“Without change, something sleeps inside us, and seldom awakens. The sleeper must awaken.” (Frank Herbert, 1920-1986)
Not too silent
The silent bull market that persisted in the last three years is not so silent these days. At least relative to last year, market strength is not quite as easily dismissed as positive expectations increase. Looking around at some estimates, most anticipate markets to replicate the 2012 stock market rally. The broader investment crowd awakens to behold an attractive stock market that has not crumbled but has shown unprecedented returns.
Thus, one is faced with a different market dynamic. On one hand, optimism is less feared than before. Yet, stock prices are not overly cheap enough to take aggressive risks in pursuit of bigger payouts. This is not a comforting junction, as alertness on the next clues (earnings, primarily) will be a demanding exercise for most participants.
Familiarity preferred
Typically, in a period of confusion, the search for safety or the “familiar trade” seems to resurface but that usually has its dangers. Obviously, it’s much easier to get comfortable with risk when markets keep moving higher, volatility remains lower and bad news ends up being mostly “no news.” The last twelve months have not required investor creativity or skills, due to the lack of turbulence. Of course, some courage was needed after the debt ceiling theatrics for those buyers. Similarly, piling into gold and waiting for a “cliff” resolution reaffirms further conventional thought. Investors these days and in the past week remain more skeptical about a potential increase in volatility and appear confident of a continuing smooth-sailing trend. It’s fair to say, what a difference a year makes! Although the optimism has not reached extreme bravado or excess hubris at this point, the recent tone suggests a step closer to collective optimism than previously imagined.
“The weekly poll of bullish sentiment from the American Association of Individual Investors (AAII) rose from 38.71% up to 46.45%. Even though bullish sentiment is at an eleven month high, one would think that with the S&P 500 at a five year high, it would have at least been able to cross the 50% threshold.” (Bespoke Investment Group, January 10, 2013).
Perceived stability
Looking around, stability has been restored both in European and Asian markets, at least temporarily. The fourth quarter of 2012 demonstrated the strength of emerging markets. In particular, the run-up in Chinese-related stocks demonstrates some optimism, while trust remains an investor issue that’s less resolved. Interestingly, capital inflow to emerging markets continues to gain momentum: “Flows into EPFR Global-tracked emerging market equity funds hit a record $7.39 billion during the week ending Jan. 9 as this fund group extended their longest inflow streak since a 29 week run ended in mid-December, 2010.” (Forbes, January 11, 2013).
Meanwhile, European indexes in Spain and Italy turned a positive week after the European Central Bank elected to stick with the status quo in keeping lower rates. The speculative game focuses on European policymakers’ ability to overcome ongoing challenges. The real European economy is far from vibrant, but stocks and interest rates directionally mirror the US markets.
Relevant signs
Perhaps, the improving labor and housing numbers create some comfort on the march toward stability. Yet, with US 10 year Treasury Yields below 2%, the general notion suggests that staying in US equities appears to make sense – until further clarity emerges from earnings growth. In terms of the macro element, treasury yields have not made new lows in a while. In fact, rates have risen from 1.37% to 1.86% in more than six months. This is a very early trend that suggests a bottoming process in rates. Therefore, a follow-through is worth tracking as the potential trend-shifting event.
Article Quotes:
“The United States has long partnered with Europeans on Middle Eastern diplomacy, but Middle East interests are by no means a European preserve. Asian countries importing millions of barrels of oil a day have a keen interest in regional stability and energy security, and they increasingly pursue diplomacy to further those goals. U.S. diplomacy is similarly concerned with stability and energy security. While the United States imports relatively little energy directly from the Middle East, all of its Asian allies import it in growing amounts and use it to manufacture goods that they sell to the United States. In this way, indirect U.S. imports of Middle Eastern oil remain robust. In addition, oil (and to a lesser extent, gas) are globally traded commodities, so a price spike in one place affects prices globally. U.S. production can affect where the specific barrels of U.S. oil consumption come from, but it has much less effect on the price of those barrels. For that reason, the United States cannot turn away from the Middle East. Instead, it will increasingly turn to the Middle East from the other side of the world.” (Center for Strategic & International Studies, January 2013)
“After China’s statistics bureau reported third-quarter GDP in October, Standard Chartered Plc analysts said the 7.4 percent increase was “too good to be true” when compared with the slowdown in electricity production and the readings of a manufacturing index, while London-based Capital Economics Ltd. said its own analysis indicated expansion of about 6.5 percent. The median forecast for December exports in a Bloomberg survey of 40 economists was for a 5 percent gain, with the highest estimate at 9.2 percent, after November’s 2.9 percent growth. Goldman Sachs, ranked by Bloomberg as the most accurate forecaster for the indicator, projected a 7 percent rise. The increase, which was the biggest since May, could indicate exporters’ rush to finish year-end orders and government pressure to report exports before the end of the year to reach the government’s 2012 target of 10 percent growth, Shen Jianguang, Mizuho’s Hong Kong-based chief Asia economist, said in a Jan. 10 note.” (Bloomberg, January 13, 2013).
Levels:
(Prices as of January 11, 2013)
S&P 500 Index [1472.05] – Less than two points removed from 2012 highs reached in September. From a trend perspective, no signs of trend reversal, and the positive trend remains intact. A rally since mid-November showcases the renewed interest in the run-up.
Crude [$93.56] – The multi-month rally continues. A move above $90 shows hints of new trading ranges. The next few weeks can confirm the strength of recent patterns.
Gold [$1657.50] – The much-anticipated bounce-back has yet to materialize significantly. A step back reminds us that there was a potential peak in September 2011 at $1885. Although consensus expects gold to revisit those ranges, the near-term evidence is not visible.
DXY – US Dollar Index [79.56] – Stuck in a multi-month range where there is a lack of movement. The decline since mid-summer 2012 has slowed down as a neutral trend continues.
US 10 Year Treasury Yields [1.86%] – The last few weeks demonstrate rising rates. The move from 1.44% to 1.97% is noteworthy relative to other recent moves. The follow-through is less convincing for most but should not be easily dismissed.
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, January 14, 2013
Monday, January 07, 2013
Market Outlook | January 7, 2013
“Our great weariness comes from work not done.” (Eric Hoffer, 1902-1983)
Isolating substance
Worrisome theatrics and collective confusion resurfaced in a holiday-shortened week. The first part of the US cliff matter reassured to avoid surprises in global market. The suspense associated with the fiscal discussion mostly resulted in lawmakers participating in a mind games while having less impact on market turbulence. Eventually, a short-lived market rally signaled a relief from the saga, rather than a confirmation or further certainty toward a new trend. On the surface, fears of another credit “downgrade” were mildly discussed, given the short memories from the overly volatile and historic summer of 2011.
Overall, the perception of the US government as being overly dysfunctional at times may not reiterate the required confidence, but the relative edge of the US is not bound to vanish overnight. Theatrics aside, periods of flux and political jargon end up being too loud for the taste of calm market observers. Keeping that in perspective helps avert near-term confusion but fails miserably to present a tangible long-term explanation.
Re-focusing
Through all the unavoidable noise, the economic stability of the current trend remains in place. The relevancy of these trends should not go unnoticed (as fiscal cliff part two awaits) since the goal after any crisis is stability in the financial system, followed by well-felt growth across the board. The labor and housing data continue to showcase a recovery mode. Importantly, corporate earnings should not be confused with economic growth, since that dynamic is quite different. Despite the S&P 500 Index reaching a five-year high, earnings growth has reached escalated ranges, at least for odds makers. Escalated expectations for fourth-quarter results do create room for legitimate disappointment. “Despite the reductions in estimates, analysts are still calling for a return to earnings growth in Q4 (2.4%) after a decline in Q3 (-0.9%). Seven of the ten sectors are projected to report earnings growth for the quarter, led by the Financials sector (15.5%) sector. On the other hand, the Industrials (-4.6%), Information Technology (-2.8%), and Health Care (-2.6%) sectors are predicted to have the weakest earnings growth.” (Factset, January 4, 2012). Similarly, the run-up in emerging markets is following the US market leadership in the last three years.
Grappling with the question of overreaction or persistent trends is the question around macro indicators. For example, the recent signs of mild increase in interest rate might prop up thoughts of a trend shift as the US 10 year treasury yields inches closer to 2%. This has few wondering if the low-rate environment has run its course. Surely, it’s a question that has been asked many times before in the last few years. The faith in quantitative easing, the engine of current markets, lingers in the background, specifically as to whether the “end” of this policy should dictate the overall sentiment and tone for the early part of 2013.
