“Pleasure may come from illusion, but happiness can come only of reality.” Chamfort (1741-1794)
Unanswered questions
Illusion versus reality appears more difficult to distinguish. It is overly confusing to put market observers, economic data gatherers and policymakers in one room to gauge overall wellness. On one end, asset prices are rising in developing markets while economic strength is not at comforting levels. On the other hand, global growth is not overly promising. Essentially, the usual questions persist despite the feel-good headlines of rising markets. At this junction, even the most seasoned experts are forced to ask the same old questions to seek some clarity.
Why do asset (stock) prices rise? Is it because the value is understood or perceived to be massively amazing? What’s the connection between a robust economy and increasing asset prices – if there is any strong connection at all? What is the effectiveness of QE and GDP – if any? Are these two factors unrelated, potentially overblown or possibly misunderstood? Are recent US macro concerns of dysfunctional government and Fed “taper” discussions still a concern or less concerning than imagined? Have markets lost their creditability as a barometer of economic strength, or has having a disconnect been normal in other, prior periods? What’s the connection between fading confidence in government and optimism toward stocks? Is there any wisdom to take away from the recent shutdown decision to defer issues? After all, markets did not bother to panic; therefore, what signals a peak in confidence?
Recent inflow into US equities has been quite massive; who is left to pour more money to US stocks? “Investors poured some $54.2 billion into all equity mutual funds and exchange-traded funds in October, the third-largest inflow on record, data from TrimTabs Investment Research showed on Sunday. All three of the largest monthly inflows into all equity funds have occurred this year, and this year's inflow of $286 billion into all equity funds is the biggest since 2000, TrimTabs added.” (Reuters, November 3, 2013).
Answering all these questions in one page is not an easy task, but to unglue the illusions, one would have to start by asking these questions that are washed away in brief mainstream summaries. Certainly, these answers are not found by looking at a chart of the S&P 500 index or tracking varying earnings results.
Uncertainty deemphasized
In any area, there are misconceptions, trickery and illusionary forces that end up driving the collective thinking. Explanations of these types of behaviors are best left to behavioral finance experts and other psychological experts. However, at this junction, these market dynamics are mysterious to some but rather dangerously familiar to others. Of course, claiming a bubble is not quite the simple explanation. Denying the bubble-like symptoms isn’t overly wise, either. Thus, this limbo will persist until a major shock or newsworthy discovery. For example, the elevated ranges of Chinese property values is one matter unfolding. As many times as “bubble” is thrown around, it is only taken seriously after the fact. Naturally, it’s fair to say some are fatigued from hearing “bubbles” discussed. Yet those on the ground level of risk management are either admitting confusion or denying tough choices in categorizing the current reality. What’s convenient for those proclaiming the Fed’s success is to loudly declare the ongoing euphoria as indexes make all-time highs. Is that run justified? That’s a question that’s debated hourly by traders and has gone unanswered for weeks. Justified or not, the reality is felt on actual returns, which is the bottom line sought after. Mapping out a five-year investment plan is shaky for any risk manager or analyst. Soft job numbers combined with a mixed to weak economic outlook enhance the suspense of trends and pending policies. This week, US labor numbers will provide further clarity, at least for shorter-term participants. The lack of yield-generating assets leaves few investment options for asset managers. Perhaps, the inflow into stocks is not surprising given the scarcity of worthwhile and liquid investments.
Digesting recent moves
The commodity markets remain fragile – a theme that’s hardly debatable. The CRB (Commodity index) is down more than 7% since late August. Obviously, gold struggled to maintain its strength and peaked about a year ago. It was October 5, 2012 when gold bugs were too confident and the price of an ounce of gold stood at $1791.75. Today it is barely above $1300, and price stability is unclear. The same applies for crude, which has failed again to stay above $110, then struggled to hold $100 and is now in the mid-$90s. Basically, the commodity decade run is slowing and, as witnessed earlier this spring, the waning global growth plays a part in this. In fact, emerging markets sold off earlier this spring with similar concerns. The EEM (emerging market fund) is 24% below its all-time highs reached in October 2007. Again, this reinforces that commodities and emerging markets are not quite as explosive as US equities. Although emerging markets are recovering, commodities are facing several pressures after an impressive multi-year run. Changes in commodity prices can impact consumer behavior as well as key foreign relations. Perhaps, these developments are macro events with powerful catalysts that are worth tracking for upcoming months.
