Market Outlook | November 25, 2013

“Whoever is winning at the moment will always seem to be invincible.” George Orwell (1903-1950)

Invincible?

Low US presidential sentiment combined with an all-time low congressional approval rating is not stopping and has not stopped markets from reaching all-time highs. This stresses the lack of correlation between confidence in political leaders and actual asset class appreciation. Unimpressive economic growth is not bothersome to a smooth-sailing rise in stock and home prices.

Numerous expert calls for “bubbles” have not resulted in the market flinching or overreacting. Short-term memories of crisis or panic-like behaviors and contemplation of gloom and doom have yet to bother the volatility index, which loudly points to fearlessness. A sign of calmness, justified or not, is for risk managers to debate. Talks of a new Federal Reserve chairman and over dependence on quantitative easing are not viewed as risky, despite overwhelming chatter. The taper discussion came and went and is to be revisited soon, as conflicting messages from Fed speeches are common.

For market participants, the government shutdown of early autumn was a near non-event for markets then, despite sour sentiment and the usual political bickering. Unmoved, undisturbed, these markets are barley worried. Common as it has been for months, the status quo trend remains a forceful trend that’s influencing markets.

Lack of answers

At this junction of the bullish run: How many latecomers (participants) wait to jump on this bullish ship? This is a pending question that’s fair to ask but murky to grasp as the celebratory sentiment persists. Beyond reason or logic, investors are forced to accept the following:

1) No visible and dramatic symptoms of a macro shift have materialized. Timing is difficult to gauge even with bizarre market dynamics.

2) As long as the majority of participants believe the Fed’s ongoing story, what is believed becomes and remains an ongoing reality.

3) Lack of alternatives in investment areas present further relative strength to US equities versus bonds, commodities or cash.

Catalyst search

Conventional wisdom of identifying trend-changing catalysts has not proved to work thus far. At least, there has not been a major disruption to risk-taking, which leads to less conventional thoughts. For a while, rising interest rates as well as inflation were feared to stir some response. Perhaps, deflation is the issue at hand rather than inflation, and the central banks will have to acknowledge this at some point.

“All of the past week’s data point to heightened deflationary risks. Paltry U.S. consumer price index (CPI) figures, German producer prices undershooting and another bout of weakness in commodity prices, particularly oil, suggest deflation is winning the battle over central bank stimulus. The U.S. inflation rate fell to 1% annualised in October, the lowest figure in almost 50 years, excluding the 2008 financial crisis. …. The German producer price index (PPI) fell 0.2% month-on-month in October, more than expected.” (Financial Sense, November 21, 2013)

Perhaps, deflation is the primary concern that was not overly anticipated. Certainly, declining commodity prices contribute to this threat in developed economics. In months ahead, that’s an issue that awaits, given slowing growth as well. This potentially forces action by the Federal Reserves and changes the market narrative of QE in the US, Europe and Japan and its consequences.

There is a growing chance that the search for a game-changing market catalyst is not a grandiose mystery after all. If the tune of the economy and financial markets march to different beats, then at some point both have to be in sync. In other words, the gap between cheerful corporate profits and economic strength (labor and growth) will be confronted soon enough. It is important to note that corporate profits contribute to stock market strength as much as QE. Corporate profits as a percentage of GDP remain above average. Certainly, this has impacted stock prices, and pending sensitivity to corporate earnings might serve as the clue to minor disruption. Until then, speculators can speculate, doubters can doubt, but the established momentum will determine its own slowdown. For now, the bullish narrative has been made simple and appears invincible. Detecting illusionary market patterns is a risk manager’s valuable asset.

