Market Outlook | October 14, 2013

“Have no fear of perfection – you'll never reach it.” Salvador Dalí (1904-1989)

Perfection desired

Anyone worried about a peaking market or with a skeptical view continues to feel puzzled by the relentless positive momentum. Whether due to legitimate upside forces the mood remains cheerful rather than overly subdued, as the S&P 500 index is hovering near all-time high levels. Since the last debt ceiling debate in 2011, this smooth-sailing upside move seems all too perfect at times. Of course, ongoing signs of market strength and asset value appreciation in turn stir up renewed skepticism, which forces investors to buy downside insurance (or bet on volatility) as pundits loudly express a wide range of political outcomes.

“VIX (Volatility Index) option trading set a record volume day this past week, surpassing the old record by almost 400,000 contracts. 400,000 is the total volume on some light days, so that really is a significant beat on volume. Basically the volatility market went from ‘what me worry?’ to ‘worry!’ to ‘what me worry?’ again.” (CBOE, Options Hub, October 12, 2013)

Yet, are markets too numb to dissect unpleasant news? Or are investors pleasantly deferring bad news for 2014? Both questions are a daily debate for newsmakers or risk takers.

For now, risk-taking remains in style. Future conductors of financial markets are expected to keep a similar easing policy. Last week’s announcement of a Fed Chairman replacement removed one uncertainty. But other macro factors remain unknown. Clearly, status-quo preservation through QE has been a crowd favorite, as “addicts” are infatuated with relief rather than grappling with side effects. Whether we are seeing a justified rally or an overly jumpy news-driven rally, the stock market optimists are further encouraged by recent resilience to maintain a bullish perspective.
Yet, no market gain is safe or perfect, no policy is overly comforting and shifts can occur suddenly. Perhaps, this upcoming week is vital for capital preservation or aggressive speculators. Frankly, the stakes are too high in terms of witnessing a meaningful move, a contrast to the casual and steady nature of this not-so-quiet bull market. In fact, early signs of confusion are reappearing.

Bubble-like memories

To get nervous about a pending bubble versus identifying overly extreme conditions are two different matters. Rational minds could not ignore government uncertainties blended with earnings and potentially an exhausted multi-year run. Certainly, this autumn marks the fifth-year anniversary of the nerve racking “end of times”-like banking crisis. Memories might fade, but “bubble”-like thoughts resurface when dysfunction or distrust floods the airwaves. Somehow, veterans remind us that investor complacency has its dangers, but timing is still everything – hence the escalating drama and thrill that’s felt by traders, investors and observers alike. The unknown entices excitement, increases risks and forces digestion of nuances that can translate into market-moving factors. To claim we are at an extreme is not as clear. Thus, bubble symptoms can be spotted here and there, but overall we’re in a no man’s territory that makes it rather more edgy and confusing than opportunistic.

“It is not too often that you see a week where both bearish and bullish sentiment rise by three or more percentage points in the same week. In fact, the last time it happened was back in May 2009 just as we were coming out of the bear market. However, when you have a market where prices move on headlines or even rumors of meetings, you can't blame investors for being confused.” (Bespoke Investors, October 10, 2013).

Sluggish reality

Real economy hints continue to suggest a slowdown, which even the most optimistic observer cannot blindly ignore. Sure, markets are forward looking, but in reality, indexes are a measure of sentiment by participants with stake. Unlike voters who vote, shareholders who own shares express approval/disapproval via buying and selling. These days, selling has not been visible. In fact, global markets have shown liveliness in recent weeks. Yet, perception alone cannot erase nervousness felt by investors, business owners and policymakers. At some point, if the disconnect between the stock market and economic indicators grows wider, then the engineers of financial markets might lose additional credibility. For now, facing reality might be more vital than ignoring potential pain that’s felt by stakeholders in the global economy. The reality begins when the stock market reflects the not-so-rosy global growth picture. Then a collective regrouping can take place and new entry points can reemerge. A breather to reflect on current conditions is a reality that is inevitable.

Article quotes:

“Beyond the fact that spurring growth has a multiplicity of benefits, of which reduced federal debt is only one, there is the further aspect that growth-enhancing policies have more widely felt benefits than measures that raise taxes or cut spending. Spurring growth is also an area where neither side of the political spectrum has a monopoly on good ideas. We need more public infrastructure investment but we also need to reduce regulatory barriers that hold back private infrastructure. We need more investment in education but also increases in accountability for those who provide it. We need more investment in the basic science behind renewable energy technologies, but in the medium term we need to take advantage of the remarkable natural gas resources that have recently become available to the US. We need to assure that government has the tools to work effectively in the information age but also to assure that public policy promotes entrepreneurship. If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder government finances and a restoration of the power of the American example. At a time when the majority of the US thinks that it is moving in the wrong direction, and family incomes have been stagnant, a reduction in political fighting is not enough – we have to start focusing on the issues that are actually most important.” (Financial Times, Lawrence Summers, October 13, 2013)

“Euro zone countries will consider on Monday how to pay for the repair of their broken banks after health checks next year that are expected to uncover problems that have festered since the financial crisis. Nobody knows the true scale of potential losses at Europe's banks, but the International Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years. Yet five years after the United States demanded its big banks take on new capital to reassure investors, Europe is still struggling to impose order on its financial system, having given emergency aid to five countries. Finance ministers from the 17-nation currency area meeting in Luxembourg will tackle the issue of plugging holes expected to be revealed by the European Central Bank's health checks next year. … During the region's debt turmoil, the European Union conducted two bank stress tests, considered flops for blunders such as giving a clean bill of health to Irish banks months before they pushed the country to the brink of bankruptcy. The ECB's new checks are seen as the last chance to come clean for the euro zone as the bloc tries to set up a single banking framework, known as banking union. The debate opens amid ebbing political enthusiasm for banking union – originally planned as a three-stage process involving ECB bank supervision, alongside an agency to shut failing banks and a system of deposit guarantees. It would be the boldest step in European integration since the crisis.” (Reuters, October 13, 2013).

Levels: (Prices as of close October 11, 2013)

S&P 500 Index [1703.20] – Up less than 1% week over week. Revisiting the 1700 level, which proved to be a top in early August when the index peaked at 1709.67. At the same time, optimists are eyeing the all-time highs from September 19 of 1729.86. In both cases, buyers have showcased interest at or below 1660, yet volume is needed to confirm the up days.

Crude (Spot) [$102.02] – The downtrend continues, as the commodity has dropped by nearly $10 per barrel since August 28. Investors debate between a pending bottom at $100 versus an ongoing breakdown. Demand slowing and supply expanding are the takeaways in the recent cycle, which can make the case for a move around $95.00

Gold [$1268.20] – A fragile and early sign of recovery at these oversold levels. Intermediate-term momentum remains negative. Speculators await a near-term recovery, which has struggled as the index dropped more than 3% last week.

