Market Outlook | April 28, 2014

“Vision is the art of seeing things invisible.” Jonathan Swift (1667-1745)

Clarity awaits (yet again)

As April draws to a close, eager participants seeking hints on Fed policy, labor conditions, GDP status and some guidance on housing growth await several data points. Surely, waiting and reacting to data has not always proven to be instrumental in altering the existing bullish stock market. Whether corporate earnings or economic recovery, the catalysts for price declines are a mystery. As much as pundits want to rave about one or two factors, it takes a lot to bring down this market. Surely, signs of slowing in momentum-driven stocks have been quite visible in the last few weeks, considering biotech, as well as some high-growth tech names. On a company-specific basis, those weaknesses are identifiable but have not been enough to trigger broader, meaningful corrections.

At the same time, the pace of the housing slowdown and interest rate policies require clarification. With the US 10 year yields at 2.66% (a relatively low range), the market is not suggesting that the economic strength is vibrant. In turn, any doubt about US economic growth is reasonable. Plus, the dollar has not shown any strength. Therefore, investors need to be convinced that economic “strength” is a supportable trend, rather than a stalling trend. The questions will be asked, especially regarding the “taper,” and suspense will linger despite volatility hovering at familiar calm/low levels.

Search for sense

Does supply-demand make sense when markets are tinkered with and simple logic goes out the window? Gold owners have been learning that in the last few years, with prices declining. Is there real demand? Is supply understood? Similar logic (or lack thereof) applies in the patterns of oil prices. In terms of oil prices, one would think price decline is highly possible with US supply expansion and a not-so-vibrant global economy recently. Yet again, the logic of supply-demand is not enough to be a speculator, and certainly, grasping more of the inefficient dynamics is vital. Perhaps, this is a telling point for various markets, from stocks and commodities to interest rates. The irrational nature of markets is normal, and sometimes the prevailing theme or momentum can drive the direction of prices. Thus, logical explanations are not always available in this tricky market.

Rotational game

Any wobbly pattern in US stock markets may trigger interest (or the consideration of shelter) in emerging markets which have shown signs of revival since early February 2014 lows. Certainly, investors have slowly trickled money back into EM funds in recent weeks. Some may argue that short-term recovery from 2013’s underperformance is not quite convincing, but long-term participants continue to favor EM upside potential. The relative-basis argument here simply suggests any pullback in US markets will require rotation into developing markets, and the recent cycle supports that. Equally, some European markets that have underperformed may appeal to those bargain hunters.

Macro puzzle

More than the general emerging market climate, the status of the Chinese economy is a puzzle within itself. On one end, large US corporations view the Chinese market as a great contributor to earnings:

“China has proven to be a strong engine for Apple (AAPL), with its new partner China Mobile (CHL) helping push fiscal Q2 iPhone sales to more than 43 million, far more than expected. The $9.2 billion that China added to Apple's coffers comprised nearly 25% of the company's total quarterly revenue, up 13% from a year earlier. … Starbucks (SBUX) saw net revenues in its China/Asia-Pacific region grow 24% year over year to $265.3 million during its fiscal Q2, driven in part by nearly 700 stores opening over the past year. Comparable store sales were up 7%.” (Investors Business Daily, April 26, 2014)

On the other hand, China’s domestic growth and currency management remains a suspenseful international story. The growth rate of last decade is hard to replicate, and investors are coming to terms with that. Meanwhile, the Yuan continues to weaken. The currency markets are seeing speculation on drivers and partially discovered facts. This Yuan devaluation is hitting new multi-month lows, which will force corporations to hedge currency exposure. Other participants will interpret these as weak economic signs. Surely, this can stir political talk of “currency wars” and intervention, which certainly can stir up a bigger macro debate. Frankly, lesser-known currency-related news might result in a sensitive market reaction.


