Monday, February 18, 2013
Market Outlook | February 18, 2013
“Chaos often breeds life, when order breeds habit.” Henry Brooks Adams (1838-1918)
Habitual pattern
The established and prevailing low rates, weak dollar and calmer volatility shape the current trend. This habitual pattern of risk taking is accepted as the rewarding norm. Perhaps, rash or optimistic decisions are made by fear of “missing out” rather than calculating unforeseen fears. Surely, this pile-on attitude will turn into complacency or numbness. The volatility index is at its lowest point since the 2008 crisis. There are plenty of explanations for this, but the real numbness to bad news and better-than-expected results has reshaped a bull market that’s in the fourth year of formation.
Demand and deployment in risky assets are visible in the S&P 500 Index, which is up for the seventh week in a row. Sustainability of this cheerful headline is being pondered and questioned around the holiday weekend, especially by a few passionate market followers – and rightfully so, as believers and new bulls may be overly eager to continue this rally. Not to mention, most are too intimidated to go against the grain, especially when this status quo is generated by the Federal Reserve game plan.
Early tone shifts
Monitoring potential shifts in this well-documented and highly followed low interest rate policy showcases that a macro catalyst is silently brewing. Looking ahead, some are dissecting the clues that may serve as a catalyst and eventually disrupt the Fed-induced rally. Interestingly, the tone of the Fed is poised to gradually change for two reasons: 1) Economic improvements (by reported data) can send a message supporting a mild move in rising interest rates and changes of Fed’s purchasing plans. 2) The low-rate environment has created a new wave of increased risk appetite, given the lack of attractive yielding assets.
In this regard, the comments of Federal Reserve Governor Jeremy Stein delivered the following message:
“Putting it all together, my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit. … One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability” (Speech, Federalreserve.com, February 7, 2013).
Overheating acknowledged
Perhaps, the warning signs are not too mysterious for a casual observer and the Federal Reserve’s plans are not as clear as most would like to think. For now, the sensitive data point revolves around improvement in the US labor market – which is collectively used as a barometer of a healthy economy. Meanwhile, those relying on the stock market for sentiment can easily (misleadingly) conclude optimism is in full gear. We’re in a period where the US economy and global economies attempt to play catch-up to the stock market. The disconnect between a heating equity and credit market versus a mixed to not-so-good global economy is a risk that’s worth studying. That art in deciphering the next macro move is beyond quantitative models, political talk or headline watching.
In the same light, Eurozone weakness is not so easy to ignore these days, even though the recent mantra alludes to a ‘great escape’ from further crisis. Being skeptical in the Eurozone has not been a profitable bet, but in due time the real economy must reflect the forward-looking market behaviors. Clearly, even if the markets decide to look ahead (for surprises), the present conditions are bluntly muddy:
“Gross domestic product fell 0.6 percent in the fourth quarter from the previous three months, the European Union’s statistics office in Luxembourg said today. That’s the most since the first quarter of 2009 in the aftermath of the collapse of Lehman Brothers Holdings Inc. and exceeded the 0.4 percent median forecast of economists in a Bloomberg survey.” (Bloomberg, February 14, 2013).
Popular but pausing
During the bullish market, the owners of gold had mixed feelings, especially in the last six months. Two challenges have resurfaced for the commodity. First, rising investor confidence may stir less demand for “safe assets” – which negatively impacts gold. Second, the momentum-driven gold appreciation, witnessed for so many years, has changed its course, as well. Therefore, regardless of how general risk is perceived, the gold price movement seems mysterious, but the trend is negative by any measurable indicators.
Surely there is no denying that gold serves as a hedging instrument for those seeking to diversify their currency holdings. That primarily applies to Central Banks and larger hedge funds. Nonetheless, the decade-old gold rush is facing a turbulent and existing downtrend that’s in limbo. Early cyclical messages of a pause in gold prices have been restated a few times, even though aficionados and staunch bullish participants are too nostalgic to change their views. The drivers of gold prices must be understood beyond typical supply-demand analysis. This is a dreadful task for those only analyzing the traditional valuations of known assets. Yet, this invites further speculation on the next price movement, and the less rosy behavior only adds further suspense.
