“Everything has been said before, but since nobody listens we have to keep going back and beginning all over again.” (Andre Gide, 1869-1951)
Hunt for a catalyst
Generally, over the last few weeks, there has been a search for negative news to drive markets lower. First it was the Cyprus dilemma, then it shifted to US employment numbers. Other catalysts (or a combination of the first two) await in these spring months. The resilient market is not “giving in” easily to day-to-day worrisome news – which is tiresome for the simple minded, challenging for the thoughtful planner and artful for the removed observer.
Digesting labor data
For a while, the doubts have lingered around this rising market, which caused many to await some breather or price correction. March’s labor numbers sent a unanimous sign of disappointment on Friday, since the employment result was significantly below analysts’ expectations. Of course, matching collective expectations is one issue, and judging absolute numbers (i.e., non-farm payroll) is another matter. Yet, it’s fair to say that job growth, which is a sample measure for the real economy, did not send a sign of noteworthy strength but rather a one-month reality check for all participants. Frankly, there is one trend that is not a fluke or a one-time event. That is the workforce participation rate, which fell to 63.3% – the lowest in 24 years. Although this is much discussed, the roots of this are vital in order to grasp the US trends. Here is one well-balanced explanation of the current status:
“There are three big explanations for why so few Americans are in the labor force: 1) The country is aging. 2) Men have been leaving the labor force consistently for 60 years. 3) More people are in school.” (Motley Fool, April 5, 2013).
The impact of the labor numbers, as usual, is an attempt to decipher the pace of recovery, the perception of economic strength, the potential influence required by the Federal Reserve and speculations on how one clue can impact future financial market behavior. As economists regroup to understand the nuance of the labor status, the markets are eager to express a view on interest rates and equity risk. For now, the economy is not quite collapsing, the job recovery is not close to overheating and the demographic trends of baby boomers are highly influential.
Commodities – trading vs. investing:
Since May 6, 2011, the multi-year run-up in commodities (CRB Index) has begun to weaken. A 22% drop in commodities in nearly two years hints at a new era, when buying and holding commodities for the long term makes less sense than last decade. In fact, gold investors are restless and impatient about the lack of movement and unconvincing status as a safe haven. Similarly, crude has not held its strength, especially when inventories are estimated to reach the high ranges. Copper has dropped for three consecutive weeks, emphasizing the lack of demand versus the available supply. The same applies for corn, where oversupply is contributing to lower prices. “The U.S.D.A. said in its quarterly grains report that corn stocks totaled 5.4 billion bushels as of the beginning of March, and that farmers intend to plant the most corn in nearly 80 years. Corn closed at $7.33 a bushel March 27, the day before the report came out.” (Associated Press, April 4, 2013).
Thus, the investment community is contemplating how to implement the risk of commodities into greater portfolios. This paradigm is shifting as the commodities optimism slowly fades. Also, the speculative nature of gold and crude is too much noise to manage on a day-to-day basis – especially when the returns are not steady and are below prior years’ expectations. Similarly, emerging markets (EEM) also peaked on May 6, 2011 and are down 16% since then. Surely, there was a strong connection between expanding emerging markets and increasing demand for commodities. Now the inverse may hold true in the emerging market-commodity relationship, in which both remain fragile despite this explosive US bull market that is near all-time highs.
Observing
The deep search for catalysts and new ideas persists as anxiety continues to build. Are markets extended? Is the labor recovery slumping? Is Europe overdue for collapse now? Are commodities worth abandoning? And what about other fiscal crises and governance risk? All these questions are circulating in the minds of many. To be fair, all these questions are nothing new. Thus, a self-fulfilling panic-like move may resurface, but building a logical argument in a not-so-rational market is challenging for all. That being said, patience and closer observation in the weeks ahead may be as rewarding as acting and reacting.
Article Quotes:
“The truth is that the responsibility for the euro-crisis is shared. For every reckless debt or there was a reckless creditor… The northern countries were all too ready to provide loans to southerners so as to be able to accumulate export surpluses. The northern countries’ banks involved in these lending operations managed to shift the loan losses to their respective governments. None was subjected to the bail-ins that will now be imposed on the debtor countries. The recognition that responsibilities for this crisis are shared would go a long way to making it acceptable for the costs of the adjustment to be shared among taxpayers in the north and south of the eurozone. The failure to recognize shared responsibility has led to the imposition of a bail-in template that increases the risk of banking crises and economic depression in the eurozone. When a banking crisis erupts, authorities have to weigh up two risks. One is the moral hazard risk that will emerge in the future when the banks are bailed out. The other is the immediate risk of an implosion of the banking system when bail-ins are implemented.” (CEPS, April 4, 2013).
“In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. ‘Abenomics’ has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity. But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment.” (EconoMonitor, April 1, 2013).
Levels: (Prices as of close April 5, 2013)
S&P 500 Index [1553.28] – A four-year bull market run that’s back to 2007 levels now wrestles to keep up the momentum. After a nearly 6% run since February 26, 2013, a near-term pullback would hardly be surprising.
Crude (Spot) [$92.70] – After a very explosive run last month, crude affirmed its base is closer to $92 than $98. Buyers’ momentum continues to fade at $96, which has been witnessed on several occasions.
Gold [$1546.50] – Since December 17, 2012, gold is down nearly 9%. The adored commodity has re-established a new downtrend.
DXY – US Dollar Index [83.21] – Showcasing stability in the past few weeks. No major changes as the intermediate-term trend signals dollar strength.
US 10 Year Treasury Yields [1.84%] –After climbing above 2%, the yield has backtracked closer to 2012 year-end levels. The back-and-forth swings create a fuzzy trend. In the near-term, staying above 1.60% will determine the nature of activity and sentiment.
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, April 08, 2013
Monday, April 01, 2013
Market Outlook | April 1, 2013
“Success depends upon previous preparation, and without such preparation there is sure to be failure.” Confucius (551-479 BC)
Seasonal change
With a seasonal change and a new quarter upon us, perhaps old notes are worth dusting off. One thought to ponder revolves around the relationship between currencies and stock market performance. Since nearly half of S&P 500 companies’ earnings are produced overseas, the strengthening dollar in last six months may appear to impact corporate balance sheets. The impact of currency movements for mutli-national companies should be discovered broadly in this earning season. This is a thought-provoking point hidden behind the ongoing optimism for stock ownership and value. The currency-earnings relationship has been hinted at by some in the past few years but has not been at the center stage of discussions.