Article Quotes:

“To be sure, Beijing's willingness to inject itself into the South Sudanese crisis is driven by the simple fact that China buys almost 80 percent of South Sudanese oil exports and has watched with alarm as the current fighting has crippled the country's ability to produce and export oil to customers in Asia. Oil production in both Sudans has dropped from a peak of about 480,000 barrels a day in 2010 to about 160,000 barrels today, and even that last bit is under pressure from rebels in South Sudan, who have ordered international oil companies to pack up and leave as part of a strategy to cut off the main economic lifeline of the South Sudanese government. China may also not have much of a choice. The cease-fire in South Sudan brokered in early 2014 imploded in the last week, with rebels advancing on key cities in oil-producing regions and slaughtering civilians as they went. The political nature of the fighting – which pits Salva Kiir's South Sudanese government forces against rebels led by Riek Machar – has by some accounts descended into an ethnic bloodletting. China has been caught in the middle; a pair of its oil workers were abducted by Machar's forces last week and Chinese oil firms have been told to leave the country. … China's traditional interests in both Sudan and South Sudan, and its newfound interest as a mediator, were on full display in the wake of the attacks. China's foreign ministry on Wednesday ‘strongly condemned’ the killings in Bentiu and called on ‘relevant parties in South Sudan to resolve their issues by pushing forward political dialogue and achieve reconciliation.’ But the ministry also called on South Sudan's government to better protect Chinese oil firms and workers there after the two workers were abducted last week.” (Foreign Policy, April 24, 2014)

“Major organizations that carry out banking activities, but are not banks, may become so important to the financial system that they need to be regulated like traditional banks, a European Central Bank governing council member said on Saturday. Financial regulators are seeking to shine a light on so-called ‘shadow banking,’ a 24-trillion-euro ($33 trillion) industry in Europe – half the world's total – that comprises money market funds, some hedge funds, and firms involved in securities lending and repurchase markets. Such groups borrow and lend like banks, but because they are not banks they often fall outside the remit of regulators. Speaking at the Finnish Social Forum, Erkki Liikanen said there was a risk that tighter banking regulation in the aftermath of the global financial crisis could lead to growth in unregulated shadow banking. If markets then began to expect that shadow banks would have to be bailed out with public funds to prevent a financial sector collapse, the problem would not have not been solved, Liikanen said, adding that authorities were following developments.” (Reuters, April 26, 2014)

Levels: (Prices as of close April 25, 2014)

S&P 500 Index [1863.40] – Numerous hints of stalling; surpassing 1900 has proven to be challenging. Interestingly, the index peaked closer to 1850 to start the year. Although currently above the 50-day moving average, further tests await. Staying above 1880 would restore further confidence.

Crude (Spot) [$100.60] – Buyers’ demand above $105 appears to lose momentum. As usual in recent times, trading is around $100. Early hints suggest that without a noteworthy catalyst, downside pressure is a near-term possibility.

Gold [$1291.50] – The 1280 range is setting the tone as a bottom for optimists of gold prices. Realists are wondering if 1360 is the next critical range.

DXY – US Dollar Index [79.74] – For now, the April 10 lows (79.33) are the benchmark to measure potential future weakness. Trend-shifting moves have not transpired in the last three months.

US 10 Year Treasury Yields [2.66%] – The common range these days is between 2.60-2.80%. The 3% level has proved to be a tough place to reach throughout all of 2014. Interestingly, the 50-day moving average is almost at Friday’s close.






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 | April 7, 2014

“It is the eye of ignorance that assigns a fixed and unchangeable color to every object; beware of this stumbling block.” (Paul Gauguin, 1848-1903)

Some stumbling

Chatter, debate and uproar about market mechanics dominated last week’s financial discussion points. More will follow on this trading maze, and there will be worthwhile debate where more guidance is needed. However, markets of all kinds are trying to examine whether share prices are justified at this junction between all-time highs in US market and the mixed and less-stable emerging market world. Nickel-and-diming strategies on high volume are eventually a regulatory challenge rather than a cyclical or psychological matter. Regardless of how the day-to-day mechanics (some abstract) have transpired, this is and has been a bull market. It has been for a while, with the revival of economic conditions and growth in select industries. Refocusing the attention on bigger issues is in the minds of risk-takers and it has been for weeks. Certainly, inflow to US equity markets has not stopped either, and the expectations for better-than-prior-year returns still persist.