Open-minded approach
Printing more dollars to keep rates low and stimulate the economy appears to have achieved its goal. Despite the politically slanted talks, the solution has rejuvenated confidence, as evidenced in 2012. Thus, those entangled with Federal Reserve bashing might to take a breath or two to visualize the whole picture: “In short, Ben Bernanke has made it more expensive for the government to borrow money. And that's good news. Just consider the counterfactual where there was no quantitative easing. Asset prices, like stocks and homes, would almost certainly be lower, and that would make households try to save more. That doesn't exactly sound like a problem, but it would be a massive one right now” (The Atlantic, January 4, 2012).
Fund managers have to balance the less-known macroeconomic issues of interest rates and currency behaviors while diligently finding specific themes that present an attractive balance. Until the macro picture provides a clear path, some may struggle to simply buy attractively valued US companies. At the same time, perception alone can extend global rallies beyond logical sense; therefore, staying nimble in risk management will continue to require further alertness. Finally, the less controllable and frustrating part of anticipating policymakers’ decisions is inescapable this first quarter. Thus, having a curious and open mind will be collectively required.
Article Quotes:
“Market watchers say after more than two decades of economic pain for Japan, local pension executives are just as likely to use the 20% gain Tokyo's benchmark Nikkei index has enjoyed since mid-November as an opportunity to take profits as to rethink long-standing moves to lower allocations to domestic equities. According to data compiled by Towers Watson K.K., the Tokyo-based subsidiary of investment consulting giant Towers Watson & Co., between Dec. 31, 2000, and Dec. 31, 2010, Japanese pension funds' average allocation to local bonds rose to 41.9% from 31.5% while allocations to domestic equities plunged to 16.2% from 34.7%. More recent data compiled by Japan's Pension Fund Association show a similar trend for domestic equities, with an average allocation plunging to 17.4% as of Dec. 31, 2011, from 34% as of Dec. 31, 2000. The PFA data, which break out insurance ‘general account’ products as a separate category, show those general account allocations rising to 14% from 11.3%, and domestic bond allocations climbing to 27.2% from 21.3% over the same period.” (Pensions & Investments, January 7, 2012).
“Almost everybody would agree that Greece was living beyond its means for a long time and that this should have been corrected. Consumption spending supported by rising disposable incomes and ample and cheap credit after the country joined the eurozone in 2001 was behind it and the obvious culprit which had to be dealt with. The economic adjustment programs sought to correct the fiscal and external account imbalances by imposing higher taxes and cuts on salaries and pensions and other measures to improve competitiveness, such as lower minimum wages in the absence of a national currency that could be devalued. … Private and public consumption spending contracted by about 36.4 billion between 2009 and 2012 at the same time economic output fell by about the same amount or 36.1 billion. GDP is estimated at 195 billion in 2012 from 231.1 billion in 2009. Therefore, it comes as no surprise that households and the government are consuming less but the share of total consumption as a part of GDP has remained resilient, easing to 91.4 percent last year from 92.8 percent in 2009, according to our calculations. … In other words, the much-desired and sought-after decrease in consumption spending has been analogous to the drop in GDP during the 2009-12 period. Of course the EC projects the share of consumption spending in GDP will fall faster this year and next to about 89 percent and 86.4 percent respectively. However, these are still projections and even so the drop is not as big as the proponents of a different economic model hoped for.” (Ekathimerini, January 6, 2012).
Levels:
S&P 500 Index [1466.47] – Closed near the highs of 2012 after a quick relief rally. Anticipation increases for a run-up to the 2007 high, which is less than 100 points away.
Crude [$93.09] – Nearly a 10% rise since the November lows. Weekly trends suggest a floor of $85 and an upside around $100 for several weeks.
Gold [$1648.00] – Slightly below its 200-day moving average. This emphasizes the existing multi-week downtrend in the last three months.
DXY – US Dollar Index [80.49] – Ended the week with a sharp rise. This is mainly an event-driven reaction until a significant break above $82-84.
US 10 Year Treasury Yields [1.89%] – Noticeable recent acceleration suggests a revisit of 1.90-2%. Certainly since the summer 2012, it’s safe to conclude that rates have kept going higher.
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.
Isolating substance
Worrisome theatrics and collective confusion resurfaced in a holiday-shortened week. The first part of the US cliff matter reassured to avoid surprises in global market. The suspense associated with the fiscal discussion mostly resulted in lawmakers participating in a mind games while having less impact on market turbulence. Eventually, a short-lived market rally signaled a relief from the saga, rather than a confirmation or further certainty toward a new trend. On the surface, fears of another credit “downgrade” were mildly discussed, given the short memories from the overly volatile and historic summer of 2011.
Overall, the perception of the US government as being overly dysfunctional at times may not reiterate the required confidence, but the relative edge of the US is not bound to vanish overnight. Theatrics aside, periods of flux and political jargon end up being too loud for the taste of calm market observers. Keeping that in perspective helps avert near-term confusion but fails miserably to present a tangible long-term explanation.
Re-focusing
Through all the unavoidable noise, the economic stability of the current trend remains in place. The relevancy of these trends should not go unnoticed (as fiscal cliff part two awaits) since the goal after any crisis is stability in the financial system, followed by well-felt growth across the board. The labor and housing data continue to showcase a recovery mode. Importantly, corporate earnings should not be confused with economic growth, since that dynamic is quite different. Despite the S&P 500 Index reaching a five-year high, earnings growth has reached escalated ranges, at least for odds makers. Escalated expectations for fourth-quarter results do create room for legitimate disappointment. “Despite the reductions in estimates, analysts are still calling for a return to earnings growth in Q4 (2.4%) after a decline in Q3 (-0.9%). Seven of the ten sectors are projected to report earnings growth for the quarter, led by the Financials sector (15.5%) sector. On the other hand, the Industrials (-4.6%), Information Technology (-2.8%), and Health Care (-2.6%) sectors are predicted to have the weakest earnings growth.” (Factset, January 4, 2012). Similarly, the run-up in emerging markets is following the US market leadership in the last three years.
Grappling with the question of overreaction or persistent trends is the question around macro indicators. For example, the recent signs of mild increase in interest rate might prop up thoughts of a trend shift as the US 10 year treasury yields inches closer to 2%. This has few wondering if the low-rate environment has run its course. Surely, it’s a question that has been asked many times before in the last few years. The faith in quantitative easing, the engine of current markets, lingers in the background, specifically as to whether the “end” of this policy should dictate the overall sentiment and tone for the early part of 2013.
Open-minded approach
Printing more dollars to keep rates low and stimulate the economy appears to have achieved its goal. Despite the politically slanted talks, the solution has rejuvenated confidence, as evidenced in 2012. Thus, those entangled with Federal Reserve bashing might to take a breath or two to visualize the whole picture: “In short, Ben Bernanke has made it more expensive for the government to borrow money. And that's good news. Just consider the counterfactual where there was no quantitative easing. Asset prices, like stocks and homes, would almost certainly be lower, and that would make households try to save more. That doesn't exactly sound like a problem, but it would be a massive one right now” (The Atlantic, January 4, 2012).
Fund managers have to balance the less-known macroeconomic issues of interest rates and currency behaviors while diligently finding specific themes that present an attractive balance. Until the macro picture provides a clear path, some may struggle to simply buy attractively valued US companies. At the same time, perception alone can extend global rallies beyond logical sense; therefore, staying nimble in risk management will continue to require further alertness. Finally, the less controllable and frustrating part of anticipating policymakers’ decisions is inescapable this first quarter. Thus, having a curious and open mind will be collectively required.
Article Quotes:
“Market watchers say after more than two decades of economic pain for Japan, local pension executives are just as likely to use the 20% gain Tokyo's benchmark Nikkei index has enjoyed since mid-November as an opportunity to take profits as to rethink long-standing moves to lower allocations to domestic equities. According to data compiled by Towers Watson K.K., the Tokyo-based subsidiary of investment consulting giant Towers Watson & Co., between Dec. 31, 2000, and Dec. 31, 2010, Japanese pension funds' average allocation to local bonds rose to 41.9% from 31.5% while allocations to domestic equities plunged to 16.2% from 34.7%. More recent data compiled by Japan's Pension Fund Association show a similar trend for domestic equities, with an average allocation plunging to 17.4% as of Dec. 31, 2011, from 34% as of Dec. 31, 2000. The PFA data, which break out insurance ‘general account’ products as a separate category, show those general account allocations rising to 14% from 11.3%, and domestic bond allocations climbing to 27.2% from 21.3% over the same period.” (Pensions & Investments, January 7, 2012).
