn) serve as a macro-indicator for the tense global landscape. Beyond complicated currency or interest rate management, food prices can influence behaviors and stimulus options. Perhaps, political or market turbulence can trigger the outcome of soft commodity actions. The contrast in pattern between hard and soft commodities is a prevailing theme worth observing in the months ahead.
Article Quotes:
“After 25 years in business trying to do the right thing for our clients every day, after 25 years of never using leverage and sometimes holding significant cash, we still are forced to explain ourselves because what we do—which sounds so incredibly simple—is seen as so very odd. When so many others lose their heads, speculating rather than investing, riding the market’s momentum regardless of valuation, embracing unconscionable amounts of leverage, betting that what hasn’t happened before won’t ever happen, and trusting computer models that greatly oversimplify the real world, there is constant and enormous pressure to capitulate. Clients, of course, want it both ways, too, in this what-have-you-done-for-me-lately world. They want to make lots of money when everyone else is, and to not lose money when the market goes down. Who is going to tell them that these desires are essentially in conflict, and that those who promise them the former are almost certainly not those who can deliver the latter? The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions. Success in the market leads to excess, as bystanders are lured in by observing their friends and neighbors becoming rich, as naysayers are trounced by zealous participants, and as the effects of leverage reinforce early successes.” (Seth Klarman, October 20, 2007)
“But there are more exotic methods that can push interest rates below zero. Lars Svensson, vice governor of Sweden’s Riksbank and a former Princeton colleague of Ben Bernanke, in 2009 implemented a negative interest rate on bank reserves of 0.25 percent. What that means, in plain English, is that banks had to pay 0.25 percent of the principal they parked at the central bank. Because the banks can’t keep their reserves in cash, they couldn’t just pull them out and avoid the penalty. The result was the strongest recovery in Europe. There are other ways to achieve negative interest rates. Mankiw has jokingly suggested invalidating all physical currency whose serial number ends with a certain digit. If every $1, $5, $10 etc. bill with a serial number ending in 7 were declared invalid, 10 percent of all paper money would be worthless — or, in other words, there’d be a negative interest rate on cash of 10 percent. Willem Buiter, formerly of the London School of Economics and currently of Citigroup, has proposed abolishing paper currency altogether. If all the money is in bank accounts, after all, the Fed can just shave off a certain percentage every so often. This is harder to do with paper money, absent a scheme like Mankiw’s serial number idea.” (Washington Post, July 25, 2012)
Levels:
S&P 500 Index [1385.97] – Choppy trading pattern in last few weeks. Closing above 1380 is encouraging despite the murky sentiment. June 4th lows of 1266 mark a key inflection point for now.
Crude [$90.13] – Attempting to hold above $90. Buyers have shown significant interest when prices traded around $84. Early signs of bottoming, however, increased skepticism around the $98 range.
Gold [$1618.00] – Seen in a range in the past three months between $1560-$1620. Now, an ultimate test for buyers’ conviction is here, during the climb back up to $1700.
DXY – US Dollar Index [82.70] – Climbed and peaked at 84, as last seen in the summer of 2010. Near-term pause is too early to declare a trend shift.
US 10 Year Treasury Yields [1.54%] – Trapped in a narrow range between 1.40-1.60%. while attempting to stabilize around all-time lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, July 23, 2012
Market Outlook | July 23, 2012
“A good traveler has no fixed plans, and is not intent on arriving.” Lao Tzu (600 BC-531 BC)
Observers are wondering why the market is not deteriorating at a faster pace. Is it the buzz of potential further easing (i.e. QE3) or the fact that corporate earnings were not as bad as expected that’s keeping stock markets higher? Investors who succeed within the rules usually know to trade what they are given, so patience may not hurt for those willing to adjust. However, risk-aversion persists in many and fatigued observers continue to recognize that it takes a while to dust off.