DXY – US Dollar Index [80.53] – Since July, the dollar has decelerated and is a few points above annual lows (78.91 – February 2013).

US 10 Year Treasury Yields [2.68%] – Charts suggest an early attempt to re-accelerate and bottom around 2.60%. This case can be supported further with real economic strength. 3% remains the key 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 | October 7, 2013

“All truths are easy to understand once they are discovered; the point is to discover them.” Galileo Galilei (1564-1642).

Waiting to understand

The unknown timeframe of the ongoing shutdown and known deadline of the debt ceiling can create enough discomfort even as a simplistic view. Without monthly labor results and without clarity of third-quarter earnings, a suspenseful period awaits the next movement. The market’s attention should not dismiss the traditional market-moving factors other than the Washington theatrical fiasco.

There has been much discussion about prior market behavior during government shutdowns; however, market-moving items revolve around these usual factors:

1. Earnings expectations versus actual results
2. Relative attractiveness of equities versus other assets
3. General cyclical momentum and investor sentiment
4. Discovery and impact of a new “unknown” that turns into short-term fear (i.e., debt ceiling)
5. Macro: Currency and commodity trends

There is some waiting to do before deciphering the points above. Therefore, this will be challenging for the very impatient observers and traders. Last week demonstrated that with a very uneventful movement of -0.07% in the S&P 500 index. The upcoming week may be equally uneventful, but the stage is set for either a relief rally following an end to the suspense or reawakening of panic-like behavior.

Earnings riddle

Even if the current government shutdown event had not occurred, the pending earnings result was already a highly relevant matter to participants. Typically, when markets are dancing around all-time highs as part of a multi-year run, the question of pending sell-offs is normal. Doubting the sustainability is not strange, either. The stakes are relatively high. Earnings concerns are already reflected in general expectations as forecasters attempt to set expectations.
“U.S. companies are warning about third-quarter earnings at a rate lower than last quarter but still at the second highest level since 2001, leaving estimates well below what they were just three months ago. Companies issuing negative outlooks for the quarter outnumber positive ones by 5.2-to-1, the most negative since the 6.3-to-1 ratio in the second quarter.” (Reuters, September 30, 2013)
Interestingly, the financial fund (XLF) has underperformed the broad stock market indexes since late July. Perhaps, that’s a hint of slowing momentum in financial services, but earnings, especially in banks, will verify the actions of recent stock performance.

It is also important to remember that nearly half of S&P500 companies generate revenues from outside the US. Thus, as Europe is showing early sings of recovering along with the US, this might change the landscape for the largest corporations. This makes evaluating corporate health versus US market wellbeing rather difficult and not straightforward.
Risk-taking preferred

The so-called “great rotation” is driving capital from bonds into equities, as heard loudly in prior quarters. The theme of low interest rates forces investors into risking capital in search of returns. Plus, the positive market momentum creates the fear of “missing out.” Thus, capital inflow into stocks both in the US and now into emerging markets begins to carry over. Chasing good performance is not always rewarding, and eagerness can backfire. A breather of a 7-10% pullback might be a “necessary evil” rather than a catastrophic response. However, momentum is too powerful and rational optimism can extend further before turning to irrational moves. This is an interesting period, where risk-taking is being encouraged as headline noise accumulates. Certainly, the bull market has been in place for a while; thus, bargain-hunters may wait longer for correction. At the same time, if expectations are not set back to reality in upcoming weeks, then danger awaits sooner than later.

Article quotes:

“America had already surpassed Russia in natural gas production last year, pulling ahead for the first time since 1982. But this was the first year the US was on pace to surpass Russia in production of both oil and natural gas. … Most of the new oil was coming from the western states. Oil production in Texas has more than doubled since 2010. In North Dakota, it has tripled, and Oklahoma, New Mexico, Wyoming, Colorado and Utah have also shown steep rises in oil production over the same three years, according to EIA data. But the EIA said the new natural gas production was coming from across the eastern United States. Russia is believed to hold one of the world's largest oil-bearing shale formations. But the industry has lagged behind America in its embrace of horizontal drilling and hydraulic fracturing to get at the oil and gas. Meanwhile, energy firms are stepping up production from North Dakota and Texas. Earlier reports from the EIA suggests the trend will continue. The EIA said earlier that US crude oil production rose to an average of 7.6m barrels a day in August, the highest monthly totals since 1989. It forecast total oil production would average 7.5m barrels a day throughout the year, rising to 8.4m barrels a day in 2014.” (The Guardian, October 4, 2013)

“In 2012, textile and apparel exports were $22.7 billion, up 37 percent from just three years earlier. While the size of operations remain behind those of overseas powers like China, the fact that these industries are thriving again after almost being left for dead is indicative of a broader reassessment by American companies about manufacturing in the United States. In 2012, the M.I.T. Forum for Supply Chain Innovation and the publication Supply Chain Digest conducted a joint survey of 340 of their members. The survey found that one-third of American companies with manufacturing overseas said they were considering moving some production to the United States, and about 15 percent of the respondents said they had already decided to do so. … Beyond the cost and time benefits, companies often get a boost with consumers by promoting American-made products, according to a survey conducted in January by The New York Times. The survey found that 68 percent of respondents preferred products made in the United States, even if they cost more, and 63 percent believed they were of higher quality. Retailers from Walmart to Abercrombie & Fitch are starting to respond to those sentiments, creating sections for American-made items and sourcing goods domestically.” (New York Times, September 19, 2013)

Levels: (Prices as of close October 4, 2013)

S&P 500 Index [1690.50] – Since the “no-taper” announcement in September, the index has declined by more than 2%. Staying above 1680 is the next challenge.

Crude (Spot) [$103.84] – Since its August 28 peak of $112.24, crude has dropped by more than 7%, confirming a downtrend. Buyers’ interest above $110 begins to slow, as showcased again in the recent cycle.

Gold [$1316] – Growing evidence of bottoming around $1300. However, the upside that’s visible to chartists is closer to $1360. The pattern is not convincing either way, as the dominant theme is a cycle downturn.

DXY – US Dollar Index [80.53] – For more than three years, it has failed to rise above 84 and typically hovers around 80. The weak dollar theme keeps persisting, with no major alarming changes.

US 10 Year Treasury Yields [2.64%] – During the last two months, yields have jumped from near 2.60% to peaking at 3.0% and now back to the 2.60%-ish range. We are seeing a pause after the explosive run since the spring. Weaker economic numbers and natural pullbacks are causing a breather at current levels.