“Almost everybody would agree that Greece was living beyond its means for a long time and that this should have been corrected. Consumption spending supported by rising disposable incomes and ample and cheap credit after the country joined the eurozone in 2001 was behind it and the obvious culprit which had to be dealt with. The economic adjustment programs sought to correct the fiscal and external account imbalances by imposing higher taxes and cuts on salaries and pensions and other measures to improve competitiveness, such as lower minimum wages in the absence of a national currency that could be devalued. … Private and public consumption spending contracted by about 36.4 billion between 2009 and 2012 at the same time economic output fell by about the same amount or 36.1 billion. GDP is estimated at 195 billion in 2012 from 231.1 billion in 2009. Therefore, it comes as no surprise that households and the government are consuming less but the share of total consumption as a part of GDP has remained resilient, easing to 91.4 percent last year from 92.8 percent in 2009, according to our calculations. … In other words, the much-desired and sought-after decrease in consumption spending has been analogous to the drop in GDP during the 2009-12 period. Of course the EC projects the share of consumption spending in GDP will fall faster this year and next to about 89 percent and 86.4 percent respectively. However, these are still projections and even so the drop is not as big as the proponents of a different economic model hoped for.” (Ekathimerini, January 6, 2012).
Levels:
S&P 500 Index [1466.47] – Closed near the highs of 2012 after a quick relief rally. Anticipation increases for a run-up to the 2007 high, which is less than 100 points away.
Crude [$93.09] – Nearly a 10% rise since the November lows. Weekly trends suggest a floor of $85 and an upside around $100 for several weeks.
Gold [$1648.00] – Slightly below its 200-day moving average. This emphasizes the existing multi-week downtrend in the last three months.
DXY – US Dollar Index [80.49] – Ended the week with a sharp rise. This is mainly an event-driven reaction until a significant break above $82-84.
US 10 Year Treasury Yields [1.89%] – Noticeable recent acceleration suggests a revisit of 1.90-2%. Certainly since the summer 2012, it’s safe to conclude that rates have kept going higher.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, December 31, 2012
Market Outlook | December 31, 2012
“Any occurrence requiring undivided attention will be accompanied by a compelling distraction.” (Robert Bloch, 1917-1994)
Balancing distractions
Heading into 2012, sentiment was overly depressed and fearful around the debt ceiling debacle and much-hyped downgrade. Eventually, betting against fear paid well, and investing in risky assets, mainly US stocks, rewarded the daring bunch then. Particularly, underestimating the financial sector resulted in leaving profits on the table for shareholders. That’s showcased in housing, where the homebuilder index re-ignited silently and is now praised loudly, given year-to-date numbers. Similarly, banks confirmed stability and rapid acceleration for shareholders. Overall, stability has been restored and investors’ appetite for risk is slowly normalizing, yet nagging skepticism is abundantly visible.
As we encounter a new year, analysts are becoming more bullish. It feels like the gloom-and-doomers have awakened to positive momentum, and sentiment is net positive and quietly building. Analysts are either playing catch-up or, convinced by momentum, are suggesting a stronger 2013 for stocks. Repeating the returns of this year in US markets may not be as easy as one expects. Of course, the evidence of a bubble is not quite convincing either, at least for stocks.
All of a sudden in a short period, we've shifted from “bad news exhausted” to seeing optimism resurfacing, but not quite to bubble-like levels as witnessed twice in last decade. This leaves the crowd with plenty to ponder: How many upside surprises are left? Of course, any "cliff" resolution can re-spark enthusiasm for the short term, while other issues loom further ahead.
Connected puzzles
Recent consecutive down days slightly altered the established positive tone as year-end shuffling resumed. Perhaps, regardless of an unclear tax picture and extended earnings growth, there is no lay-up in any market. Tamed volatility has been a surprising story to most in 2012, but assuming extreme lows remain in place. One overriding issue revolves around the low interest rate policy that's been outlined by the Federal Reserve. Taking away the potential fear of rate hikes and guiding without month-to-month prognosis shifts has been comforting for markets. Is quantitative easing comforting enough for fundamentals and economic indicators? That’s a major question to be answered in a nerve-wracking first quarter. As the Federal Reserve Bank of Cleveland reminds us:
“Arguably the improvement in labor market conditions might be because of QE3 and the market’s anticipation that it is probably not going to end imminently. It remains to be seen how much more improvement is necessary before the Committee ends QE3.” (December 28, 2012).
Economic improvements led by labor and housing segments are expected to continue; at least, consensus is moving toward those expectations. The ever-so-overly awaited collective "growth" may serve as the last and only hope. As usual, the Federal Reserve’s quantitative easing policies appear to have run out of “magic” to some, while the merits of those actions will be naturally debated by practitioners and historians alike. For now, it’s too early to conclude.
Safety questioned
The way in which gold is set to end the year may not please its buyers. Surely, a 6.5x jump in gold prices since 1999 reinforces that being a gold bull is not necessarily a creative or innovative idea. Certainly, this is not a beginning of a run, while the current pattern is too fuzzy to call an end. Those waiting for the gold explosion have had their patience tested this year on numerous occasions. Clue after clue suggest a hurdle above $1800 per ounce. The lack of catalysts or changing landscape between retail speculators and those hedging are tricky for observers to surmise. In terms of the recent trend: “Speculators are becoming less positive, reducing their net-long position to 112,421 futures and options in the week to Dec. 18, the least since August, U.S. Commodity Futures Trading Commission data show. Hedge funds’ bets on a rally this year were on average 28 percent lower than in 2011.” (Bloomberg, December 28, 2012).
A central bank buying gold to hedge its own books is not a guarantee of rising prices. Importantly, if global economic strength persists, then the appetite for gold may alter a bit. For now, we may see a technical bounce is in the cards for odds makers in gold prices, but restlessness among participants might persist if prices fail to appreciate or barely move. The consensus view on gold is favorable – in fact, it appears too favorable when glancing at surveys and reports. Optimism in gold will have to determine if ongoing popularity soothes or misleads from a risk-reward perspective.
Article Quotes:
“Many homes are paid for in cash in China, so buying a car with cash is considered no big deal. The idea of paying by credit is catching on among the younger generation, though older Chinese still abhor the notion. As recently as five years ago the percentage of buyers using credit to buy a car was tiny. But that is changing, say auto analysts. Eva Chan, who is buying a new car, says she could afford to pay cash but has decided to use credit because a local bank is offering an interest-free loan as part of a dealer promotion. She ends up with a Rmb200,000 ($32,000) car, bought with Rmb120,000 of credit. … South Korea’s Hyundai Motor this year set up a car financing joint venture with Beijing Automotive Industry Corporation. Lee Kyo Chang, chief executive of Beijing Hyundai Auto Finance, says that while only 15 per cent of buyers use credit, 30 per cent say they would be willing to. Commercial banks, Mr. Lee says, approve only half of applications, so car financing companies, which have less conservative approval policies, can step into the breach.” (Financial Times, December 27, 2012).
”In September 2012, the average hedge fund still charged 1.6 percent annually in management fees and collected 18.7 percent of any gains, according to data provider Preqin. Through November of that year, the average global hedge fund investor earned just 2.6 percent, according to the HFRX global index maintained by Hedge Fund Research. In 2011, investors lost nearly 9 percent. The average annual return from 2009 to 2012, supposedly recovery years following the losses of more than 20 percent in 2008, was a measly 3 percent. … The other wing of the industry consists of hedge funds that have essentially gone back in time to something closer to the original concept – impressive returns in all market conditions, with fees to match as long as the returns are forthcoming. In the 1960s, Warren E. Buffett ran a fund charging no management fee but taking 25 percent of investment gains above a 6 percent threshold return.” (New York Times, December 28, 2012)
Levels:
S&P 500 Index [1402] – Attempting to hold above 1400. Entering a fragile territory between 1380-1400.
Crude [$85.93] – Recent resurgence showcasing a strong move since December 8,which saw lows of $85.21. Yet, skeptics question its ability for momentum to extend above $98. A potential trend shift forming.
Gold [$1657.50] – Steady decline since the start of the fourth quarter. From its peak of $1791, gold has declined by nearly 8%. Until there is a break below $1600, long-term investors are not quite geared to bail out on this multi-year trend. Nonetheless, those seeking price appreciation may not be pleased with the new, slower pace in the past two years.
DXY – US Dollar Index [79.67] – Strengthening dollar possibilities seem short-lived and unconvincing for now. Meanwhile, the lack of surprises and significant changes explain the narrow trading range between 79-81.