Tangible takeaways
Speculation aside, markets are known to rally beyond the scope of what the consensus believes to be rational. In fact, the irrational element of market behavior is what keeps investors, speculators and observers eagerly awake. Yet, mean-reversion is inescapable in any cycle or asset, for that matter. Surely, the last year and a half produced an improving economic environment, a roaring stock market and desperate search for higher-yielding assets. To think that the status quo remains in place is becoming a much riskier proposition than a daring or safe outlook. Prudent and forward-thinking observers are stuck in a balance between the Fed-induced rally versus a pending inflection point that requires corrections to calm the bubble-like nerves. Understanding these conflicting dilemmas is what most likely rewards the next few months.
Article Quotes:
“(The) Federal Reserve’s balance sheet is not as big as shrill critics of QE3 would lead you to believe. True, $3 trillion is serious money. It represents a tripling in the size of the Fed’s balance sheet since 2008, before the U.S. central bank unleashed the first round of its aggressive campaign of so-called quantitative easing. It is now on round three, and has committed to keep buying bonds until it spies a substantial improvement in the outlook for the labor market. But as a percentage of GDP (gross domestic product), the Fed’s balance sheet is still smaller than those of the Bank of Japan, European Central Bank, and Bank of England, notching under 20 percent of GDP compared with over 30 percent of GDP for both the BOJ and ECB. Jim Bullard, president of the St. Louis Federal Reserve, made this point during a presentation at Mississippi State University on Wednesday. Bullard was more cagey on whether it mattered that the Fed’s balance sheet was smaller than several other major central banks. He said the size of the balance sheet could still hinder a “graceful exit” from the Fed’s extraordinary efforts to spur growth, while the value of the assets on its books would fall as interest rates rise.” (Reuters, Macroscope, February 15, 2013).
“Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers. The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms' overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.” (Center of Economic and Policy Research, John Schmitt, February 2013).
Levels:
(Prices as of market close February 15, 2013)
S&P 500 Index [1519.79] – Nearly 8% above its 200-day moving average. Clearly, the uptrend is in place, but technical signals argue for pending pullbacks.
Crude (Spot) [$95.72] – Pausing from a recent multi-month rally. The $98 range marks a hurdle rate and vital point for buyers.
Gold [$1668.00] – The commodity is down 10% since peaking in October 2012. There is various evidence of slowing enthusiasm. The recent break below the 200-day moving average signals concern for gold bugs. Behavior between $1600-$1620 can signal the next shift in trend.
DXY – US Dollar Index [80.58] – Few points removed from 200-day moving average. In the last six month, a bottoming shape is visible. It’s worth remembering that the Dollar Index is up 11% since May 2011.
US 10 Year Treasury Yields [2.00%] – The struggle to stay above 2% will be tested in the weeks ahead. July 2012 may have marked a bottom for interest rates and remains a vital trend indicator for macro observers. Entering a new inflection point, yet again.
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, February 11, 2013
Market Outlook | February 11, 2013
“Many complain of their memory, few of their judgment.” Benjamin Franklin (1706-1790)
Recovery vs. wildness?
With each upside stock market move that comes closer to revisiting the 2007 highs, the S&P 500 Index attempts to remind us that the post-bubble era may quickly erase the undesired recent memories. Digesting the current climate requires an open but critical mind.
On one end, old tricks and familiar habits persist: Leverage is back as it’s applied by larger risk-taking institutions , sub-prime mortgage deals are vitalizing and perceived “risk” is more favored than not. On the other end, the post-mortem analysis of the 2008 credit crisis is making some noise. This is highlighted by the federal suit against one credit rating agency in regards to mortgage-related investments. In addition, more chatter and pending legislation is taking hold in the discussions related to banking regulations. By now, the macro-focused worries have dissipated, at least by noticing that the Bank Index (BKX) is up nearly 70% since October 2011. Unresolved regulatory matters and pending fallouts have not stopped shareholders from partaking in the heavily scrutinized financial sector.
