Market Outlook | August 19, 2013

“Judge a tree from its fruit, not from its leaves.” Euripides (480-406 BC)

Stimulus questioned

The most powerful and most prevailing theme in this ongoing bull market run is how participants continue to credit and adore the powers of the Federal Reserve. As to those "magical” central bank powers, any glance at a financial article or journal will remind one on the strength or dangers of QE. This is a suspenseful topic! Yet, with the economic growth being quite visibly disconnected from tangible stock market appreciation, then one has to wonder about the merits of the current trend. Obviously, we’re nearing a point where the fruits of Quantitative Easing are being heavily questioned. Skepticism and uncertainly continue to build around the pending “taper” – the end of stimulus efforts under the assumption of a recovering economy. Interestingly, it was evident participants were either hedging or speculating on rising volatility:

“About 234,000 futures contracts on the Chicago Board Options Exchange Volatility Index, or the VIX, changed hands yesterday. That’s the most since June 21, as the S&P 500 (SPX) reached a one-month low, according to data compiled by Bloomberg. Trading in the securities has exceeded 24.7 million since January, 5 percent more than the 2012 total and double the level from 2011.” (Bloomberg, August 16, 2013).

Repeating lessons

It’s quite clear that perception management is what drives markets until reality comes. Yet, when there is a sudden acceptance of a painful reality, then inevitably shocks follow, causing a dent. Luckily for most of us, this concept of a “bubble” is not ancient history. In fact, the technology and real estate bubble of last decade fed into the greedy mindset while neglecting the drivers of true natural growth Experts go on and on ad nauseum about the recent bubbles of 2000 and 2008, but surely that has not changed the theatrical orchestration of rising stocks and housing markets in 2013 – at least for now. It is important to remember that in the 2000s, US GDP grew by 1.9%, much lower than the historical average, and this fact at times is overshadowed by the housing crisis. Even the inflated housing boom (consumer spending) failed to create significant economic growth. Perhaps, history is repeating itself despite the complicated and deceptive messages that are thrown around. The Federal Reserve Bank of St Louis reminded us in early 2012:

“What makes the U.S. experience of recent decades unusual is that the share of consumer spending in GDP was relatively high already before it began to increase substantially further during the 1980s, 1990s and 2000s. In dollar terms, PCE's share of GDP in the third quarters of 1977, 1987, 1997 and 2007 were 62.5, 65.9, 66.7 and 69.5 percent, respectively. Thus, consumer spending was a large and increasingly important part of the American economy during the decades preceding the recession and remains so today.” (January 2012).

Frankly, lifting this economy post-technological boom and increasing competitive global markets has been difficult and purely unanswered. Yet, investors have been rewarded in post-crisis periods, which encourages risk-taking. If the prevailing theme deeply resorts to “relying on Fed messaging,” then this continues to repeat the obvious, well-known theme in which the central bank remains the conductor of markets. The Central Bank Chairman, through messaging alone, can influence how data is interpreted while being a key catalyst for macro events. Love it or hate it, if one is in the business of risk-taking, being a rebel or anti-Fed is not always the answer. In fact, it’s proven to be a dangerous way to manage money. Yet, being blinded by perception alone is neglecting the lack of growth that’s been visible in the US economy – regardless of political leadership, regulation, or policy implementation.

The markets easily can sniff the lack of sustainable corporate earnings versus a stale, lackluster economy on a local or national basis. In fact, the big downside surprise in consumer sentiment last week set off some early warnings for the bulls. Even with broad indexes hitting all-time highs, now the ranges appear to be in no man’s land, while the collective thought is for the trend to continue. The Federal Reserve is attempting to craft a new chapter for the autumn season. A continued rally or not, the US growth rate is not quite lively, and being distracted by other forces that ignore this reality is bound to be more costly than prior years.

Bargain hunting

Emerging markets appear to have corrected enough to attract early bargain hunters. European woes have persisted for a while, and any relief can entice speculative buyers to reexamine. Both markets took a back seat in the last few years as the US stock market outperformed. However, in recent months, strength in European markets may signal a shift. Frankly, that’s too early to tell, as a declaration of the end of the recession has plenty to prove beyond being a favorite view for contrarians. Now, the upside potential for US equities lingers: 1) Do US stocks need to retrace further? 2) Is the pending correction a synchronized global stock market decline or isolated to the US only? Answers to these questions may be found in the upcoming quarters ahead, but for now, the jittery US market feeling extends to other notable markets.

Article quotes:

“As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China. Top luxury clothing stores in this city’s downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city’s business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions. But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted. Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city’s car dealerships have failed. The owner of the city’s largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars’ worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.” (New York Times, August 15, 2013)

“Many economists have been expecting the housing boom to provide a visible lift to the US economy. So far the results have been underwhelming. In spite of strong homebuilder optimism housing starts remain subdued. The momentum we saw in late 2012 has dissipated and last year’s forecasts (for example Goldman and ISI Group) turned out to be too optimistic. … The hope of course is that in addition to the jobs created in construction, the indirect impact of the housing market improvement would provide a much needed boost to the economy. But the so-called ‘housing services’ sector (mostly rent and utilities), which is typically 12-13% of the GDP, grew by about 0.7% over the past 4 quarters. That’s roughly the growth rate of the US population. Clearly the ‘knock-on’ effect of the housing recovery isn’t there just yet – other than more people in the US resulting in more rent and utilities payments. … There is another trend that is probably not helping with conversion of new home activity into the economic growth some were expecting. Multi-family units represent an increasing proportion of total housing starts. It is possible that because these units are more likely to be rentals, the ‘multiplier effect’ of housing just isn’t as strong. Homeowners (living in a single-family unit) will probably spend considerably more in house-related purchases than multi-family unit renters.” (SoberLook.com, August 17, 2013).

Levels: (Prices as of close August 16, 2013)

S&P 500 Index [1655.83] – Closed last week below the 50-day moving day average (1657.40). Since peaking on August 2, the index is down nearly 3%, as early signs of a pause are building in late summer.

Crude (Spot) [$107.46] – Twice this summer, crude prices failed to sustainably stay above $108. Now for the third time, the test is looming as buyers look to revisit the annual highs of $109.32 – set on July 19.

Gold [$1329.10] – The next key level is $1400, followed by $1465 (200-day moving average). It’s a long climb back to $1600, confirming the current downtrend.

DXY – US Dollar Index [81.18] – The strong dollar momentum has slowed down in the last month or so. This has been familiar territory since 2008, in which DXY has spent plenty of time in the 77-84 range.

US 10 Year Treasury Yields [2.82%] – The explosive run since May 2013 continues. Early stability around the 2.60% range and last Friday’s (Aug 16) intra-day highs of 2.86% will mark a new upside target.

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.

Market Outlook | August 12, 2013

“How often misused words generate misleading thoughts.” (Herbert Spencer, 1820-1903)

Misleading conviction

With each upside tick, buyers pick up confidence and sellers become even more cautious. Strangely enough, conviction levels of bulls and bears appear much higher when measuring unofficial sentiments. Amazingly, the believers in an ongoing market rally seem as confident as those calling an ultimate top – which creates a confusing and rather suspenseful climate.

First, the bullish reawakening carries a strong momentum now that we’re in the multi-year rally. Persuasive bank analysts’ estimates, warm investor reception for risk and a convenient selling point to riding a wave and proclaim “in the moment” frenzy. Dancing above previous all-time highs brings out ferocious risk appetites and roaring index behaviors. Bullishness is contagious, and perception can influence, mislead and rapidly change. Risk-taking has rewarded the brave and the follower alike; thus, breaking the status-quo mindset requires an extraordinary catalyst. Guessing the turning point is nearly impossible, and ignoring recent gains is not a fair judgment either. But accepting the bullish conditions spearheaded by the Federal Reserve is much closer to the honest conclusion.

Secondly, there is the natural pause of cautious experts that looks beyond the brewing hubris. Of course, the gloom-and-doom mindset is not a healthy or balanced way of analyzing the past or present. However, questioning the merits of earnings growth combined with understanding the drivers of the ongoing rally is another form of skepticism. Not to mention, questioning the legitimacy of key economic drivers is reasonable. Surely, grasping labor and real economy growth is hard to pinpoint with accuracy. Regardless, financial positioning tells more about one’s conviction than artful presentations and self-serving commentaries.
“Rising demand for protection against stock declines has made the iPath S&P 500 VIX ETN the fifth-most active U.S. exchange-traded security. About 37.5 million shares of the ETN traded on average in the past 30 days.” (Bloomberg, August 9, 2013)

This illustrates the common theme over recent years, where protection for downside is highly demanded even in a rising market. At least one can somewhat conclude that any future market decline is not overly shocking. In other words, not all investors are going to be blindsided by pending worries.

Weakness accepted

Observers have established slow economic growth rates globally especially in first half of 2013. Commodities have been slowing along with emerging markets. Yet, the current puzzle is figuring out if both commodities and emerging markets are cheap enough to entice "value" investors. A timing question:

“Morgan Stanley calculates that emerging market equities have underperformed their developed counterparts by 18% over the last six months, one of the worst relative performances in history. As a result, the relative price-to-book ratio of emerging markets is 0.73, the lowest since 2004.” (The Economist, August 1, 2013)

Finding a timely entry point in emerging markets keeps many participants scrambling with lack of answers. The Chinese story and growth potential finds a way to confuse rather than reassure success. Yet it is the same frenzies that may attract barging hunters.