US 10 Year Treasury Yields [1.70%] – For the fourth time in six months, yields have failed to reach above 1.80%. Climbing to 2% would re-catch the attention of macro observers. For now, there is a lack of strong, compelling reasons to claim a trend shift, but it’s fair to say stability has been established since the summer lows of 1.37%.
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, December 17, 2012
Market Outlook | December 17, 2012
“Where
there is an open mind there will always be a frontier.” (Charles F. Kettering, 1876-1958)
Levels:
Grasping the landscape
Moderate optimism is being felt, and rightfully
so, after a three-year re-awakening of a bull market. Anticipation of
improvement in housing and less panic about Europe fueled price movement of
risky assets. Central banks stuck to their grand plan of maintaining a low rate
policy as an ongoing stimulus effort. Importantly, minimizing the elements for
downside surprises was essential in taming volatility.
As stated in many ways and forms,
betting on low volatility and strong European market performance would not have
been viewed as a winning strategy (to put it politely) by most last year. The
frenzied thoughts and chatter from more than a year ago were not overly
influential as US
The scramble to grasp why global
markets are up has been overly discussed as usual at year-end. Meanwhile, pondering
reasons for possible decline in asset prices is worth observing while
selectively extracting meaningful themes. And keeping an open mind for
surprises typically is rewarding even in this short-term-oriented marketplace.
Revisiting: The known worrisome topics
Concerns looming around a potential peak
or correction in US markets circle around the following:
1)
Difficult to sustain corporate earnings which have reached historic highs in
recent years.
2)
Expiration and replacement of Operation Twist. Consequences of Federal Reserve’s
stimulus efforts as time passes.
3)
Markets reaching extended or exhausted levels, given the broad-base rally over
the past three years.
4)
Government deliberation: policy makers’ perceived mismanagement, leading to
additional uncertainty in Europe and US.
5)
Volatility rising from relatively low levels driven by shifts in sentiments
favoring "risk-aversion."
6)
Sell-offs in key commodities following a multi-year run, causing a drag in
other risky assets.
First, crude inventories continue to
rise, causing a negative impact on pricing. "U.S.
average daily output will climb 14 percent this year, the most in six decades,
according to the Energy Department, as Anadarko Petroleum Corp. and Chesapeake
Energy Corp. exploit new deposits from North Dakota to Texas.” (Bloomberg,
December 13, 2012)
Secondly, gold prices have not
surpassed all-time highs and appear to have lost some luster versus pervious
years. Goldbugs overall may not be too pleased with actual results, given the
lofty expectations.
Continuing the run
Despite the points above, there are forces
to support the ongoing bull market. Similarly, the natural worries do not
translate into fear-like behavior overnight and to claim a bubble-like collapse
is due loses merit unless there are drastic fundamental changes. Of course,
during a tense period after a bank crisis and flash crash, there is a growing
audience that has a wide appetite for calamity.
Favorable points supporting the current
upside run include:
1.
Speculators expressing a negative market view remain elevated via "short
interest" in the S&P 500 index. The indicator is near summer highs,
suggesting sentiment is not quite overly positive. Therefore, worries of a
sudden sharp sell-off should not feared like 2000 and 2008.
2.
Economic recovery persists related to housing and labor as trends build on
positive results. A business cycle that’s bottoming and geared to convince
doubters on sustainability.
3.
Limited investment options in a low-yield environment leaves room for further
upside in select liquid assets. Unless there are major shifts in currencies and
interest rates, the lack of alternatives theme remains in force.
4.
The interconnected global marketplace is gearing for another run for a
synchronized upside movement from recovering China
Between now and year-end, capturing new developing themes may not
be highly visible. Plus, the worrisome items do not disappear and will be
pondered for most of 2013, as well. Anticipation for a trend shift grows daily,
but the existing trend is not broken easily. Thus, the challenge for trades is
to balance both views selectively. This is a daunting task indeed.
Article
Quotes:
“Apartment prices in Manhattan have
increased substantially relative to rents over the past seventeen years,
raising concern about the sustainability of current prices. Although they have
retreated somewhat since 2008, price-rent ratios in the borough are more than
twice as high as they were in the mid-1990s. Part of this increase can be
explained by lower mortgage rates, which tend to lift sales prices relative to
rents by reducing financing costs, and by lower property taxes. Moreover,
price-rent ratios appear to have been unusually low in the mid-1990s. Still,
current rent levels, mortgage rates, and property tax rates make it difficult
to account for the high prices of Manhattan co-ops and condominiums in 2011
without assuming an expected future price appreciation of at least 4 percent
per year. That figure could be even higher if transaction costs and risk
premiums are included. While the analysis here covers the period through 2011, reports
of accelerating rents but stable apartment prices in 2012 suggest that people
may have tempered their expectations for price appreciation.” (The Federal Reserve Bank of New York, November 9,
2012).
“During a difficult summer, the
leadership’s understated response to China’s economic woes looked like an
under-reaction. But the economy has gathered momentum in recent months.
Industrial production grew by over 10% in the 12 months to November, its first
double-digit growth since March. … The recovery is also visible in electricity
output (up by 7.9% in the same period). This had failed to grow in the 12
months to June, inspiring fears that the economy was much weaker than the
official growth figures suggest. But two
related problems still weigh on China’s manufacturers. The first is excess
capacity in industries such as steel, cement and carmaking. The second is
excess inventory. In the first half of the year unsold goods piled up as firms
failed to find customers for their wares. Since then they have slowed production
and reduced their stockpiles..” (The Economist, December 15, 2012).
Levels:
S&P 500 Index [1413.58] – Closed right near the 50-day moving average. Once
again, this suggests the strength remains intact, despite growing odds of a near-term
pause.
Crude [$85.93] – Since mid-October, crude has failed to surpass $90.
Many of the price swings continue to occur between $85-95. Interestingly, the
annual highs of $110 seem too far and revisiting July lows of $77.28 would
require a major shift. Understandably, followers of crude prices are on edge
for the next directional movement.
Gold [$1696.25] – For more than 15 months, gold has failed to surpass
$1900 on three occasions. Interestingly, in the last three months, gold has also
not significantly declined below $1700. The much-discussed hype and enthusiasm
may not match price actions.
DXY – US Dollar Index [80.15] – The last three months showcase some signs of a strengthening
dollar. This reinforces the bottoming process that began in May 2011.
US 10 Year Treasury Yields [1.70%] – Digging out of historic lows for several months
and beginning to show moderately rising yields. Breaking above 1.85% could
spark a noteworthy trend.
Dear Readers:
The positions
and strategies discussed on MarketTakers are offered for entertainment purposes
only, and they are in no way intended to serve as personal investing advice.
Readers should not make any investment decisions without first conducting their
own, thorough due diligence. Readers should assume that the editor holds a
position in any securities discussed, recommended, or panned. While the
information provided is obtained from sources believed to be reliable, its
accuracy or completeness cannot be guaranteed, nor can this publication be, in
any Publish Post, considered liable for the future investment performance of
any securities or strategies discussed
Monday, December 10, 2012
Market Outlook | December 10, 2012
“Ninety-nine
percent of the failures come from people who have the habit of making excuses.”
George
Washington Carver (1864-1943)
Mixed
labor results combined with a slightly convincing housing recovery linger in
this recovery process. Another week has passed where US
Like
several months before, the investor’s search for clarity centers around the
following:
- Assessing
trends and hints from economic data
- Grasping
impact of low interest rates
- Speculating
on big-picture sentiment and catalysts
Economic recovery
The trick of digesting data creates a danger for those who lump various data points into one headline story. Even the nature of stimulus impact on housing and labor is mysterious, for the most part. As the end of Operation Twist looms around year-end, there are brewing questions on Federal Reserve policy. Whether Quantitative Easing 3 was “overkill” or much needed is to be determined – a macro call of high significance. In fact, the extension of stimulus efforts from the Federal Reserve is not off the table, either. All that said, long-term investors who are looking to deploy capital for three to five years face a quandary given the shaky grasp of the current business cycle.
Digging out of lows
Global
interest rates remain around historic lows. The pattern of trading at or around
all-time lows has become a norm in this era. In fact, the contemplation of negative
yields is not a bizarre thought these days, as hinted by the European Central
Bank. Plus, the same story is evident in 30-year mortgages, which remained near
all-time lows last week by dropping below 3.40%. Interestingly, many have
attempted to call the rates in the past few years and have not been accurate.
Thus, this mega global coordinated effort is not bound to change in one quarter,
but any clue will be overly dissected.