Article quotes:
“It has become something of a cliché to predict that Asia will dominate the twenty-first century. It is a safe prediction, given that Asia is already home to nearly 60% of the world’s population and accounts for roughly 25% of global economic output. Asia is also the region where many of this century’s most influential countries – including China, India, Japan, Russia, South Korea, Indonesia, and the United States – interact. One future is an Asia that is relatively familiar: a region whose economies continue to enjoy robust levels of growth and manage to avoid conflict with one another. The second future could hardly be more different: an Asia of increased tensions, rising military budgets, and slower economic growth. Such tensions could spill over and impede trade, tourism, and investment, especially if incidents occur between rival air or naval forces operating in close proximity over or around disputed waters and territories. Cyberspace is another domain in which competition could get out of hand. … In fact, the regional security climate has worsened in recent years. One reason is the continued division of the Korean Peninsula and the threat that a nuclear-armed North Korea poses to its own people and its neighbors. China has added to regional tensions with a foreign policy – including advancing territorial claims in the East and South China Seas – that would be described diplomatically as ‘assertive’ and more bluntly as ‘bullying.’”(Richard Haass, Project Syndicate, November 4, 2013).
“Just beyond the mainstream, though, there's a growing view that QE could continue at its current rate for even longer – until, say June 2014. That would bring the QE total, including the subsequent taper, to some $5,000bn, equivalent to more than 30pc of America's annual GDP. Last Wednesday, at its monthly meeting, the Fed's monetary committee voted to keep QE going – ordering the purchase of another $40bn of mortgage-backed securities and another $45bn of Treasuries, so $85bn in total. While the wording of its statement was very close to that of the month before, one key sentence was removed. In its September statement, the Fed had said that ‘the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market.’ In the October minutes, that sentence was gone – causing some to argue that tapering is now more likely, because the economy is improving. Yet, the only reason that ‘tightening of financial conditions’ has gone is because, since early September, when it lost its nerve, the US central bank has stopped talking about tapering. This illustrates the Fed's Catch-22. If Bernanke starts preparing the world for tapering again, yields will start to spiral, choking off recovery and robbing the Fed of its resolve to taper. So US policymakers are caught in a trap – a seemingly inescapable dilemma that stems directly from the massive scale of QE.” (The Telegraph, November 2, 2013).
Levels: (Prices as of close November 1, 2013)
S&P 500 Index [1761.64] – Slightly up for the week which was enough make another all-time highs. Since March 2009, the index has risen more than 1.6 times. Prior all-time highs of 2000 and 2007 remain in some investors’ minds as unchartered territory continues to be explored.
Crude (Spot) [$94.61] – Substantial drop since September, in which crude has fallen by nearly $18 a barrel. Normalizing to ranges seen in the spring between $88-$96. Downside momentum continues to build.
Gold [$1324.00] – Clearly, this year has marked a significant breakdown in prices. Between October 4, 2012 and July 1, 2013, gold declined by more than 33%. Overcoming that sell-off has led to range-bound trading. Momentum is tilted to negative, with oversold recoveries being a possibility for risk-takers.
DXY – US Dollar Index [80.71] – After hitting the lowest point of the year, the dollar index has slightly recovered back to the 80 range.