Also, from a sentiment point of view, rising earnings expectations in an upward trending market do raise the stakes for the next quarter, as well. Of course, neither sentiment argument is new and both have been previously discussed in summer 2012, but the bullish strength has proven again and again to remain powerful and resilient. Amazingly, in this low-volatility and steady period, it remains equally discomforting for buyers and sellers.
Accumulated curiosity
Beyond the markets flirting with all-time highs, a reflection of low rates is driving US stocks and real estate much higher – not to mention the lack of investment alternatives and the classic "fear of missing out” that revive and propel bull markets. A few questions await: Is headline chatter of all-time highs in US markets very symbolic, as advertised? Or is the soaring stock market mainly a result of low rate/higher asset dynamic? Soon to be discovered …
Now, between an inevitable and long-awaited mild correction and anxious European market lingers as the suspense continues to build. A verdict on the recent European financial system implications is too mysterious, yet many assumed it might serve as the catalyst. However, Eurozone crisis prevention methods or delay may persist. Thus far, there has been no sweeping overreaction regarding Cyprus drama, as the last two weeks hinted. Surely, it sparked a noticeable concern, especially in other vulnerable European markets (i.e. Italy and Spain). Near-term and pending consequence are mostly misunderstood. Many noteworthy Eurozone actions are expected following German elections in September. A barrage of worrisome news can hit randomly, when and if markets need an excuse to sell off. Then, one can adjust accordingly. For now, a tangible reason to panic in this five-year European crisis management has not been found. Eagerly, we collectively and patiently observe.
Humbling results
The last two years, showcase a short-term cycle in which commonly assumed trends did not play out as touted (at least, a surprise to most). What seems obvious today was not too clear back then. These humbling reminders are worthwhile for forecasters.
- Buying gold in September 2011 for accelerated run
Heading into this weekend, the following article demonstrated that:
“Gold fell on Thursday and closed the first three months of 2013 with a quarterly decline of nearly 5 percent as fears about Europe waned, Wall Street surged and strong U.S. economic data cut demand for a safe haven.” (Reuters, March 28, 2013)
- Betting against US stock market after S&P downgrade of US credit
Interestingly, since the downgrade on Friday, August 2, 2011, the S&P 500 index rose 25%. Worrying about the fiscal cliff and other Congress-related issues did not impact the market.
- Assuming continued weakness in US dollar depreciation
Since May 2011, the dollar theme has mildly strengthened. And these days, the euro weakness is picking up pace versus the dollar. Shaky European conditions may even drive further demand for US dollars.
All three macro trends can reverse suddenly, which is not a surprise. Limited ideas in the marketplace are too challenging for passive investors. Yet, the lessons learned from these assumptions are to prepare for trend-shifts, and keeping an open mind is vital.
Constraining realities
Willing fully or not, risk managers had to rotate to equities to participate in the momentum. Also, the rush for safe assets quieted down, although the supply of safe assets is limited, as well. Over the years, buying insurance (hedges for volatility) and deciphering safe assets has consumed most professional time. There are gray areas in terms of earnings sustainability, level of participation and shift in the Fed’s language toward an end game for easing. The week ahead, with Chinese PMI, US labor numbers and digestion of first-quarter returns, should produce some responses to question the known status quo.
Article Quotes:
“Last year marked the most severe and extensive drought in at least 25 years, according to the U.S. Department of Agriculture. It was also the hottest year on record for the United States. Nearly 80 percent of farmland experienced drought in 2012, with more than 2,000 counties designated disaster areas. By September 2012, 50 percent of the crops being harvested were in poor or very poor condition. Last year's damaged harvest is expected to raise food prices by as much as 4 percent in 2013, particularly products like beef, which suffered from a lack of available cattle feed and viable foraging options. Overall, the 2012 drought cost an estimated $150 billion in damage, as well as an estimated 0.5 to 1 percent drop in the U.S. gross domestic product. One industry looking closely, albeit cautiously, at the early-season drought maps is the insurance business. Farmers have filed for a record $14.2 billion in crop insurance so far to cover losses from last year, with the federal government and private companies splitting the bill.” (Inside Climate News, March 28, 2013)
“Oil production in the Lone Star State has more than doubled in only three years, from 1.10 million bpd in January 2010 to 2.26 million bpd in January 2013, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over just the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. Just a little more than three years ago, Texas was producing less than 20% of America’s domestic oil. The recent gusher of unconventional oil being produced in the Eagle Ford Shale area of Texas, thanks to breakthrough drilling technologies, has pushed the Lone Star State’s share of domestic crude oil above 30% in each of the last ten months, and up to 32.2% in January. Further, Texas oil output in January at an average of 2.26 million bpd was 25.7% greater than the US oil imports that month from all of the Persian Gulf countries (Saudi Arabia, Iraq, Kuwait and Qatar) combined at 1.79 million bpd. In fact, Texas oil output has exceeded Persian Gulf imports in each of the last five months starting in September, and that has never happened before in the history of the monthly EIA data for Persian Gulf imports back to January 1993.” (American Enterprise Institute March 28, 2013)
Levels: (Prices as of close March 31, 2013)
S&P 500 Index [1556.89] – Revisiting the highs of 2007, erasing the post-crisis losses. A jump of 135% since the extreme lows of March 6, 2009 (666.79).
Crude (Spot) [$97.23] – An explosive run in March, leading to a jump from $89 to $97. Interestingly, we’re revisiting a resistance point around $98. Chart observers are eager to see a break above those levels.
Gold [$1613.75] – Neutral/bottoming pattern remains in place. Trading below its 50- and 200-day moving averages, as buyer fatigue appears to resurface.
DXY – US Dollar Index [83.21] – Steady strength, especially in the last two months. The next upside hurdle is above 84, where the dollar peaked in July 2012.
US 10 Year Treasury Yields [1.84%] – Short-term decline in yields continues after peaking above 2%. Most await a break below 1.80% to confirm this trend. For now, 1.80-2% appears to be the normal range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Seasonal change
With a seasonal change and a new quarter upon us, perhaps old notes are worth dusting off. One thought to ponder revolves around the relationship between currencies and stock market performance. Since nearly half of S&P 500 companies’ earnings are produced overseas, the strengthening dollar in last six months may appear to impact corporate balance sheets. The impact of currency movements for mutli-national companies should be discovered broadly in this earning season. This is a thought-provoking point hidden behind the ongoing optimism for stock ownership and value. The currency-earnings relationship has been hinted at by some in the past few years but has not been at the center stage of discussions.
Also, from a sentiment point of view, rising earnings expectations in an upward trending market do raise the stakes for the next quarter, as well. Of course, neither sentiment argument is new and both have been previously discussed in summer 2012, but the bullish strength has proven again and again to remain powerful and resilient. Amazingly, in this low-volatility and steady period, it remains equally discomforting for buyers and sellers.