Signs to ponder

The US consumer market, should set the tone of collective mood since the consumer drives the economy. At times the consumer is stretched given limited wage growth, elevated gas prices and a less stellar job numbers. In terms of the fundamentals, retail related earnings this week geared to provide desired clues at to market conditions. Housing has made headline recoveries while student loan concerns looms. Nonetheless, markets which are driven by perception prefer to hear from the central bank before emphasizing visible concerns. However, one does not need the Federal Reserve to confirm the troublesome consumer conditions.

Article quotes:

“Most dangerously of all, the bulls think that China can fix its problems while growing at 7% or 7.5% – which is better than the 8% they used to think is the minimum acceptable, although worse then the 6% they will undoubtedly cite next year as the minimal acceptable growth rate. But these growth rates, the skeptics argue, are impossible. In order that Beijing get its arms around credit growth and reduce the extent of wasted investment, GDP growth rates – the skeptics argue – must drop considerably, although since rebalancing means that household income must grow faster than GDP, it will not be nearly as painful as the bulls think it will be. The issue about how much China’s GDP growth must slow in order to accommodate the necessary adjustment is probably the key difference between the bulls and the skeptics. Contrary to the new argument put forward by the old bulls, the problems of debt, investment and consumption in China are not new and unexpected, they are not just the normal growing pains associated with rapid growth in an otherwise healthy developing economy, they are not simply individual problems caused by irresponsible behavior, and they cannot be addressed except with far more radical changes than the bulls acknowledge.” (Michael Pettis, blog.mpettis.com, August 7, 2013)


“The truth this week came courtesy of the Consumer Financial Protection Bureau and the Wall Street Journal, whose data parsing revealed that about one in five college graduates who borrowed for tuition via the federal direct loans program are not paying the money back. More than half of all new jobs created this year in the US came in the low-wage sectors of retail, travel and restaurants. The consulting firm McKinsey & Company determined that only half of recent college graduates were working in fields that actually required a degree to perform well. The report's author dryly noted:” The cliché of the overeducated waiter or limousine driver seems to have some support.” All this debt followed by low-paying gigs has serious consequences for our young people. The New York Federal Reserve reported earlier this year that they believed that the rapidly growing problem of student debt was causing twenty-somethings to delay home and auto purchases. Others are beginning to suspect it is also impacting the country's fabled entrepreneurial culture. Earlier this year, the CFPB reported that many believe the burden of the student debt is costing the US startup jobs.” (The Guardian, August 8, 2013)



Levels: (Prices as of close August 9, 2013)

S&P 500 Index [1691.42] – Consolidating between 1687-1691 range. This suggests a mild pause as eclipsing 1700 is the next target on near-term investors mind.

Crude (Spot) [$105.78] – Mild consolidation between $103-106 range. Intermediate-term run is biased towards the upside but waning momentum setting up.

Gold [$1329.10] – Sings of bottoming resurfacing after a bounce from $1200. Optimist wondering if $1400 is attainable in the near-term. Nonetheless, the long-term trend appears biased for down to sideways movement.

DXY – US Dollar Index [81.18] – Slight decline in recent weeks leading to a move below the 50 and 200 day moving averages. Yet, the dollar index is trading much higher below its multi-year lows.

US 10 Year Treasury Yields [2.58%] – Back to trading below 2.60%. Unclear if breaking above 2.73% is attainable at this point.

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.

Market Outlook | July 15, 2013

“Creativity is the power to connect the seemingly unconnected.” (William Plomer 1903-1973)

Emphatic gains

A seven-day winning streak for the S&P 500 index has reinforced the already known and existing bull market. Flirting with all-time highs demonstrates strength with unknown upside. This current trend reaffirms the rotation out of fixed income and emerging markets while showcasing the pent-up and ongoing demand for stocks. According to EPFR Global, $11.8 billion flowed into equity funds last week. Interestingly, this was the largest inflow into equities since September 2011. The S&P 500 is up nearly 18% for the year. Certainly, this is a landscape that awakens performance chasers, as the fear of missing out remains a powerful motivator. The financial sector is breaking out to new highs and this is a powerful force heading into earnings. Advisors and managers of all kinds are gaining confidence in participating in this wave while risk tolerance continues to expand.

Victory by default

Naturally, when reaching all-time highs, along with euphoric responses there are equal doubts that resurface. One issue relates to earnings sustainability. Secondly, many ask: What’s the upside from this point on? Is this too easy to invest, with low volatility and constant upside moves? Discussions of the end of QE can trigger short-lived concerns, but asset prices have risen to previous record highs as the Fed has successfully pleased homeowners and stockholders. Yet the real selling point for US equities (in addition to QE and strong currency) is the lack of alternatives and the dismal conditions of emerging markets. Surely, both China and Brazil have seen major sell-offs in their respective stock markets. For example, the Brazilian Index is down more than 50% since peaking in November 2010.
As investors continue to exit developing markets, perhaps the daring investors are seeing value at current levels and can dig in. Perhaps, the neglected emerging market theme offers the best risk-reward, but at this point that contrarian trade is not overly popular. However, at this point the ever-so-popular investment in US equities is gaining followers. As noted by observers and foreign investors, the US market stands to continue to benefit from capital inflow as disappointed emerging market investors seek shelter. The safer exposure versus the daring bet is clearly defined by recent behaviors, and investors are left to choose.

Mind games

Comparisons to 2007-‘08 may resurface here and there, but as usual, history repeats in a different form. Also, unlike the 2000 stock market bubble, the retail participation and innovation craze is not quite at the same pace. In an environment where most commodities have declined and interest rates appear to be rising, the macro challenges affecting future stock market behavior are equally mysterious. Even though the bullish momentum can continue beyond what’s imagined, the hints of a stronger dollar and real economic growth are not eagerly convincing. Calming words from Central Banks have been magical in re-fueling the market. But is this substance from the real economy or hype from financial instruments? Balancing the two challenges practical observers. Amazingly, perception forces that are more like artwork than science drive markets. The artful managers with a full grasp of connecting macro dots are in a better position at this tricky junction.

Article quotes:

“In 1966, Mao launched the Cultural Revolution to prevent China from ‘taking the capitalist road,’ yet ironically his efforts ended up having precisely the opposite effect. ‘A common verdict is, “no Cultural Revolution, no economic reform,”’ declare Roderick MacFarquhar and Michael Schoenhals, leading historians of the period, in their 2008 book Mao's Last Revolution. ‘The Cultural Revolution was so great a disaster that it provoked an even more profound cultural revolution, precisely the one that Mao intended to forestall.’ By force-marching Chinese society away from its old ways of doing things, Mao presented Deng with a vast construction site on which the demolition of old structures and strictures had been mostly completed, making it shovel-ready for Deng's bold new policy of reform and opening up. Mao's epic destructiveness, which was supposed to prepare China for his version of utopian socialism, instead paved the way for China's transformation into exactly the kind of capitalist economy that he most reviled during his lifetime, but also a nation that Mao, like every modern Chinese reformer before him, dreamed of fashioning: a strong and prosperous one. The question for Chinese leaders now is what exactly they intend to do with their newfound and hard-fought wealth and power – and the challenge for the United States, is how to best help shape the answer in ways beneficial for both nations' people.” (Foreign Policy, July 12, 2013).

“If unlimited Quantitative Easing was Bernanke’s policy of successfully convincing the market that he is a madman, just like Henry Kissinger’s nuclear policy with Russia during the Nixon administration, then laying out a roadmap to tapering actually pulls away the curtain and reveals the Fed as being sane and rational. While -2% real yields might be accepted under a ‘mad’ Fed regime, a reasonable Fed will certainly not be able to push real yields to such extremes – particularly when a slowly recovering economy makes alternative investments more attractive than locking in negative real rates of return. Given financial markets’ dislike of uncertainty, this change in directive by the Fed also comes at a precarious time for the Committee, as Bernanke’s term as Chairman ends in January and given President Obama’s recent remarks, he will not be returning. While Janet Yellen is favored to be appointed after Bernanke and keep Fed policy largely status quo, the departure of Bernanke will still result in the Committee losing a powerful dovish voter at a time when policy decisions and communications have become increasingly democratized. As a result, we have likely seen the beginning of a regime shift towards higher rate volatility.” (EconoMonitor, July 12, 2013).




Levels: (Prices as of close July 12, 2013)

S&P 500 Index [1680.19] – A few points removed from intra-day highs of May 22 (1687.18). Nearly an 8% explosion since the June 24 lows.

Crude (Spot) [$105.95] –Reaching a key range between $105-110 last seen in spring 2012. A relentless run since December 2012 lows with a noticeable re-acceleration since breaking above $98.

Gold [$1285.00] – Near 8% run since the lows of July 1 ($1192.00). Yet, the longer-term downtrend is intact, as the 50-day moving average stands at $1359.83.

DXY – US Dollar Index [82.98] – Retracing after making multi-year highs on July 9, 2013. Overall, since Spring 2011, the strengthening dollar is a noticeable theme.

US 10 Year Treasury Yields [2.58%] – Taking a short-term breather after an explosive two-month rise. A new trend is stabilizing between 2.40-2.60%.



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.