US 10 Year Treasury Yields [2.62%] – Attempting to bottom around 2.60%. Glimpse of signs for rising rates in the last few weeks, as the 50-day moving average is at 2.70%.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, November 04, 2013
Monday, October 28, 2013
Market Outlook | October 28, 2013
“Confidence contributes more to conversation than wit.” François de la Rochefoucauld (1613-1680)
Plot thickens
There is a roar from the bullish camp that’s supported by this momentum-driven rise in stock prices. Earlier this spring, with bonds seeming less appealing and commodities collapsing, there was a question: Are equities the new safe haven? Basically, stocks appeared to be the asset that one “should” own in a low-rate environment where risk-taking is welcomed despite a mixed picture for corporate earnings. Perhaps, being viewed as a safe haven is investors’ way of expressing a lack of alternatives while appreciating the familiarity and liquidity of US stocks. Recent inflow into equities demonstrates a combination of fear of missing out and piling onto the theme that’s working. After being over 23.4% on the year, the S&P 500 index performance sells itself to entice more buyers.
“Data from the fund flow analyst shows that $69.7bn (£43bn) was pulled from money market products in the week ending 16 October while equity funds captured net inflows of $17.2bn.” (Fundweb, October 21, 2013).
The risk-taking nature in stocks is not only visible in the US. In fact, European assets are attracting capital with the fifth consecutive inflow into European equities, according to Lipper’s data. Not only are assets rising, but the capital inflow is a full-blown declaration of positive momentum, which is also matched by some upside surprises in earnings.
Skepticism threatened
Reaching uncharted territories of new all-time raises few questions. "Doubt" is an ever-growing force surrounding those skeptical observers. Even the non-extreme gloom-and-doom crowd is baffled and awaiting a breather. Goldman Sachs and other banks’ year-end targets have been surpassed. Retail or institutional sentiment indicators all point one direction: simply bullish.. Contrarian indicators suggest a counter-move is only around the corner. Yet, that contrarian story has been preached and tested for weeks among close observers. Each tick-up appears to defuse a dose of skepticism. Some concerns (economics and sustainability) have merits, but a game of perception is tricky to grasp and time.
Piecing the parts
Drivers of a comfortable rally are fueled by the essential thought of status-quo policy when it comes to interest rates. A few months ago, speculation on outcomes surfaced, and today there are less big picture issues to fear (based on collective perception) as the market wait for clarity in early 2014. Amazingly, there is a crowd chasing returns and others who are sitting tight given no known evidence to relinquish exposure to risky assets. Calmness is seen when discussing the taper or QE, since the central bank’s messaging is soothing the crowd. Perhaps, the market is running out of macro issues to fear. Some suggest the panic-buying trends are the ultimate defenseless trend where the bulls are trapped. The decision is facing many between taking justifiable profits and a reasonable run versus rolling the dice for further “greedy” moves. There are a few weeks to close out the year, where vulnerability seems less likely if listening to glorious headlines. The disconnect between the real economy and the stock market should not be comforting by any measure. Even if oil prices decline and economies avoid further crisis, there must be some rhyme and reason for grasping price movement. Irrationality can be accepted for a while, but reason will prevail. For now, confidence remains blinding and spectators wait to be amazed for yet another week with record highs.
Article quotes:
“The sapped U.S. strength in innovation is epitomized by the NIH research funding trends. Between 2003 and 2013, the number of applications increased from nearly 35,000 to more than 51,000, while NIH appropriations shrunk from $21 billion to $16 billion (in 1995 dollars). As a consequence, it has become increasingly difficult for our scientists to garner an NIH grant. Overall application success rates fell from 32 percent in 2000 to 18 percent in 2012. This is particularly bad news for the new applicants, most of whom are young scientists who are at their most productive age and are most in need of grant support: not only have the number of research project grants dropped in absolute numbers, but the success rates for first-time award recipients has dropped from 22 percent to 13 percent. The story is dramatically different on the China side. The government is determined to be the next technology innovation center in the world. By 2011, China had already become the world’s second highest investor in R&D. Government research funding has been growing at an annual rate of more than 20 percent. At the end of 2012, for example, 7.28 billion yuan was spent on promoting life and medical sciences, nearly 10 times the 2004 level. Even more troubling (for the United States), in 2011, 21 percent of the applications were supported, and for young scientists, the application success rate was 24 percent, both of which were higher than the U.S. level. It was predicted that if the U.S. federal government R&D spending continues to languish, China may overtake the U.S. to be the global leader in R&D spending by 2023.” (The Diplomat, October 27, 2013).