Accumulated curiosity
Beyond the markets flirting with all-time highs, a reflection of low rates is driving US stocks and real estate much higher – not to mention the lack of investment alternatives and the classic "fear of missing out” that revive and propel bull markets. A few questions await: Is headline chatter of all-time highs in US markets very symbolic, as advertised? Or is the soaring stock market mainly a result of low rate/higher asset dynamic? Soon to be discovered …
Now, between an inevitable and long-awaited mild correction and anxious European market lingers as the suspense continues to build. A verdict on the recent European financial system implications is too mysterious, yet many assumed it might serve as the catalyst. However, Eurozone crisis prevention methods or delay may persist. Thus far, there has been no sweeping overreaction regarding Cyprus drama, as the last two weeks hinted. Surely, it sparked a noticeable concern, especially in other vulnerable European markets (i.e. Italy and Spain). Near-term and pending consequence are mostly misunderstood. Many noteworthy Eurozone actions are expected following German elections in September. A barrage of worrisome news can hit randomly, when and if markets need an excuse to sell off. Then, one can adjust accordingly. For now, a tangible reason to panic in this five-year European crisis management has not been found. Eagerly, we collectively and patiently observe.
Humbling results
The last two years, showcase a short-term cycle in which commonly assumed trends did not play out as touted (at least, a surprise to most). What seems obvious today was not too clear back then. These humbling reminders are worthwhile for forecasters.
- Buying gold in September 2011 for accelerated run
Heading into this weekend, the following article demonstrated that:
“Gold fell on Thursday and closed the first three months of 2013 with a quarterly decline of nearly 5 percent as fears about Europe waned, Wall Street surged and strong U.S. economic data cut demand for a safe haven.” (Reuters, March 28, 2013)
- Betting against US stock market after S&P downgrade of US credit
Interestingly, since the downgrade on Friday, August 2, 2011, the S&P 500 index rose 25%. Worrying about the fiscal cliff and other Congress-related issues did not impact the market.
- Assuming continued weakness in US dollar depreciation
Since May 2011, the dollar theme has mildly strengthened. And these days, the euro weakness is picking up pace versus the dollar. Shaky European conditions may even drive further demand for US dollars.
All three macro trends can reverse suddenly, which is not a surprise. Limited ideas in the marketplace are too challenging for passive investors. Yet, the lessons learned from these assumptions are to prepare for trend-shifts, and keeping an open mind is vital.
Constraining realities
Willing fully or not, risk managers had to rotate to equities to participate in the momentum. Also, the rush for safe assets quieted down, although the supply of safe assets is limited, as well. Over the years, buying insurance (hedges for volatility) and deciphering safe assets has consumed most professional time. There are gray areas in terms of earnings sustainability, level of participation and shift in the Fed’s language toward an end game for easing. The week ahead, with Chinese PMI, US labor numbers and digestion of first-quarter returns, should produce some responses to question the known status quo.
Article Quotes:
“Last year marked the most severe and extensive drought in at least 25 years, according to the U.S. Department of Agriculture. It was also the hottest year on record for the United States. Nearly 80 percent of farmland experienced drought in 2012, with more than 2,000 counties designated disaster areas. By September 2012, 50 percent of the crops being harvested were in poor or very poor condition. Last year's damaged harvest is expected to raise food prices by as much as 4 percent in 2013, particularly products like beef, which suffered from a lack of available cattle feed and viable foraging options. Overall, the 2012 drought cost an estimated $150 billion in damage, as well as an estimated 0.5 to 1 percent drop in the U.S. gross domestic product. One industry looking closely, albeit cautiously, at the early-season drought maps is the insurance business. Farmers have filed for a record $14.2 billion in crop insurance so far to cover losses from last year, with the federal government and private companies splitting the bill.” (Inside Climate News, March 28, 2013)
“Oil production in the Lone Star State has more than doubled in only three years, from 1.10 million bpd in January 2010 to 2.26 million bpd in January 2013, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over just the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. Just a little more than three years ago, Texas was producing less than 20% of America’s domestic oil. The recent gusher of unconventional oil being produced in the Eagle Ford Shale area of Texas, thanks to breakthrough drilling technologies, has pushed the Lone Star State’s share of domestic crude oil above 30% in each of the last ten months, and up to 32.2% in January. Further, Texas oil output in January at an average of 2.26 million bpd was 25.7% greater than the US oil imports that month from all of the Persian Gulf countries (Saudi Arabia, Iraq, Kuwait and Qatar) combined at 1.79 million bpd. In fact, Texas oil output has exceeded Persian Gulf imports in each of the last five months starting in September, and that has never happened before in the history of the monthly EIA data for Persian Gulf imports back to January 1993.” (American Enterprise Institute March 28, 2013)
Levels: (Prices as of close March 31, 2013)
S&P 500 Index [1556.89] – Revisiting the highs of 2007, erasing the post-crisis losses. A jump of 135% since the extreme lows of March 6, 2009 (666.79).
Crude (Spot) [$97.23] – An explosive run in March, leading to a jump from $89 to $97. Interestingly, we’re revisiting a resistance point around $98. Chart observers are eager to see a break above those levels.
Gold [$1613.75] – Neutral/bottoming pattern remains in place. Trading below its 50- and 200-day moving averages, as buyer fatigue appears to resurface.
DXY – US Dollar Index [83.21] – Steady strength, especially in the last two months. The next upside hurdle is above 84, where the dollar peaked in July 2012.
US 10 Year Treasury Yields [1.84%] – Short-term decline in yields continues after peaking above 2%. Most await a break below 1.80% to confirm this trend. For now, 1.80-2% appears to be the normal range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, March 25, 2013
Market Outlook |March 25, 2013
“The secret of all victory lies in the organization of the non-obvious.” (Marcus Aurelius, AD 121-180)
Thinking beyond
The most appealing and puzzling part of markets is that “nothing is quite obvious.” Having conviction is worthwhile when investing in an idea that’s working and bigger rewards await. The escalating Cyprus fear did not materialize to a collapsing market last week, nor it did lead to unimaginable spikes in gold prices. In fact, gold was up less than 1% last week, to many gold bugs’ surprise. Perhaps, markets have matured when it comes to digesting crisis-like news in recent years.