Forecasting sentiment
Favoring
gold against owning other instruments, including cash, has its appeal mainly for
those seeking diversification. Yet, there is more risk to gold that’s loudly
publicized besides the directional debates. Perhaps, this historical reference
is worth noting for commodity risk assessors:
“In 1933 President Roosevelt issued Executive Order 6102, prohibiting the
private holding of gold and requiring U.S. citizens to turn over their gold
bullion or face a $10,000 fine (equivalent around $170,000 today) or 10 years
imprisonment. In response, opportunistic coin dealers encourage investors to buy
expensive “numismatic” or “collectible” coins, taking advantage of an exemption
in the 1933 order which protected these assets from government seizure.” (Naked
Capitalism, Satyajit Das, December 6, 2012).
Collectively,
soft and hard commodities have showcased underperformance for more than a year.
Specifically, the CRB – or commodity index – has declined by nearly 20% since
peaking in early May 2011. The commodity optimist sees further price increases as
part of the ongoing decade-long run, while others suggest that further easing
from risk-aversion may make the gold story less appealing. Right now, both
views are deadlocked without any trend shift to make a splash.
Speculators
may find it worthwhile to guess investors’ response toward risk in upcoming
months. The script of risk-aversion is typically associated with increasing US
dollar demand, less trust in Federal Reserve policy and ongoing credit
downgrades in European nations. This bearish script is wearing down, along with
upside expectations that are coming down. However, unknown risks associated
with tax implications and pending regulatory changes continue to cause a
natural pause. Not to mention overly sensationalized fiscal worries that are
lumped into many forward-looking dialogue.
The
desperate search for growth is a common theme that stretches from the GDP to
corporate earnings and emerging markets growth. Revival of the Chinese market
in recent weeks is fulfilling the demand of risky asset investors. Other
developing countries like Turkey and Mexico offer renewed momentum for those
searching for a sustainable but profitable run. Similarly, in recent weeks, the
Chinese recovery is showing positive signs despite skepticism. This is demonstrated
by a 20% run in the Chinese index since September 5, 2012. Perhaps, the
investor’s dilemma of lack of growth combined with limited options will force
more risk-taking than imagined.
Article
Quotes:
“Private equity firms and hedge funds have stepped into the morass that is the US housing market by scooping up single-family homes at discounted prices and renting them out to disenfranchised masses. Their goal is to generate returns from a combination of rental income and appreciation in housing prices. Silver Bay Realty Trust, a joint venture of RMBS specialist Two Harbors Investment with private-capital management firms Pine River Capital Management and Provident Real Estate Advisors, is seeking to put a public face on the booming trend through its forthcoming initial public offering. Credit Suisse, Bank of America Merrill Lynch and JP Morgan plan to price 13.25m shares at an indicative price of US$18–$20 each on December 13. The vehicle, which is seeking to be structured as a REIT, is initially targeting a net annual yield of 6%–8% after factoring in vacancies and operating costs. Higher returns are expected in future years as occupancies rise and the value of owned homes appreciates. Silver Bay gets its revenue from an underlying portfolio of 3,100 homes. The vehicle is structured as an up-REIT, whereby the joint-venture partners will control a 64% equity stake and public shareholders the remainder.” (International Financing Review, December 8, 2012)
Levels:
S&P 500 Index [1418.07] – New challenges facing the current momentum as the
index nears 1420.
Crude [$85.93] – Ongoing pause continues following a peak since $100
in mid September. So far, resilience is witnessed at $85. At same time, buyers’
appetite above $90 is less visible.
Gold [$1701.50] – For the second time in a month, attempting to climb
above $1700. Enthusiasm of the commodity anticipates a rally, while recent
history shows that Quantitative Easing 3 has yet to have a big influence on
pricing.
DXY – US Dollar Index [80.15] – No major decline since the fall. Yet, the
catalyst for a noteworthy upside move remains a mystery at this point.
US 10 Year Treasury Yields [1.61%] – Stability in place between 1.55-1.82% which is a
theme that continues to repeat. A step back reinforces an era of historic lows
that continues to resurface.
Dear Readers:
The positions
and strategies discussed on MarketTakers are offered for entertainment purposes
only, and they are in no way intended to serve as personal investing advice.
Readers should not make any investment decisions without first conducting their
own, thorough due diligence. Readers should assume that the editor holds a
position in any securities discussed, recommended, or panned. While the
information provided is obtained from sources believed to be reliable, its
accuracy or completeness cannot be guaranteed, nor can this publication be, in
any Publish Post, considered liable for the future investment performance of
any securities or strategies discussed
Monday, December 03, 2012
Market Outlook | December 3, 2012
“Blame
is safer than praise” Ralph Waldo Emerson (1803-1882)
Familiar
banter
It wasn't long ago that the phrase “manufactured
news” was used by some during the debt ceiling crisis. Now, the much and overly
discussed “fiscal cliff” is reaching a tiresome level of over-hyped discussion.
It’s debatable whether the actual substance is overblown or the fear-mongering
produces political posturing and indirect market confusion. Nonetheless, unlike
the summer of 2011, when a lack of government cooperation led to increased
volatility and market turmoil, this time around there is a sea of calm in
participants’ reactions. Interestingly, panic-like mode is not easily generated
and spikes in volatility have yet to materialize. At the same time, there is no
comforting sign of safety in an already low-rate environment with limited
investment themes. In the near-term, the political debate may heat up on the
surface, but the US
Clarity
search
There is a rising equity market climate as the
S&P 500 index maintains its strength above 1400. Ongoing bullish residues
from the recent recovery are visible for chart observers and a few economic
trend followers. Finding tangible reasons for further bullish stability is
harder after the year-over-year appreciations. In addition, sustaining attractive
earnings is an uphill climb and the quantitative-easing-as-stimulus tactic is
wearing down as a long-term solution. So the puzzled crowd awaits the next
substantive matter, especially in housing strength, GDP growth and key corporate
fundamentals, particularly those related to consumer trends.
Last week, US GDP numbers for the third quarter
were revised higher. However, the headline and one-line summary does not tell
the full story: The latest GDI [Gross
Domestic Income] data tell a sobering story. In the three months through
September, GDI grew at an annualized, inflation-adjusted rate of only 1.7
percent, compared with 2.7 percent for GDP. Historically, when we've seen
divergences like this, it has been more common for the GDP estimate to be
revised toward the GDI estimate. So future revisions are likely to show that
GDP growth was a bit weaker than the current optimistic headlines suggest. (Bloomberg,
November 29, 2012). There are signs of improvement, yet the pace of economic
strength is sluggish enough to welcome debates and differing interpretations. A
fragile consumer environment combined with weak macro backdrop requires time to
accelerate investor sentiment. Thus, the labor numbers remain vital along with
housing improvement in months ahead. Perhaps, any disappointment in those areas
can spark further sensitivity.
Abandoning last decade’s themes remains difficult.
Too
early to claim the gold run has peaked. Similarly, it’s too premature to
conclude that Chinese investments are not attractive at these levels. Clues on emerging
market slowdown have persisted throughout the year. Recent rejuvenation of the Chinese
recovery is gaining some traction but is met with a dose of skepticism.
Equally, the slowdown in the BRIC nations is too evident across various
indicators: “The $1.69 billion initial
public offering for Moscow-based wireless telecommunications provider, MegaFon,
brings the volume of IPOs from BRIC issuers to $21.5 billion, a 60% decline
compared to last year at this time and the slowest year-to-date period for BRIC
IPOs since 2003.” (Reuters, Deals intelligence, November 29, 2012).
Conflicting
thoughts
The recovery process since 2009 has produced a
move away from financial collapse and major recession and reemphasized relative
US Mexico
or cheap assets in most of Europe . US
investors are diving deeper into mortgage-related and higher-risk assets, given
the low-rate environment. At the same time, issuance of corporate bonds
escalates and enthusiasm in equity markets wanes, but both trends can suddenly
shift. The inherent conflicts in major trends are not easy and bound to
challenge forecasters.