Beyond the visible
Beyond the cheerfully trending stock and real-estate markets, there lies a murky, hard-to-decipher economic status. The prognosis of the current economy is mixed, and digging deeper may lead to further ambiguity rather than clear-cut answers. In terms of housing and student loans, which drive the consumer market, there is a fact that’s hard to ignore for an active or casual observer: “The Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007.” (Wall Street Journal, January 30, 2013). Perhaps, the gloomy climate for questionable borrowers reminds us of the desperate need for growth and reinforces the daunting shape of credit markets. This is a discussion that’s at the center for social and financial pundits. Yet, it’s becoming overly difficult to find experts or lawmakers with conviction and ideas for job growth or problem solving.
It appears the marketplace feels that unrecoverable problems are not worth worrying about. Certainly, this mindset is developing to the liking of the Federal Reserve. Glancing at the very calm volatility index (VIX), the barometer reinforces that turbulence is not overly priced-in for the pending weeks. Simplistically, bad news is overly exhausted and numbness to the bullish bias is in place. The same nearly applies in the Euro-zone, where the crisis-like mindset rapidly evaporated. In fall 2011, being overly worried was costly at a critical inflection point. Today on a global scale, “fear” is not trading at a steep premium as the non-fearful pay up to own risky assets. In this case, risky assets not only include mortgage-related securities but also Euro-zone based sovereign debt.
“A combination of complacency and a strong appetite for risk is relieving pressure on Spain and Italy, causing investors to underprice the risks in both countries. … (The) wake-up call to pay more attention to the risks in Spain and Italy has not been heeded by investors. Yet the stakes are rising, increasing the scope for a more severe correction in asset prices.” (International Financing Review, February 5, 2013)
Chess match
For investors and fund managers, the option of missing out on the market rally is too costly from a performance standpoint. Thus, further herding inevitably takes place and sentiment rises not by independent thinking but by collective bias. A typical asset manager is faced with weighing the required mandate of profitability versus the inevitable irrational market behavior. Certainly, profits and losses can be measured on paper more easily than psychological measures. For now, marching with the favorable themes brings some comfort in the near-term. Thus, the self-fulfilling prophecy of a recovery is a hard battle to fight, until the clues turn into shocks. It’s healthy to leave some room for surprises and unknowns. In that respect, two indicators worth tracking (not necessarily acting on) for early clues include a strengthening US dollar and interest rates. Although neither is endorsed by the Federal Reserve, at some point the tune is bound to change.
Article Quotes:
“Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons, Grubb said by phone from London, where his industry group is based. While Putin is leading the gold rush in emerging markets, developed nations are liquidating. Switzerland unloaded the most in the past decade, 877 tons, an amount now worth about $48 billion, according to International Monetary Fund data through November. France was second with 589 tons, while Spain, the Netherlands and Portugal each sold more than 200 tons. Even after Putin’s binge, though, Russia’s total cache of about 958 tons is only the eighth-largest, the World Gold Council said in a Feb. 8 report. The U.S. is No. 1 with about 8,134 tons, followed by Germany with 3,391 tons and the Washington-based IMF with 2,814 tons. Italy, France, China and Switzerland are fourth through seventh. While gold accounts for 9.5 percent of Russia’s total reserves, it accounts for more than 70 percent in the U.S., Germany, Italy and France.” (Bloomberg, February 10, 2013)
“We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so – enough to buoy global coal, crude, and copper prices for a while – but then it will all be over. China’s demographic dividend will be exhausted. Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. It will soon go into ‘precipitous decline,’ according to the International Monetary Fund. Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path. The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice. Less known is the parallel – and linked – labour drain in the countryside. A new IMF paper – ‘Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?’ – says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing. The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140m workers, surely the greatest jobs crunch ever seen. ‘This will have far-reaching implications for both China and the rest of the world,’ said the IMF.” (The Telegraph, February 3, 2013)
Levels: (Prices as of close February 8, 2013)
S&P 500 Index [1513.17] – Continues to make multi-year highs, closing near intra-day highs set on Friday, February 8. Notably, a breakout above 1460 triggered an accelerated run. The index is approaching 2007 highs of 1576, which has a symbolic meaning to participants.