Also, participants have partially matured, as sudden overreactions are not at the dramatic levels last seen in summer 2011. In fact, volatility is still clinging to calmness, the S&P 500 index is nearing all-time highs and the Federal Reserve policies haven’t signaled changes. Nonetheless, the crowd is edgy while welcoming a new season. The news reporting is aggressive and curiosity is heightened to decipher the Eurozone, risk perception and the rest of the market-moving matters. Turbulence can re-emerge anytime, but is settles down quickly.
Before grappling with Cyprus’ even more puzzling deal and Eurozone matters, a breather is needed to reflect. Prior to making big (risky) moves for upcoming months, one is faced with understanding the nuances, hints and misunderstandings that continue to plague this market. There is plenty of discipline required to resist hype, fear-mongering and “obvious” statements. That’s the global message that keeps on teaching, especially in a period that’s desperately awaiting turning points. The Cyprus deal can spark reactions, but it will take time for participants to weigh the big-picture impacts. (To be continued) …
Clues: Two springs ago
The commodity downtrend became evident in early May 2011 – a point that might serve as an important turning point when reflecting back. The CRB Index (a collection of various commodities, which includes crude) peaked on May 6, 2011. In fact, crude fell below the $100 mark then, sparking some early bearish reactions. Interestingly, the US Dollar bottomed at the same time, putting in the lows as the strength continues today. An inflection point indeed! Back then, the dollar-crude inverse relationship was being dissected along with the end of quantitative easing II and the improving US economy. In several areas, the origins of today’s macro issues come from that colorful period.
Here is a headline from Friday May 6, 2011:
“U.S. crude oil futures [ended] with the biggest weekly loss in dollar terms since oil trading began on the New York Mercantile Exchange in 1983, as a stronger dollar prompted investors to continue trimming oil bets. The extended sell-off in an extremely volatile day snuffed out gains made after early data showed U.S. companies created jobs at the fastest pace in five years last month.” (Reuters).
Since May 2011, the Dollar Index is up nearly 14%, and the commodity index (CRB) is down 20%. The same message is echoed in the last six months, as further confirmation is needed to put an exclamation point to this trend. The broad indexes have spoken based on prior trend-shifting patterns. At the same time, unemployment that stood then at 9% is closer to 7.7%, which mirrors the improving confidence and undeniable improvement (even for those who doubt the data’s accuracy). So we should not be overly surprised with the optimism that’s swept risk managers and investors of all kinds. Sure, to say markets are overheating has some legitimacy to some extent, but we are not overheating, especially if collectively there is an agreement for further growth.
Internalizing
Speculating on pending European decisions or Congress votes is a very daunting task that can be closer to reckless gambling than sound planning. Sure, there is room for traders and short-term risk managers to participate in those heart-pounding events. Yet, the big picture themes/trends are worth understanding when it comes to currency, interest rates and equities. Otherwise, mapping out a plan is less likely. Despite the edginess that’s growing, there should not be an urgent need to make directional or big calls at this stage. The art of digesting prior clues provides better clarity, as exhibited by the dollar-crude relationship.
Article Quotes:
“China's crude oil imports from Iran rebounded last month from a 10-month low hit in January, official data showed, in line with an International Energy Agency (IEA) report that said new U.S. sanctions appeared to have had little impact on shipments. The rebound also came after an official from China's biggest refiner, Sinopec Corp, said his refinery will process more Iranian crude this year than last. China, Iran's top crude oil customer, bought nearly 2.0 million tonnes of Iranian crude in February, equivalent to about 521,330 barrels per day (bpd), up 68 percent from 309,906 bpd in January, according to data from the General Administration of Customs. February crude imports from Iran rose 81 percent from 288,576 bpd a year earlier. … China – along with other main buyers of Iranian crude, including India, Japan and South Korea – has been under pressure since last year to reduce imports in the face of U.S. and European sanctions. The West has imposed sanctions targeting Iran's vital oil sector as it suspects Tehran wants to develop nuclear weapons, an allegation Iran denies.” (Reuters, March 21, 2013).
“The Chinese government has expressively endorsed developing African states through the creation of economic, trade and cooperation zones (ETCZs) in Africa, similar to China’s own use of Special Economic Zones (SEZs) domestically. However, Chinese investors and companies work together with African leaders to develop specially tailored zones without a lot of Chinese government involvement in how the zones are designed or operated. While some of the Chinese companies are technically state-owned, the companies still enjoy a high degree of autonomy. Eight official government endorsed zones have been built thus far (although some have not begun operating yet). Private Chinese enterprises also operate their own. Since these zones are still new, it is hard to determine whether or not they are mutually beneficial to China and Africa, and a lot of the negative speculation on Chinese investment in Africa stems from this uncertainty. Although some of these zones are joint ventures, Chinese companies have also come under criticism for owning 100 percent of the shares in some of the ETCZs. This ignores the fact that prior experience has shown that many times the African stakeholders often inhibit the success of these kinds of projects due to rampant corruption and mismanagement. Thus, Chinese companies exercising ownership of the STCZs can actually be to the benefit of the ordinary Africans involved.” (The Diplomat, March 25, 2013)
Levels: (Prices as of close March 22, 2013)
S&P 500 Index [1556.89] – Nearly unchanged from last week after peaking on March 15, 2013 at 1563.62.
Crude (Spot) [$93.71] – Appears stuck in the near-term between $92-94. Crude is in a slow but noticeable downtrend. The price peaked at $114.83 (May 6, 2011) and momentum stalled at $110.55 last March.
Gold [$1613.75] – In the last year and a half, buyers have bought below $1600 and sold closer to $1750. This is a very visible pattern that’s becoming convincing and continues to encourage buyers to purchase.
DXY – US Dollar Index [82.69] – Since February 1, the dollar index is up 5.38%, showcasing a noticeable short-term response. Sustainability of this trend is still in question, despite the multi-month comeback of the “King Dollar.”
US 10 Year Treasury Yields [1.92%] – A fragile level is being tested. The 2% hurdle proves to be difficult yet again. The 50-day moving average is at 1.94%, which summarizes the recent behavior.
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
Thinking beyond
The most appealing and puzzling part of markets is that “nothing is quite obvious.” Having conviction is worthwhile when investing in an idea that’s working and bigger rewards await. The escalating Cyprus fear did not materialize to a collapsing market last week, nor it did lead to unimaginable spikes in gold prices. In fact, gold was up less than 1% last week, to many gold bugs’ surprise. Perhaps, markets have matured when it comes to digesting crisis-like news in recent years.
Also, participants have partially matured, as sudden overreactions are not at the dramatic levels last seen in summer 2011. In fact, volatility is still clinging to calmness, the S&P 500 index is nearing all-time highs and the Federal Reserve policies haven’t signaled changes. Nonetheless, the crowd is edgy while welcoming a new season. The news reporting is aggressive and curiosity is heightened to decipher the Eurozone, risk perception and the rest of the market-moving matters. Turbulence can re-emerge anytime, but is settles down quickly.