“The rise of margin debt is also a fairly bearish indicator. Margin debt, money borrowed by investors against the value of their securities portfolios, exceeded US$400bn for the first time in September, according to data from the New York Stock Exchange. We care about margin debt for two principal reasons. First, it measures the level of optimism in the market. If you are willing to borrow against your securities you must be fairly confident because you risk being forced to sell them, often at the worst possible time, to meet a margin call. That, of course, is the second reason we care: lots of margin debt means you can have lots of forced selling, allowing downdrafts in the market to take on a life of their own. Even adjusted for inflation, this is a high figure. Using 1995 dollars as a base, analyst Doug Short of Advisor Perspectives, a firm which provides analysis to investors, calculates that margin debt adjust(ed) for inflation is a bit below the 2007 peak but above where it stood just before the dot-com bubble burst in 2000. … To be sure, margin debt is not a pure indicator of bullishness. It can represent the activity of hedge funds which sell short as well as go long.In general though it is consistent with what a lot of investors believe: that volatility has been outlawed and that continued support from the Federal Reserve means the stock market has a safety net.” (IFR, October 24, 2013).
Levels: (Prices as of close October 25, 2013)
S&P 500 Index [1759.77] – All-time highs once again surpassing the year-end target by some analysts. Nearly 9% above the 200-day moving average.
Crude (Spot) [$97.85] – Down 13% from August 28, 2013 highs, suggesting a strong downside move driven mainly by supply-demand. Some signs of early bottoming at current levels. Revisiting $95, a common place before the summer highs.
Gold [$1344.75] – Over four months, the commodity is staying above $1300. The upside potential remains questionable following a major correction.
DXY – US Dollar Index [79.19] – Since July, the dollar continues to weaken as the euro is around two-year highs. In upcoming weeks, traders will seek a bottom to the current bleeding.
US 10 Year Treasury Yields [2.50%] – The annual highs of 3% (September 6) seem like a tough achievement in the near-term, given current macro trends.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, October 21, 2013
Market Outlook | October 21, 2013
“Delay always breeds danger and to protract a great design is often to ruin it.” Miguel de Cervantes Saavedra (1547-1616)
Exuberance felt
The current reality showcases at least two narratives for those willing to listen beyond headline noise. The first and highly publicized matter shows that the US stock market indexes are making all-time highs. The S&P 500 index is up 22% and the small cap index (Russell 2000) is up more than 31.3% for 2013. As obvious as it gets, this is a noteworthy declaration of a bull market. It was only nine months ago that this felt like a silent bull market. Now it’s louder than ever. A collective glance at the scoreboard leads to further inflow into equities. Interestingly, global stocks continued to see enthusiasm:
“Stock funds worldwide attracted $17.2 billion in new cash during the week, according to the report, which also cited data from fund-tracking firm EPFR Global. The inflows were the biggest in four weeks.” (Reuters October 18, 2013).
Not only are stock prices rising, but capital inflow confirms the ongoing eagerness of participants to seek exposure to this rally. Certainly, cashing returns is a known human trait, as some called it “panic buying.” This positive momentum has been a remarkable force, as rates remain low and the status quo seems more stable than expected.
Delay, defer and deny
The second narrative of the current behavior looks ahead. It deals with the dangers that are not solved in terms of economic revival or general wellbeing of wealth creation. Political pollution diverts attentions, as witnessed most of this month with the mindless shutdown discussions. Interestingly, the debt ceiling discussion is deferred for 2014. The same may apply to decisions regarding Fed tapering. These are two US macro uncertainties that are not going to ruin the rally immediately but remain in the back of the mind of any financial strategist. In fact, last month’s announcement not to taper only surprised the market and enhanced the suspense by buying further time.
Whether this rising market is a declaration of improving investor sentiment or a reflection of a lack of alternative investments remains a debatable question. Yet, earnings season is in full play as clues surface about companies’ quarterly earnings. This week should present additional clarity; therefore, generalizing the earnings result is not a wise approach. So far, there have been mixed reactions with massive moves in both directions when considering stock-specific results. Interestingly, quarterly corporate earnings look like a game of beating expectations; the art of lowering expectations is in full gear. At this point, even the most bullish investors are not quite clear on the market driver’s fundamentals, especially since key indexes are trading at all-time highs.