Market Outlook | July 8, 2013

“Knowledge is proud that it knows so much; wisdom is humble that it knows no more.” (William Cowper 1731-1800)

Relative dominance

A few days after the July 4th holiday, there is a message echoing across financial markets. As stated so often on this weekly write up, the relative edge of the US Dollar and US equity is visible, as both are sought after globally. Neither is this cheerfulness driven by the positive headline labor numbers for June, which reinforces the prevailing bullish bias. Certainly this glorification of US markets is not breaking news for active and seasoned observers who’ve seen the silent bull market continue to build up for months. Equally, the Federal Reserve’s assessment of improvement is not an opinion that’s up for debate. The dollar reached a three-year high and rates are moving higher from deeply wounded levels, proclaiming economic strength. Surely, the change in QE is something that’s been too discussed and anticipated for one to act surprised.

So here we are in July, in which the Small Cap index (Russell 2000) is sporting all-time record numbers and the S&P 500 index is not far removed from all-time highs. For US homeowners and stockowners, the value of wealth broadly has not been destroyed over the last four years if one bought and held – thus proving how the post-crisis performance has virtually erased all the crisis-related damages. The debate now is more about future damages, for which no one has a clear-cut answer.

Seeking shelter

The increased demand for exposure to US equities does not suggest astronomical upside movement for years to come, either. Instead, the attractiveness of US stocks is bolstered by poor emerging market performance, the demise of commodity prices (with the exception of crude, of course) and shaky bond market confidence and actions. To grasp this loud statement in support of stocks, one needs to connect all macro dots and discard some of the misleading noise, which at times is very difficult. The BRIC nations have struggled immensely and investors are reacting viciously in their behavior. Here is one example of emerging market outflow:


“Global fund managers have yanked money out of Chinese stocks for sixteen of the last 18 weeks, including a net $834 million during a five-day period ending June 5. That was the largest outflow since January 2008, when the financial crisis was getting underway, according to data provider EPFR.” (Wall Street Journal, July 3, 2013)
The bottom line is that the lack of alternatives ends up driving rotation into the next-best assets. Equities may enjoy the pending inflow; however, earnings starting today will enable us to know if expectations match reality. For now, the known is the US attractiveness; the unknown is the fundamental shift and art of spin that await.


Reasonable unease

Before celebrating the positive momentum, one should ponder the macro occurrences that have been brewing in the last few weeks. 1) Interest rates have risen sharply as US 10 year treasury yields are above 2.50%. 2) Crude, unlike other commodities, refuses to decline below $85-90, finally breaking above $100. It continues to benefit from oil-related headline noise. 3) A strong dollar may not necessarily be beneficial for US companies dependent on overseas revenue. 4) European recovery is hardly visible and hopeful signs are not an easy find. Certainly, this is not quite a reason to declare an all-out collapse, but it is a justified list of worrisome topics that surely will persist even if bad news is completely ignored in the short term.

Higher interest rates and oil price appreciations are poised to be the vital macro indicators of collective interest. Financial circles view a rise in both as impeding economic and stock market growth. It is unclear whether the inverse relationship is theoretical or practical. Soon the answer will be discovered, but the discovery requires either patience or risky speculation, which is not comforting despite the cheerful bias.

Article quotes:

“Currently, more than half of China's industrial water usage is in coal-related sectors, including mining, preparation, power generation, coke production and coal-to-chemical factories, according to China Water Risk, a nonprofit initiative based in Hong Kong. That means that the water demand of the Chinese coal industry surpasses that of all other industries combined. A geographic mismatch worsens the water stress. Statistics from China Water Risk show that 85 percent of China's coal lies in the north, which has 23 percent of the country's water resources. As the majority of the Chinese coal industry is built where coal reserves are, those water-scarce regions are increasingly pressured to give more water. To answer China's rising appetite for power, Chinese policymakers have decided to establish 16 large-scale coal industrial hubs by 2015. If the plan materializes, those hubs are estimated to consume nearly 10 billion cubic meters of water annually, equivalent to more than one-quarter of the water the Yellow River supplies in a normal year, according to a report jointly issued last year by the environmental group Greenpeace and the Chinese Academy of Sciences. Researchers from the two groups say that China is now running into a tough choice: Should it adjust the national coal development plan that is set to fuel the economy, or should it go ahead and build up large-scale coal industrial hubs that could cause a serious water crisis?” (Scientific American, July 1, 2013)


“Unfortunately the euro resembles the flawed interwar version of the gold standard rather than the classical pre-war model. After the gold standard was restored in the 1920s, central banks in surplus states like France (which had rejoined it at an undervalued exchange rate) sterilised the monetary effects of gold inflows so that prices did not rise. That put all the pressure to adjust on countries like Britain, which rejoined the gold standard in 1925 at an overvalued rate. A similarly harsh deflationary process is now under way in peripheral euro-zone countries like Greece. Their adjustment would be much less draconian if the core states were prepared to tolerate considerably higher inflation than the euro-zone average. But Germany fiercely resists this. … When countries joined the gold standard, it bestowed a seal of approval that prompted a big influx of foreign money. That pumped up credit, driving an expansion of domestic banks that often ended in grief. Under the gold standard a strong state could support wobbly banks and investors; in pre-war Russia, for example, the central bank was called the ‘Red Cross of the bourse.’ But a weak state could easily forfeit investors’ confidence, as happened to Argentina in its 1890 debt-and-banking crisis. That same story has been repeated in the brief history of the euro. Money cascaded into peripheral Europe, causing banking booms and housing bubbles. In the bust that followed, the task of recapitalising banks has caused both the Irish and Spanish states to buckle.” (Economist, July 6, 2013)


Levels: (Prices as of close July 5, 2013)

S&P 500 Index [1573.09] – Between May 22, 2013 and June 24, 2013, the index fell 7.5%. Now, a bottoming process is setting up for a potential re-acceleration.

Crude (Spot) [$103.22] – After failing to hold above $98 on several occasions, oil has broken above key resistance. Momentum is building, given headline concerns. It is quite evident that $85 is a floor that was established both in April 2013 and December 2012.

Gold [$1251.75] – Recovering from recent lows of $1192.00. Deeply wounded from a heavy sell-off. Although the downside potential appears limited, the long-term downtrend is still intact.

DXY – US Dollar Index [83.23] – Since the May 2011 lows, the dollar has maintained its strength. It finished the week near the two-year highs. Certainly, the multi-decade trend of a weak dollar is not quite the case now, as the bottoming continues.

US 10 Year Treasury Yields [2.73%] – Explosive move remains in place, with the jump from 1.61% to 2.73% in nearly two months. This is a macro game changer that’s been long awaited. Stabilization is anticipated, but this trend is not fragile




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.

Market Outlook | July 1, 2013

Market Outlook | July 1, 2013

“Tension is the great integrity.” (Richard Buckminster Fuller, 1895-1983).

Truth discovery

The last few weeks have realized some tension, shaken a few status-quo thoughts, conjured up tons of speculation and confirmed some lingering weaknesses that were around us. The puzzle between the need for further stimulus versus economic growth that’s plausible is being worked out. At least, policymakers are working on releasing messages and avoiding panics, while so-called financial experts are scrambling to guess, to rebalance and to simply understand what awaits next.

Moving parts

Risk-taking has been encouraged and heavily promoted for several quarters. The well-documented stimulus efforts shifted from being an obvious policy to an evolving mystery – yet have been rewarding for those who bought into the story. Managers who claim to understand this "Fed" mystery will be tested ahead in financial markets. Meanwhile, others blaming the Federal Reserve need to remember that risk-taking is still a choice. And the Federal Reserve is not quite a financial advisor – a much-needed clarification for some caught up in the recent storm.
Surely, the public relations and messaging by Fed officials add further suspense, but the markets have a mind of their own. Calmness is no guarantee and the next phase of earnings, economic and Fed cycles are converging faster than most would like to admit. An inflection point is either brewing or the boiling point is postponed. Perhaps a chaotic series of events is quietly accumulating.

Hints of change or fear of change from the norm are being contemplated by participants. Three items that stand out, given what is known:

1) The US growth (Real GDP) has been moderate since 2009 but has struggled to accelerate further. This stalling does not demonstrate strong recovery.

2) Emerging markets collectively have slowed down, and that weakness is visible. This only follows a dismantled and fragile European condition, which is bound to get volatile in the fall.

3) General contemplation of rotating out of bonds is sparking further possibilities of near-term turbulence. The threat of rising rates is not a theoretical argument this summer, especially after the recent move in 10-year yields. Thus, migration out of fixed income is a debatable topic that will consume a few people in the weeks ahead.

Digesting and acting

This head-scratching setup waits so that even if one is a risk-taker, the options seem limited. Emerging markets are attempting to bottom as further weakness is resurfacing. Heading into this week, the sluggish condition was further verified in China: “The HSBC/Markit Purchasing Managers' Index (PMI) for June retreated to 48.2, the lowest level since September 2012 and down from May's final reading of 49.2. It was in line with a preliminary reading of 48.3 released on June 20.” (Reuters, June 30, 2013).

Emerging markets’ strong link to commodities (metals) is the big macro driver where both have unraveled. Damaged fund managers who blindly fell in love with last decade’s winners are calibrating to some rude awakenings. Are emerging markets a bargain? Are gold and silver worth a second look at cheaper prices? Are equity markets overvalued despite the relative appeal?

These are a few questions that await additional clues ahead. Clearly, growth is not overly convincing and the success of easing is not overly impressive, either, in the real economy. As confusion builds, it is probably safe to bluntly watch these tensions play out before making strong market assumptions and heavy allocations.