Finding perspective

As a start, the S&P 500 index didn’t reach all-time highs overnight, and the Fed’s message is not reexamined daily. Neither are the labor conditions that have been brewing. In the last few weeks, the market had moments of silent stumbling as highlighted by trading action last Friday. Yet, the current bull market is easily painted as stable, well-established, Fed-driven magic that turned into reality. Of course, that’s one version, and the view of this market run-up depends on the perspective. Investors gaining from appreciation are not too worried about the ifs and whys. Corporate leaders who have averted showcasing real growth might get a bit nervous playing the share buyback and layoff game as a short-term fix for higher share prices. The post-2008 recovery has been fruitful for shareholders, and the buzz felt from the ease of 2013 may linger more than desired by rational seekers. Critical thinking is now required in risk allocation. Against this backdrop, memories of 2000 and 2007 peaks are in the minds of cycle observers who know that bull markets build slowly and sell-0ffs are explosive to take away gains, especially for the latecomers. Yet, many ponder this again and again: Can we have a bubble with not-so-glorious economic recovery, but a roaring stock market?

Near-term dynamics

If the volatility index provides any worthwhile hints, then for now, it mirrors 2013 trends. Basically, calm is the dominant force, despite mild, occasionally worrisome periods. In terms of the “taper,” the decision by the European Central Bank and the pace of an emerging market slowdown, the market is comfortable that issues are known and surprise hasn’t overly crept up. Perhaps, the potential for a meaningful correction lies in the possibility that these “known” or “expected” matters end up being underestimated. Basically, a Fed-driven market is reliant on messaging and the Fed’s leadership, from an unemployment target to inflation status to the definition of “economic growth.” Yet, NASDAQ’s recent action symbolizing momentum and innovative companies tells a story of minor pullbacks as early signs. Since March 7th, the tech and biotech-heavy index is down more than 5%. The question ahead is if buyers are seeing a discounted entry point or declining momentum. The same applies to the Russell 2000 index, which is led by growth-driven companies and, like the NASDAQ, another area with wobbling signs. At least bubble seekers can focus here to see the level of breakdown.

Interestingly, with US momentum names slightly slowing, the EM themes have shown signs of liveliness. It’s unclear if this is a new trend or a short-term rotation. Nonetheless, momentum areas in US markets, especially in tech and biotech, may set the tone for the rest of the sectors. At some point, the health of business fundamentals may re-shift the focus from the interest rate policies that have mesmerized and captured participants’ thinking.

Article Quotes:

“Buybacks are such a common feature of corporate life and the stock markets that it’s easy to forget that they were essentially illegal not too long ago. They are used to manipulate share prices and earnings per share, all in the name of ‘maximizing shareholder value.’ The result has been an explosion of wealth among executives who are typically loaded with stock-based pay and who enjoy the luxury of determining the amounts of the buybacks as well as their timing. As buybacks increased in frequency and value, so did the share of executive pay in the form of stock options and stock awards. The result was a positive feedback loop that enriched all executives and handed a few unimaginable wealth. A new research paper written by William Lazonick of the University of Massachusetts Lowell, which will be presented at the conference of the Institute of New Economic Thinking in Toronto on April 10 to 12, noted that in 2012, the 500 highest-paid executives in the United States received an average pay of $24.4-million (U.S.) – 52 per cent from stock options and 26 per cent from stock awards. ‘The more one delves into the reasons for the huge increase in open-market [share] repurchase since the mid-1980s, the clearer it becomes that the only plausible reason for this mode of resource allocation is that the very executives who make the buyback decisions have much to gain personally through their stock-based pay,’ Mr. Lazonick said. As executive pay soared, workers’ wages stagnated when measured against productivity gains. Between 1948 and 1983, when regulations severely limited the size of buybacks, real compensation per hour and gains in productivity per hour closely tracked one other. That’s no longer the case. In the early 1980s, a significant gap between productivity and wages emerged and kept getting wider. By 2012, the 100-per-cent rise in productivity (partly due to corporate ‘downsizing’) from its level in 1963 was met with a mere 60-per-cent increase in real wages.” (The Globe and Mail, April 4, 2014).