The rate journey:
Central banks’ master plan of lowering rates with the intention of increasing inflation expectations remains the ultimate hopes for stimulating growth. These efforts remain more suspenseful than usual, especially when growth is on the decline and cash remains on the sidelines. Perhaps, it is natural to worry and ask the following: Is there enough collective patience with the current central bankers’ plan? Certainly, we keep learning this is not an easy sales pitch. Even in some cases, the Federal Reserve is deferring to politicians to take action:
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.” (Chairman Ben S. Bernanke, July 17, 2012).
Rather a bold statement that is not pleasing to hear from the Federal Reserve. Yet again this summer, governance risk is at the forefront for money managers to dissect and ponder. In simple terms, pleading for leaders to make decisions for the health of competitive markets is not quite comforting. In some aspects, this fails to project broader confidence, even for the not-so-savvy financial observer. Basically, this alludes to the fragile state of markets, as stated by various indicators last quarter.
Marketing Risk
Perhaps, the vital capital that is too distant from flowing in the traditional economy is getting much more attention these days:
“A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.” (The Guardian, July 21, 2012)
Clearly, anyone labeled “ultra-rich” may not see the need to risk capital given the chaotic nature of sentiment. Perhaps, taxes present more of a priority than risk for some groups. Interestingly, even the typical retail account is lowering exposure to stock markets based on weaker volume. On a similar note, S&P 500 companies are holding cash while struggling to move it toward growth-based investments as an ongoing trend. On this topic, the Financial Times points out: “It continues to be depressingly obvious that corporates cannot find anything very exciting on which to spend their money.” (John Authers, July 22, 2012).
Thus, by various measures, it is quite visible regardless of wealth amount or decision-making role that the current deadlock is “trust” based. Bailouts and interventions are a global theme, not a geographic occurrence, and unknown tax consequences and unpredictable government mindsets even fuel the level of discomfort for participants. Yet, the reward for risks taken now is shaping up nicely for those willing to bet on unknowns. However, it takes courage and vision to ignore the much-discussed concerns.
Rerouting
In the last decade, financial engineering such as derivative products have been in great favor versus real investments in core economies. Perhaps, innovation that was heavily saturated in financial services can shift to other areas, such as manufacturing or innovation-based sectors. However, a globalized world makes this thought semi-nostalgic, and political constraints make it harder to envision. But it’s a necessity by all accounts to reenergize growth to entice capital activity.
Technology, as a known innovative sector, is showing relative strength despite a cloudy macro outlook. The successful IPOs of Kayak and Palo Alto Networks last week should not go unnoticed. Plus, the Semiconductor index is at the early stages of showing signs of bottoming, along with fundamentals that turned out not as dismal as previously thought (or desired). Surely, picking the right company’s stock is more appropriate in the sector, but requires further digging as entry points remain attractive for months ahead.
Article Quotes
“These events of the past five years have put the aging, close to retirement – or already retired population – in capital preservation modes. After all, who would take care of them in their rainy days – which, with the suddenly longer life expectancy, are expected to have become far more numerous? Better give up consumption now and have something for the invalid years. Youngsters, in contrast, can hope to recoup money when exposing themselves to risk and losses; for people above 60, the chances of recouping after losing are slim. Lower interest rates will not induce older people to take more bets: at best they would buy lotteries occasionally for a few bucks, giving up a few cans of beer. Few are in the position of Federal Reserve chairman Ben Bernanke or other public officials, endowed with generous pensions. In Bernanke's case, he can count upon retirement on generous pensions, and speaking and possibly board fees. Push come to shove, he can even return to lecturing at universities.” (Asian Times, July 21, 2012).
“There are two competing models of successful American cities. One encourages a growing population, fosters a middle-class, family-centered lifestyle, and liberally permits new housing. It used to be the norm nationally, and it still predominates in the South and Southwest. The other favors long-term residents, attracts highly productive, work-driven people, focuses on aesthetic amenities, and makes it difficult to build. It prevails on the West Coast, in the Northeast and in picturesque cities such as Boulder, Colorado and Santa Fe, New Mexico. The first model spurs income convergence, the second spurs economic segregation. Both create cities that people find desirable to live in, but they attract different sorts of residents. This segregation has social and political consequences, as it shapes perceptions – and misperceptions – of one’s fellow citizens and ‘normal’ American life. It also has direct and indirect economic effects. ‘It’s a definite productivity loss,’ Shoag says. ‘If there weren’t restrictions and you could build everywhere, it would be productive for people to move. You do make more as a waiter in LA than you do in Ohio. Preventing people from having that opportunity to move to these high-income places, making it so expensive to live there, is a loss.’ That’s true not only for less-educated workers but for lower earners of all sorts, including the artists and writers who traditionally made places like New York, Los Angeles and Santa Fe cultural centers.” (Bloomberg, July 19, 2012).