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 | September 30, 2013

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

Theatrical

Beyond the theatrical discussions that range from QE debates to a government shutdown to murmurs of economic growth, there is a looming theme worth observing. In the weeks ahead, observers will watch the pace of the depreciating dollar; lower US 10 year yields and a bottoming in gold prices remind us of the tumultuous summer of 2011. That was around the last debt ceiling debate, which triggered a downgrade of the US sovereign rating. Of course, it was then when volatility rose and stocks were sold off hard before it eventually led to a buy opportunity for stock market risk takers. It was then, when the “safe assets,” such as treasuries and gold, were highly sought after, that uncertainty reached a new, confusing and unsettling place.

As this autumn approached, casual fear (not panic) was lurking in the background despite elevated US market indexes. Consistently, a few sentiment-driven discoveries repeat themselves. For example, growth is slowing, the government is viewed as dysfunctional and consumer confidence is not quite robust. In addition, talks of a new Fed Chairman combined with deferred “taper” talk add layers of uncertainty. The theatrics are plenty for noisemakers, stretching from Italian leadership to Chinese growth estimates. Money managers would need to apply shrewdness in re-assessing risk at this junction.

Cycles and moods

What is relatively certain is the mood of global uneasiness as Eurozone concerns persist. The fragile nature of confidence restoration is a very daunting task from developed to emerging markets. We’re in an era when the word “bubble” is easily thrown around and dangers are outlined consistently (and sometimes overblown). Perhaps, that’s understandable given recent memories of the 2008 breakdowns and short-lived panic of 2011. Neither event can be masked or quickly erased in the investor’s mindset today, even when a bullish market is highly celebrated and risk-taking has panned out better than sideline observing. Interestingly, most of 2013 is known for rewarding bold moves in risky assets, with some signs of credit returning. Ironically, looking at the housing surge, one may easily argue that memories are short-lived, and credit bubbles are merely a cycle of boom and bust. Timing the cycles is the inevitable mystery as housing experts contemplate these issues.

Mind-boggling or not, the disconnect between QE and the real economy is so obvious that it’s only a matter of time until this reality is confronted. Reasons for a sell-off are plenty and known, but a market that’s shrugged off complex and practical matters awaits another test. Simply, the power of QE has driven the upside momentum and continues to drive the mindset. The natural human ambition of chasing returns remains too powerful, considering the recent equity inflow data. More capital is rotating back to European stocks, as well as emerging markets.

“Investors fed a record-breaking $25.94 billion into equity funds for the week ending Sept. 18, eclipsing the old mark set during the third quarter of 2007, according to EPFR Global.” (Barrons, September 20, 2013).

Critical assessment

So far this year, the S&P 500 index is up 18%, sporting a pretty number on a historic basis. Similarly, the Nasdaq 100 is up more than 20%, creating an all-out confidence and performance chasing. Thus, even a slight danger is imminent, considering a healthy correction has been mostly averted and earnings confidence is not quite subdued. Odds that we made annual highs for the year are being questioned and are soon to be resolved.

Surely, the gloom-and-doom theories have been mocked and disproved, which creates comfort and hubris. Whether an overconfidence level has been reached is debatable, but catalysts are less predictable. At times, figuring out key macro catalysts is even more difficult than guessing market direction. Yet, the frantic symptoms are already embedded in this market. Government shutdown or political crisis in Italy only adds to an existing list of concerns, which includes the sustainability of corporate earnings. Being washed away by some of the latest news is misleading at times, since the fundamentals of corporate and economic growth have been muddy. Complacency has swept away investors and, in due time, comfort will face unmet realities. Perhaps then, the volatility index may reawaken from its deep two-year sleep.

Article quotes:

“To put it bluntly, the belief that an economist can fully specify in advance how aggregate outcomes – and thus the potential level of economic activity – unfold over time is bogus. The projections implied by the Fed’s macro-econometric model concerning the timing and effects of the 2008 economic stimulus on unemployment, which have been notoriously wide of the mark, are a case in point. Yet the mainstream of the economics profession insists that such mechanistic models retain validity. Nobel laureate economist Paul Krugman, for example, claims that ‘a back-of-the-envelope calculation’ on the basis of ‘textbook macroeconomics’ indicates that the $800 billion US fiscal stimulus in 2009 should have been three times bigger. Clearly, we need a new textbook. The question is not whether fiscal stimulus helped, or whether a larger stimulus would have helped more, but whether policymakers should rely on any model that assumes that the future follows mechanically from the past. For example, the housing-market collapse that left millions of US homeowners underwater is not part of textbook models, but it made precise calculations of fiscal stimulus based on them impossible. The public should be highly suspicious of claims that such models provide any scientific basis for economic policy.” (Project Syndicate, Frydman, Goldberg, September 13, 2013).

“China has opened the Shanghai Pilot Free Trade Zone today, the first free trade zone (FTZ) on the mainland. State-run news outlet Global Times reports that the FTZ will be ‘an important step in China’s economic reform and the internationalization of the yuan.Details as to exactly what will be allowed remain somewhat murky, but the Financial Times reports a surge in interest in both houses neighboring the 28 square-kilometer zone, which is located in Shanghai’s Pudong district, and in stocks of companies expected to benefit. Initially believed to entail primarily a reduction of tariffs, the FTZ recently appears to have been positioned as a symbol of China’s commitment to economic reform. Now, according to plans issued on Friday by China’s State Council, it will be a test ground for financial liberalization. Specifically, interest rates in the zone will be market driven, and firms will have greater freedom in converting yuan and shifting money offshore. Foreign companies will ‘gradually’ be able to participate in a commodities future exchange. The Wall Street Journal says that Citigroup has received approval from Chinese authorities to set up a branch in the FTZ, making it the first foreign bank to part in the new development. Other banks have expressed interest in following suit. Meanwhile, a number of foreign hedge funds are apparently set to be allowed to raise money from domestic Chinese institutions. It appears now that the Chinese government is using the FTZ in Shanghai as a test-bed for tricky reforms, in much the same way that Deng Xiaoping used Shenzhen in 1980 to experiment with capitalism. Those reforms are seen as marking the start of China’s extraordinary economic rise over the past three decades. Apart from the financial sector deregulation, the reforms being trialed in Pudong include a ‘negative list’ approach to foreign investment, which would mean that outside certain prohibited sectors, foreign companies would get the same treatment as domestic firms.” (The Diplomat, September 29, 2013).

Levels: (Prices as of close September 27, 2013)

S&P 500 Index [1691.75] – Struggling to hold above 1700 yet again, as seen in August. Despite the highly cheered “no taper” announcement, the S&P 500 index is facing some resistance when viewing the chart.

Crude (Spot) [$102.82] – Noticeable downtrend as crude has declined nearly $10 per barrel in less than a month. There are growing odds that the next familiar target is closer to $96 as the supply data continues to expand.

Gold [$1328.00] – Risk-reward evaluators notice that above $1300, there are signs of revival. Upside potential ranges from recent highs of $1419.50 to the 200-day moving average ($1470).