“More than Sino-European relations, though, the unstoppable river may be the flow of Chinese goods around the world. A recent paper for Bruegel, a think-tank, co-written by Jim O’Neill, a former Goldman Sachs economist who coined the term ‘BRIC’ (for the fast-rising economies of Brazil, Russia, India and China), predicts some striking changes. China has already overtaken America as the biggest single trader and will match the EU by 2020. By then, China’s share of global GDP (measured at purchasing-power parity) will also probably surpass the EU’s. Some European countries will lose their share of global trade faster than others. On current trends, by 2020 China will become the biggest single destination for German exports (overtaking France) and the second-biggest for France (displacing Belgium, but still behind Germany). Italy and Germany will export more to emerging and developing markets than to their euro-zone partners (unlike France, Spain, Belgium and the Netherlands). All this raises some big questions. Internationally, it will be ever harder for Europeans to justify their disproportionate seats and voting weights in the IMF and World Bank. That may push some to reconsider the idea of a single seat for the EU or perhaps the euro zone. At home, the implications may be harder still. If European countries trade more with the outside world than with each other, the commitment to a single currency may weaken. Yet diverging trade patterns may also mean that euro-zone countries have to become more integrated to be better prepared to resist asymmetric shocks from external partners.” (The Economist, April 5, 2014).



Levels: (Prices as of close April 4, 2014)

S&P 500 Index [1865] – Another sign of momentum stalling around 1880. Overall, the bullish cycle remains in play as some pullbacks are awaited.

Crude (Spot) [$101.14] – During the last few weeks, a narrow trading range between $98-102. Appears steady at current levels without major directional shift.

Gold [$1284.00] – Since peaking on March 17, 2014, the commodity has dropped more than 7% after making a 15% run since late December 2013. Fair to say, gold is seeking and reaching a normalizing level.

DXY – US Dollar Index [80.42] – March 13 bottom of 79.26 may signal the beginning of new strength in the dollar. Yet, a major move is not quite visible, as witnessed for years.

US 10 Year Treasury Yields [2.72%] – Patterns suggest again that surpassing the 2.80% mark is challenging in the near-term, as the 3% target is long awaited.


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 | March 31, 2014

“Dreams are today's answers to tomorrow's questions.” Edgar Cayce (1877-1945)

Today’s answers

Stock market appreciation in the recent bull run can be attributed to ongoing stock buybacks, increasing dividend payouts and limited investable options. All contribute to lifting the shares of established and more liquid companies making up the major indexes in particular. In reflecting back, this has been a dream-like period for stockholders in US stock indexes. From tech companies to banks, companies are buying back their own shares and in turn shrinking the supply of available shares for investors. Of course, this strengthens the market perception and the reward appeases existing investors – a critical supply-demand factor for those seeking exposure to US equities. Clearly, rewarding investors appears more critical than growing businesses and earning potential for the next 5-10 years. That’s the central debate, as investors will be asking these “tomorrow’s questions” very soon, with earnings season approaching.

“Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares—a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.” (Wall Street Journal, March 21, 2014).

As for matters related to labor growth, bank-lending expansion, sustainable earnings and more capital expenditure, this all presents a different story. Perhaps, real economic barometers have been dull and not an overly stellar trend relative to a flamboyant stock market that continued to register all-time highs. There is a severe disconnect between fulfilling shareholders’ desires and those seeking creation of long-term value and economic strength. Perhaps, this is a conflicting reality that always existed but is more pronounced at this junction. So, as the first quarter draws to an end, the run-up in share prices and the pace of economic growth are questioned equally. Are banks now going to lend? Is there more momentum left for further economic growth? Are public policy uncertainties less of an unknown?

Inflection point

At the start of the year, value seekers were viewing beaten up assets that underperformed in 2013 and a full-blown sell-off took place. Among the notable areas that were deeply discounted and mostly disliked were gold and key emerging market areas. Interestingly, gold’s behavior since the Fed’s taper announcement has been telling in the near-term, in which a higher rate and the end of QE makes the gold story less thrilling. Meanwhile, the EM landscape is not only a bargain-hunting exercise, but an area where value investors with limited investment options may continue to bet on a noteworthy recovery. Interestingly, the EM index was up 4% last week, showcasing very early revival from low ranges. The pace of outflow is slowing.