Crude (Spot) [$95.72] – As witnessed in September 2012, crude has failed to go above $98. In the near-term, observers’ wait for deceleration continues.
Gold [$1668.00] – Barely moved week over week. This simply reiterates the non-trending pattern that has persisted for several weeks. The 200-day moving average stands at $1663.15, which serves as a benchmark to pending movements.
DXY – US Dollar Index [80.24] – In the last six days, a mild spike in the US dollar versus other currencies. This is a theme that’s been developing since the start of the month, as the EUR/USD dropped from 1.36 to 1.33. Yet, this mild dollar strength is hardly impactful enough to claim a major trend shift.
US 10 Year Treasury Yields [1.94%] – Flirting near the 2% range after a surge that began in early December. Now, the two-month run is stalling. No evidence of a major breakout in rising rates.
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.
Recovery vs. wildness?
With each upside stock market move that comes closer to revisiting the 2007 highs, the S&P 500 Index attempts to remind us that the post-bubble era may quickly erase the undesired recent memories. Digesting the current climate requires an open but critical mind.
On one end, old tricks and familiar habits persist: Leverage is back as it’s applied by larger risk-taking institutions , sub-prime mortgage deals are vitalizing and perceived “risk” is more favored than not. On the other end, the post-mortem analysis of the 2008 credit crisis is making some noise. This is highlighted by the federal suit against one credit rating agency in regards to mortgage-related investments. In addition, more chatter and pending legislation is taking hold in the discussions related to banking regulations. By now, the macro-focused worries have dissipated, at least by noticing that the Bank Index (BKX) is up nearly 70% since October 2011. Unresolved regulatory matters and pending fallouts have not stopped shareholders from partaking in the heavily scrutinized financial sector.
Beyond the visible
Beyond the cheerfully trending stock and real-estate markets, there lies a murky, hard-to-decipher economic status. The prognosis of the current economy is mixed, and digging deeper may lead to further ambiguity rather than clear-cut answers. In terms of housing and student loans, which drive the consumer market, there is a fact that’s hard to ignore for an active or casual observer: “The Chicago-based credit bureau found that 33% of the almost $900 billion in outstanding student loans was held by subprime, or the riskiest, borrowers as of March 2012, up from 31% in 2007.” (Wall Street Journal, January 30, 2013). Perhaps, the gloomy climate for questionable borrowers reminds us of the desperate need for growth and reinforces the daunting shape of credit markets. This is a discussion that’s at the center for social and financial pundits. Yet, it’s becoming overly difficult to find experts or lawmakers with conviction and ideas for job growth or problem solving.
It appears the marketplace feels that unrecoverable problems are not worth worrying about. Certainly, this mindset is developing to the liking of the Federal Reserve. Glancing at the very calm volatility index (VIX), the barometer reinforces that turbulence is not overly priced-in for the pending weeks. Simplistically, bad news is overly exhausted and numbness to the bullish bias is in place. The same nearly applies in the Euro-zone, where the crisis-like mindset rapidly evaporated. In fall 2011, being overly worried was costly at a critical inflection point. Today on a global scale, “fear” is not trading at a steep premium as the non-fearful pay up to own risky assets. In this case, risky assets not only include mortgage-related securities but also Euro-zone based sovereign debt.