Article quotes:

“The situation in Italy is different from Spain in some important respects. Italy’s banks are not sitting on mountains of bad mortgage debt. Italy has a lower gross external debt position, at 124 per cent of GDP. But the problem in Italy is a vicious circle of a credit crunch, a recession, and a public sector with little fiscal room for manoeuvre to fix an undercapitalised banking system. The new government’s focus on a petty scheme to reduce youth unemployment when its real problem is a liquidity crunch is unbelievably misguided. With the rise in global market interest rates, the country is getting closer to an ESM programme, which would then trigger bond purchases by the European Central Bank. But the ECB cannot recapitalise the Italian banks. Nor can the Italian state. Nor can the ESM. According to Mediobanca, an Italian investment bank, the degree to which Italy can tap private wealth as a source of new funds is limited, since wealth taxes are already relatively high. So even Italy’s sustainability in the eurozone is not assured in the absence of a joint-liability banking union. How could it have come to this? It was my reading of the political situation a year ago that a majority in the European Council was quite serious about a proper banking union to be followed by a fiscal union in the future. Germany had yet to be persuaded. Then came the ECB's celebrated backstop last summer. And that killed it. The politicians no longer saw a need for policies that would be a hard sell back home.” (Financial Times, June 30, 2013)

“In late 2011 many were expecting China's property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear. But the correction turned out to be quite shallow and in spite of China's government's multiple attempts to arrest housing price appreciation (and partially succeeding) house prices went on rising. With real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks ("encouraged" by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than ‘arms length’. Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally. Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles.” (Sober Look, June 29, 2013)


Levels: (Prices as of close June 28, 2013)

S&P 500 Index [1606.28] – Attempting to hold to the 1600 range, as the next benchmark stands at the 50-day moving average (1621.72).

Crude (Spot) [$96.56] – Three times this year, crude prices have failed to break above $98-100 range. This showcases either a lack of demand or increased inventory.

Gold [$1232.75] – There was a downtrend that began in September 2011, then another peak and deceleration in September 2012. Since then, gold has corrected by nearly 30%. It’s due for some bounce, but the longer-term outlook has been severely impacted.

DXY – US Dollar Index [83.16] – Signs of increased volatility in May and June. The dollar is attempting to resume its strength, as it closed above its 50-day moving average.

US 10 Year Treasury Yields [2.53%] – Since May 1, an explosive run that began from 1.61%. Now a breather is underway.


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.

Market Outlook | June 24, 2013

“Truth, like a torch, the more it's shook it shines.”(William Hamilton 1788-1856)

Shaken

The status quo of central bank stimulus (aka QE) succeeded in inflating asset prices, primarily in stocks and real estate. Yet, the stimulus efforts have not proven to be highly effective in re-energizing the real US economy. This is a disconnect that's been much talked about, but cracks in this foundation began to appear in financial markets. Markets globally got a dose of sharp drops last week, setting up turbulent weeks ahead. The catalysts have been building up, and turning a blind eye was not an option at this point of the four-year cycle. Thus, tough questions and inevitable knee-jerk reactions materialized.

So the questions remain: Did the Fed finally realized the ‘disconnect’ is not solved by further easing? Or did the believers in QE realize that, outside of Fed easing, there are not many reasons to own assets? Reality checks on cycles and newly formed bubbles are now playing out in a frantic way as the multi-month smooth sailing market woke up to sharp selling. Certainly, the credit markets were reheating along with stocks to mirror a pre-crisis feel.
Lose-lose options

The overly decorated and at times over-glorified Federal Reserve faced a lose-lose situation last week, ahead of their public announcement:

1. Observers were skeptical of the age-old concept that more easing would lead to growth. There is increasing doubt in that easing strategy today versus two years ago, and rightfully so. The Fed has recognized that as well.

2. Lack of further QE was going to severely impact risk-takers who loaded up on assets with hopes of prolonged QE. Perhaps, overdependence has its own natural risk and at some point this reality must be confronted, as the disconnect was wearing off.

Simply put, both options are not pleasant, but a step toward facing the truth. As the saying goes, ‘If you live by the knife you die by the knife,’ and risk-takers experienced that last week. It’s safe to say that volatility has awakened, and calming participants is not that easy and quick when shifting gears. The macro drivers suggest more turbulence ahead, especially ahead of earnings – which will reveal more. Ultimately, the Fed chatter is not that soothing, and the inevitable correction is here after an explosive first half.

“The Fed has been at the forefront of central banks seeking to stimulate economic recoveries through creating trillions of dollars to buy bonds and wrestle down global interest rates. Much of the new money has spilled into the developing world as investors have desperately sought better returns in new markets. This helped countries from Honduras to Rwanda gain access to international capital for the first time, and buoyed the bigger developing markets.” (Financial Times, June 23, 2013)

Beyond the Fed

Hints of a slowdown have persisted for months, and the signals had been mounting way before the Federal Reserve meeting. A slowing emerging market economy was no secret, especially with the cooling of BRIC nations led by weakness in Chinese growth. In fact, the GDP story of China is unresolved and causes further concerns. This developing nation slowdown is highlighted in the decline in Brazil and Turkey, where investors are discovering the previous growth is not sustainable. Since January 2, 2013 the emerging market fund (EEM) has declined nearly 20%, painting a not so attractive picture.

Similarly, a 12-year bullish run in gold had to come to a pause. This is not a story of gold only, but within the context of the commodity super-cycle that needed a breather. Importantly, over a decade, the commodity boom mirrors plenty of the emerging market explosions and now both are correcting rapidly. Gold is down nearly 28% since October 2012 highs, emphasizing the hype as a safe haven, which has failed despite aficionados’ resilience.
Another critical hint is in interest rates, which bottomed out in early May. The US 10 Year Treasury was already rising heading into the Federal Reserve announcement. Now with 10-year yields reaching two-year highs, analysts are revisiting their targets and bond traders reshuffle their thoughts. Thus, emerging markets, commodities and fixed income all whispered of changes before roaring and shaking the markets.

Bracing for fallout

Linked into developed and emerging economies is the recent shakeup in currency markets. Overall, a three-decade theme of a weak dollar and low interest rates was bound to reverse as well. Even a slight rise in the US dollar led to a domino effect on other currencies, sparking volatility. Thus, the prevailing status quo was defined, as low rates and rising assets must rewrite their path in terms of currency behaviors as well. Surely, the global markets are interconnected and so are asset classes, which are highly correlated. Thus, a sudden spook led to a sell-off in bonds, commodities and fixed income. This only brings up a common theme of: Where does one invest? It’s well known that there are limited options all around, which will force many to look ahead and, like usual, suspect a quick bounce-back. Yet, turbulence has its own pace to sort out and previous misconceptions need to be flushed out of the system.

Article quotes:

“To put it into context, in the four-year period between late 2008 and late 2012, China’s stock of credit, excluding the financial sector, rose 57% of GDP. The US took seven years between 2002 and 2009 to increase the ratio by the same amount, with the UK debt-to-GDP ratio increasing by 80% in the same seven-year period. The speed of China’s growth is not quite unprecedented, but the precedent is not a happy one. ‘These extreme rises of debt-to-GDP have been a very good predictor of financial crises,’ says Coulton. ‘A lot of financial crises have followed this kind of credit expansion.’ There is no sign of any rise in non-performing loans (NPL) as yet, though many suspect Chinese banks are seriously under-reporting deterioration in asset quality. According to the China Banking Regulatory Commission, the NPL ratio of Chinese commercial banks stood at 0.96% in Q1 2013, a nudge up from 0.95% in the fourth quarter of last year – the sixth straight quarter of rises since the fourth quarter of 2011. If there is a bubble in China, it is not a typical one, with government interventions serving to distort the usual indicators – a fact that makes famed China bear Michael Pettis claim the Chinese banking sector is de facto insolvent without state subsidy of interest rates and political cover for asset quality deterioration.” (Euromoney, June 2013).

“From Turkey to Brazil to Iran the global middle class is awakening politically. The size, focus and scope of protests vary, but this is not unfolding chaos – it is nascent democracy. Citizens are demanding basic political rights, accountable governments and a fairer share of resources. The movements may lose their way. The demonstrations will have a limited long-term impact if they fail to become organized political movements. And the violence and criminality that erupted during some protests in Brazil have prompted a popular backlash. … In Turkey, the protests are not the equivalent of the Arab Spring demonstrations that toppled governments across the Middle East. Nor are they simply a pitched battle between religious conservatives and secular liberals. Instead, they are deeply Turkish – and hugely important. After decades of the Turkish state reigning supreme, young Turks are demanding pluralism and basic individual rights. The Turkish state should be accountable to the people, they argue, instead of the people being accountable to the state. … Brazil presents a different dynamic. The ruling Workers' Party is left-leaning and its economic reforms have helped the poor and middle class. But now a souring economy, corruption scandals and $12 billion in government spending on 2014 World Cup stadiums has sparked one million people to take to the streets.” (The Atlantic, June 23, 2013).

Levels: (Prices as of close June 21, 2013)

S&P 500 Index [1592.43] – Since May 22 intra-day highs, the index has fallen nearly six percent. Pausing and poised for further correction.

Crude (Spot) [$93.69] – Once again, oil failed to hold above $100. This is a theme that has repeated again and again in recent months. The ability to hold above the 200-day moving average ($92.30) will set a key tone.

Gold [$1292.50] – Additional deceleration from a multi-month decline. Down more than 25% since peaking on October 4, 2012. Further confirmation of weakness as a break below $1300 sent sharp daily selling.