DXY – US Dollar Index [80.53] – The last three months have showcased a near 6% decline. Dollar weakness re-emerges to a nearly eight-month low.

US 10 Year Treasury Yields [2.62%] – There has been further evidence that surpassing 3% is a legitimate hurdle in the recent cycle. The multi-month bond sell-off (yield appreciation) is pausing. Staying above 2.50% (around the 200-day moving average) looks to serve as a key near-term barometer.


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 | September 23, 2013

“Considering how dangerous everything is, nothing is really very frightening.” Gertrude Stein (1874-1946)

Dangerously comfortable

The story of rising markets is easier to tell when day by day, a roaring bull market picks up momentum. Certainly, any novice, or expert, for that matter, can identify a positive market and proclaim its previous undeniable success while boldly claiming higher conviction. Similarly, policymakers like the Central Bank prefer to proclaim their instrumental role in championing rising asset prices. Collectively, it seems participants are programmed to simply think that higher market levels produce an intangible but psychologically powerful list of reasons for risk-taking. Perhaps, those cashing out from the current run feel the tangible impact of stimulus-led results. Meanwhile, others deploying new capital with renewed greed might lose sight of where we've come since the crisis. Now in the fall of 2013, it shouldn't take much to get collective angst or pure genuine confusion about the sustained status quo driven market. Plenty of items are candidates for next ‘big catalyst,’ but usually, the build-up tends to be overdone, mistimed and blown out of proportion. However, entering a fragile period, one should be aware of controllable market-moving elements.

Policymaking pressures

Fearing the worst is not a rewarding investment thesis thus far, as skepticism is not scarce and US markets have shown resilience. Yet, somehow this time around the stakes appear higher, considering the unknowns. First, the Fed is not the almighty fortuneteller or mighty fighter for ‘the people’ who participate in the real economy. This is not as obvious as it may be. Confused and overly pressured by stakeholders of all kinds, experts following the Central Bank will remind us that the Fed is running out of tools. Last week's delay to do anything with taper guidance not only illustrates the disheartening motto of ‘kicking the can down the road,’ but it also shows admission of having exhausted relevant options. Perhaps, some would say, the Fed is not going to admit its weak points or lack of ability to navigate the economy to a promising landscape. It’s politics as usual for a non-political entity that's been labeled a ‘hedge fund’ by a key investor. Not only is the Fed’s role being questioned, but the Fed’s new chairman is a daily guessing game that only raises the stakes to historic levels.

Adding to this mix is the discussion of the US budget in a contentious political climate. Memories of 2011 remind us that market participants are not big fans of debt ceiling debates. Yet, the sensitive Fed discussions can be dangerously mixed in with budget talks to create some inflection point. The current set-up of all-time highs in stock market indexes and soft economic growth creates a divergence that in turn creates uneasy sentiment and irrational behaviors.

Rotation game

During the first half of 2013, the demise of emerging markets eventually turned into a late-summer bargain-hunting project for those betting on recovery. Now the appetite to re-enter risky emerging markets is picking up, as China’s manufacturing is re-stabilizing and emerging market currencies are stabilizing from recent volatility. Short-lived or not, rotation to emerging markets is quite noticeable: “[EPFR] said it found that $1.65 billion had flowed to emerging equity funds in the week to September 18.” (Reuters, September 20, 2013. Clearly, the taper decision and relative appearance versus developed markets will impact the timing and direction of pending moves.

The common Eurozone post-crisis dilemma shifted to renewed interest for value-driven managers in desperate need of optimistic purchases. The highly anticipated German elections are behind us, which takes away one uncertain factor. In fact, Angela Merkel’s victory preserves the status quo, but whether that’s beneficial or not is a debate. As the risk-reward is unclear, it only invites courageous speculators to express views of the near future in a complex region.

Meanwhile, US housing as a key driver of consumer mood painted a positive picture at one end, while stock price appreciation produced a sense of wealth creation. The hype of QE has merits when tracking known indexes and housing data, but fails to provide a nuanced explanation for the fundamental improvements. In a game of perception, reality is understated and the bluffing game takes center stage. Thus, each economic data from now until the next ‘taper’ discussion is bound to be micro-analyzed. Amazingly, as these market-moving dynamics play out, the ‘safe’ thing to do is perceived as taking on more risk in already risky assets that are not cheap. As history reminds us, truth discovery is either a lengthy process or a shock; thus, staying nimble is the autumn theme for financial markets.

Article quotes:

“China’s one-child policy, which since 1979 has limited most Chinese couples to a single child, is notorious for having accelerated the rate of China’s aging. It’s also created a glut of young men who can’t find Chinese wives; by 2020, bachelor ranks will swell to between 30 million and 35 million—equal to the population of Canada. But lovelorn suitors aren’t the only fallout from China’s draconian population controls, says Zhang Xiaobo, a Peking University economist. ‘I just returned to Beijing [from Washington, DC], and housing prices are three times that of DC,’ Zhang said. ‘If you look at all the indicators there’s a housing bubble. But despite the very low economic returns, people [keep buying].’ The reason? Intensified marriage market competition, says Zhang. ‘The reason is that people have to buy a house in order to get married,’ he says, explaining that the mothers of most brides will accept only grooms who can provide a home for their daughter. This, says Zhang, is what has made home prices so unaffordable (a small Beijing two-bedroom is about $330,614—what an average Beijinger earns in 32 years). And, ironically, the one-child policy will eventually reverse this trend, knocking the floor out of the market. China’s gender imbalance contributed 30 percent to 48 percent of the rise in real home prices in 35 major cities from 2003 to 2009, according to research Zhang and two colleagues conducted. Home values rose more sharply in cities with many more young men than young women.” (The Atlantic, September 13, 2013)

“The new European structure seems to be missing something. The current paralysis of the financial markets is due to transactions conducted over the past year by the European Central Bank (ECB), notably the Outright Monetary Transactions (OMT) programme by which treasury bonds are acquired in secondary, sovereign bond markets to boost countries under pressure. Two hedge funds, however, Brevan Howard in London and Bridgewater in the United States, believe that the German elections will become a turning point in the crisis – for the worse. For Brevan Howard, a Merkel victory may slow down the reform process in the Eurozone. This is an understandable fear given the snail's pace at which reforms were carried out in the past two years. The blame lies with the Bundesrat or Federal Council, which must approve each of Germany's administrative expenses, including each contribution to the bailout funds for member states, to the European Financial Stability Facility and to the European Stability Mechanism (ESM). Many issues remain unresolved. The first is the banking union. Or better yet, a system that would put EU banks under the supervision of the ECB. The aim is to avoid jolts linked to opaque positions, partially protected by national financial authorities. As indispensable as it is slow to implement, a banking union must overcome two hurdles: the reluctance of German banks to submit to the control of the ECB and Berlin's multiple doubts regarding the European deposit insurance fund. These are precisely the two points that could soon become major differences between Germany and the other members of the Eurozone.” (Fabrizio Goria, Press Europ, August, 28, 2013).