“Funds that specialize in emerging market stocks, meanwhile, posted just $43 million in outflows, marking their smallest outflows in 22 weeks.” (Reuters, March 28, 2014)

Yet, to claim a rotation out of developed markets into EM is premature for now (as there is no concrete evidence yet). But opportunities are opening up for those looking to exploit speculative risk-reward setups.

Cycles viewpoint

Seven years ago, the market was robust and thriving ahead of the 2008 crisis. Some similarities to 2007 are commonly pointed out by pundits, mainly in how risky assets have recovered and recouped last cycle’s losses. Certainly, key indexes demonstrate that point at which housing has climbed back, and volatility has stayed calm as risky assets flourish. One can argue these trends are a restoration of stability. If so, what stage of “stability” are we currently in? The seven-year cycle may have a magic meaning/offer a clue, or simply be a coincidence without substance. At least, it serves as a historical reminder that’s not worth dismissing. Surely, these factors will end up playing a role in mind games of decision making for risk takers. Data points resembling the pre-crisis behavior are worth tracking as we approach this wobbly period. Here is one example:

“For all the warnings from the Federal Reserve over excessive risk-taking as loan growth soars to levels last seen just before the crisis, bankers still have 10 trillion reasons to lend. That’s the dollar amount that banks hold in deposits in the U.S., which exceeded the value of all loans by a record $2.5 trillion last month. Banks are amassing more cash even as lending to U.S. companies this quarter is poised to increase by the most since 2007, according to data compiled by the Fed.” (Bloomberg, March 28, 2014).

Momentum names (social media, biotech, etc.) have showed signs of slowing, but not at a pace to trigger notable sell-offs. The S&P 500 index pattern is stalling at current levels. Surely, the recent week’s actions suggest markets are a bit wobbly where a breather is much needed, like earlier in the year. The bullish bias has been resilient, as the Fed-supported and Fed-guided messaging has led to the joy of shareholders of US companies. Unaddressed economic concerns have accumulated; therefore, triggers of “bad news” are plenty and should not be overly shocking to most in-tune observers. Timing is unpredictable, but cyclical hints are profound and awareness of the current junction is essential in managing risky assets. For now, reexamining the thought that markets are “invincible” is as valuable as speculating on the next macro-driven event.

Article Quotes:

“Like other parts of the US economic recovery — housing, the labour market — capital expenditures by companies have been a letdown recently, even accounting for the weather. The latest example came in Wednesday’s durable goods report, in which the ‘nondefense capital goods orders excluding aircraft’ component fell. (That figure is a proxy and obviously doesn’t capture everything that normally counts as capex, which also includes investment in property and structures, imported capital goods, and certain intangible assets. Capex is often poorly or loosely defined in discussions about it.) But capex has been disappointing for more than a year. The growth rate of investment in both equipment and structures declined last year after a strong 2012, which economists credit partly to a one-off tax incentive that pulled investment forward in time. Equipment spending rebounded quickly after the recession ended in 2009, but its year-on-year growth rate has fallen in every year since 2010. (See page 13 of the revised Q4 GDP release.) The good news here is that it climbed an annualised 10.9 per cent in Q4, the best quarterly growth rate since the third quarter of 2011. Investment in structures has been more volatile, declining much more than equipment spending during the downturn and showing sings of healthy growth only in 2012, before rising just 1.2 per cent last year. The category declined slightly in the fourth quarter.” (Financial Times, March 28, 2014)