DXY – US Dollar Index [82.31] – After an up-and-down May, the dollar is stabilizing and appearing to re-strengthen.

US 10 Year Treasury Yields [2.53%] – An explosive run in the last few weeks, from 1.55% to more than 2.50%.




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.

Market Outlook | June 17, 2013

“What has puzzled us before seems less mysterious, and the crooked paths look straighter as we approach the end.” Jean Paul Richter (1763-1825)

The plot thickens

In the past month, a few events have unfolded, heightening hints of a potential sell-off. It started with sharp sell-offs in emerging markets, along with currency volatility and certainly the ongoing debate about the status of Quantitative Easing (QE). In addition, US participants in the past month witnessed a run-up in interest rates and minor pullbacks in broader markets. In what has been a smooth-sailing ride (year-to-date: S&P 500 up 14.1% and NASDAQ 100 above 10%), now this begs a few questions about asset prices. Are we poised for a slowdown triggering a prolonged selling period? Is the status quo at risk of changing its tune? These are natural and key questions to ask among the financial circles.

Before building the pending downside thesis, one should realize a few reasons that favor further upside moves in US markets. Here are key influential points to consider:

1. Limited participation. This thus-far unloved rally does not feel like a broad participation to set up a bubble-like collapse in the US. A few pundit comparisons to the 2008 or 2000 bubbles are not quite relevant yet. Perhaps, the lack of enthusiasm thus far may require more cheerleading to even reach a more dangerous level.

2. Lack of alternative markets. When considering European woes and the recent emerging market sell-off, US equities end up benefiting from capital rotation. Plus, given the low interest rate environment, there are limited options in sound bond investments, which again bodes well for equities

3. Power of intervention. Stabilizing the market remains a priority for central bankers as conductors of the financial market orchestra – stimulus efforts can prolong the rally and attempt to postpone potential demise or loss of confidence.

Big-picture assessment

Surely, the reason for upside moves is now being understood. However, there is a potential setup of a lose-lose situation facing the Federal Reserve, which risks the hopes of those falling deeply in love with this market. In the summer of 2011, the panic served as a buy signal. However, in summer 2013, having market confidence is not such a rare trait or outlook.

First, if QE as we know it ceases, there is a natural investor withdrawal or shift from the status quo that can cause justified and unjustified concerns. Participants have been trained not to doubt the status quo, and when that's taken away, then fear easily brews.

Secondly, if QE continues for long, then the mystery of QE’s end date would trigger additional skepticism and worry beyond the Fed’s messaging control. Not to mention, if the economy is considered okay, then more will ask: Why more stimulus? The last thing central banks desire is to admit that ongoing stimulus efforts were a failure. So one should brace for government intervention and confusing messaging. So far, it's quite clear that US homeowners and stock owners benefited in price appreciation. Thus, the Fed can flex some muscles to re-emphasize the old saying: "Don't fight the Fed.” Yet, the economy is mysterious to grasp, when sorting through revisions and debatable sample sizes and other tricks in calculation that confuse rather than refute potential doubts.

Unlocking confusion:

It’s fair to say that the trend for recent months is known. The upcoming trend is less clear, which can cause some near-term disturbance. Perhaps, some market overreaction should not be surprising and is the healthy approach. Corporate earnings ahead will dictate some responses related to investor confidence. If emerging markets are slowing, then odds are multi-national corporations will feel the pinch, too. So earnings may set the tone in the US. Each trading day can confirm the clues of jittery macro reactions. For now, cleverly observing is wiser than boldly relying on old trends or speculating on new, unproven movements.

Article quotes:

“After three years, Greece’s experience is telling. As a new IMF report acknowledges, structural reforms there have failed to produce the intended effects, partly because they ran up against political and implementation difficulties, and partly because their potential to increase growth in the short run was overstated. Nor have Spain’s labor-market reforms worked as expected. None of this should come as a surprise. Structural reform increases productivity in practice through two complementary channels. First, low-productivity sectors shed labor. Second, high-productivity sectors expand and hire more labor. Both processes are needed if the reforms are to increase economy-wide productivity. But, when aggregate demand is depressed – as it is in Europe’s periphery – the second mechanism operates weakly, if at all. It is easy to see why: making it easier to fire labor or start new businesses has little effect on hiring when firms already have excess capacity and have difficulty finding consumers. So all we get is the first effect, and thus an increase in unemployment. There is little new in the European Commission’s approach, and few reasons to be optimistic that its “new” strategy will work better than the old one. Structural reform – however desirable it may be for the longer term – simply is not a remedy for these countries’ short-term growth conundrum.” (Project Syndicate, June 17, 2013)

“Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity. India’s central bank sold dollars the past two days to stem the rupee’s slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate today. Brazil said yesterday it would unwind some of the capital controls it began putting in place in 2010 – when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week. Foreign selling of Thai, Indonesian and Philippine stocks has reached record levels as the threat of reduced Fed monetary stimulus spurs the biggest equity declines since 2011. Overseas investors unloaded a net $2.7 billion from the three stock markets so far this month, the biggest eight-day outflow since Bloomberg began compiling the data in March 1999. Three years after emerging-market policy makers from Brazil to South Korea warned about destabilization from record Fed stimulus, they are now coping with the prospect of the spigot being tightened. Fed actions have pumped more than $2.5 trillion into the financial system since 2008.” (Bloomberg, June 13, 2013).

Levels: (Prices as of close June 14, 2013)

S&P 500 Index [1626.73] – After peaking on May 22, the index appears to stabilize around 1620. Buyers with conviction are offered an entry point, while sellers debate the magnitude and potential of this downtrend.

Crude (Spot) [$97.85] – Very early signs of a breakout above $96. There is technically some significance in that move, yet some wonder if this is a short-lived run.

Gold [$1385.00] – A nine-month decline leading to a more than 20% depreciation reemphasizes the cycle pause. Although there has been chatter of buying the last few quarters, gold prices have not rejuvenated.

DXY – US Dollar Index [81.66] – Since late May, the dollar has declined in value, giving up some of the gains that began in February 2013.

US 10 Year Treasury Yields [2.12%] – After an explosive run since May 3, yields have risen at a faster pace. Sustainability remains questionable and suspenseful.


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.

Market Outlook | June 10, 2013

“Good teaching is one-forth preparation and three-fourths theater.” (Gail Godwin 1937-Present)

Dichotomy

A few triggers of potential unrest in global markets are loudly visible despite a positive weekly finish for the S&P 500 Index and the not-so-catastrophic labor numbers for May. Underneath the surface, mild turbulence is brewing while financial minds ponder the faith of interest rates and speculate on quantitative easing exit plans.
Meanwhile, other nations resume efforts to replicate the art of asset price stimulus via easing (of course). With home values and stock markets above or around pre-bubble levels, for some Americans, the perception of feeling wealthy or normal seems rather legitimate, as opposed to digesting the not-so-pleasant to mixed economic realities that persist. This ironic maze brings forth a disconnect often used and misused in political arenas and general discussions. For the so-called professionals, it is crucial to navigate thoroughly to survive any pending fallout. For market observers making distinctions between the dominant status quo and trend shifts, it is a burning question with higher stakes.

The quiet turbulence

The message from emerging stock markets acknowledges the weakness of the real and slowing global economy. For example, since March 7, 2013, the Brazilian Index (EWZ) is down nearly 15%. Similarly, Mexico (EWW) saw its stocks fall by more than 15% after peaking on April 11, 2013. Last week, the Turkish stock market (TUR) fell nearly 10%. Perhaps, these key markets followed the footsteps of the Japanese stock market decline from two weeks ago. Related or not, sell-offs have been materializing across various markets. These movements are worth highlighting as the US equity markets have maintained composure thus far by avoiding sharp sell-offs.

Interestingly, the emerging market decline has coincided with commodity price deceleration. The simple logic goes: If global demand softens, then commodity prices need to correct as well. This mirrors the same cyclical perspective. So far this year, one can say it is only natural to have moderation in both given the over decade run.

Practical dilemma

There might be a disconnect between weak economic growth and inflated assets that lives on. Clearly, that's the message. Maintaining high asset values while applying low interest rate policy is hardly new anywhere these days. In a world that's still somewhat desperate for growth and yield, there are not many alternatives to stocks. It’s a tough case to claim this is of a bubble of 2008 nature, as the participation rate by investors is not quite at the same pace.

“U.S. equity trading volume has dropped 7 percent in the first five months of the year, positioning it as the fourth year in a row of decline. For the five months through May, U.S. equity average daily volume was 6.34 billion shares, down 7 percent from the same period in 2012, according to data from Credit Suisse's Trading Strategy Group. Trading in exchange-traded funds dropped 9 percent, while trading in stocks fell 7 percent. (Traders Magazine, June 7, 2013).

If the number and level of participants in equity markets remain at low levels, then calling bubbles is not quite accurate. That’s the challenge and danger for those betting on further gloom or a repeat of recent history. At some point, the hints of market slowdown cannot be just ignored easily or dismissed collectively. The labor and GDP lack of growth is one factor, while earnings require further clarity that needs unlocking. The status quo has been quite powerful in lifting asset prices, but expectations are rising and patience is wearing thin as the market truth is being confronted.