Article quotes:

“Turks are fiercely hoarding foreign currency. The reason? Their own remains weak and could get weaker. The lira has been one of the worst performing emerging markets currencies since May, when investors first took fright at the US Federal Reserve’s plans to start scaling back its vast stimulus. Despite periodic rallies in riskier assets – reflecting changing bets on the timing of tapering – the lira remains 12 per cent down against the dollar since January. Usually, Turks are sanguine about such fluctuations: households tend to sell foreign currency when the lira weakens and build dollar and euro deposits when it snaps back. But since May, households’ foreign currency deposits have risen about 6 per cent to more than $70bn, suggesting savers expect rising inflation and further falls in the lira. International investors share this view, considering Turkey to be one of the countries most vulnerable to a withdrawal of the Fed’s easy money, because it relies on short-term capital inflows to finance a gaping current account deficit. Net outflows from Turkey’s bond market since the end of May jumped to $3.1bn in the second week of November, while net outflows from equity markets over the same period moderated to $154m.” (Financial Times, November 21, 2013)

UK Housing: “Mortgage lending is ‘back with a bang’ with borrowing rocketing 37 per cent in a year as first-time buyers surge into the housing market, according to latest figures. Banks and building societies advanced a total of £17.6billion last month, more than at any time since the financial crisis five years ago, said the Council of Mortgage Lenders. First-time buyers are leading the charge with London agents reporting a near doubling in numbers registering with them this autumn. The latest data came as the Bank of England once again played down fears of a crippling rise in interest rates coming as early as next year. Last month’s total is the first time £17billion has been breached since October 2008 when the British financial system’s ‘near death experience’ condemned the home loans sector to a deep freeze. Loans to buyers with only small deposits are up by 80 per cent. Experts said the revival is set to continue into next year fuelling further house price gains but increasing fears of a dangerous housing ‘bubble.’” (London Evening Standard, November 2013).

Levels: (Prices as of close November 22, 2013)

S&P 500 Index [1804.76] – A few points above last week’s finish led to another all-time high mark last Friday. Since November 2012, the index is up nearly 35%, showcasing a strong run.

Crude (Spot) [$94.84] – Since peaking in late August, prices have declined constantly. A key junction is forming now between a short-term relief rally and notable confirmation of further pricing breakdown.

Gold [$1240.00] – Deceleration continues as felt throughout the year. Annual lows of $1192 are on the radar for some as the bottoming process waits. For now, the unwinding process continues and value seekers may not be overly eager to reenter.

DXY – US Dollar Index [80.70] – Barely moving in the last few weeks. The 15-week moving average is in around 80, which sums up the familiar range.

US 10 Year Treasury Yields [2.74%] – Strong case building for rates to stay above 2.60%. That’s been the case for more than five months. Appears to be stable but overly neutral for trend seekers.

Dear Readers:

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

Market Outlook | November 18, 2013

“It is dangerous to be right in matters on which the established authorities are wrong.” (Voltaire 1694-1778)

Swept away

Five years after the 2008 crisis, the volatility level is low, showcasing the lack of anxiety by market participants. In fact, the volatility index is around its lowest level in the post-crisis period. Alarmingly, it feels that the fear of disaster is not quite as powerful as the fear of missing out on the ongoing stock market rally. That’s been the case for months now with ongoing enthusiasm. Additionally, some can proclaim US equity as having a “safe haven” status on a relative basis. Nonetheless, there is no such thing as safe when involved in risk taking, which is obvious when examined in a sober way. For some, being swept away in record highs comes with less visible danger of not knowing the end date to a massive run. As usual, the thrill of momentum is forceful and illusionary unless profit is realized in a very timely fashion. The script is familiar to historians, but the catalysts are mysterious for now.