“The word dollar didn’t even come up. ‘The volume of transactions that can be carried out in the Chinese currency in international and German financial centers is not commensurate with China’s importance in the global economy,’ the Bundesbank explained in its dry manner on Friday in Berlin, after signing a memorandum of understanding with the People’s Bank of China. President Xi Jinping and Chancellor Angela Merkel were looking on. It was serious business. Everyone knew what this was about. No one had to say it. The agreement spelled out how the two central banks would cooperate on the clearing and settlement of payments denominated in renminbi – to get away from the dollar’s hegemony as payments currency and as reserve currency. This wasn’t an agreement between China and a paper-shuffling financial center like Luxembourg or London, which are working on similar deals, but between two of the world’s largest exporters with a bilateral trade of nearly $200 billion in 2013. German corporations have invested heavily in China over the last 15 years. And recently, Chinese corporations, many of them at least partially state-owned, have started plowing their new money into Germany. This ‘renminbi clearing solution’ – the actual mechanism, clearing bank or clearing house, hasn’t been decided yet – will be an important step for China to internationalize the renminbi and ditch its reliance on the dollar. It will be located in Frankfurt; that the city is ‘home to two central banks,’ Bundesbank Executive Board Member Joachim Nagel pointed out, made it ‘a particularly suitable location.’ As a world payments currency, the renminbi is still minuscule but growing in leaps and bounds: in February, customer initiated and institutional payments, inbound and outbound, denominated in RMB accounted for only 1.42% of all traffic, but it set a new record, according to SWIFT, the NSA-infiltrated, member-owned cooperative that connects over 10,000 banks, corporations, the NSA, and other intelligence agencies around the world.” (Wolf Richter, March 29, 2014)

Levels: (Prices as of close March 28, 2014)

S&P 500 Index [1857.62] – Any movement closer to or below 1850 will trigger noteworthy clues. At this point, buyers’ conviction is being tested with a narrow range of 1845-1875.

Crude (Spot) [$101.67] – Again revisiting the $100-102 level. Increasing hints of bottoming at $98. The 200-day moving average remains at $100. The next key target is the annual high of $105.22 (set on March 3).

Gold [$1296.00] – Sharp decline since March 17, around the time of the Fed’s message regarding rate expectations. Now below 200- and 50-day moving averages, which can trigger some selling pressure. The break below $1320 may have been meaningful in terms of the stalling momentum.

DXY – US Dollar Index [80.10] – For now, the annual lows of March 13 (79.29) appear to be a bottom for the dollar index. Yet this familiar level is hardly a major turning point for now.

US 10 Year Treasury Yields [2.72%] – Surpassing 2.80% has been a challenge in recent attempts. Reaching 3% seems ambitious based on recent behaviors, while breaking below 2.56% would amaze most following the taper/post QE discussion. It is amazing that the 50-day and 200-day moving averages are not far from the current closing price.





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 | March 24, 2014

“Political chaos is connected with the decay of language ... one can probably bring about some improvement by starting at the verbal end.” (George Orwell, 1903-1950)

Convergence

Plenty has been mentioned about the varying path between the real economy and financial markets. Perhaps, markets are debating corporate earnings trends versus the health of an economy from the ground level. Too often, misleading messaging is heard when talking about stock indexes and other wellbeing barometers measuring labor or wage growth. Equally, the health and sustainability of large corporations in developed market versus mid-sized to small business in all markets has a unique, not-so-clear path as well.

At the same time, the mid-sized to small business concerns are intertwined with the level of consumer spending, regulatory changes and policy-driven variables affecting overall confidence. Surely, this is a junction where financial markets and economies would be expected to come to an agreement and narrow some of the disconnect that’s persisted for a long while. For now, the recovering/sluggish economy and the roaring stock market tell one story. Surely, low interest rates have benefited larger corporate earnings and have been less influential in other areas. Yet, consumer spending and confidence is felt enough by large and smaller companies; therefore, how it impacts businesses might provide a better perspective. A convergence between larger firms and the real economy can demonstrate the real status of growth a few years after the last crisis. Maybe this can unlock the mystery, apart from financial tricks and a game of exceeding expectations.

Fragility

Meanwhile, financial markets are grappling and anticipating US interest rate hikes, ECB policies toward low rates and a shift in sentiment toward various economies. In recent decades, the collective pursuit of capital united the interests of leaders in emerging and developed markets. Overall, a perceived “peaceful” period in the last two decades has encouraged and emphasized borderless capital and risk allocation. Globalization swept away the mindset, expanded the real economy and synchronized most parts of financial markets. Now, fragility remains visible in these deeply interconnected markets.