Before grappling with Cyprus’ even more puzzling deal and Eurozone matters, a breather is needed to reflect. Prior to making big (risky) moves for upcoming months, one is faced with understanding the nuances, hints and misunderstandings that continue to plague this market. There is plenty of discipline required to resist hype, fear-mongering and “obvious” statements. That’s the global message that keeps on teaching, especially in a period that’s desperately awaiting turning points. The Cyprus deal can spark reactions, but it will take time for participants to weigh the big-picture impacts. (To be continued) …
Clues: Two springs ago
The commodity downtrend became evident in early May 2011 – a point that might serve as an important turning point when reflecting back. The CRB Index (a collection of various commodities, which includes crude) peaked on May 6, 2011. In fact, crude fell below the $100 mark then, sparking some early bearish reactions. Interestingly, the US Dollar bottomed at the same time, putting in the lows as the strength continues today. An inflection point indeed! Back then, the dollar-crude inverse relationship was being dissected along with the end of quantitative easing II and the improving US economy. In several areas, the origins of today’s macro issues come from that colorful period.
Here is a headline from Friday May 6, 2011:
“U.S. crude oil futures [ended] with the biggest weekly loss in dollar terms since oil trading began on the New York Mercantile Exchange in 1983, as a stronger dollar prompted investors to continue trimming oil bets. The extended sell-off in an extremely volatile day snuffed out gains made after early data showed U.S. companies created jobs at the fastest pace in five years last month.” (Reuters).
Since May 2011, the Dollar Index is up nearly 14%, and the commodity index (CRB) is down 20%. The same message is echoed in the last six months, as further confirmation is needed to put an exclamation point to this trend. The broad indexes have spoken based on prior trend-shifting patterns. At the same time, unemployment that stood then at 9% is closer to 7.7%, which mirrors the improving confidence and undeniable improvement (even for those who doubt the data’s accuracy). So we should not be overly surprised with the optimism that’s swept risk managers and investors of all kinds. Sure, to say markets are overheating has some legitimacy to some extent, but we are not overheating, especially if collectively there is an agreement for further growth.
Internalizing
Speculating on pending European decisions or Congress votes is a very daunting task that can be closer to reckless gambling than sound planning. Sure, there is room for traders and short-term risk managers to participate in those heart-pounding events. Yet, the big picture themes/trends are worth understanding when it comes to currency, interest rates and equities. Otherwise, mapping out a plan is less likely. Despite the edginess that’s growing, there should not be an urgent need to make directional or big calls at this stage. The art of digesting prior clues provides better clarity, as exhibited by the dollar-crude relationship.
Article Quotes:
“China's crude oil imports from Iran rebounded last month from a 10-month low hit in January, official data showed, in line with an International Energy Agency (IEA) report that said new U.S. sanctions appeared to have had little impact on shipments. The rebound also came after an official from China's biggest refiner, Sinopec Corp, said his refinery will process more Iranian crude this year than last. China, Iran's top crude oil customer, bought nearly 2.0 million tonnes of Iranian crude in February, equivalent to about 521,330 barrels per day (bpd), up 68 percent from 309,906 bpd in January, according to data from the General Administration of Customs. February crude imports from Iran rose 81 percent from 288,576 bpd a year earlier. … China – along with other main buyers of Iranian crude, including India, Japan and South Korea – has been under pressure since last year to reduce imports in the face of U.S. and European sanctions. The West has imposed sanctions targeting Iran's vital oil sector as it suspects Tehran wants to develop nuclear weapons, an allegation Iran denies.” (Reuters, March 21, 2013).
“The Chinese government has expressively endorsed developing African states through the creation of economic, trade and cooperation zones (ETCZs) in Africa, similar to China’s own use of Special Economic Zones (SEZs) domestically. However, Chinese investors and companies work together with African leaders to develop specially tailored zones without a lot of Chinese government involvement in how the zones are designed or operated. While some of the Chinese companies are technically state-owned, the companies still enjoy a high degree of autonomy. Eight official government endorsed zones have been built thus far (although some have not begun operating yet). Private Chinese enterprises also operate their own. Since these zones are still new, it is hard to determine whether or not they are mutually beneficial to China and Africa, and a lot of the negative speculation on Chinese investment in Africa stems from this uncertainty. Although some of these zones are joint ventures, Chinese companies have also come under criticism for owning 100 percent of the shares in some of the ETCZs. This ignores the fact that prior experience has shown that many times the African stakeholders often inhibit the success of these kinds of projects due to rampant corruption and mismanagement. Thus, Chinese companies exercising ownership of the STCZs can actually be to the benefit of the ordinary Africans involved.” (The Diplomat, March 25, 2013)
Levels: (Prices as of close March 22, 2013)
S&P 500 Index [1556.89] – Nearly unchanged from last week after peaking on March 15, 2013 at 1563.62.
Crude (Spot) [$93.71] – Appears stuck in the near-term between $92-94. Crude is in a slow but noticeable downtrend. The price peaked at $114.83 (May 6, 2011) and momentum stalled at $110.55 last March.
Gold [$1613.75] – In the last year and a half, buyers have bought below $1600 and sold closer to $1750. This is a very visible pattern that’s becoming convincing and continues to encourage buyers to purchase.
DXY – US Dollar Index [82.69] – Since February 1, the dollar index is up 5.38%, showcasing a noticeable short-term response. Sustainability of this trend is still in question, despite the multi-month comeback of the “King Dollar.”
US 10 Year Treasury Yields [1.92%] – A fragile level is being tested. The 2% hurdle proves to be difficult yet again. The 50-day moving average is at 1.94%, which summarizes the recent behavior.
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, March 18, 2013
Market Outlook | March 18, 2013
“True genius resides in the capacity for evaluation of uncertain, hazardous, and conflicting information.” (Winston Churchill, 1874-1965)
Optimism confirmed
The relative edge of the US financial system is showcased not only by the vigor of the post-crisis recovery, but also by the never-ending weakness of the European financial system and the ongoing catching up that is required by emerging market economies. Of course, this is not to say the economic or financial strength of today will stay the same in the next 10-15 years. Importantly, in dealing with the present and the known, this theme of America’s comparative edge in this interlinked world is surely playing out in many ways. Also, the potency of the robust US financial system is not to be confused with satisfying or glorious economic (labor, wages etc.) strength for all. Certainly not. Corporate earnings (around all-time highs) should not be confused with labor and housing market performance. Yet, in an overly critical and at times sensational environment of instant opinion sharing and news making, one should try to maintain a clearer picture. Today, the gap between perception and reality is very narrow when evaluating the relative attractiveness of the US financial system. This stretches beyond cliché, as the markets have spoken loudly to back up this quantifiable reality.