Deception or not, this bullish market vibe is alive and explosive as skepticism seems to have quickly run out of favor. In fact, recording all-time highs for stock indexes has become a normal event, considering it has happened on several occasions. Perhaps, it’s fair to say that 2013 is the year when this “silent bull market” turned into a grand parade of capital inflow with decorative performances leading into further risk enticement. Amazingly, as year-end approaches, the question arises of what awaits next. On one hand, the capital that stayed on the sidelines in recent years has flowed in. Secondly, the worrisome topics have been dismissed for a while and most likely are being collectively misunderstood. For now, capital is persistently chasing:

“Investors poured some $34.1 billion into all equity mutual funds and exchange-traded funds in the past four weeks that ended November 13, the biggest four-week total since January, according to data from TrimTabs Investment Research.” (Reuters, November 17, 2013)

Weighing danger

Occasional speculation on future Fed actions and policies remains a guessing game that mostly does not disrupt the prevailing theme of quantitative easing. In the financial circles, there is potentially a growing comfort of knowing what to expect in 2014, especially in regards to the playbook and policies of a new Federal Reserve chairman. It is reasonable to wonder if this hubristic multi-year run collides with an overly complacent crowd who may be wrong in “taper” assumptions. For now, the year is nearly winding down and the early part of next year will clarify if the term “bubble” is legitimate.

One item that came and went was the budget debate, which is bound to be revisited soon by policymakers. A contentious political climate hovers around this momentum-driven market that’s been numb to economic slowdown, government shutdown or further labor concerns. The pain-free attitude of the stock market fails to match some real economy patterns, both in the US and Europe. Thus, it’s only wise to look for the sudden shift of sentiment, as the narrative may switch to more practical versus perception-based results. Perhaps, one should not use the stock market as a barometer of the nation’s wellbeing, especially when the approval rating for lawmakers is very low and confidence is even shakier. Thus, the dangers of a recovery are murmured, dissected daily but not quite reflected in the volatility or stock indexes.

Changing tones

The market dynamics around oil prices suggest a different tone than last decade. Primarily, the supply-demand picture is changing, with more supply visible and demand slowing recently. Plus, international events will determine if more supply is due to flood the market. In turn, the pricing pressure on crude is quite visible.

“Last month, for the first time since February 1995, the U.S. produced more crude oil than it imported: 7.7 million barrels per day in October, versus 7.6 million of imports. Domestic output ticked up further to a level just shy of 8 million barrels per day in the week that ended Nov. 8, according to data from the Energy Information Administration.” (Bloomberg, November 14, 2013)

Participants who had estimates clouded by previous decade assumptions are considering adjustments. If crude begins to move below $85, then that might raise some alarms and even be seen as a positive for consumers. The economic implication of oil at this junction is too intriguing and equally impactful, as crude prices failed to reach above $100. For now, six consecutive down weeks in crude prices are catching the attention of market observers.

Meanwhile, the close link between commodities and emerging markets is where the shift has taken place versus last decade. Interestingly, commodities and emerging markets underperforming versus US stocks and other benchmarks begs the question of timely entry points versus further deceleration. In other words, bargain hunters may look to purchase emerging market shares or commodities that have retraced recently.

Yet, slowing global growth makes the upside potential too questionable. At the end of the tactical messaging and perception game, it boils down to global growth and avoiding credit bubbles. Those are the tangible elements that count. Until then, the perception-driven market fragilely impresses (especially US stocks) and draws more risk-takers, but timing as usual is the bigger mystery.

Article quotes:

“According to China’s Foreign Ministry, Medvedev said the following at the meeting: ‘Russia-China relations are comprehensive strategic cooperative partnership both in name and in fact. Russia is ready to further expand the scale of trade and investment with China.’ Trade between China and Russia reached US$88 billion in 2012. While in China, Medvedev said the two sides hope to raise that to US$100 billion by 2015 and US$200 billion by 2020.Given their historically competitive relationship, the booming ties between China and Russia have puzzled many analysts. However, there is growing evidence that Moscow is seeking to balance against China’s influence by expanding its bilateral relationships with China’s neighbors. Over the weekend, for instance, Japan's Foreign Minister Fumio Kishida and Defense Minister Itsunori Onodera held Japan’s first ‘2+2’ meeting with their Russian counterparts, Foreign Minister Sergei Lavrov and Defense Minister Sergei Shoigu.The two sides agreed to hold a joint naval drill aimed at countering terrorism and piracy, and also to hold 2+2 meetings an annual event. Lavrov reportedly told a press conference after the meeting that bilateral cooperation with Tokyo would help resolve security issues on the Korean Peninsula as well as territorial disputes.” (The Diplomat, November 5, 2013).