Levels: (Prices as of close September 20, 2013)

S&P 500 Index [1709.91] – After making all-time highs of 1729.86, there is a wave of optimism reflected in the charts. However, staying above 1700 created a few doubts earlier this summer. Buyers might be vulnerable for short-term pullbacks within this multi-year run.

Crude (Spot) [$110.53] – Climbing above the $108-110 range has proven to be difficult over the last 50 days. This marks a resistance level and showcases a slowdown in momentum as the three-month range-bound trade resumes.

Gold [$1328.00] – Following a sharp first-half decline, a bottoming process might surface around $1279-1300. Gold is showcasing some revival in an oversold asset that’s underperformed for more than a year. Upside potential is mysterious, but upcoming weeks will provide vital clues.

DXY – US Dollar Index [81.36] – A three-month decline in the dollar index has awakened the multi-decade common theme of the weak dollar. Suspense builds as to whether the DXY will go below its annual lows of 78.91 from February 2013.

US 10 Year Treasury Yields [2.88%] – The next noticeable yield move is either a break above 2.90% or breaking below 2.70% (around the 50-day moving average). For now, this narrow band suggests investors are waiting for clarity on rate-moving factors.



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 | September 16, 2013

“Art is making something out of nothing and selling it.” Frank Zappa (1940-1993)

Fed’s selling points

The central bank gears up to make its selling points as investors wait for the artful messaging. As highly expected by consensus, the Fed is looking to scale back its stimulus efforts of purchasing bonds (treasuries and mortgage-backed securities), which provided cheap money and fueled assets. The timing for this is supported by an “encouraging” economic environment and indicators that a stimulus is less required ahead. Sure: That’s more or less the driver of this much-anticipated taper that’s been long awaited since the revival of this bull market. On the bright side, no one will argue this is a powerful recovery for stockholders and those tracking corporate earnings.

Amazingly, the issue not to be dismissed in this shuffle is the lack of meaningful impact of QE into this real economy that’s created mainly part-time jobs and is expected to grow around 2% GDP. A step back from the jargon and day-to-day psychology begs the question: Is the central bank effective in providing an economic boost, beyond appreciating stock and real estate markets? Complex explanations and crafty language aside, the Federal Reserve should acknowledge that the economy is not as rosy as desired. Importantly, some wonder if the Fed is admitting that the stimulus effort has run its course. Otherwise, the self-promotion of success in reviving the US market might result in a mixed response.

Past and present

Meanwhile, the fifth year anniversary of the Lehman Brothers collapse had a few in a reflective mode this weekend. There is general agreement that the post-crisis management has been successful in providing financial system stability. Thus, we all wait for the explanation this week in what is always a market-moving event – even if baked into forecasters’ estimates. Reactions are hard to predict and this vibrant bull market (year to date: S&P 500 up 18.4% and Nasdaq up 23.3%) continues to test its upside potential. Surely, the stock market is seeking other good news catalysts for the months ahead. Odds suggest that the end-of-stimulus period may lead to the disruption of current trends, and that’s more than reasonable at this junction. Not to mention, ongoing budget discussions in Congress and the guessing game of the next Fed chairman create additional market buzz. Perhaps, these uncertainties are candidates for an eruption in volatility. In some ways, the corporate earnings environment hasn’t fully peaked yet, but concerns are legitimate as ever.

Speculators’ dilemma

An explosive stock market supported by increased capital inflow creates confidence, inviting people to pile on. The decimation of commodities, primarily weakness in metals, reinforces that stocks are a better alternative. Similarly, a sell-off in bonds reiterates the ‘great rotation’ theme that’s been thrown around and realized in practice. “U.S. bond funds saw $30.3 billion in redemptions this month through Aug. 19 – the third-highest on record, according to a report this week from TrimTabs Investment Research.” (Bloomberg, August 23, 2013). As US equities continue to gain traction, the asset is unofficially becoming a safe haven. Yet, as we saw with gold and treasuries, safe havens are not quite “safe” from nasty turnarounds. As the autumn months approach, it’s natural to think about severe declines in the past, as well as irrational behaviors that persist beyond collective expectations. Claiming stocks are safe is overly ambitious and potentially too confident. Perhaps, that’s the mental game that challenges investors, given the lack of alternatives and complacency that follows well-acclaimed rallies.

Article quotes:

“The top 1% of earners also took in a whopping 95% of whatever gains were made in the recovery from the recession, and the top decile took in 50.4% of 2012 income. (Note: The analysis didn't take into account health benefits, unemployment, or Social Security for the rest of the population, but we can probably assume those wouldn't greatly upset the gap between richest and poorest in this country.) [Emanuel Saez, University of California, Berkeley economist] gives us the detailed stats: From 2009 to 2012, average real income per family grew modestly by 6.0% (Table 1). Most of the gains happened in the last year when average incomes grew by 4.6% from 2011 to 2012. However, the gains were very uneven. Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover.” (Fast Company, September 12, 2013)


“The inability of credit rating agencies to anticipate sovereign-debt crises and the tendency to overreact once financial difficulties have piled up are well-known phenomena. Ferri et al. (1999) show that the downgrades by Moody’s and S&P exacerbated the Asian crisis in 1997. Examining the Great Depression, Gaillard (2011) and Flandreau et al. (2011) find that major credit rating agencies did not lower sovereign credit ratings until 1931. The ratings assigned by Fitch, Moody’s, and S&P to Eurozone members since 1999 illustrate these chronic shortcomings. For example, no Eurozone country was downgraded by Moody’s during the 1999-2008 period and none was upgraded by this agency between 2009 and mid-2013! More worrying still is that Greece, which was forced to restructure its debt in February 2012, has been the highest-rated defaulting country since sovereign rating rebounded in the mid-1980s. The Hellenic Republic was rated in the single-A category until June 2010 and in the investment-grade category until January 2011 by at least one credit rating agency. Since 2009, credit ratings have persistently lagged behind credit default swaps. Although hardly surprising – given that markets can instantaneously incorporate new economic and financial information – these findings are valuable for policymakers. In particular, they support the view that the credit ratings assigned to Eurozone countries have been more flattering than expected and that credit default swaps may simply be too volatile to be used for regulatory purposes.” (VOX, Norbert Gaillard, September 9, 2013)

Levels: (Prices as of close September 13, 2013)

S&P 500 Index [1687.99] – On two previous occasions this year (May and July), the index struggled to hold above 1680. This time around, the question remains whether surpassing 1680 and holding above 1700 is a sustainable move.

Crude (Spot) [$110.53] – For several weeks, crude has traded between $105-$110. Its momentum seems to be weakening after an explosive run from April to August 2013. Over the past three years, reaching above $110 has proven to be highly challenging for bulls.