“A combination of complacency and a strong appetite for risk is relieving pressure on Spain and Italy, causing investors to underprice the risks in both countries. … (The) wake-up call to pay more attention to the risks in Spain and Italy has not been heeded by investors. Yet the stakes are rising, increasing the scope for a more severe correction in asset prices.” (International Financing Review, February 5, 2013)
Chess match
For investors and fund managers, the option of missing out on the market rally is too costly from a performance standpoint. Thus, further herding inevitably takes place and sentiment rises not by independent thinking but by collective bias. A typical asset manager is faced with weighing the required mandate of profitability versus the inevitable irrational market behavior. Certainly, profits and losses can be measured on paper more easily than psychological measures. For now, marching with the favorable themes brings some comfort in the near-term. Thus, the self-fulfilling prophecy of a recovery is a hard battle to fight, until the clues turn into shocks. It’s healthy to leave some room for surprises and unknowns. In that respect, two indicators worth tracking (not necessarily acting on) for early clues include a strengthening US dollar and interest rates. Although neither is endorsed by the Federal Reserve, at some point the tune is bound to change.
Article Quotes:
“Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons, Grubb said by phone from London, where his industry group is based. While Putin is leading the gold rush in emerging markets, developed nations are liquidating. Switzerland unloaded the most in the past decade, 877 tons, an amount now worth about $48 billion, according to International Monetary Fund data through November. France was second with 589 tons, while Spain, the Netherlands and Portugal each sold more than 200 tons. Even after Putin’s binge, though, Russia’s total cache of about 958 tons is only the eighth-largest, the World Gold Council said in a Feb. 8 report. The U.S. is No. 1 with about 8,134 tons, followed by Germany with 3,391 tons and the Washington-based IMF with 2,814 tons. Italy, France, China and Switzerland are fourth through seventh. While gold accounts for 9.5 percent of Russia’s total reserves, it accounts for more than 70 percent in the U.S., Germany, Italy and France.” (Bloomberg, February 10, 2013)
“We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so – enough to buoy global coal, crude, and copper prices for a while – but then it will all be over. China’s demographic dividend will be exhausted. Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. It will soon go into ‘precipitous decline,’ according to the International Monetary Fund. Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path. The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice. Less known is the parallel – and linked – labour drain in the countryside. A new IMF paper – ‘Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?’ – says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing. The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140m workers, surely the greatest jobs crunch ever seen. ‘This will have far-reaching implications for both China and the rest of the world,’ said the IMF.” (The Telegraph, February 3, 2013)
Levels: (Prices as of close February 8, 2013)
S&P 500 Index [1513.17] – Continues to make multi-year highs, closing near intra-day highs set on Friday, February 8. Notably, a breakout above 1460 triggered an accelerated run. The index is approaching 2007 highs of 1576, which has a symbolic meaning to participants.
Crude (Spot) [$95.72] – As witnessed in September 2012, crude has failed to go above $98. In the near-term, observers’ wait for deceleration continues.
Gold [$1668.00] – Barely moved week over week. This simply reiterates the non-trending pattern that has persisted for several weeks. The 200-day moving average stands at $1663.15, which serves as a benchmark to pending movements.
DXY – US Dollar Index [80.24] – In the last six days, a mild spike in the US dollar versus other currencies. This is a theme that’s been developing since the start of the month, as the EUR/USD dropped from 1.36 to 1.33. Yet, this mild dollar strength is hardly impactful enough to claim a major trend shift.
US 10 Year Treasury Yields [1.94%] – Flirting near the 2% range after a surge that began in early December. Now, the two-month run is stalling. No evidence of a major breakout in rising rates.
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, February 04, 2013
Market Outlook | February 4, 2013
“People who demand neutrality in any situation are usually not neutral but in favor of the status quo.” (Max Eastman, 1883-1969)
Art of interpretation
Even a shrinking fourth-quarter GDP did not slow down the overly determined and existing bullish stock market. After all, the weak GDP results were driven by decreasing defense spending, while consumer spending remained healthy. Participants digested those factors quickly and looked beyond the headline noise of nearly zero growth. The link between a weak economy and the need for additional stimulus is where the curiosity begins to heat up. For now, that is mostly a mystery left for the Federal Reserve to muster an answer and direction.