Article quotes:

“Data released on Sunday showed China's annual consumer inflation slowed in May while bank lending fell below expectations, more evidence that the world's second-largest economy could slow further in the second quarter. Fuel demand in China, the world's second-largest user and a key driver for global oil markets, grew at the slowest pace in four years last year as the economy expanded less rapidly. China consumed roughly 9.48 million barrels per day of oil in May, according to Reuters calculations based on preliminary government data. Reuters tallies implied oil demand by adding crude throughput and net imports of refined products, but excludes changes in inventories which China rarely discloses. That compared to 9.38 million bpd in May last year and April's 9.6 million bpd. The lackluster consumption was mostly due to weak refinery throughput, which gained 2.4 percent over a weak year-earlier base to 9.2 million bpd, data from the National Statistical Bureau showed on Sunday, the lowest daily rate since September 2012.” (Reuters, June 9, 2013)

“The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway. That number was even worse than it looked since new orders plunged 3.5 points while inventories rose. The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December. Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline. Consumer expenditures for April declined 0.2% and disposable income 0.1%. Compared to a year-earlier, real consumer spending is up a paltry 2.1% and real disposable income only 1%. Even then, consumers were able to maintain this inadequate rate of spending only by reducing their savings rate to 2.5%. Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle. Real GDP has increased only 1.8% over the last four reported quarters, within a range that has been in force since the first quarter of 2010. The current quarter is shaping up as no better. Manufacturing production has declined for the last two months and three of the last four.” (Comstock Partners, Inc June 6, 2013).

Levels: (Prices as of close June 7, 2013)

S&P 500 Index [1643.38] – After temporarily pausing, the index bounced back from 1600. In upcoming days, bullish participants await revisiting all-time highs (1687 on May 22). The four-year bull market is facing an inflection point, and sustaining this run will be severely questioned.

Crude (Spot) [$96.03] – Once again, climbing back to $96, a familiar resistance range. Staying above it has been a challenge, as the $100 point has seemed elusive in recent months.

Gold [$1400.00] – Since October 5, 2012 the commodity has dropped by 24%. Clearly, this confirms the downtrend. The discounted price might attract new buyers seeking a liftoff, but the cycle is hard to dismiss.

DXY – US Dollar Index [81.66] – A sharp two-week sell-off in dollars wiped out last month’s gains. It’s too early to determine the nature of the recent sell-off, but the strengthening trend is mildly pausing.

US 10 Year Treasury Yields [2.17%] – Since May 1 lows of 1.61%, yields are raising and holding steady. Reaching and breaking above 2.50% will prompt a new wave of confirmation of a stable rising yield theme. For now, between the skepticism and lack of evidence, speculators line up.








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.

Market Outlook | June 3, 2013

“Every calamity is a spur and valuable hint.” Ralph Waldo Emerson (1803-1882)

Concerns building

The status quo of higher markets, lower interest rates and stable economic growth is not as sustainable as in previous years. There are several unfolding events that point to a potential for increased uncertainty and analysts, journalists and participants alike misunderstand plenty of uncertainties. A few big-picture themes to consider:

1. The end date for quantitative easing is being debated as interest rates show signs of rising (increased bond market nervousness).

2. Drivers of sharp selling in the Japanese stock market are being understood as the sell-off spreads to other emerging market indices.

3. The lack of compelling and sustainable fundamental strength in corporate earnings suggests limited upside potential.

4. May ended with a stretched stock market that needs a breather from an explosive recent month and a well-defined four-year bull market.

5. Weak economic data in key nations (led by China) signal lack of expansion and growth. This is further supported by the decline in commodity prices, which respond to the softening global demand.

All this adds up to suggest that a pending calamity is in the not-so-distant future, as the collective run-up has long ignored the brewing issues. Of course, the right move in the past few years has favored risk-taking, and pessimists were wrong in their views and missed out. Now in a new setting, the environment is quite different than March 2009, when the S&P 500 bottomed after the crumbling of the bubble top. Back then, it was an opportune time to purchase; these days, it’s not ideal to double down on risk.

Deceiving calmness

The comfort of the status quo leads to calmness, which is common before bigger sell-offs, as witnessed in August 2007 – right before the major sell-off. Certainly, the magnitude of any pending sell-off should not be automatically compared to the 2008 crisis. Perhaps, the magnitude is not the same here, but the concept of ebb and flow is important. Not long ago, the all-time highs in the S&P 500 index we cheered as other global indexes rejoiced in the collective bull market. Yet, even the most bullish and rational speculator would admit some sell-off or price readjustment is necessary. At least, the disconnect between the real economy and elevated stock market is harder and harder to justify. Thus, as the summer months approach, there is plenty to ponder, as central banks will have to find a coherent explanation of pending developments while investor near-term overreactions seem inevitable in either direction. When viewing turbulence (Volatility Index), it has been quiet since summer 2011, and keeping that calmness may not be as successful as the last two years.

Bracing and accepting

With all the uncertainties, it is fair to say participants – investors and analysts alike – are facing shaky confidence and limited conviction. If market uncertainty is brewing while lack of conviction is playing out, then ongoing rosy forecasts for risk-taking omit the recent clues that suggest corrections in asset values. The S&P trading at all-time highs versus weakening real economic data is a highly noticeable reality that illustrates this disconnect. Full questions await on earnings and sustainability.
“Of the 106 companies that have issued EPS guidance for the second quarter, 86 have issued projections below the mean EPS estimate and 20 have issued projections above the mean EPS estimate. Thus, 81% (86 out of 106) of the companies that have issued EPS guidance to date for Q2 2013 have issued negative guidance. This percentage is well above the five-year average of 62%.” (Factset, May 31, 2013).

It is one thing to beat already lowered analyst expectations; it is another to showcase natural growth. Overwhelming evidence is building, from technical chart pattern spotting to simple economic trend following. There is the usual denial or attempts to keep the uptrend going. Even commodities such as gold are in a decline, rather than serving as a reliable shelter during risk aversion. The safe asset is not quite safe, either, as there is a lack of escape in the short term. Thus, accepting the inevitable correction is healthier than fighting it. Keeping an open and observant mind appears to be the trick for the week ahead, as tension accumulates.

Article quotes:

“The list of major emerging-markets countries either currently cutting rates or very likely to do so in the near term consists of just five: Hungary, Poland, Turkey, Korea, and India. The first two of these are suffering the consequences of the extended euro area recession. On top of that effect, the National Bank of Hungary is carrying out a “structural” easing associated with a regime change at the central bank, with doves now holding a majority on the board. Turkey is also feeling the euro area chill, though to a lesser extent. Its easing additionally reflects the upgrading of the role played by real exchange rate management in determining the overall policy stance. Gradual currency appreciation (in real, trade-weighted terms) is triggering compensatory interest rate reductions. In Korea’s case, global cyclical weakness is combining with the yen’s depreciation — a negative competitiveness shock to Korea — to bolster the case for additional cuts, on top of the 50 basis points in easing during 2012. Finally, India has been cutting gradually since last year but has brought the policy rate down a modest 75 basis points during that period. The statement following the most recent move suggested that the cycle is drawing to a close or perhaps has already done so.” (Institutional Investor, May 15, 2013).

“I believe this to be a crucial point of distinction and I think that many Western central bankers – including some of our own Bank of England members – have misled themselves, as well as others, about measuring the effectiveness of so-called quantitative easing (QE). Some policymakers, especially in the early days, tried to judge the success of QE by the impact it had on whether long-term bond yields were lower than they would otherwise have been. It always struck me that this was hardly a high hurdle, nor an appropriate one. In fact, it could be a potentially troublesome criterion once markets believe the economy is starting to do better – as some might now think about Japan – because eventually, if economies return to normal, it would seem quite sensible that bond yields might return to normal. Most economists would argue normal 10-year bond yields should equate closely to the trend growth rate, plus the inflation performance or underlying inflation expectation, plus some kind of risk premia.” (The Telegraph, May 31, 2013)



Levels: (Prices as of close May 31, 2013)

S&P 500 Index [1630.74] – The last seven trading days have started a near-term correction after reaching record highs. The magnitude of the sell-off is being questioned.

Crude (Spot) [$91.97] – Once again holding in not far from $92, but failed to hold above $96 – confirming the weakness in global demand.

Gold [$1413.50] – After a multi-month sell-off, a bottoming process appears to form around $1400. Yet, the intermediate-term trend remains fragile and confirms a prevailing weakness.

DXY – US Dollar Index [83.37] – A few points removed from its multi-year high. The dollar strength story remains alive.

US 10 Year Treasury Yields [2.12%] – Within the month of May, treasury yields went from annual lows (1.60% - May 1) to reaching yearly highs (2.23% - May 29). This was an impressive reversal, raising all types of questions on faith of interest rate policies and movements.


***
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.

Market Outlook | May 28, 2013

‘It is a bad plan that admits of no modification.’ Publilius Syrus (~100 BC)

Untangling unknowns

There is a commonly touted disconnect between stock markets, economic growth and general socio-political sentiment. At least, when considering all factors, this is puzzling for those attempting to plug in a formula and dissect this matter. It’s discouraging to those seeking a definitive answer. It is also unclear for those predicting a foreseeable future. We see the same old challenge for those managing risk and chasing returns. And this mostly stems beyond politics and government polices. The unconvincing economic growth combined with an explosive stock market is mysterious for experts and outsiders alike. Thus, in that not-so-clear picture, many will attempt to decipher the pending fallouts.