Article
Quotes:
“The physical environment is in pretty good shape. It is cleaner in
developed countries than it was in those same countries when they were
developing, and the same potential exists in countries that are still
developing today. While some resources have been depleted so that the
easiest-to-obtain supplies are gone and what remains is costly and difficult to
obtain (oil being the most prominent example), that very cost makes the
discovery and development of substitutes possible, necessary, and likely. We
have barely breached the surface of nuclear, solar, geothermal, wind, and tidal
power. Recent fossil fuel discoveries have been a pleasant and unforeseen
surprise (though we’d be foolish to rely on more such good fortune). People
have been finding cheaper substitutes for existing resources since the
beginning of human history, and there is no sign that we will stop any time
soon. We have heard concerns about the permanent slowing or stopping of global
growth after every depression or severe recession. In the 1890s, the idea was
circulated that everything worth inventing had already been invented. In the
1930s, it was popular to say that capitalism had created the mechanism of its
own destruction. In the 1970s, concerns focused on foreign competition and
resource constraints, and some people forecast mass starvation. Today’s
concerns are no different in principle, and they are no more realistic.” (Advisors Perspective, Laurence B. Siegel,
November 27, 2012)
Levels:
S&P 500 Index [1416.18] – Trading between the 50- and 200-day moving averages.
Buyers’ interest around 1380 showcases ongoing investor willingness for US
equity exposure.
Crude [$88.91] – Calmness remains, as wide price swings are not visible.
The range between $85-90 is becoming too familiar.
Gold [$1726.00] – Soaring above $1750 or decreasing below $1700 creates
equal suspense. There is a lack of trend clarity for now, despite overall
buyers’ demand.
DXY – US Dollar Index [80.15] – The 200- and 50-day moving averages stand at 80.
This reinforces the lack of movement in several months.
US 10 Year Treasury Yields [1.61%] – A drop below 1.60% has been very short-lived.
The most noticeable period of very low rates took place this summer. No
evidence of trend reversal from this multi-year rate drop.
Dear Readers:
The
positions and strategies discussed on MarketTakers are offered for
entertainment purposes only, and they are in no way intended to serve as
personal investing advice. Readers should not make any investment decisions
without first conducting their own, thorough due diligence. Readers should
assume that the editor holds a position in any securities discussed,
recommended, or panned. While the information provided is obtained from sources
believed to be reliable, its accuracy or completeness cannot be guaranteed, nor
can this publication be, in any Publish Post, considered liable for the future
investment performance of any securities or strategies discussed
Monday, November 26, 2012
Market Outlook | November 26, 2012
Familiar unease
For about three years, common macro-related fears persisted in various financial market conversations. Those worrisome topics stretched from slowing corporate earnings, to a complex cleanup of the European crisis, to decelerating emerging markets. Today, no clarity or certainly exits on these big-picture topics; thus, participants are left to balance their views between collapse and, hopefully, rally. Finding the middle ground is less thrilling, more nuance-oriented and most likely closer to the truth than a simple statistical summary. Plus, the interconnected themes, which are worth tracking for observers and participants, can easily shape and form a consensus perception. Yet, the fears of fundamental and macro concerns are exhausted and dramatic shifts are short-lived.
The last two months demonstrated the suspense of all key macro events and a breather among risk-takers. Yet, risk-takers do not sit on the sidelines long enough, as that would go against human nature. Eventually, money has to be invested somewhere. Betting on upside surprises is still more intriguing than betting on the collapse of known macro issues. As a start, GDP is expected to be revised higher in the US, supporting the building argument of an improving economy. Eurozone concerns may me overstated in some cases, as the German economy is showing signs of recovery and is not as bad as advertised. After all, the German DAX Index is up nearly 24% this year as the leading European economy. Certainly, the thought of Eurozone collapse may linger in headlines, but actual results are not clear-cut. Finally, overall market volatility remains tamed as the low interest rate policy remains in place. This suggests that markets may turn out more stable than the many conventional stories told.
Revisiting old ideas
Five years ago, the themes of housing and emerging markets were favored among fund managers. In both cases the bubble was forming before its eventual burst in 2008. Now, the questions of lessons learned are deliberated by historians, but forward-thinking observers are noticing that history is digested faster than imagined. While most concluded that risk in housing is not fruitful or plausible, the recent trends suggest otherwise on a broad level. The housing recovery in this new era (post-2008) makes a tangible and strong argument for revival. The Federal Reserve Chairman addressed the following point:
“Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year. These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years.” (Ben Bernanke, New York Economic Club, November 20, 2012). Of course, sustaining this housing recovery is an uphill battle, which is addressed by economists and analysts alike, especially since the bounce was somewhat inevitable from depressed levels. Nonetheless, momentum is powerful, especially in a world with limited ideas with a compelling growth story. Investors in homebuilders (XHB – Homebuilders Index) have realized more than a 100% gain in the past year. The recent stock market pause enables investors to re-assess conviction levels in housing-related strength.
The second controversial theme from last decade relates to
Down the stretch
The S&P 500 index is up 12% on the year, showcasing that despite outflow in equity markets, finding returns is attractive. Fragile conditions in the credit and banking sectors persist, and the system at times feels clogged. In recent months, investors have realized the attractive risk-reward in US financial services even beyond housing. According to Factset: “two of the stocks that received the most interest [from the largest 50 hedge funds] during the quarter included AIG and Capital One Financial Corp.” (November 19, 2012). There is momentum that favors a continuation of a collective rise in key asset prices for now. Of course, companies are lowering earning guidance and sustaining the recent run is not an easy task when skepticism keeps building. Nonetheless, the months ahead will provide more clues while potential short-lived shocks can provide evidence on investors’ resilience.
Article Quotes:
“According to projections by HSBC, in six years’ time the United States will be more dependent on imports
from Mexico China
“Britain's biggest pension funds have delivered deplorable performance
over the past decade. New research, seen exclusively by The
Telegraph, shows that 14 of the 20
biggest actively managed pension funds delivered below-average returns over
this period. In total more than £62bn of retirement savings is invested in
these funds. Just three of the UK's largest funds (managed by Standard Life,
Zurich and Windsor Life) delivered a decent return for investors, while another
three – which have a further £21.5bn invested in them – beat the average fund
in their sector only by a whisker. The underperforming pensions are managed by
some of Britain's largest insurers and banks, including Aviva, Scottish Widows,
Lloyds, Scottish Equitable, Friends Life and Barclays. … Philippa Gee, who runs her own advisory
firm, said many people pointed out that passive tracker funds were
"guaranteed to underperform" because they simply returned what the
market did, minus charges. Philppa stated: ‘Fund
managers have no encouragement to outperform as this would involve taking a
high risk, which may not fit comfortably with the investment style of the fund
in question, and they have no push from investors to perform, as the money will
stay there whatever the return delivered.’ This is because the banks, salesmen
and advisers who sold these pensions in the first place are, on the whole, no
longer reviewing them – although some will still be collecting an annual
commission payment on the back of the sale.” (The Telegraph, November 25,
2012).
Levels:
S&P 500 Index [1409.15] – Climbing back above its 200-day
moving average. Attempting to stabilize around 1400.
Crude [$88.28] – Narrow range forming between
$85-89 in recent trading days. Like
most risky assets, crude is overcoming a multi-week decline that began in mid-September
2012.
Gold [$1734.50] – Heavy resistance at $1800 points
to a noteworthy trend that catches the eyes of gold aficionados.
DXY – US Dollar Index [80.19] – Another short-lived upside
move. A shift back to risky assets is most likely to cause further dollar
weakness.
US 10 Year Treasury Yields [1.68%] – Since the announcement of QE3,
yields are trading between 1.60-1.80% – nearly in line with their 50-day moving
average of 1.70%.
Dear Readers:
The
positions and strategies discussed on MarketTakers are offered for
entertainment purposes only, and they are in no way intended to serve as
personal investing advice. Readers should not make any investment decisions
without first conducting their own, thorough due diligence. Readers should
assume that the editor holds a position in any securities discussed,
recommended, or panned. While the information provided is obtained from sources
believed to be reliable, its accuracy or completeness cannot be guaranteed, nor
can this publication be, in any Publish Post, considered liable for the future
investment performance of any securities or strategies discussed
Monday, November 19, 2012
Market Outlook | November 19, 2012
“Most quarrels amplify a misunderstanding.” (Andre Gide 1869-1951)
Collective pause
Digesting the market slowdown since autumn stirs mixed reactions and a desperate aim for clarity, as well. The catalysts of global stock market sell-offs range from various triggers such as weakness in corporate earnings, the slowing pace of a three-year bull market and some blurry responses to quantitative easing III. The combination of these factors alone would have been enough to cause a pause way before election results and the over-obsessive focus on “fiscal cliff” matters. Taking a look at the macro picture in the context of the business cycles is the puzzle that faces participants. At the same time, economic recovery, from a pickup in housing to positive signs in the GDP, requires further confirmation.