“A world in which countries like Russia are doing things like they are in Crimea is one in which capital which ventures abroad is going to be more cautious. More cautious capital requires higher returns to entice it. Russia particularly is going to get hit by this, but there is a good chance it applies generally to emerging markets. Russia’s aggression in Crimea doesn’t just undermine this by itself, it does so through the very timid response it has thus far generated internationally. German interests seem inclined to block sanctions based on energy, while British ones seem wary of anything, such as seizure of the Russian elite’s assets abroad, which might threaten London’s banking franchise.” (IFR, March 23, 2014)

Additionally, last year showcased some EM nations’ failure to sustain growth – Turkey and Brazil being examples of social, political and economic weakness that attack in waves. Equally, China is too vital and interconnected to many economies, and softening data (PMI numbers over the weekend) creates some suspense and more unease. Surely, the Chinese slowdown or perception of a slowdown has big implications, and markets are anxiously watching. The Eurozone solution requires commonality and it presents its own challenges, as documented in the post-2008 crisis. Yet, the overwhelming shift toward developed markets such as US markets illustrates the ongoing search for safety. However, even broad US indexes are becoming more crowded with more questions asked. Justifying future potential with high predictability is challenging corporate leaders, central bankers and asset managers alike.

Next move – contemplation

The multi-year rally results in the S&P 500 index trading near or at all-time high levels, which is now all too familiar – even tiresome on some levels. There is a sense of comfort that a rate hike is not a near-term event and escalating turbulence is not overly feared, either. Thus, participants are virtually re-evaluating similar patterns that were witnessed early in the year, last fall and last summer. What has changed in the dynamics besides time? Perhaps, some growth and high beta sectors like biotech, tech and retail are susceptible to pullbacks as investors evaluate stretched valuations. At the same time, banks did well after the Fed’s comments on rate outlook. In addition, banks overwhelmingly met the capital hurdle requirements set by the Fed. Although positive and negative stories persist, overall corporate earning concerns may soon be reflected more in day-to-day market movements. Plus, geopolitical behaviors are sensitive to western corporate interests. For now, the general assumption is that matters are contained. If not, a true test waits for the conviction level of risk takers.

Amazingly, the concerns over Fed policy or Ukrainian implications continue to showcase that fear is short-lived. Thus, long-term holders who accept the risk may not be overly compelled to trim or exit exposure to US equities. Bargain hunters who looked into Europe last year might handpick select emerging and frontier market opportunities. However, the list of shrugged-off issues is accumulating, especially in developing markets. In some ways, it is daring to ride the current wave as much as betting against it.

Article Quotes:

“Some of the developing world’s larger countries, flush with capital after being recognized by investors as ‘emerging-market economies’ (EMEs), have been pursuing policies with little regard for the lessons of the financial crises of 1997-1998 and 2008-2009. As a result, countries like India, Brazil, South Africa, and Indonesia have been hit by the US Federal Reserve’s gradual exit from so-called quantitative easing (QE) – not just capital-flow reversals, but also a sharp decline in domestic asset prices. Various developments last year raised expectations that the Fed would begin to taper its $85 billion-per-month open-ended bond-buying program sooner rather than later. This drove up US government-bond yields, and reduced the appeal of higher-yielding EME currencies. As a result, several EME currencies, from the Indian rupee to the Turkish lira, declined sharply. Moreover, some EMEs have experienced financial-market disruptions and slowing economic growth. Such developments often lead to perverse economic behavior, as rumors and pessimistic predictions become self-fulfilling. Typically, after international investors ‘discover’ an EME, it receives massive – but easily reversible – capital inflows. The influx of cash fuels domestic asset-price bubbles and booms in related sectors of the real economy, pushing up the real exchange rate and, in turn, weakening incentives for domestic producers. This drives investors to put even more of their money in non-tradable sectors, such as construction and real estate. The growing current-account deficit is largely ignored, as long as capital inflows continue to cover it and economic growth remains strong. Short-lived market rallies make matters worse, frequently inducing further unfounded exuberance. And when officials recognize the problem, hurriedly announced policy measures, such as capital controls, are usually too little too late, and can have adverse effects in the short term.” (Project Syndicate, March 14, 2014)