“There are three reasons why he [Mario Draghi, the ECB president] should now look beyond the conventional. The first is, of course, the economic outlook, and the associated downside risk on inflation. When German commentators such as Hans-Werner Sinn criticise the ECB’s decision to cut rates they never discuss the decision in connection with the inflation target – which should be the primary benchmark. The current inflation rate of 0.7 per cent is below target, and forecasts tell us that it will remain so for at least two years. The second reason is a lack of further policy tools after the next rate cut. The main ECB interest rate is now 0.25 per cent. The deposit rate – the one levied on commercial bank deposits at the ECB – is zero. The central bank could cut its main rate one more time and impose a small negative deposit rate. At that point, the ECB will have run out of policies. That would be an uncomfortable position. The third set of reasons relates to Mr Draghi’s lender-of-last-resort promise – the outright monetary transactions he launched last year. The OMT has no doubt calmed down markets over the past year, but it is not a monetary policy instrument. It is an insurance policy. Its purpose is to reassure investors by reducing the likelihood of a country’s being forced from the eurozone. But it is still only a backstop. Quantitative easing, by contrast, is a monetary policy instrument. Its purpose would not be to bail out countries but to reduce medium to long-term interest rates in specific sectors of the economy.” (Financial Times, November 17, 2013).

Levels: (Prices as of close November 15, 2013)


S&P 500 Index [1798.18] – Making all-time highs yet again this year. More than 30 times, new highs were reached. Nearly 10% above the 200-day moving average.

Crude (Spot) [$93.84] – Sharp drop continues in the last three months, from $110 to below $94. This suggests a notable shift in the supply-demand dynamics supporting lower prices. The next noteworthy point on downside potential is closer to $85.

Gold [$1286.00] – Recent months showcase increasing odds of a bounce at the 1280 rage. If positive momentum is not mustered, then this showcases ongoing negative momentum that has persisted in the last twelve months.

DXY – US Dollar Index [80.71] – Hardly changed. Annual lows stood at 78.99 on October 25. Potentially a turning point of a weak dollar from a very near-term perspective.

US 10 Year Treasury Yields [2.70%] – In the last five months, the low end suggests around 2.50%, while the upside is somewhere between 2.70-3.00%.


Dear Readers:


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

Market Outlook | November 4, 2013

“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.

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.

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.

Market Outlook | October 14, 2013

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

Perfection desired

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

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

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

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

Bubble-like memories

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

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

Sluggish reality

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

Article quotes:

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

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

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

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

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

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

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

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


Dear Readers:

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

Market Outlook | October 7, 2013

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

Waiting to understand

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

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

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

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

Earnings riddle

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

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

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

Article quotes:

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

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

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

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

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

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

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

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


Dear Readers:

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

Market Outlook | September 30, 2013

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

Theatrical

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

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

Cycles and moods

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

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

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

Critical assessment

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

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

Article quotes:

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

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

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

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

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

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

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

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


Dear Readers:

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

Market Outlook | September 23, 2013

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

Dangerously comfortable

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

Policymaking pressures

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

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

Rotation game

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

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

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

Article quotes:

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

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

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

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

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

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

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

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



Dear Readers:

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

Market Outlook | September 16, 2013

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

Fed’s selling points

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

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

Past and present

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

Speculators’ dilemma

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

Article quotes:

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


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

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

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

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

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

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

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


Dear Readers:

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

Market Outlook | September 9, 2013

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

Anxiety building

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

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

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

Realization

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

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

Comprehending fear

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

Article quotes:

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

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

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

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

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

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

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

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


Dear Readers:

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