To start with the obvious, the US markets have made headlines as the legendary Dow Jones index’s all-time high achievement is often cited for those who still care to listen. Meanwhile, the S&P 500 index flirting within inches of all-time highs is in the mind of practitioners, traders and investors of all kinds. That record, set in October 2007, serves as more of a symbolic rather than tangible reason. Doubters and doomers are less hesitant to fight on the inevitable rally. Of course, confusing the stock market strength with the overall economic status is dangerous, as stated too often. Now in the fourth year of a bull market, participants should welcome reasonable skepticism, and fear is deeply discounted these days, in which a mild reversal would be less surprising to most.
Similarly, the neglected US dollar is back from beaten-up levels, mainly by outperforming other currencies in the last six month. US 10-Year Treasury Yields have fought back to 2% and mild hints of a Federal Reserve change of plans on quantitative easing suggests the US economy has recovered from intensive care. Yet, there is a mystery to the real economic growth and there is fragility to the current confidence buildup. Nonetheless, in this dichotomy, US assets have benefited the most.
Re-awakening
Within the celebratory climate for risk takers in the US, this weekend’s attention quickly shifted toward revisiting the Eurozone crisis via headlines from Cyprus. Initial discussion of a one-time levy on depositors (6.75% or 9. 99%), as in a penalty on all savers for the nation and the Eurozone, sent shockwaves through the financial community. The terms are being negotiated, but the message sends all kind of damaging signals. Perhaps, the real worst-case scenario is for a complete banking collapse, but the thought of a levy alone is not easily palatable Now this deliberation has begun and is likely to result in a suspenseful decision.
This weekend, chatter offered a big-picture reminder that the European crisis repair never evaporated, despite the recent perceived stability in Europe. And “too big to fail” is a concept that’s alive and kicking globally, and playing out in different forms and schemes. In that sense, crisis-like themes are back, despite attempts to ignore the systemic blunders. Bailout (or bail-in) and the consequences of fallouts are not as uncommon as pre-2008. Fairness to stakeholders is another heated debate and is at times lost in the shuffle. The ultimate fear instantly points to a run on banks; therefore, putting out fires is the preferred short-term solution. For now, the final result is unknown, but the speculation is in full gear. Clearly, these dim realizations leave a bad taste that opens up potential rational and irrational fears in market behavior. Eventually, if and when cooler heads prevail, markets will recognize that Cyprus accounts for 0.2% of the Eurozone’s GDP.
Piecing the puzzles
We’re seeing overheating markets on one end, while investor confidence in US equities keeps growing. This may smells like trouble when one is too comfortable, at least for a moderate price correction. Then there is the sensitive and edgy crowd ready to react. The reignited Eurozone crisis can stir chatter and increase demand for “safer assets.” Gold bugs are eager for price appreciation; the flight to safety should benefit US liquid assets, as seen in various past episodes. After all, volatility is at a multi-year low. Plus, one can easily find suppressed negative headlines that are poised to brew. At that point, a slight catalyst can embark into a spring sell-off. Plus, the S&P 500 Index has gained more than 16% since mid-November 2012, in a mostly uninterrupted manner. Chart observers have called for a breather of sorts in broad markets, as winning streaks eventually end. Yet, the words “bubble” or “gloom-doom” are not so easily applicable and fail to fully describe the current dynamics. Thus, dealing with and embracing the conflicting market signals is the practical way to manage risk.
Article Quotes:
“Indian refiners, which are waiting for an order from the oil ministry on whether to stop buying Iranian cargoes, are discussing annual term contracts with Saudi Arabia, Iraq and Kuwait for the year starting April 1, the people said this week, asking not to be identified because the information is confidential. While the volume hasn’t been set, the Indian companies have been told there is enough supply to cover the loss of Iranian crude, the people said. The assurances reduce the risk of disruptions to oil supplies for Asia’s third-largest economy as it seeks to cut fuel subsidies and narrow its budget deficit. They are also evidence of how global penalties against Iran because of its nuclear program are squeezing the nation’s revenues. At current prices, Iran stands to lose about $11.5 billion in sales annually if India stops buying its oil. … Iranian oil shipments advanced 13 percent last month to 1.28 million barrels a day even as the U.S. implemented sanctions that complicate sales from the Persian Gulf country, according to the International Energy Agency. Iranian crude production rose by 70,000 barrels a day to 2.72 million barrels a day in February, with the increased output going to China and India, the Paris-based adviser to 28 oil-consuming nations said in a report today.” (Bloomberg, March 13, 2013)
“With inflation looking like more of a threat to China than unemployment at the moment, China may have no other choice than to revalue CNY upwards vs. USD. China's consumer prices registered a 10-month high in February of 3.2% year-on-year, but more seriously in terms of popular discontent potential, food prices rose 6%. That's partly down to China's New Year festivities. But flows of speculative capital driven by foreign central bank QE programs could see China's inflation levels pushing higher. The magnet for that hot money is partly because CNY has risen in value pulled up by its USD peg. According to the People's Bank of China there was 684 billion CNY ($109 billion) worth of foreign currency exchanged in January, a record for a single month. Large inflows of hot money can spur imbalances in China's economy as it feeds the already significant shadow banking system and speculative activity in real estate and commodities, making them more expensive for industry and households. China could simply try and clamp down on those capital inflows and that's still a possibility. But it has porous capital controls and the authorities want China to become an international finance center and for the CNY to one day become a reserve currency. Enforcing stricter capital controls would be a retrogressive step in terms of achieving those objectives. The downside of allowing CNY to appreciate, especially against USD, is that it will make many of China's exporters uncompetitive and that will create unemployment in the coastal cities. Also, rebalancing toward a consumer driven economy and more value added activity still has a long way to go.” (Futuresmag.com, March 13, 2013)
Levels: (Prices as of close March 15, 2013)
S&P 500 Index [1560.7] – A few points away from the all-time highs of 1576.09 (intra-day highs). Positive momentum lives on in the ongoing bullish run, but mild pullbacks seem more likely in weeks ahead.
Crude (Spot) [$93.45] – Early signs of re-acceleration are developing as the commodity attempts to reach back to the $98 range. Currently, trading is in a neutral area.
Gold [$1586.00] – Buyers have shown recent interest closer to $1550 levels, while sellers’ appetite begins to wane at $1750. Gold is due for a short-term recovery closer to $1650.