Tangible guidance
Actual activity in the real economy versus the perception-driven stock market remain unsynchronized. Despite the all-time highs in stocks, the consumer sentiment paints another picture: “Americans in October were the most pessimistic about the nation’s economic prospects in almost two years, as concern mounted that the political gridlock in Washington would hurt the expansion, according to the Bloomberg Consumer Comfort Index of expectations.” (Bloomberg, October 19, 2013). Mysterious to most outside observers are the mechanics of how stock markets work and how sentiment and perception cause reactions and overreactions. Certainly, artful moves are driven by future guesses, past facts and popular (or unpopular) themes. The hunger to decipher the economic wellbeing of US markets must have reached overly anxious levels. In other words, data-starved analysts are waiting for labor numbers this Tuesday, which were delayed due to the government’s partial shutdown. Sure, one data point may not move the needle, but having a barometer for economic growth is vital, especially when growth has slowed globally.
The fragile conditions of emerging markets and Europe stir up the question: Is the US’s relative edge still fully intact? In addition, these questions linger based on pending economic data: Is further risk-taking justified? Is volatility priced correctly at these low levels? Are markets showcasing hubris that will last months? These are very familiar but unanswered questions that need to be asked again.
Article quotes:
“The Fed’s dual mandate, imposed in 1977, requires maximum employment and price stability, but the reality is that there are limits to monetary policy. Printing money cannot increase the wealth of a nation. Moreover, there can be no permanent tradeoff between inflation and unemployment. Market participants learn to adjust to monetary policy. Once workers anticipate inflation, they will demand higher wages and unemployment will revert to its ‘natural’ level consistent with market demand and supply. Increasing real economic growth requires improved technology, capital investment, a better educated workforce, and institutions that are conducive to entrepreneurship and prudent risk taking. Those institutions include a just rule of law that protects persons and property, free trade, sound money, limited government, low marginal tax rates, and market-friendly regulation. … The near zero interest rates on saving accounts since 2008 has harmed conservative investors and significantly lowered their lifetime income. Thus, Fed policy has not led to a net increase in national wealth, merely an arbitrary redistribution to favored groups. If the Fed is too slow to increase rates and shrink its balance sheet, inflation will further redistribute income as creditors are repaid in depreciated dollars. And if the Fed raises rates too fast, the risk of a recession increases. Consequently, Yellen will be faced with difficult options, none of which is cost free. And there will be strong political pressure to fund an already bloated government, provide relief for homeowners, and create jobs – especially when many voters tend to believe those goals can be accomplished by an all-powerful central bank.” (Forbes, James Dorn, October 17, 2013).
“Growth in advanced economies is gaining some speed. The IMF projects these economies will grow 2% next year, up from an expected 1.2% this year. The average unemployment rate in advanced economies is expected to inch down from its peak of 8.3% in 2010 to 8% next year. This is progress, but it is clearly not enough. The state of labour markets remains dismal for a number of reasons. First, even before the crisis, average unemployment rates were high in many countries, and potential output growth too low. For instance, between 1995 and 2004, the average unemployment rate in the Eurozone was 9.5%. Unemployment today is over 11%, but a return to the pre-crisis average would be far from nirvana. Second, the labour market is plagued by a duality of outcomes, which the Great Recession has exacerbated. Workers on temporary contracts have limited employment protection, and have borne the brunt of labour-market adjustment. Low-skilled workers and young people have fared worse than high-skilled and older workers. The long-term unemployed risk being cast away beyond reach of the tides of recovery. Third, some countries in the Eurozone need to boost competitiveness. With devaluation ruled out as an option, the channel to bring this about is through wrenching labour-market adjustments.” (VOX, October 18, 2013)
Levels: (Prices as of close October 18, 2013)
S&P 500 Index [1744.50] – Surpassing previous all-time highs. Last Friday’s close is more than 8% above the 200-day moving average. In the last four months, investors have shown eagerness to buy around, and staying above $1700 for a while has been shaky. The next few trading days will confirm whether this new-wave upside move has legs to it to justify additional buying.