Occasional Clues

The decline in the Japanese stock market sent an early hint of pause in the form of consecutive down days. Granted, the Japanese Index made a strong run already this year, and set up for the inevitable correction, the moves were rather sharp. Interestingly, this negative action is taking place after a collective cheering of a revival in the Japanese economy (‘abenomics’), and flourishing inflow of capital into Japanese funds. Perhaps, the old lesson of going with the popular thought has its dangers. The following was outlined on May 23:
“The latest inflows in the week ending May 22 marked the 27th straight week of cash gains into funds that hold Japanese stocks. The latest demand was for exchange-traded funds, which attracted $1.52 billion, while mutual funds that hold Japanese stocks saw slight outflows of $14.8 million.” (Reuters).

Short-lived or not, other markets wait to see if a similar sell-off pattern is to follow. In the case of Japan drivers of recent sell-offs, they are being discovered and slowly being understood. Some attribute the Japanese sell-off to a weak Chinese PMI (Purchasing Managers Index) data. Money managers cannot deny that the warning sign are here from a fundamental point of view. In fact, there is a strong correlation between weakness in commodity prices and the Chinese stock market. It is worth noting that since May 6, 2011, the CRB (Commodity Index) fell 23% and the fund measuring the Chinese index (FXI) decreased by 20% during the same timeframe.

Basically, the message is quite clear how the commodity and stock market project a similar message of economic weakness. Of course, naturally, the question to ask is: If China is slowing down along with commodities, then why are markets not declining? This is a question to ponder in these summer months ahead.

Fragility

Pressures for downside movement in asset values have been building for a while, considering the lack of impressive global growth and restless responses to familiar ‘easing’ tactics. In fact, lowering interest rates is such a common theme from Japan to Eurozone to other emerging markets. Similarly, the theme of lower growth is also a common theme, which has potential socio-political consequences. Here is one example: “‘The government is showing a much bigger tolerance for slower growth because they understand that China’s potential growth rate is slowing and that concerns about the environment are rising,’ said Bank of America’s Lu. ‘One of the reasons we cut our growth forecast is because protests over environmental issues are leading to the cancellation or delay of a lot of investment projects.’’’ (Bloomberg, May 26, 2013)

With the S&P 500 index up 15% so far this year, a long-awaited breather logically is being discussed and awaited. Volatility is deceivingly calm when viewing the Volatility Index (VIX). Sometimes, calm occurs before potential shocks. There is no question the bullish run is in place, but a fragile stage is silently brewing, at least in the near-term.

Article Quotes:

“Private equity investors are eyeing Africa more intently than ever, with big global firms such as Carlyle Group and KKR & Co. boosting their presence on the continent alongside smaller regional players like Helios Investment Partners and Development Partners International. Deal flow remains far below the peak hit in 2007, though, and well behind the ambitions of most major players. Investors complain of too many buyers chasing too few opportunities, leading to excessive valuations. … The political and economic environment has improved dramatically in many parts of the continent over the past decade. The International Monetary Fund forecasts that 28 of 45 sub-Saharan African countries will post economic growth rates of 5 percent or more this year. There is plenty of money pursuing deals, but only modest amounts are being committed. Helios, an Africa-focused firm founded by former TPG Capital executives, closed its second fund – at $900 million, almost three times the size of its first fund – in June 2011. The firm, which aims to return three times its invested capital, hoped the newer fund would allow it to make larger investments.” (Institutional Investors, May 22, 2013)

“The following editorial appeared in El Pais (Madrid) earlier this month: The consolidation of a fascist party in Greece. The success of Beppe Grillo and Silvio Berlusconi in Italy. The 6.2 million unemployed in Spain, its highest since the year after Franco's death, and the 26.5 million in the EU. The collapse of the French hope for François Hollande. The rise of anti-European parties in Greece, France, Finland, UK, Germany. The dismantling of the welfare state and the return of starvation wages in Southern Europe. … The risk to Europe today is what Fisher said about America under Hoover: ‘If our rulers should still insist of “leaving recovery to nature” and should still refuse to inflate in any way, should vainly try to balance the budget and discharge more government employees, to raise taxes, to float, or try to float, more loans, they will soon have ceased to be our rulers. For we would have insolvency of our national government itself, and probably some form of political revolution.’” (Project Syndicate, May 26, 2013)


Levels: (Prices as of close May 24, 2013)

S&P 500 Index [1649.60] – Slight pullbacks after reaching record highs. Consolidation at this stage seems fitting, with 1600 and 1592 being noteworthy levels. The run since mid-November 2012 showcases the increase demand for equities.

Crude (Spot) [$94.15] – A range forming between $92-96 for several months. No convincing signs of directional movement.

Gold [$1380.5] – The commodity has not changed much since last week. It stands 16% removed from its 200-day moving average, which showcases the magnitude of the recent sell-off, loss of momentum and may convey the message of being cheap for some.

DXY – US Dollar Index [82.12] – Maintaining a four-month strength. However, the near two-year strength is not significant enough to cause major disruptions.

US 10 Year Treasury Yields [2.00%] – Climbed back to 2% after stalling in the first quarter. Questionable sustainability here, given previous patterns.



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.

Market Outlook | May 20, 2013

“Nature cares nothing for logic, our human logic: she has her own, which we do not recognize and do not acknowledge until we are crushed under its wheel.” (Ivan Turgenev 1818-1883).

Digesting surprises

We are reaching a junction where fighting the status quo is wearing down those who did not accept the power of the Federal Reserve. The power of surprises plagues the consensus mindset and costs investors if they miss out. The surprises, of course, are in how the stock markets reached all-time highs, inflation is not a big threat and commodities are weakening despite an overall economic cooling period. Clearly, the Federal Reserve has engineered the stock market recovery and demonstrated its dominance and influence. Love it or hate it, those are the facts that confront those who placed their bets in the liquid markets. The commentary of Fed-bashing and gloomy opinions is mere noise now, as the bullish months passed by through all built-up concerns.

Similarly, gold bugs who kept proclaiming the “inevitable” gold price upside movement in a religious-like manner are learning that markets are not overly simplistic or logical. At the same time, this is a reminder that all trends must come to a pause even before a trend comes to a sudden shift. Two points made headlines this weekend:
“[1] Money managers, including hedge funds, pulled $1.4 billion from the U.S. gold futures market for the week ended May 14 by trimming their net long positions in the metal, according to Reuters calculations of data released by the Commodity Futures Trading Commission (CFTC) … [2] On [last] Friday, gold fell for a seventh straight session, its longest losing streak in four years, as the dollar rose to the highest since 2008.” (Reuters, May 17, 2013)

For those proclaiming the weak dollar path, it has been nearly deadly to claim a declining dollar in the last two years. Equally, the rise in inflation theory was proven wrong thus far and a spike in rates is hardly visible, as reaching 2% on the US 10 year Treasuries remained more of a struggle than a norm early this year. Unfortunately, grasping previous trends fails to create enough comfort for those looking ahead. Amazingly, it forces one to think of all surprise possibilities for months ahead and that the wisdom learned since the March 2009 recovery has reverted to a new normalcy.

Barometer

Is the stock market a barometer of confidence (wealth or wellbeing)? Or is the stock market a projection of earnings outlook? Or do these broad indexes provide clues to an economic recovery? Obviously, finding one answer that fits all these questions is plenty to ask. Thus, curiosity looms now with elevated markets, while pundits talk and managers wrestle with discovering the truth (for those who seek it, of course). Yet, in a competitive world judged by portfolio performance, the challenge of month-to-month money management is a brutally daunting task, especially if the status quo is misunderstood. In hindsight, the reward has been for the one that simply went bullish for the past three years or so and resisted piling into a “safe asset.” Obviously, the “truth” is nearly discovered by participants who fully noticed that after a crisis, it is more than convenient to sell/preach protection against the next crisis. But piling into safe assets to avoid unforeseen panic is not fruitful in practice. So weariness of fear-mongering stories is healthier. Now we collectively grasp the hint and message from the fluid market, which keeps welcoming risk and rejecting fear.

Many discuss the market “science,” logical arguments are thrown around constantly and salesmanship dominates forecasting as much as critical thinking. Yet, using science to prove points (future prediction) is one issue, but the art within markets is what differentiates and rewards those vested. Frankly, global economies are slowing; data after data have proven this point, not only in the Eurozone and US, but in emerging markets, as well. Nonetheless, the Eurozone troubles have not reached the overly dismal levels as expected. Thus, the better-than-expectations feel supersedes actual weak numbers. And that’s the lesson that keeps repeating itself on a global basis. Thus, the science alone is not enough without the art to complement it for taking a calculated risk.

Matching the art with logic

The sustainability of this market is bound to be questioned from chart observers and fundamental analysts. The glamour of calling tops will be enticing many in upcoming weeks with either the bad news brewing quietly or being less neglected than in prior months. Yet, the reason “bad news” was neglected is due to a lack of alternatives offered in markets and the acceptance of a low interest rate policy to resume in the foreseeable future. The puzzling issue remains whether the crowd will pile into stocks at a faster pace than the last four years. Perhaps, mildly using the term bubble might be more than justified beyond fear mongering. For now, a healthy pullback is not so newsworthy, especially in a period of overly tame volatility and restless crowd ahead of the summer months. Surely the stage appears set for some pause in this rally. Continuation of this upside run might even be more of a surprise than a global slowdown.
Article Quotes:

“The United States and China really are opponents – and they really do need each other to prosper. Accepting all this requires changing some of our assumptions about friends and enemies, allies and competitors. It means acknowledging that opposed forces and ideas do not always merge into a grand synthesis and that their struggle also need not issue in an epic battle to the finish. It would be uplifting to conclude that peace is logical, that rational people on all sides will avert conflict by acting sensibly. But such a conclusion simply betrays the facts – and possibilities – of this tense relationship. Instead I offer a more modest claim: Geostrategic conflict is inevitable, but mutual economic interdependence can help manage that conflict and keep it from spiraling out of control. We cannot project a winner in the Cool War. If violence can be avoided, human well-being improved, and human rights expanded, perhaps everybody could emerge as a winner. If, however, confrontation leads to violence, we will all lose.” (Foreign Policy, May 16, 2013).