Gauging moods
Interestingly, a peak in risky assets also accompanies the stock market sell-off. The mid-September period triggered a peak in crude prices, decline in US Treasury yields and a mild strength in the US dollar. Perhaps it’s not a stretch to state that September 14, 2012 marked a vital macroeconomic day around the announcement of open-ended quantitative easing. Surely, beyond the political banter and never-ending European concerns, the Federal Reserve’s stimulus efforts remain controversial. Overall consensus expects this low-rate environment to continue for the next two to four years (according to a recent CFA poll). It remains unclear on the end of the low-rate policy; there is a debate that’s brewing within the Federal Reserve. A myriad of speculations will linger, but the stimulus efforts are viewed with increasing skepticism, especially by larger money managers. Perhaps, the Federal Reserve’s implementation of quantitative easing III may be too early to judge for now.
Growth search
Despite the negative climate generated by the self-fulfilling risk-aversion, the volatility index remains steady thus far. At least, the volatility index has not witnessed a dramatic spike that signals an all-out turmoil. Sure, the consecutive down days in equity markets are known easily to cause an emotional response, but that’s to be expected. Yet, the investor demand for growth themes and/or higher yielding returns remains in place regardless of accumulating noise that surrounds macro flux. The shift away from risky assets has been visible for several weeks, but there is no clarity on its longer-term impact. Interestingly, the less-than-stellar earnings have one positive angle for those desperately seeking good news. According to Bespoke Investment Group: “For the first time in three quarters, more than 60% of companies beat earnings estimates. This season, 60.1% of the 2,158 US companies that reported beat consensus analyst EPS estimates. While not great, at least it's a quarter-over-quarter increase.” (November 16, 2012).
In looking ahead to the first quarter of 2013, investors appear to shift their hopes for an emerging market recovery that can restore collective growth rates to desired levels. After all, the developing market is known to provide relative safety (at lower yields) rather than impressive expected growth rates in developing markets. However, resuming last decade’s trend of extraordinary growth is challenging for China and other nations. Similarly, the relative strength of the US market has been an appealing story for a while given the growing momentum. This creates a quarrel for money managers seeking to deploy capital. For now, global markets remain inter-connected, which in turn enhances the difficulty for money managers.
Article Quotes:
“Most of the weakness in state and local governments’ purchases apart from their spending on construction can be traced to a below-average rebound in tax revenues and the need to balance general-fund budgets, but additional pressure came from below-average growth in federal grants. The American Recovery and Reinvestment Act of 2009 (ARRA) authorized an increase in federal grants to states and localities through 2011; those grants helped support state and local purchases for a while, including in the final months of the recession, by raising the amount of assistance to states and localities above what it would have been otherwise. However, the winding down, beginning in 2011, of payments from that increase in federal grants was most likely a drag on the rate of growth of state and local governments’ purchases last year and in the first half of this year. In contrast, state and local governments’ construction spending was probably held back primarily by general budgetary pressures and by tight credit markets early in the recovery, because federal grants for capital projects in the current recovery have been in line with those during previous recoveries since 1959.” (Congressional Budget Office, November 2012).
“As Beijing is continuously prodded to distinguish its policies and engagements from that of the West in Africa, ‘image’ is of paramount importance. For China, keeping a carefully managed image in Africa will be critical to undercutting the arguments of neo-colonialism that are levied by its critics. The policy of non-interference has always been Beijing’s welcome answer to queries about its self-centered policy and economic gains in Africa. As the initial honeymoon is far spent with multitudes of Chinese businesses descending onto African soil, sections of African populations disagree with the image of China as a non-meddling altruistic partner; hence the display of recent anti-Chinese sentiments in places like Zambia and Sudan, and the increasing deportation of Chinese from countries like Angola, Ghana and Nigeria. To deal with these growing pains in Sino-African relations, and chart a different path from that of the West in Africa, Beijing has an inconceivable task of being both a responsible power that commends and chastises as well as a respectful partner that brandishes the policy of ‘no domestic interference.’ In maintaining this precarious balance, non-interference becomes a mirage since an increase in Chinese economic investments might come with temptations to help shape and sustain the requisite business environment needed for these investments to flourish. Finally, Beijing is currently dealing with a new generation of African leadership that is under pressure to embrace liberal democratic ideals and pragmatic economic agenda. Even though persistently described as a façade by the West, non-interference has variedly won the hearts of some African leaders who perceived it as a much-needed break from the quid pro quo relations with the West.” (The Diplomat, October 25, 2012).
Levels:
S&P 500 Index [1359.88] – Remains in a downtrend. Breaking below $1420, which set off further deceleration.
Crude [$86.07] – Bottoming process developing around $86. After a 16% decline, we will get a better idea of the buyers’ conviction and enthusiasm.
Gold [$1713.50] – The struggle continues to surpass $1800. A very early sign of deceleration is shaping up. However, gold’s behavior relative to other commodities showcases further strength.
DXY – US Dollar Index [81.25] – No major acceleration, but the decline in dollars’ value has stopped and is showing signs of turning the corner.
US 10 Year Treasury Yields [1.58%] – The four-month swing between 1.80-1.55% remains in place. Now the low end of this range showcases recent risk-aversion. Recent patterns suggest high odds of rising yields, as a move below 1.47% can enhance the deceleration.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Collective pause
Digesting the market slowdown since autumn stirs mixed reactions and a desperate aim for clarity, as well. The catalysts of global stock market sell-offs range from various triggers such as weakness in corporate earnings, the slowing pace of a three-year bull market and some blurry responses to quantitative easing III. The combination of these factors alone would have been enough to cause a pause way before election results and the over-obsessive focus on “fiscal cliff” matters. Taking a look at the macro picture in the context of the business cycles is the puzzle that faces participants. At the same time, economic recovery, from a pickup in housing to positive signs in the GDP, requires further confirmation.
Gauging moods
Interestingly, a peak in risky assets also accompanies the stock market sell-off. The mid-September period triggered a peak in crude prices, decline in US Treasury yields and a mild strength in the US dollar. Perhaps it’s not a stretch to state that September 14, 2012 marked a vital macroeconomic day around the announcement of open-ended quantitative easing. Surely, beyond the political banter and never-ending European concerns, the Federal Reserve’s stimulus efforts remain controversial. Overall consensus expects this low-rate environment to continue for the next two to four years (according to a recent CFA poll). It remains unclear on the end of the low-rate policy; there is a debate that’s brewing within the Federal Reserve. A myriad of speculations will linger, but the stimulus efforts are viewed with increasing skepticism, especially by larger money managers. Perhaps, the Federal Reserve’s implementation of quantitative easing III may be too early to judge for now.
Growth search
Despite the negative climate generated by the self-fulfilling risk-aversion, the volatility index remains steady thus far. At least, the volatility index has not witnessed a dramatic spike that signals an all-out turmoil. Sure, the consecutive down days in equity markets are known easily to cause an emotional response, but that’s to be expected. Yet, the investor demand for growth themes and/or higher yielding returns remains in place regardless of accumulating noise that surrounds macro flux. The shift away from risky assets has been visible for several weeks, but there is no clarity on its longer-term impact. Interestingly, the less-than-stellar earnings have one positive angle for those desperately seeking good news. According to Bespoke Investment Group: “For the first time in three quarters, more than 60% of companies beat earnings estimates. This season, 60.1% of the 2,158 US companies that reported beat consensus analyst EPS estimates. While not great, at least it's a quarter-over-quarter increase.” (November 16, 2012).
In looking ahead to the first quarter of 2013, investors appear to shift their hopes for an emerging market recovery that can restore collective growth rates to desired levels. After all, the developing market is known to provide relative safety (at lower yields) rather than impressive expected growth rates in developing markets. However, resuming last decade’s trend of extraordinary growth is challenging for China and other nations. Similarly, the relative strength of the US market has been an appealing story for a while given the growing momentum. This creates a quarrel for money managers seeking to deploy capital. For now, global markets remain inter-connected, which in turn enhances the difficulty for money managers.
Article Quotes:
“Most of the weakness in state and local governments’ purchases apart from their spending on construction can be traced to a below-average rebound in tax revenues and the need to balance general-fund budgets, but additional pressure came from below-average growth in federal grants. The American Recovery and Reinvestment Act of 2009 (ARRA) authorized an increase in federal grants to states and localities through 2011; those grants helped support state and local purchases for a while, including in the final months of the recession, by raising the amount of assistance to states and localities above what it would have been otherwise. However, the winding down, beginning in 2011, of payments from that increase in federal grants was most likely a drag on the rate of growth of state and local governments’ purchases last year and in the first half of this year. In contrast, state and local governments’ construction spending was probably held back primarily by general budgetary pressures and by tight credit markets early in the recovery, because federal grants for capital projects in the current recovery have been in line with those during previous recoveries since 1959.” (Congressional Budget Office, November 2012).