Observers continue to learn there is no tight or magical connection between fluctuating economic reports and collective stock market behavior. Pinpointing at handful of influential data points is a daunting and humbling task for analysts. Not to mention, sample sizes on various economic data may fail to capture the full and relevant story – as interpreted by influential market participants. The prevailing theme in the past few months centers around better-than-expected labor and housing results. Within that context, January’s employment numbers reconfirmed the improvement in labor markets. The positive twist primarily centered around this surprise: “The economy added 247,000 jobs in November and 196,000 in December, the BLS said. That’s a total of 127,000 more for the two months than previously estimated.” (Bloomberg, February 1, 2013).
Mostly unchanged
The major big-picture influences seem hardly changeable. The interest rate policies combined with US dollar behavior both remain in place. For a while now, “fear” has not been overly feared, a spike in volatility is less anticipated and numbness to bad news is virtually becoming a norm.
This demonstrates the power of the status quo; thus, the message of this strong bullish market is becoming clearer for fund managers, forecasters and speculators of all kinds. Succumbing to these realities adds a slight jolt to further buying, even if the bubble-like scenarios are silently brewing. Sure, some company-specific performances can vary from the general trend, but the economic numbers are in a recovery mode. Thus, the reported data are failing to make a strong case for bearish setups. In a competitive landscape where managers are measured by monthly performance, it is difficult to ignore and not participate in the perceived trend. The skill that is rewarding in looking ahead, is knowing when these clunky trends begin to shift noticeably. Otherwise, “fighting the Fed” may end up being a deadly game for portfolio managers. Again and again, risk-taking is deeply encouraged and saving is punished, and that’s the blunt takeaway.
The earnings games
At some point, the game of beating earnings expectations may be sufficient to uphold the current stock market run. Heading into this quarter, the ability of larger companies to keep up with desired profitability has been questioned. Sure, analysts can tweak estimates by setting up potential surprises. “In terms of revenues, 67% of companies have reported actual sales above estimated sales and 33% have reported actual sales below estimated sales. The percentage of companies beating sales estimates to date reflects an improvement relative to recent quarters.” (Factset Earning Insights, February 1, 2013).
As usual, a dose of skepticism will be required, even though the unanimous trend favors rising share prices. Yet, a skeptical approach alone should not dictate one’s investment decisions, since irrational patterns are as common as "misleading perception." Either way, until the so-called truth is discovered, the markets have a “mind of their own.” Beating collective expectations is the name of the game, as it fuels a perception of positive developments.
Article Quotes:
“This week we saw another move that is likely to alter the perception of Swiss banks. UBS and Credit Suisse, two of the banks at the centre of the IRS investigations, significantly raised their charges for holding gold – making it very unattractive for private individuals to deposit the precious metal with them. The primary reason for the decision was not to stick it to the IRS, of course. Rather it is to move gold off the banks' balance sheets ahead of the introduction of the Basel III rules, which require them to change the ratio of capital to assets. The banks are encouraging clients to move their gold deposits to “allocated” accounts, which sit outside the banks’ balance sheets and generally attract far larger fees, and are primarily aimed at institutional investors. The rise in charges on “unallocated” will undoubtedly discourage private individuals from keeping gold on deposit with Swiss banks. One gold market analyst told me the banks were now ‘terrified of US clients, who account for a significant proportion of their client base.’” (New Statesman, February 1, 2013)
“While the Cypriot economy may be worth only 18 billion euros, making it the third smallest in the euro zone, the problems it poses are among the most complex Europe has faced, combining elements of Greece, Spain and Ireland. The latest estimates from analysts are that the country needs 17.5 billion euros to get back on its feet, including 10 billion for its fractured banking sector and up to 7.5 billion for general government operations and debt servicing. While small in nominal terms, that would amount to almost 100 percent of its gross domestic product, making it the biggest euro zone rescue after Greece and nearly three times the size of the package that was granted to Portugal in 2011. There's no question that the euro zone has the money to help, the problem is how Cyprus could ever afford to pay the money back – the bailout is just not sustainable. And unless it is made sustainable, the International Monetary Fund will not take part, which would cast doubt on its overall credibility.” (Reuters, January 31, 2013).