“Low inflation has reassured investors that central banks can keep their feet on the monetary accelerator – and enabled share prices to increase faster than profits. But have prices risen too far? The valuation of stock markets can be gauged in two ways: relative and absolute. In relative terms, the convention is to compare the valuation of equities with that of government bonds or cash, and calculate the risk premium (the higher return investors demand for putting money into the more volatile stock market). A new paper by Fernando Duarte and Carlo Rosa, two researchers at the New York Fed, analyses 29 separate models used to calculate the expected premium over the past 50 years. A weighted average of those models suggests that the current premium is around 5.4 percentage points, about as high as it was after the bear market of the mid-1970s and close to the recent share-price bottom in early 2009. That makes equities look like a bargain. In contrast, the cyclically adjusted price-earnings ratio of the American stock market, which averages profits over ten years, is currently 23.2, as calculated by Robert Shiller of Yale University. That valuation is well above the historical average, suggesting lower, not higher, equity returns from here. Is it possible to square the absolute with the relative measures? Equities may perform much better than government bonds, but only because those bonds will provide dreadful returns.” (The Economist, May 18, 2013)

Levels: (Prices as of close May 18, 2013)

S&P 500 Index [1667.47] – Continuation of a higher market into record territory. The index is 5.4% above its 50-day moving average, which only begs the question of a pending breather.

Crude (Spot) [$96.02] – Once again attempting to top $96. With crude inventories at five-year highs, further pressure is building on prices to continue higher at the current range.

Gold [$1381.00] – After the short-lived rally, gold has confirmed its weakness, as the commodity stands one point above its April 17 lows. The debate between collapsing and bottoming will live on, but it’s hard to deny the multi-month downtrend that is persisting.

DXY – US Dollar Index [82.12] – Dollar strength is picking up the pace. The index is up nearly 7% since February 1 and has jumped 16% since May 2011 lows. This showcases a shift in the macro dynamics, in which the dollar is digging out of the three-decade downtrend.

US 10 Year Treasury Yields [1.95%] – Roaring back to the 2% mark after failing to demonstrate the rising rate theme. Annual highs of 2.08% set in March set the near-term benchmark. Yet, holding above 1.90% has not been an easy task recently and will be watched in the upcoming week.


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.

Market Outlook | May 6, 2013

“Deliberate with caution, but act with decision; and yield with graciousness, or oppose with firmness.” Charles Caleb Colton (1780-1832)

Subdued milestone

When stock markets hit all-time highs, one would expect a cheerful environment all around. A collective celebration is expected rather than the subdued skepticism that’s plagued this silent bull market. Not so silent perhaps when considering that this time around, it is not quite 2007 in terms of the real economy feel. In terms of risk appetite, there are some similarities to pre-crisis days, in which participants were chasing risk and the index was roaring higher, while volatility remained steadily calm.

Strangely enough, on broad indexes, the S&P 500 Index is 2% higher than its 2007 highs (1576). However, through this recent wave of bullishness, it remains hard to convince most that the real economy is much better and robust growth is in full gear. Perspective is needed, as usual. From the doomsday standpoint, the reported labor and growth numbers are not as bad as March 2009. Yet, there is a growing divide in perception and driving forces for confidence. Even the concept of measuring investor sentiment or opposing the Federal Reserve policies is either biased or inaccurate and open for heated debate. At the same time, it’s simply difficult or at least not fully accurate to use the stock market as a sole indicator for individual and national well-being. The current trend restates the relative strength of the US financial system relative to other nations. Of course, all is relative – today’s world is more fragile, but relative strength counts. This is showcased in the current market behavior, where US assets are beneficiaries of uncertain Europe and slowing Asia.

Late this weekend, Chinese manufacturing and servicing (PMI) data came in below consensus and the weakest in two years. This reinforces the real economic slowdown even in regions that were winners last decade. Escaping to commodities and emerging markets alone is not quite the answer for all this decade. Interestingly, the EEM (Emerging Market stock markets) is not quite at its all-time highs, which were achieved in December 2007. It’s not impossible for emerging market stocks to follow the US, as global indices march on with a tune that’s familiar. However, the disconnect between economic realities and stock market behavior has this uneasy feel that requires more of a closer study than a definitive conclusion.

Cycles repeating

The mechanics of price appreciation are driven by a lack of yielding alternatives in this global market. The task of desperately boosting confidence in recent years has left the Federal Reserve implementing further easing. Collectively, we’ve reached a point where the talk of quantitative easing is too numbing, not so strange and certainly uniform. The same rate cuts in Europe and Japan reflect the coordinated efforts led by the US. Plenty have commented on the puzzling process of the “bubble” re-creation, yet talks of a bubble are not enough to slow down this market. It has been painful for money managers who relied on fundamentals (or emotionally based advice) only and bet on declines and demises of equity markets. Not quite. Perhaps, the bubble or peak talk appears premature for now, but to bring up concerns is hardly rare these days.

Hazy moving parts

The status quo of lower interest rates and higher asset prices is always up for debate, but the trend is in place. Yet commodities remain at a tricky junction. Crude has made a sharp upside run, while gold has had a trading bounce. Crude prices have gained despite the slowing global demand. Thus, a mystery resurfaces between the supply-demand argument and actual crude price appreciation.

Meanwhile, grasping the fundamentals of gold is not quite clear these days. In fact, the sudden drop in gold prices last month is still being digested:

“The biggest reason for the move in gold was investor liquidations of gold-backed exchange-traded products, said Jerome Gaudry, the London-based head of commodity structuring at Natixis SA. Gold holdings in ETPs plunged 174 metric tons last month, the biggest drop ever, as prices entered a bear market and wiped $17.9 billion from the value of the funds, data compiled by Bloomberg show.” (Bloomberg, May 3, 2013).

Gold: Safe asset or not; physical versus synthetic; or a hedge to paper assets – the confusion remains in place. It’s fair to call it a speculative trading vehicle. There is nothing wrong with boldness, as only the bold will continue to take a risk in a quasi-currency and full commodity that’s still fuzzy, even to experts.

Article Quotes:

“So why does onshoring make so much sense in banking? With both China and India growing year on year, the cost savings are less appealing. Wage growth in these regions means that the difference in salaries, compared to local talent, has become increasingly marginal. Banks are also more focused on the cost reduction opportunities offered by an increase in digital channel usage and a decline in branch activity. Regional branch closures are expected to grow again this year. There is also an acceptance that delivering quality technology now, more than ever, relies on face-to-face interaction. Having a team full of people co-located and empowered means not only an improvement in product quality, but a significant increase in time-to-market. Whereas offshoring was once considered a competitive advantage, it is now considered the opposite. More and more banks are looking to bring jobs back home, and even analysts and investors are starting to ask questions. The key to the transition is to do it smartly. No more inflated business cases. No more forced changes. By onshoring too rapidly you run the risk of making the same mistake most banks did with offshoring. Have clear objectives so you can easily decide what roles or departments are going to grow locally.” (American Banker, April 24, 2013)

“The Bureau of Labor Statistics recently produced a breakdown of job growth during North Dakota's oil rush, and it's pretty remarkable. In counties where oil rigs have sprouted up to drill from the Bakken Shale Formation – a few of which are actually in Montana – employment grew by 35.9 percent from 2007 to 2011, from about 78,000 jobs to more than 105,000. But much as in Texas's shale country, the impact on local job growth has actually been dwarfed by the impact on local income. Total wages more than doubled from $2.6 billion to $5.4 billion. Average pay jumped by more than half, from $33,040 to $50,553. Blue-collar men suddenly finding high-paying work in the fields is a big part of the story. But jobs and paychecks have surged across industries. Some of the fastest growth has been in professional and technical services, a category dominated by college educated workers. Earnings have grown the most in real estate, which, with rents rivaling Manhattan in the boom town of Williston, isn't that much of a surprise. But they've also jumped in working class sectors like transport (think trucking), construction, and even food services.” (The Atlantic, May 2, 2013)

Levels: (Prices as of close May 3, 2013)

S&P 500 Index [1614.42] – All-time highs, as the index is nearly 4% above its 50-day moving average. Most technical indicators suggest some minor pullbacks within the context of an established bullish trend.

Crude (Spot) [$95.61] – After failing to stay above $96 on two occasions, prices of crude attempt to make another upside run.

Gold [$1469.25] – From October 4, 2012 until April 17, 2013, Gold fell 23%. Since the mid-April lows, a recovery appears visible, but only showcasing its early legs.

DXY – US Dollar Index [82.12] – Mostly unchanged week over week. The dollar maintains its slight relative edge, despite the slowing pace.

US 10 Year Treasury Yields [1.73%] – The significant drop in yields, from 2.08% to 1.61%, was a noteworthy three-month move. Now, at around 1.70%, the possibility of a trend reversal may be set up, although there’s a lack of strong evidence to declare that trend.







Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.