DXY – US Dollar Index [82.69] – Holding steady above 80, which showcases further legitimacy to the 15% appreciation since May 6, 2011.
US 10 Year Treasury Yields [1.98%] – Staying above 2% remains a common challenge and again that leap will be tested.
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, March 11, 2013
Market Outlook | March 11, 2013
“Make not your thoughts your prisons.” William Shakespeare (1564-1616)
Reflective comparison
Not long ago, in September 2011, the markets were overcoming the US sovereign downgrade, weak employment numbers and a dysfunctional perception of lawmakers in the US and Europe. Those factors served as the backdrop for escalating worries resulting in a crisis-like madness. History will remember those months for the aftermath of the debt ceiling drama, but there are a few takeaways that are helpful, especially to grasp the nature of today’s bull market.
On September 9, 2011, gold reached an all-time high of $1895.00. Gold, touted as the safe-haven asset as well as the anti-currency bet, attracted momentum chasers, which eventually drove prices higher. During that same period, the S&P 500 index was attempting to stop the “severe bleeding” after a multi-month decline. Investors were seeking a breather of sorts following the heightened frenzy. Back then, the fragile state of the post-2009 recovery was being questioned, especially as QE 2 ended at the end of June 2011.
Today, with the luxury of hindsight, one notices that since September 9, 2011, gold prices have declined by 16% while the S&P 500 Index rose by 37%. Interestingly, back in autumn 2011, the volatility index (VIX) was around 40, versus last Fridays’ calm finish of 12.59. Stocks, gold and volatility have dramatically changed in less than two years. How has the setting changed between then and now? A few explanations are floating around, such as a rise in investor demand for risky assets driven by the Federal Reserve or the temporary problem-solving of kicking problems down the road. Another possibility is that the perception of Eurozone conditions has improved, temporarily. Either way, the scoreboard is giving observers some noticeable clues.
Digesting some lessons
Sentiment in gold prices continues to change its tone. In its twelfth year of a bullish run, gold supporters may appear confident that the prices will stay higher. Yet, it is hard to ignore the recent downtrend and $5 billion outflow in the main gold fund (GLD) this year. Sure, a near-term recovery looms around the corner, but the investor base is less patient and eager for big moves. However, after a decade, one should adjust expectations and grasp the nuances of an asset that’s often confused between being a commodity or a currency. It is also confused between a momentum play and a value investment. Frankly, the distinctions are not as clear as some would like to claim. Thus, further discovery awaits, as the verdict for gold is murky. Similarly, the commodity index (CRB) peaked in September 2012, suggesting the waning momentum that stretches beyond gold.
As the S&P 500 Index nears 2007 highs, the investment crowd cheers with hopes of participating in a fruitful experience. The habitual low interest rate environment continues to make a strong pitch that supports stocks and other risky assets. Improving economic trends broadly continue to make headlines, while the unemployment numbers are slowly improving. At some point, if the economy improves at the desired pace, then questions will surface as to altering plans by the Federal Reserve to end its stimulus efforts.
Thinking ahead
Entering the fourth year of a bullish stock market has shocked some while intriguing others. But for money managers, critical decisions await between the casual joining-the-crowd path versus the difficult task of planning. Now it takes guts to think ahead beyond just this status quo of low rates, a weak dollar and higher stock market. Slowly, a new trend is silently forming. The US dollar is strengthening by showcasing eight weeks of rally. Meanwhile, Treasury yields continue to rise so far this year. Today, it seems a little wild to think that the rates will rise, but the landscape is shaping that setup, given the perceived economic growth. The lesson of sudden shifts is hardly surprising in the last five years. Yet, bracing for changes requires more skills and guts. Perhaps, flexibility is the biggest asset heading into a suspenseful spring.
Article Quotes:
“In the face of slowing exports, the [Chinese] government wants to raise domestic consumption's share in the economy to close one of the world's widest gaps between rich and poor and quell discontent among those Chinese who feel they missed out on blistering economic growth of the past three decades. The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown. Consumption’s contribution to growth, however, fell in the fourth quarter for the third straight quarter. About 13 percent of China's population still live on less than $1.25 per day, the United Nations Development Programme says. Average urban disposable income is just 21,810 yuan ($3,500) a year. Meanwhile, China has 2.7 million millionaires in dollar terms and 251 billionaires, according to the Hurun Report, known for its annual China Rich List. Urbanization could cure China's economic imbalances, a study by consultants at McKinsey showed last November, putting it on a path to domestic consumption-led growth within five years to replace three decades of investment and export-driven development that stoked global trade tensions. The government hopes 60 percent of its population of almost 1.4 billion will be urban residents by 2020, from about half now, and will build homes, roads, hospitals and schools for them.” (Reuters, February 28, 2013).
“According to Morningstar, a research firm, the average monthly inflow into American bond mutual funds over the past three years has been $18.5 billion; US equity funds have seen average outflows of $7.2 billion. In January, despite much talk of a “great rotation” out of bonds and into equities, bond funds received inflows of $38.1 billion and equity funds (domestic and international) had inflows of $37.8 billion. There are a few signs that investors are demanding higher yields from corporate issuers in 2013 but nothing that indicates panic. As long as the return on cash is so low, it is unlikely that bond funds will see massive outflows. To the extent that investors are moving into equities, they are probably shifting out of cash and money-market funds, not bonds. So for a collapse in the corporate-bond market to happen there will either have to be a sudden reversal of central-bank policy or a wave of defaults. The former looks highly unlikely this year. The latter is most likely to occur if companies suddenly go on a wild spending spree with borrowed money. A recent pickup in mergers and acquisitions may eventually lead to the kind of excesses that have been seen in the past. But these are early days. If this is a bubble, it probably has a bit more inflating to do.” (The Economist, March 9, 2013).
Levels: (Prices as of close March 8, 2013)
S&P 500 Index [1551.18] – Approaching all-time highs of 2007; the bullish run is intact. Nearly a 16% rally from mid-November 2012. The breakout above 1460 triggered the current forceful upside momentum.
Crude (Spot) [$91.95] – Trading in line with the 10-month average. Over the past two years, buyers’ appetites have slowed down at $98, and selling pressure wanes at $84. Within this trading range, several up-and-down patterns persist. For now, the ability to stay above $90 can shape the collective mindset.
Gold [$1579.40] – Over the last year and a half, gold prices have established a range between $1600-1800. Now the slight break below $1600 creates a charged-up environment between buyers and sellers. Odds favor a slight price increase in the near-term. However, since September 2011, gold prices have declined 16% - a slight hint that’s worth noting.