Levels:
S&P 500 Index [1513.17] – Strength resumes with multi-year new highs, indicating that the bullish market is re-energizing. The breakout above 1460 marked a new buildup in positive momentum.
Crude (Spot) [$97.77] – More than a 15% appreciation since December 11, 2013. Newly forming upward movement is in place, with $100 being a key anticipated range.
Gold [$1669.00] – Trading between the 200-day ($1662.44) and 50-day ($1685.09) moving averages. This new range defines a nearly trend-less behavior in the past several weeks. Despite the popularity of the asset, the drivers of demand and supply remain more mysterious than most would like to admit.
DXY – US Dollar Index [79.12] – Although the pace of the dollar weakness slowed down in September 2012, there are no convincing signs of a sustainable dollar rally.
US 10 Year Treasury Yields [2.01%] – A minor near-term milestone was achieved by closing above 2%. These levels were last achieved in March-April 2012. Enhanced curiosity looms, filled with skepticism on its ability to carry on with this multi-month pattern of rising rates.
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 28, 2013
Market Outlook | January 28, 2013
“Courage is never to let your actions be influenced by your fears.” (Arthur Koestler, 1905-1938)
Undisrupted Rhythm
Ongoing discussions of low interest rates and a weak dollar have been used to explain various status quo trends, including a rising stock market. Yet, there is a perception that the relatively low rates and weak dollar will ultimately create growth. Perhaps that’s a simplistic view, as the first challenge for policymakers was restoring stability. These days, stability is a “sellable” point in US markets, given signs of progress in rising risk tolerance. At some point, growth in the real economy has to be easily noticeable beyond slight improvements in the monthly data. Reported data has pointed to growth in labor and housing, primarily. This week, more than 20 economic data points will set the tone for further clues. With volatility so low and stock markets at a multi-year high, the suspense is building to confirm the ongoing direction.
The macro climate has not been overly suspenseful in several months. Some wonder if participants are less prepared (in risk management) for rising rates and a strengthening US dollar. Although neither macro trend has shifted dramatically, the current setup of rising risk tolerance may serve as a catalyst. The US 10-year treasuries have fought back closer to the 2% range, while the dollar depreciation theme has slowed its deceleration. At the same time, the pace of gold price appreciation has paused, as well. Indicators of big-picture themes have been quite enough to create some complacency, and that has its sudden danger of turning faster than imagined. Thus, the surprise element rises despite the dormant-like performance thus far.
Euphoric responses
Recent chatter and observations quickly remind us of pre-crisis days. For example, hedge funds are back to using leverage, the ultimate symbol of subsiding fear and increased confidence. The Volatility Index (VIX) is not too far from its lows last witnessed in 2007. Lack of volatility has been witnessed for a while. Of course, the major comparison to five years ago is highlighted by the S&P 500 Index causing a buzz by reaching the 1500 level. Of course, a cheerful one-liner only deserves to be scrutinized for the skeptical crowd. Sure, earnings have being going up, but sustaining them is a doubtful matter, as Apple realized. And if earnings disappoint, the shrewdest crowds should not act overly surprised. Frankly, the lack of alternatives in investable assets also plays a part in driving markets higher, causing further disconnect between reality and fundamentals.
Investors’ dilemma
A three-year run-up in the S&P 500 index now finds a new wave of investors entering who may have awakened from accepting the fear-mongering messages. Yet, it is heavily documented that corporate earnings are at or near some peak, which is difficult to sustain. Similarly, the notion that saving is not rewarding in a low-rate environment has pumped more money into risky assets. Thus, some are begrudgingly forced to pile on risk even though the entry point is not overly attractive. In other words, it’s hard to claim that the stock market is at a bargain. Thus, with every upward move, the risk of a downside move is enhanced, both in domestic and emerging market areas. However, since staying neutral is vastly unappealing, the trend will favor further risk-taking until the next unforeseen shock.