Crude (Spot) [$100.00] – Since peaking on August 28, crude has dropped more than $12 per barrel. It is now back to the $100 range, where buyers’ appetites will be tested. This is due to a combination of weak demand and increased supply.
Gold [$1319.25] – In the last five months, the commodity has traded between $1250-1400. This appears relatively cheap, but the overall long-term trend suggests down or sideways movement.
DXY – US Dollar Index [79.65] – Over the last four months, the dollar has trended downward, showcasing further weakness.
US 10 Year Treasury Yields [2.55%] – Early signs that yields are failing to hold above 2.80%. Further confirmation is awaited as to whether the 200-day moving average (2.23%) is the next critical range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Exuberance felt
The current reality showcases at least two narratives for those willing to listen beyond headline noise. The first and highly publicized matter shows that the US stock market indexes are making all-time highs. The S&P 500 index is up 22% and the small cap index (Russell 2000) is up more than 31.3% for 2013. As obvious as it gets, this is a noteworthy declaration of a bull market. It was only nine months ago that this felt like a silent bull market. Now it’s louder than ever. A collective glance at the scoreboard leads to further inflow into equities. Interestingly, global stocks continued to see enthusiasm:
“Stock funds worldwide attracted $17.2 billion in new cash during the week, according to the report, which also cited data from fund-tracking firm EPFR Global. The inflows were the biggest in four weeks.” (Reuters October 18, 2013).
Not only are stock prices rising, but capital inflow confirms the ongoing eagerness of participants to seek exposure to this rally. Certainly, cashing returns is a known human trait, as some called it “panic buying.” This positive momentum has been a remarkable force, as rates remain low and the status quo seems more stable than expected.
Delay, defer and deny
The second narrative of the current behavior looks ahead. It deals with the dangers that are not solved in terms of economic revival or general wellbeing of wealth creation. Political pollution diverts attentions, as witnessed most of this month with the mindless shutdown discussions. Interestingly, the debt ceiling discussion is deferred for 2014. The same may apply to decisions regarding Fed tapering. These are two US macro uncertainties that are not going to ruin the rally immediately but remain in the back of the mind of any financial strategist. In fact, last month’s announcement not to taper only surprised the market and enhanced the suspense by buying further time.
Whether this rising market is a declaration of improving investor sentiment or a reflection of a lack of alternative investments remains a debatable question. Yet, earnings season is in full play as clues surface about companies’ quarterly earnings. This week should present additional clarity; therefore, generalizing the earnings result is not a wise approach. So far, there have been mixed reactions with massive moves in both directions when considering stock-specific results. Interestingly, quarterly corporate earnings look like a game of beating expectations; the art of lowering expectations is in full gear. At this point, even the most bullish investors are not quite clear on the market driver’s fundamentals, especially since key indexes are trading at all-time highs.
Tangible guidance
Actual activity in the real economy versus the perception-driven stock market remain unsynchronized. Despite the all-time highs in stocks, the consumer sentiment paints another picture: “Americans in October were the most pessimistic about the nation’s economic prospects in almost two years, as concern mounted that the political gridlock in Washington would hurt the expansion, according to the Bloomberg Consumer Comfort Index of expectations.” (Bloomberg, October 19, 2013). Mysterious to most outside observers are the mechanics of how stock markets work and how sentiment and perception cause reactions and overreactions. Certainly, artful moves are driven by future guesses, past facts and popular (or unpopular) themes. The hunger to decipher the economic wellbeing of US markets must have reached overly anxious levels. In other words, data-starved analysts are waiting for labor numbers this Tuesday, which were delayed due to the government’s partial shutdown. Sure, one data point may not move the needle, but having a barometer for economic growth is vital, especially when growth has slowed globally.