Levels
S&P 500 Index [1362.66] – Staying above 1360 has proved to be a near-term struggle on two recent occasions. Yet, buyers don’t appear exhausted (or ready to bail), given some visible buy appetite around 1300. Uptrend intact despite short-term stalls.
Crude [$91.44] – An explosive three-week run where the drivers remain mysterious. For now, curiosity lurks around further price escalation.
Gold [$1595.00] – The zigzag pattern since early May 2012 only leads to frustration for trend-followers on either side of the coin. The plot thickens, with a retest of the 1560 level versus the much-anticipated rally beyond 1620. For now, neutrality remains in force while the bias is building on the upside as gold is labeled (or confused) as the demise instrument.
DXY – US Dollar Index [83.37] – For nearly a year, the dollar has steadily strengthened, painting the picture of high demand for “safety” as well as ongoing decline of other currencies. This stronger dollar theme has not shown any signs of weakness, and remains counterintuitive to the nearly 30-year trend we’ve witnessed.
US 10 Year Treasury Yields [1.45%] – Barely holding above previous historic low of 1.43% reached on June 1, 2012. Now the fragile conditions resurface and are marking a new unchartered territory for participants and leaders alike.
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
Observers are wondering why the market is not deteriorating at a faster pace. Is it the buzz of potential further easing (i.e. QE3) or the fact that corporate earnings were not as bad as expected that’s keeping stock markets higher? Investors who succeed within the rules usually know to trade what they are given, so patience may not hurt for those willing to adjust. However, risk-aversion persists in many and fatigued observers continue to recognize that it takes a while to dust off.
The rate journey:
Central banks’ master plan of lowering rates with the intention of increasing inflation expectations remains the ultimate hopes for stimulating growth. These efforts remain more suspenseful than usual, especially when growth is on the decline and cash remains on the sidelines. Perhaps, it is natural to worry and ask the following: Is there enough collective patience with the current central bankers’ plan? Certainly, we keep learning this is not an easy sales pitch. Even in some cases, the Federal Reserve is deferring to politicians to take action:
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.” (Chairman Ben S. Bernanke, July 17, 2012).
Rather a bold statement that is not pleasing to hear from the Federal Reserve. Yet again this summer, governance risk is at the forefront for money managers to dissect and ponder. In simple terms, pleading for leaders to make decisions for the health of competitive markets is not quite comforting. In some aspects, this fails to project broader confidence, even for the not-so-savvy financial observer. Basically, this alludes to the fragile state of markets, as stated by various indicators last quarter.
Marketing Risk
Perhaps, the vital capital that is too distant from flowing in the traditional economy is getting much more attention these days:
“A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.” (The Guardian, July 21, 2012)
Clearly, anyone labeled “ultra-rich” may not see the need to risk capital given the chaotic nature of sentiment. Perhaps, taxes present more of a priority than risk for some groups. Interestingly, even the typical retail account is lowering exposure to stock markets based on weaker volume. On a similar note, S&P 500 companies are holding cash while struggling to move it toward growth-based investments as an ongoing trend. On this topic, the Financial Times points out: “It continues to be depressingly obvious that corporates cannot find anything very exciting on which to spend their money.” (John Authers, July 22, 2012).
Thus, by various measures, it is quite visible regardless of wealth amount or decision-making role that the current deadlock is “trust” based. Bailouts and interventions are a global theme, not a geographic occurrence, and unknown tax consequences and unpredictable government mindsets even fuel the level of discomfort for participants. Yet, the reward for risks taken now is shaping up nicely for those willing to bet on unknowns. However, it takes courage and vision to ignore the much-discussed concerns.