Gold [$1328.00] – The $1400 range is proving to be a key resistance level. The recent recovery is pausing, showcasing the ongoing downside established about a year ago.

DXY – US Dollar Index [81.36] – In the last seven trading days, the dollar has reversed its trend. It remains in a neutral zone for intermediate-term trend seekers.

US 10 Year Treasury Yields [2.88%] – In November 2012 and May 2013, investors settled on 1.61% as the low point for long-term rates. On the other hand, in 2009, 2010 and 2011, the high point stood somewhere between 3.50% and 4%.


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 | September 9, 2013

“Good judgment comes from experience, and often experience comes from bad judgment.” Rita Mae Brown (1944-Present)

Anxiety building

When the phrase ‘Septaper,’ the anticipation of a stimulus taper in September, begins to circulate in the financial circles, then one notices the obsession that’s reaching a new frenzy level. All guesses aside, this long-anticipated twist in the stimulus efforts has been on the minds of many, but for now, the timing remains only a popular guess. Interestingly, these days there is not much suspense in evaluating the success of quantitative easing. The stimulus efforts have not overly impressed many in creating plenty of full-time jobs to propel a robust economy. Escaping the post-2008 crisis and climbing back to some stability showcases some belief in central banker guidance.

Nonetheless, the expectations of QE as an organic growth-generating tool are questionable and surely awaken the skeptics. Plus, recent economic reports, including last month’s labor numbers, do not suggest an overheating economy, but are rather categorized as somewhat fragile and barely stable conditions. Thus, how can the Fed taper if the economy is not strong enough? In fact, another question might be better: If QE has not been successful in fueling a recovery in the real economy, then why should the end of QE cause suspense?

The timing of the taper is not the only concern. Amazingly, the reaction of a mostly expected event draws the suspense. This QE debate, combined with the next Fed chairman discussion and pending Syria, offers plenty of distractions from a known fundamental weakness. Nonetheless, one should not forget the inflection point that’s facing financial services that have stabilized mildly. Growth is scarce globally and government/political mismanagement is a potential risk. Both combinations are legitimate enough to cause concern, but it’s unclear if these concerns could spark a 2008-like panic.

Realization

Clearly now, there is the realization or long-awaited acknowledgement of the disconnect between the real economy and stock and home price appreciation. The acknowledgement of QE’s limitations is not only in participants’ minds, but also felt by the central bank conductors. The S&P 500 index is up nearly 16% in 2013, which showcases a bull market that’s still clinging and alive. Yet, the forecast for further positive corporate earnings is doubtful today versus last year. A wave of uncertainty looms, especially following this multi-year run. It’s not surprising that there is ongoing rotation into European stocks for now in anticipation of an over-valued US stock market. There is a potential shift that’s taking hold as investors seek bargains while looking ahead:

“Despite the risks, the fact European stocks remain cheap is encouraging more US funds to put money into the market, say strategists and investment managers. HSBC’s cyclically adjusted price earnings multiples are running at 11.4 times compared with an historical average of 14.8 times.” (Financial Times, September 8, 2013).

Comprehending fear

As we head toward the final stretch of this year, investors so far witnessed a collapse of commodities, sell-offs in emerging markets, increased volatility in developing countries’ currencies and, recently, a developing trend of bonds declining. Strangely, around the spring, US equities appeared like the temporary “safe haven,” as risk-taking was encouraged and key index performances enticed more global inflow. Now, if the status quo shifts too quickly, then a notable shift can take place. Whether emerging markets or commodities are the answer remains to be seen. The themes that suffered the most in 2013 might at first glance present the best risk-reward potential versus the established US equities. This answer is not determined. Yet, this synchronized global marketplace does not offer an insulated investment product. Therefore, expecting the unexpected should not be that strange during a fear-driven cycle.

Article quotes:

“Austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation. This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a ‘competitive devaluation’; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%). The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit). Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of ‘tapering’ quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.” (Daniel Gros, Project Syndicate, September 6, 2013)

“Chinese refiners will buy 28 percent less West African crude this month than a year earlier, the least in data starting in August 2011, according to loading plans and a Bloomberg News survey of eight traders. Shares of Frontline, which operates 32 very large crude carriers, will drop 38 percent in 12 months, the average of 14 analyst estimates compiled by Bloomberg shows. Those of Euronav SA, with 13 supertankers in its fleet, will retreat 24 percent, the forecasts show. Tanker owners are enduring a fifth year of declining rates as fleet growth outpaces demand. China’s preference for cheaper Middle East oil over West African supplies shortens voyages by 42 percent, effectively increasing the capacity of the fleet, says ICAP Shipping International Ltd., a shipbroker in London. That’s adding to changes in trade flows as the U.S., the only country that buys more oil than China, meets the highest proportion of its energy needs since 1986. ‘Falling shipments point to potentially one more bad month of earnings, which tanker owners could really do without,’ Simon Newman, the London-based head of tanker research at ICAP Shipping, said by telephone on Aug. 28. ‘To avoid an even weaker market, owners will need significant support from shipments out of other areas.’” (Bloomberg, September 3, 2013)

Levels: (Prices as of close September 6, 2013)

S&P 500 Index [1655.17] – Eclipsing the 50-day moving average and revisiting annual highs of 1709.67 remains a challenge. The last few trading days have produced a tight range between 1630-1665.

Crude (Spot) [$110.53] – Like in May 2011 and March 2012, crude oil is back up over $105. The last two years remind us of crude’s inability to hold above $110 for a sustainable period. For the third consecutive year, the question is asked again if crude can explode significantly above $110. Perhaps the unsettled Middle East is the wildcard, but the chart pattern suggests heavy resistance ahead.

Gold [$1385.00] – The last time gold made a run from $1200 to the $1400 range goes back to August-November 2010. The difference being that this time around, the recent move represented a recovery bounce following a severe drop from a cycle peak. Surpassing $1400 might be as hard as exploding to $1600. Unsettling markets may serve as a catalyst, but the natural bullish flow remains in flux.

DXY – US Dollar Index [81.36] – Since September 2012, DXY has not fallen below $79 but has not surpassed $84.75. Frankly, this is a tight range, suggesting that despite the recent currency volatility, the overall swings are not overly dramatic based on this index.

US 10 Year Treasury Yields [2.93%] – The jump from 1.61% (May 1, 2013) to nearly 3.00% today remains the key macro indicator thus far. Staying above 3% is mysterious for now, as participants wonder if the next range is around 3.00%-3.50%. Last time yields stayed in this range was in first half of 2011 before debt ceiling volatility.