Article Quotes:
“Canada is quietly trying to deflate its bubble without any eye-catching headlines. And that means keeping interest rates low while making mortgages harder to get. Now, raising rates to pop a bubble sounds like the kind of hard-hearted long view central bankers pride themselves on, but it's more hard-headed. Higher rates don't just make housing (or any other asset bought with borrowed money) less affordable for new buyers; they make them less affordable for old buyers with adjustable-rate loans too. That sends prices spiraling down and savings racing up, as heavily indebted households, which Canada has no shortage of, try to rebuild their net worths. Higher desired savings outpaces desired investment – in other words, the economy collapses – and subsequently cutting rates, even to zero, won't do much to reverse this, as houses and businesses are mostly indifferent to lower borrowing costs while they focus on paying down existing debts. It's what economist Richard Koo calls a ‘balance sheet recession,’ and it's a good description of how an economy can get stuck in a liquidity trap. But by keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won't set off a vicious circle.” (The Atlantic, January 25, 2013).
“Although many historians today focus on the Revolutionary War debt to foreign countries, the kind of debt that captivated the founders themselves, and served as one of the main prods to forming a nation, was domestic. It involved multiple tiers of bonds, issued by the wartime Congress and bought by wealthy American investors, who hoped to finance the war in return for tax-free interest payments of 6 percent. The first American financiers, in other words, were also the first American nationalists. Both the young Alexander Hamilton (savviest of the founders regarding finance) and his mentor Robert Morris (the wartime Congress’s superintendent of finance and America’s first central banker) believed that a domestic debt, supported by federal taxes collected from all the states, would unify the country. It would concentrate wealth, and yoke that wealth to a consolidated government. The goal was a nation capable of grand projects – ultimately an economic empire to compete with England’s. Other famous founders worked with Morris and Hamilton in building nationhood around the public debt. James Madison, who became Hamilton’s political enemy in the 1790s, was among his closest allies for nationalism in the 1780s. Madison’s famous ‘Federalist No. 10’ conveys a horror of default on the domestic debt as deep as anything ever expressed by Hamilton. In letters written before the Constitutional Convention to George Washington, another supporter of sustaining federal debt via taxes, Madison made clear the nationalists’ shared desire to shore up public credit by throwing out the Articles of Confederation and forming a nation. Edmund Randolph opened the convention by charging the delegates to redress the country’s failure to fund – not pay off, fund – the public debt by creating a national government with the power to do so.” (Bloomberg, January 25, 2013)
Levels:
S&P 500 Index [1502.96] – Closed above 2012 highs, reemphasizing the ongoing strength. Pending pullbacks will be monitored, especially if a new move develops below 1460. At this point, obvious bullishness is the signal, given the rapid upward move.
Crude (Spot) [$95.88] – A more than $10 jump since the lows of November 2012 awakens a new wave of buyers. Recent headlines in oil-influential countries may provide some short-term catalysts to an already explosive move. For now, the next key level is $100.42, which was last reached in mid-September 2012.
Gold [$1660.00] – Broke below the 50-day moving average of $1668.37. Gold observers remain unanimously positive on further price appreciation after a four-month sell-off period. However, this overly bullish scenario has yet to play out.
DXY – US Dollar Index [80.03] – Stability intact between 78-80. The overall message is that the “dollar weakening” theme has not decelerated.
US 10 Year Treasury Yields [1.94%] – In less than one month (Dec. 4, 2012-Jan. 4, 2013) a move from 1.56% to 1.97% materialized. Now, plenty of doubters line up to doubt the continuation of rising rates. Certainly, a resistance at 1.90% is eagerly watched for further clues.
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
Market Outlook | January 14, 2013
“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.
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 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
Subscribe to:
Posts (Atom)