The fragile conditions of emerging markets and Europe stir up the question: Is the US’s relative edge still fully intact? In addition, these questions linger based on pending economic data: Is further risk-taking justified? Is volatility priced correctly at these low levels? Are markets showcasing hubris that will last months? These are very familiar but unanswered questions that need to be asked again.
Article quotes:
“The Fed’s dual mandate, imposed in 1977, requires maximum employment and price stability, but the reality is that there are limits to monetary policy. Printing money cannot increase the wealth of a nation. Moreover, there can be no permanent tradeoff between inflation and unemployment. Market participants learn to adjust to monetary policy. Once workers anticipate inflation, they will demand higher wages and unemployment will revert to its ‘natural’ level consistent with market demand and supply. Increasing real economic growth requires improved technology, capital investment, a better educated workforce, and institutions that are conducive to entrepreneurship and prudent risk taking. Those institutions include a just rule of law that protects persons and property, free trade, sound money, limited government, low marginal tax rates, and market-friendly regulation. … The near zero interest rates on saving accounts since 2008 has harmed conservative investors and significantly lowered their lifetime income. Thus, Fed policy has not led to a net increase in national wealth, merely an arbitrary redistribution to favored groups. If the Fed is too slow to increase rates and shrink its balance sheet, inflation will further redistribute income as creditors are repaid in depreciated dollars. And if the Fed raises rates too fast, the risk of a recession increases. Consequently, Yellen will be faced with difficult options, none of which is cost free. And there will be strong political pressure to fund an already bloated government, provide relief for homeowners, and create jobs – especially when many voters tend to believe those goals can be accomplished by an all-powerful central bank.” (Forbes, James Dorn, October 17, 2013).
“Growth in advanced economies is gaining some speed. The IMF projects these economies will grow 2% next year, up from an expected 1.2% this year. The average unemployment rate in advanced economies is expected to inch down from its peak of 8.3% in 2010 to 8% next year. This is progress, but it is clearly not enough. The state of labour markets remains dismal for a number of reasons. First, even before the crisis, average unemployment rates were high in many countries, and potential output growth too low. For instance, between 1995 and 2004, the average unemployment rate in the Eurozone was 9.5%. Unemployment today is over 11%, but a return to the pre-crisis average would be far from nirvana. Second, the labour market is plagued by a duality of outcomes, which the Great Recession has exacerbated. Workers on temporary contracts have limited employment protection, and have borne the brunt of labour-market adjustment. Low-skilled workers and young people have fared worse than high-skilled and older workers. The long-term unemployed risk being cast away beyond reach of the tides of recovery. Third, some countries in the Eurozone need to boost competitiveness. With devaluation ruled out as an option, the channel to bring this about is through wrenching labour-market adjustments.” (VOX, October 18, 2013)
Levels: (Prices as of close October 18, 2013)
S&P 500 Index [1744.50] – Surpassing previous all-time highs. Last Friday’s close is more than 8% above the 200-day moving average. In the last four months, investors have shown eagerness to buy around, and staying above $1700 for a while has been shaky. The next few trading days will confirm whether this new-wave upside move has legs to it to justify additional buying.
Crude (Spot) [$100.00] – Since peaking on August 28, crude has dropped more than $12 per barrel. It is now back to the $100 range, where buyers’ appetites will be tested. This is due to a combination of weak demand and increased supply.
Gold [$1319.25] – In the last five months, the commodity has traded between $1250-1400. This appears relatively cheap, but the overall long-term trend suggests down or sideways movement.
DXY – US Dollar Index [79.65] – Over the last four months, the dollar has trended downward, showcasing further weakness.
US 10 Year Treasury Yields [2.55%] – Early signs that yields are failing to hold above 2.80%. Further confirmation is awaited as to whether the 200-day moving average (2.23%) is the next critical range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, October 14, 2013
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.
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.
Monday, October 07, 2013
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.
Monday, September 30, 2013
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.
Monday, September 23, 2013
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.
Monday, September 16, 2013
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.
Monday, September 09, 2013
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.
Tuesday, September 03, 2013
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.
Monday, August 26, 2013
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.
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.
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