DXY – US Dollar Index [82.69] – After the bottoming process over the last five months, the dollar is strengthening. Since the lows of May 6, 2011, the DXY is up by more than 13%.
US 10 Year Treasury Yields [2.04%] – As the last three months showcase, rising yields as the short-term trend suggest not only a move above 2%, but a changing dynamic according to the technical picture. Climbing back to 2% has been a gradual task. Yet, sustaining above 2% remains a major macro puzzle with attentive eyes watching.
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, March 04, 2013
Market Outlook | March 4, 2013
“All empty souls tend toward extreme opinions.” William Butler Yeats (1865-1939)
Unanimous and familiar
Characterizing the stock market behaviors in last few years has led to various expressions. About a year ago, there was the "silent bull market," which was followed by “bad news exhausted.” Today, that's grown into a widely accepted and visible bullish market. The Fed's near-promise of maintaining low interest rates continues to set the tone while numbing occasional thoughts of escalating volatility or undesired disruption.
The status quo view, shaped by low interest rates and a contained inflation period, continues to suggest taking bets in risky assets. Perhaps, memories of the 2008 crisis fade more quickly than imagined. Amazingly, American International Group (AIG) is the most favored stock among hedge funds. Clearly, this is a symbolic reality showcasing the fact that old wounds heal and optimism is welcomed even by simplistic observations. To hammer the point home, Chairman Bernanke proclaimed, "I don’t think the economy is overheating” – therefore the sudden downtrend shift may take a while to materialize. Or simply, panic-like responses are likely to be postponed down the road, even though credit markets and use of leverage are clearly back in the system.
The pursuit
Of course, another driver of the current “chase” for higher returns is partially caused by the fear of missing out. In other words, the three-year bullish run has become somewhat of an advertisement to attract/entice the gloomy bystanders from a year or two ago. Thus, as investors begin to scramble for returns, the cycle’s endpoint will be harder to determine. Traders may face near-term swings, but having a dose of skepticism is healthy, especially in managing directional patterns. In fact, within the Federal Reserve, there is a split of opinions regarding further quantitative easing. For asset managers, there is a balance act between fighting the Fed and blindingly riding a wave, which is reckless. The saga continues.
At the same time, measures of US economic recovery point to growing investor sentiment when measuring housing and manufacturing data. However, the improvements are minor, yet effective enough to project a recovery. Also, the US 10 Year Treasury Yields jumped in January of this year but failed to maintain above 2% last month. Now, the struggle to reach beyond 2%, restates same old perception rather than drastic changes. Yet, if stocks continue to be in high demand, a bond sell-off might seem logical – a point argued by some experts. However, in practice, this view may play out at a less predictable pace.
Relative strength
In big-picture financial terms, the relative advantage of US markets remains in place when considering global factors. The Eurozone crisis management gets plenty of headlines for some while causing plenty of headaches for others. Downgrades here and there are common, as signs of resilience appear short lived. In fact, the recent UK downgrade does not take away the strength of UK versus Eurozone (not to mention US versus Europe):
“Yet there are also key differences which set the British version of austerity, such as it is, apart from the sort of self-defeating fiscal consolidation we are seeing in the Eurozone. This is now unambiguously apparent in the data. Revisions to UK GDP published on Wednesday show that last year the UK economy grew 0.3pc [versus Eurozone -0.6pc] and actually quite a bit more if you ignore disruptions to production of North Sea oil. It now appears that onshore Britain never had a double-dip recession. Unemployment is also falling, with substantial private sector job creation.” (The Telegraph, February 27, 2013)
As the debate lingers in Europe, there is a suspenseful discussion of China that persists beyond economic scopes. The recent Chinese announcement of property tax and mortgage rules is poised to elicit a mixed reaction. “Property investment, which includes real-estate development, property management and intermediary services, accounted for 18 percent of China’s gross domestic product last year.” (Bloomberg News, March 2,2013). Talks of calming the real-estate bubble-like pattern in China have their consequences, and the full effect has not been felt. Any slowdown in growth is most likely to cause sensitive reactions to an already edgy climate.
Any uncertainty in Europe or emerging markets finds a way to further benefit US liquid securities and the US real estate market. The relative edge is tested at times and discussions of “falling empires” might be overstated. Nonetheless, this US growth prospect, as fragile as it may be, fares well against other economies for now.
Article Quotes:
“Merkel surely understands this, and she is determined to avoid a catastrophic euro crisis just before her own election in Germany on Sept. 22. She is therefore almost certain to heed Italian voters' refusal to accept further tax hikes, budget cuts or labor reforms. From now on, the European Central Bank will have to offer its support to Italy without any tough pre-conditions. In fact, Italy can realistically be expected to make only one economic promise: to maintain the existing taxes and reform laws already legislated under Monti. That promise should be easy enough to keep, since Italy's new parliament will be no more able to muster a majority for repealing old laws than for introducing new ones. The European Commission, meanwhile, can move the fiscal goalposts in Italy's favor. Once that precedent is set for Italy, similar flexibility should spread across the euro zone – and at that point the ECB would be able to offer effectively unconditional guarantees of financial support for all members of the euro zone, while Merkel and German voters turn a blind eye. Once investors work all this out, European financial markets can be expected to calm down and Italian politicians to return to what they know and love: plotting, backstabbing and Machiavellian intrigue.” (Reuters, February 28, 2013)
“Deferrals and forbearance also mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.” (Federal Reserve of New York, February 28, 2013)
Levels: (Prices as of close March 1, 2013)
S&P 500 Index [1518.20] – Wider intra-day swings developing in the last two weeks. 1500-1520 is the current range of interest while the intermediate-term strength remains intact.
Crude (Spot) [$90.68] – Downtrend continues. Crude has declined more than 8% since peaking on January 30. It is barely above the 200-day moving average, which will attract onlookers who may change sentiment on the commodity’s behavior.
Gold [$1582.25] – When gold prices broke below $1660, that marked another vital point in the existing downtrend. Interestingly, the 200-day moving average sits at $1662 as gold believers continue to have faith in the recovery of the metal. There have been several hints of ongoing deceleration, despite any pending bounces.
DXY – US Dollar Index [81.48] – The dollar is up more than 4% since the February 1, 2013 lows. Inverse correlation to commodities is closely tracked and materializing in recent weeks.
US 10 Year Treasury Yields [1.84%] – For several months, surpassing the 1.80% mark was a daunting task. Yet, we’ve seen a tale of two months so far in 2013 where rates jumped and cooled before surpassing 2%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, 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.
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