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 | September 3, 2013

“What convinces is conviction.” Lyndon B. Johnson (1908-1973)

Shakiness felt

One notices that skepticism never quite left the financial circles, even during the rising US stock market and some success in the confidence restoration projects both in the US and Europe. In fact, more time is spent on known concerns than unknown consequences, which explains the inevitable suspense. The one known worrisome issue is the lack of economic growth that stretches from China to the US to European nations. Collectively, the intellectual discussions of interest rate policy or currency management are left for prolonged dialogue. However, the weakening economic climate is visible even for the most casual observer, thus denting the confidence that’s been built since 2008. The painted picture of optimism, led by central banks, now needs validation and a further confidence boost, but that easing argument is losing its luster and anxiousness is building from different angles.

Emerging markets continue to witness sharp sell-0ffs, eroding confidence and causing unpleasant responses to risk-taking. Surely, this uncertainty in so-called emerging markets is not at the early stages, but the accumulating outcomes are difficult to ignore and clearly outlined in headlines.

“Investors worldwide pulled $2 billion out of emerging market debt funds in the latest week, the 14th straight week of outflows and the biggest withdrawals since June, a Bank of America Merrill Lynch Global Research report said on Friday.” (Reuters, August 30, 2013).
As a start, global economic growth is not visible (perhaps a global theme); thus, naturally, it creates all types of questions and knee-jerk responses. Notably, emerging market currencies have witnessed increased volatility, particularly in India, Brazil, Indonesia and Turkey. Entering a new season, the following is generally expected:

“The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. Thus, even modest portfolio shifts can still lead to big price swings, perhaps even more so when traders are off on their August vacations.” (Kenneth Rogoff, Project Syndicate September 2, 2013)

Thinking ahead

If skepticism is widespread and if the concerns are well known, then why not be a contrarian? Perhaps, seeking value in a disliked story is what should motivate risk-takers moving ahead. Already, a wave of fund managers has looked into Europe for bargains. There are signs of life in the Eurozone, although minor improvements:

“The recovery in the Eurozone manufacturing sector entered its second month during August. At 51.4, up from a flash reading of 51.3, the seasonally adjusted Markit Eurozone Manufacturing PMI rose for the fourth successive month to reach its highest level since June 2011.“ ((Markit, September 2, 2013)

Similarly, in due time, emerging market recovery may not be a far-fetched idea either. The list of uncertainties is building, which stretches from “taper” speculation to the pending debt ceiling debate and results of the upcoming German elections. More often than not, these pending events are the basis for a lack of conviction for buyers. As a quick reminder, EEM (Emerging Market Index) is 32% below its all-time highs reached in October 2007. It’s hard to claim that emerging markets are deeply overvalued for the growing crowd that’s afraid of further meltdown.

Managing suspense

Recent economics numbers and earnings result in the US have not created enough comfort for those judging on an absolute basis. Certainly on a relative basis, the US markets have shown strength versus other markets since the last crisis. Interestingly, until recent months, the inflow to US equity was picking up a tremendous pace. However, the ETF and equity fund outflow has picked up to multi-year highs in recent weeks. “U.S. ETFs saw $16.1 billion in redemptions through Thursday [August 29], representing the biggest outflow in one month since $17.1 billion exited in January 2010. The largest ETF was the main driver, as the SPDR S&P 500.” (MarketWatch, August 30, 2013).

The cautious approach is in full effect as gold has rallied from annual lows. This matches the declining investor sentiment as well, given the desperate search for good news. Capital is seeking shelter while fund managers are forced to put capital to work. To be overly bearish is not an overly unique view these days, as most known fears are already factored in. Being a daring bull might be less fashionable today than before. This is a deadlocked market that’s not overly cheap or overly euphoric, which puts one in no man’s land. For now, not overreacting is an asset when approaching an unsettling period ahead.

Article quotes:

“Canadian interest rates usually follow the interest rates of the U.S.…). So if U.S. interest rates continue to rise, it is very likely that Canadian housing prices will drop and defaults will go up. But two thirds of Canadian mortgages are insured by the Canadian Mortgage and Housing Corp. (CMHC), the Canadian version of Fannie Mae. CMHC is owned and guaranteed by the government. Thus the government will be on the hook, not Canadian banks. Canadians have therefore skipped a step: If (or, should we say, when) their housing crisis happens, there won't be any argument in the media about "too big to fail"; the government will take care of it. Jim Chanos of Kynikos Associates (who is not short Canadian banks), made an interesting point after Brian's talk. He is more worried about problems in Canada from incomes declining once the China-induced commodities supercycle ends — after all, Canada has benefited tremendously from it. To Jim's point, Canada reminds me of Australia, another beneficiary of the Chinese commodities party: Low-skilled people who used to work at McDonald's restaurants in Sydney or Canberra began moving to the west coast and getting jobs driving trucks at iron ore mines, instantly making more than $100,000 a year.” (Institutional Investor, August 8, 2013)

“Even with Wall Street’s help, Mexico is struggling to lure investors to its local-currency bonds as speculation the Federal Reserve will curb stimulus sparks an exodus from emerging markets. Mexico’s sale of 25 billion pesos ($1.9 billion) of five-year notes last week attracted the weakest demand since the government started using a group of banks in 2010 to help handle sales of new benchmark bonds. The bid-to-cover ratio, a measure of investor demand, was 1.02 times for the offering, which included participation by firms including Grupo Financiero BBVA Bancomer SA, Deutsche Bank AG and Barclays Plc (BARC), according to two people with direct knowledge of the transaction who asked not to be identified because they aren’t authorized to speak publicly. Investors have yanked $44 billion from emerging-market bond and stock funds since the end of May, according to data provider EPFR Global, on concern the Fed will reduce its $85 billion of monthly bond purchases as soon as this month. Yields on Mexican notes jumped 0.1 percentage point last week, five times the average in emerging markets, data compiled by Bank of America Corp. show.” (Bloomberg, September 2, 2013)

Levels: (Prices as of close August 30, 2013)

S&P 500 Index [1632.97] – Back to familiar levels from late spring/early summer after peaking on August 2nd (1709.67). In the near-term, a buyer’s appetite around 1640 can showcase the willingness for risk-taking.

Crude (Spot) [$106.42] – For more than two months, the commodity has traded closer to the $104 range, which is in line with the 50-day moving average. The long-term picture reminds us that crude is up more than 30% since November 2012. Perhaps, investors await a natural pause from the explosive run until the next catalyst.

Gold [$1407.75] – Clawing back to and around $1400. The inevitable bounce has taken place but the doubt lingers on the enthusiasm back to $1700. The perception of gold as a volatility hedge is also unclear in this run versus prior years. The 200-day moving average of $1468.71 is the next key target.

DXY – US Dollar Index [82.08] – Between summer 2012 and today, the index has traded within a tight range. Yet the swings have been too common recently, suggesting increased volatility in currency markets.

US 10 Year Treasury Yields [2.78%] – Attempting to surpass the 3% mark. The jump from 1.61% to 2.93% in a few months is noteworthy but questionably sustainable, given debatable signals of an improving economy.