“As Beijing is continuously prodded to distinguish its policies and engagements from that of the West in Africa, ‘image’ is of paramount importance. For China, keeping a carefully managed image in Africa will be critical to undercutting the arguments of neo-colonialism that are levied by its critics. The policy of non-interference has always been Beijing’s welcome answer to queries about its self-centered policy and economic gains in Africa. As the initial honeymoon is far spent with multitudes of Chinese businesses descending onto African soil, sections of African populations disagree with the image of China as a non-meddling altruistic partner; hence the display of recent anti-Chinese sentiments in places like Zambia and Sudan, and the increasing deportation of Chinese from countries like Angola, Ghana and Nigeria. To deal with these growing pains in Sino-African relations, and chart a different path from that of the West in Africa, Beijing has an inconceivable task of being both a responsible power that commends and chastises as well as a respectful partner that brandishes the policy of ‘no domestic interference.’ In maintaining this precarious balance, non-interference becomes a mirage since an increase in Chinese economic investments might come with temptations to help shape and sustain the requisite business environment needed for these investments to flourish. Finally, Beijing is currently dealing with a new generation of African leadership that is under pressure to embrace liberal democratic ideals and pragmatic economic agenda. Even though persistently described as a façade by the West, non-interference has variedly won the hearts of some African leaders who perceived it as a much-needed break from the quid pro quo relations with the West.” (The Diplomat, October 25, 2012).
Levels:
S&P 500 Index [1359.88] – Remains in a downtrend. Breaking below $1420, which set off further deceleration.
Crude [$86.07] – Bottoming process developing around $86. After a 16% decline, we will get a better idea of the buyers’ conviction and enthusiasm.
Gold [$1713.50] – The struggle continues to surpass $1800. A very early sign of deceleration is shaping up. However, gold’s behavior relative to other commodities showcases further strength.
DXY – US Dollar Index [81.25] – No major acceleration, but the decline in dollars’ value has stopped and is showing signs of turning the corner.
US 10 Year Treasury Yields [1.58%] – The four-month swing between 1.80-1.55% remains in place. Now the low end of this range showcases recent risk-aversion. Recent patterns suggest high odds of rising yields, as a move below 1.47% can enhance the deceleration.
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, November 12, 2012
Market Outlook | November 12, 2012
‘Man maintains his balance, poise, and sense of security only as he is moving forward.’ Maxwell Maltz (1927-2003)
Rebuilding
Elections marked a close to one big picture suspense while policymakers’ decision is being mildly confronted. Surely, tax implication and sustainability of the current recovery creates a speculative and potential edginess for those assessing risk. In terms of sentiment, excessive worries remains contained for a while since last summer and emotional responses are inevitable. We are entering a stretch that requires patience for investors in Europe and other emerging markets as well. The possibility of a collective recovery for an inter-connected markets is setting up as myriads of clues surface between now and year-end. This weekend observers noted that Chinese export surged by 11.6% reflecting a pick up in global trade. Perhaps, an early sign of positive movement in larger economies.
The U.S. economic recovery is slowly recognized while few have contemplated the odds of further recession ahead. Current pace of recovery showcases a visible strength in housing.
‘Construction spending in September climbed to a nearly three-year high at an annualized rate of $852 billion, as increased spending on houses, apartments and private nonresidential projects outweighed a continuing downturn in public construction.’ (Associated General Contractors of America, November 1, 2012).
Next year pundits will reassess the impact of housing while the Federal Reserve guidance on mortgages will be attentively watched. Improving labor numbers are needed to support housing and overall growth. Thus far, recent month’s labor results have reshaped gloom and doomers to re-think the ugliest scenario.
Digesting retracements
Since mid-September US stock prices, as measured by broad indexes, have declined. A two month pause triggered around the announcement of QE3 and the decelerated price action as a result of slowing corporate earnings. Adjustment to new earnings expectations presents challenges for shareholders seeking to add further risk exposure. According to Factset: ‘only 40% of companies have reported sales above estimates. This percentage is well below the average of 55% recorded over the past four quarters.’ (Factset Insights, November 9, 2012). Interestingly, the resurgence in Europe and Emerging markets remains vital since larger U.S. companies rely in overseas markets for earnings growth.
Room for surprises
Thus far, any sings of domestic hope has yet to impress analysts such to produce cheerful projections. Instead common expert thought calls for a weaker outlook:
‘Economists expect the economy to grow at an annual rate of 1.8 percent in the current quarter, down from the previous estimate of 2.2 percent growth, according to the Philadelphia Federal Reserve's fourth-quarter survey of 39 forecasters.’ (Reuters, November 9, 2012).
This collective expectations presents some upside surprise in GDP numbers given analysts lowering their expectations. Perhaps, the fist half of 2013 is the next suspenseful period to assess the speed of current expansion.
The bullish argument today, in some ways is not as appealing (since stocks have rose significantly ) as March 2009 dismal lows. Yet, the hurdle of averting suspected sovereign risk both in U.S. and Europe can trigger further, but substantial optimism. Simultaneously, the economic recovery in the U.S. needs to pick up the pace in a favorable direction. Recent Midwest drought and Northeast storm will play a role in economic numbers for near-term observers. Nonetheless, the business cycle favors an economic recovery when isolating noise within the business cycles. Not to mention, recent pullbacks in S&P 500 Index were needed and relatively healthy to have a breather. In due time, investors will have the choice to revisit entry points in riskier assets.
Article Quotes:
‘ If past-year food price information is relevant for inflation expectations, then we expect respondents who, prior to receiving the selected information, are less informed about it to find the information more valuable and to be more responsive to it. Therefore, to gauge respondents’ familiarity with the selected information, we ask: ‘Over the last twelve months, by how much do you think the average prices of food and beverages in the U.S. have changed?’ The respondents who were randomly assigned to receive the selected information (the information group) were then informed that food/beverage price inflation in the U.S. had been 1.39 percent over the last twelve months, based on data from the Bureau of Labor Statistics. Respondents in the control group did not receive this information. We measure respondents’ ‘Perception Gap’ as the difference between the objective information value (1.39 percent) and respondents’ prior beliefs; a negative perception gap corresponds to overestimation of past food/beverage price inflation. We find that respondents have inaccurate perceptions of past changes in food and beverage prices. The average perception gap in our sample is -4.92 percentage points (meaning respondents report past food/beverage price inflation, on average, to be 6.31 percent). We find that nearly 40 percent of our respondents believe past-year food and beverage price inflation was 7 percent or more, when, in fact, the published measure has not risen as high as 7 percent since 1981.’ (Federal Reserve of New York, Nudging Inflation Expectations: An Experiment, November 5, 2012).
‘In recent weeks asset managers within Japan have scrapped plans to launch funds that had aimed to raise a combined Y67bn ($840m) to invest in shares in Shanghai, according to analysts at Lipper. In the latest monthly survey of individual investors by Nomura, Japan’s largest brokerage, the renminbi fell to an all-time low rating as investors were asked to select one currency as an ‘appealing’ investment target over a three-month timeframe. Since Tokyo nationalised a disputed chain of islands in the East China Sea in mid-September, Japanese businesses such as Shiseido, the cosmetics company, and watchmaker Citizen, have experienced steep falls in sales in China, as consumers in China steer clear of obviously Japanese branded goods. Now households in Japan are responding in kind, say analysts, by checking flows of investment into Chinese stocks, bonds and bank accounts…. The dispute ‘has cast a pall’ over Japan-based funds investing in China, said Yoshihiro Hamada, head of product development at Diam Asset Management in Tokyo, which has struggled since October to find Japanese banks and securities companies willing to market its Rmb94m ($15m) bond fund.” (Financial Times, November 11, 2012)
Levels:
S&P 500 Index [1379.85] – The downtrend since mid-September is in place. The index is slightly below 200 day moving average which catches the attention of technical observer.
Crude [$86.07] – Back to familiar range around $85-86, a level that has triggered upside moves twice in 2011 (February and October) and earlier this year.
Gold [$1738.25] – The near-term question lingers on the commodities ability to revisit and surpass $1800. A growing possibility given last weeks action.
DXY – US Dollar Index [81.05] – Since mid October, the dollar index is strengthening modestly. A reflection of slight risk adjustment, but not quite a big move to cause a trend shift.
US 10 Year Treasury Yields [1.60%] – Ongoing zig-zag between 1.80-1.60% continues. Now at the low end of the 3 month trend reinforcing the low rate theme.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
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