Rerouting
In the last decade, financial engineering such as derivative products have been in great favor versus real investments in core economies. Perhaps, innovation that was heavily saturated in financial services can shift to other areas, such as manufacturing or innovation-based sectors. However, a globalized world makes this thought semi-nostalgic, and political constraints make it harder to envision. But it’s a necessity by all accounts to reenergize growth to entice capital activity.
Technology, as a known innovative sector, is showing relative strength despite a cloudy macro outlook. The successful IPOs of Kayak and Palo Alto Networks last week should not go unnoticed. Plus, the Semiconductor index is at the early stages of showing signs of bottoming, along with fundamentals that turned out not as dismal as previously thought (or desired). Surely, picking the right company’s stock is more appropriate in the sector, but requires further digging as entry points remain attractive for months ahead.
Article Quotes
“These events of the past five years have put the aging, close to retirement – or already retired population – in capital preservation modes. After all, who would take care of them in their rainy days – which, with the suddenly longer life expectancy, are expected to have become far more numerous? Better give up consumption now and have something for the invalid years. Youngsters, in contrast, can hope to recoup money when exposing themselves to risk and losses; for people above 60, the chances of recouping after losing are slim. Lower interest rates will not induce older people to take more bets: at best they would buy lotteries occasionally for a few bucks, giving up a few cans of beer. Few are in the position of Federal Reserve chairman Ben Bernanke or other public officials, endowed with generous pensions. In Bernanke's case, he can count upon retirement on generous pensions, and speaking and possibly board fees. Push come to shove, he can even return to lecturing at universities.” (Asian Times, July 21, 2012).
“There are two competing models of successful American cities. One encourages a growing population, fosters a middle-class, family-centered lifestyle, and liberally permits new housing. It used to be the norm nationally, and it still predominates in the South and Southwest. The other favors long-term residents, attracts highly productive, work-driven people, focuses on aesthetic amenities, and makes it difficult to build. It prevails on the West Coast, in the Northeast and in picturesque cities such as Boulder, Colorado and Santa Fe, New Mexico. The first model spurs income convergence, the second spurs economic segregation. Both create cities that people find desirable to live in, but they attract different sorts of residents. This segregation has social and political consequences, as it shapes perceptions – and misperceptions – of one’s fellow citizens and ‘normal’ American life. It also has direct and indirect economic effects. ‘It’s a definite productivity loss,’ Shoag says. ‘If there weren’t restrictions and you could build everywhere, it would be productive for people to move. You do make more as a waiter in LA than you do in Ohio. Preventing people from having that opportunity to move to these high-income places, making it so expensive to live there, is a loss.’ That’s true not only for less-educated workers but for lower earners of all sorts, including the artists and writers who traditionally made places like New York, Los Angeles and Santa Fe cultural centers.” (Bloomberg, July 19, 2012).
Levels
S&P 500 Index [1362.66] – Staying above 1360 has proved to be a near-term struggle on two recent occasions. Yet, buyers don’t appear exhausted (or ready to bail), given some visible buy appetite around 1300. Uptrend intact despite short-term stalls.
Crude [$91.44] – An explosive three-week run where the drivers remain mysterious. For now, curiosity lurks around further price escalation.
Gold [$1595.00] – The zigzag pattern since early May 2012 only leads to frustration for trend-followers on either side of the coin. The plot thickens, with a retest of the 1560 level versus the much-anticipated rally beyond 1620. For now, neutrality remains in force while the bias is building on the upside as gold is labeled (or confused) as the demise instrument.
DXY – US Dollar Index [83.37] – For nearly a year, the dollar has steadily strengthened, painting the picture of high demand for “safety” as well as ongoing decline of other currencies. This stronger dollar theme has not shown any signs of weakness, and remains counterintuitive to the nearly 30-year trend we’ve witnessed.
US 10 Year Treasury Yields [1.45%] – Barely holding above previous historic low of 1.43% reached on June 1, 2012. Now the fragile conditions resurface and are marking a new unchartered territory for participants and leaders alike.
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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