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 26, 2013

“Actions are always more complex and nuanced than they seem. We have to be willing to wrestle with paradox in pursuing understanding.” (Harold Evans, 1928-present)

Twisted puzzle

Not many can claim to understand the cataclysmic US market dynamic that’s torn between an unloved bull market that's heating up (even over-heating) and the growth in the real economy, which is hardly convincing. Sure, cherry-picking some data or comparing today versus the worst point of the crisis would easily point out that stability has been restored in financial services. Yet, the markets have for a long while accepted this stability, as risk-taking has been promoted and rewarded for those who participated. Certainly the guidance and leadership of the Federal Reserve is divided between those who revere the restoration for near financial collapse and others that continuously question the bubble creation driven by low interest rates. Perhaps, judgment will be left to historians in future years than active participants in today’s market.

Influential money managers are forced to sift through and make a choice in doubling down on risk-taking versus reducing exposure in anticipation of a chaotic pattern. Now, the Fed’s puzzle of deciding whether to slow stimulus efforts under the assumption of a growing economy is also the investor’s dilemma. Finding a middle ground is no easy task, considering it has been a smooth-sailing bull market. Certainly, a change in tone serves as a catalyst for unexpected responses.

Moving parts

The current stability is fragile when looking at global markets, which have expressed powerful responses. 2013 so far has showcased the struggles of emerging markets. From Turkey to China to Brazil, the performances of these nations’ stock markets have not been as pretty as last decade – not to mention currency volatility, which has expanded into countries like India. Frankly, drumming up growth in these nations is challenging, and keeping up previous growth rates is overly ambitious. At this point, the concern of emerging markets is hardly news. The flow data demonstrates the current status:

“Of the $155.6 billion investors poured into developed-market equity exchange-traded products in the first seven months this year, North American funds received $102.4 billion or 65.8 percent, according to BlackRock Investment Institute. Japan attracted a record $28 billion, while Europe-focused funds got $4.3 billion. In contrast, $7.6 billion flowed out of emerging-market funds.” (Bloomberg, August 20, 2013).

In the last four years, the US’s relative edge versus other markets stood out, especially based on stock market performance. Now, it is questionable whether the US markets may need to correct and adjust their pricing despite the increasing capital inflow. Surely, new money is chasing returns in the US. The psychology of missing out is playing a vital behavior role. It is quite clear that liquidity is drying up in developing markets and the relative argument for US markets hasn’t quite run its course.

Questions to ponder:

• Is this unloved US bull market now accumulating more momentum, given increased capital inflow into stocks? Are stock prices are set to overshoot to the upside (further irrational behavior)?

• Is this Fed-led bullish market set up for an inevitable correction, given the escalating uncertainty of earnings, policymaking and macro dynamics?

• Are emerging markets valuations cheap enough versus the US market, potentially presenting a better risk-reward for forward-thinking participants?

Increasing awareness

Adjusting expectations is the big challenge ahead with all the speculation surrounding the stimulus efforts. The interconnected nature of this global market plays a vital role in a period when central banks are examining a change of plan, i.e. taper. Key models were built under the assumption of a low US dollar and low interest rates. As these dynamics shift, adjustments will need to be made and a new normal will need to be established. In a year with heavy emerging market correction along with commodity price adjustment, one has to wonder if this process will be painless. Even the definition of “risk-less” assets needs to be redefined. Otherwise, the best alternative might be the current status quo, which we have experienced in the last few years. Geopolitical tensions and exchange glitches and failure only add on to an already edgy climate. Perhaps, the edginess has been felt profoundly despite the deceiving sense of calm when viewing US broad indexes. As the autumn approaches, nagging but accumulating issues can materialize more quickly than imagined. Thus, preparing for the unknown is not so strange in the weeks ahead.

Article quotes:

“Indonesia has lost 13.6 per cent of its central bank reserves from the end of April until the end of July, Turkey spent 12.7 per cent and Ukraine burnt through almost 10 per cent. India, another country that has seen its currency pummelled in recent months, has shed almost 5.5 per cent of its reserves. Central bank reserves are held to act as a safety buffer against turmoil, and are on average still far larger than during past emerging market crises. But the pace of the drops [has] spooked some investors and analysts. Many central banks are likely to have suffered further reserve depletion in August, as the turbulence caused by the US Federal Reserve’s plans to end its monetary stimulus has resumed, and compounded concerns over slowing economic growth in emerging markets. Palaniappan Chidambaram, India’s finance minister, said on Thursday that India’s reserves were currently $277bn, compared with $280bn at the end of July, according to Morgan Stanley’s figures. … The US bank’s economists pointed out that excluding China and the oil-rich Gulf states, the current account balance of emerging markets as a whole has deteriorated from a 2.3 per cent surplus in 2006 to a 0.8 per cent deficit this year – the biggest shortfall since 1998, the last time the developing world was gripped by crisis.” (Financial Times, August 22, 2013)

“The actual numbers (not seasonally adjusted) behind the seasonally adjusted headline number showed that the drop in sales last month was larger than typical for July, so to that extent, the big miss in the headline number wasn’t all that misleading. The average monthly decline for July over the previous 10 years is 6%. Last year the drop was just 2.9%. This year, July saw a drop of 18.6%. It was the biggest July drop of the past 11 years. Buyers apparently stopped buying after mortgage rates surged. … Regardless of whether the current trend is still rising or not, it’s important to keep this in perspective. In the context of historical norms, this is not a recovery. Sales remain extremely depressed relative to the normal levels of the past couple of decades. Housing may no longer be a drag on US economic growth, but its contribution to overall economic activity relative to its past share is minuscule.” (Wall Street Examiner, August 23, 2013)

Levels: (Prices as of close August 23, 2013)

S&P 500 Index [1663.50] – After failing to hold above 1700, early signs of a pause. Early signs of stabilization around 1650, which will be tested in a few days.

Crude (Spot) [$106.42] – In the last two months, crude is trading in a very narrow range between $104-108. Potential macro events can spark short-term moves, yet it’s key to remember that crude bottomed in late June ($92.67).

Gold [$1375.50] – After the hard sell-0ff earlier this year, there is a 15% bounce from the lows. $1400 appears to be the next goal. Perhaps, there’s an inevitable bounce that’s building some momentum. Yet, revisiting $1895.00 (the all-time high) seems a long distance away at this point.

DXY – US Dollar Index [81.36] – Lots of swings in recent months, suggesting mild volatility. However, the recent range is in familiar territory. It’s premature to declare a new trend.

US 10 Year Treasury Yields [2.81%] – Since May 1, 2013 lows, yields have moved up noticeably. Yet, many wonder if yields will hit 3% and hold that level for a sustainable time. The last time 10 year yields stayed above 3% for a while was in first quarter of 2011.


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 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.