“U.S. population growth had been around 1.20% per year post-1980, though it has slowed to a current level closer to 0.70% more recently, as the Baby Boomer generation passes on and both immigration and birth rates slow. If high debt levels in the U.S. are associated with 1% less GDP growth, perhaps half of this 1% drop in economic growth rates will coincide with the 0.5% drop in population growth rates. The drop in population growth could exacerbate the decline in GDP growth unless productivity fills the gap. As we noted in a related series, productivity growth rates are also falling with population growth rates, which is a very disturbing trend. On the other hand, perhaps Rogoff and Reinhart data surrounding high debt or low growth account for an associated decline in population growth. The challenge is that if investment is crowded out due to excess consumption and government spending or taxation in a high debt environment, investment-related productivity growth could slow—resulting in declining standards of living and consumption. In other words, too much consumption and too much debt could lead to real lower growth rates going forward. A shrinking labor pool equipped with greater productivity can mitigate some of these negative effects of excess consumption and high levels of debt. However, if current levels of consumption are crowding out investment in productivity growth, the U.S. economy could be facing a lower growth rate in a slower growing labor pool that has an even lower rate of productivity growth. That means slower GDP growth rates going forward, as well as declining purchasing power for the U.S. consumer. (Market Realist, March 20, 2014)





Levels: (Prices as of close March 21, 2014)

S&P 500 Index [1866.52] – Recent move above 1840 marked a new upside territory for this bullish run. Similarly, the 50-day moving average is 1832 and will be watched closely.

Crude (Spot) [$99.46] – As witnessed in the past few weeks, prices are attempting to hold above $98, while signs of a pause are visible. The 200-day moving average is around $100, which is a hurdle commonly mentioned and tracked.

Gold [$1327.00] – Signs of retracement after reaching a peak of $1385.00 (March 17, 2014). A move below $1300 can trigger further responses of slowing momentum. Long-term buyers are still exploring a recovery at this pricing range.

DXY – US Dollar Index [80.10] – Early pause to the recent downside move that has persisted since late January 2014. A turnaround for a strengthening dollar is expected in the near-term and closely linked with reactions regarding interest rate policies.

US 10 Year Treasury Yields [2.74%] –On three occasions this year, the market has signaled that the 2.56-2.60% range is a sort of a bottom. Perhaps, this is a hint that’s developing, as the retest to 3% is the next landmark move.








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 | March 17, 2014

“Time crumbles things; everything grows old under the power of Time and is forgotten through the lapse of Time.” Aristotle (384 BC-322 BC)

Silently crumbling?

Turbulence is reawakening a bit within the existing positive momentum that has formed a stable US financial market. Of course, hints of a trend shift are brewing more and more as perceived risk is being evaluated in developed markets. From the pending FOMC meeting to several EM nations increasing interest rates, the landscape is mildly changing. Similarly, pending responses to technical indicators as well as reshuffling of capital into new themes can trigger new thoughts. Plus, ongoing data will continue to seep through the investor mindset. How to perceive risk will be revealed further and the bulls’ confidence level will be tested – yet again. The status-quo approach is overly comfortable for those betting on rising stocks and low rates. However, the danger of being flatfooted ahead of turbulence begs the question of how to prepare for the next move.

The volatility index has not and is not signaling absolute panic, and previously, false signals have prematurely called for short-lived sell-offs. Thus, naysayers to this bullish run have had shaken confidence in recent trading action, where “bad news” has been deferred or deemed a non-forceful catalyst. Uncertainty of macro and micro concerns is calmly digested, and a collective rush to exit is not quite justified by mainstream investors. One part of the puzzle is deciphering the pace of economic and corporate growth, which offers plenty of tricks and data points to ponder. Perhaps, the market has a mind of its own, living and moving at its own pace.

Meanwhile, deflation and disinflation concerns are brewing in developed markets. In fact, the deflation debate has reached beyond speculation, but rather has become a reality that’s come to the forefront in Europe:

“Europe's headline price data understate the full deflation risk. Eurostat's HICP index ‘at constant taxes’ – stripping out the one-off effects of austerity – shows that 23 of the EU's 28 countries have seen a fall in prices over the past seven months.” (The Telegraph, March 12, 2014).

Big-picture parts

The macro-climate is awakening to the realization that post-crisis matters have stability, but long-term issues persist with a slowing global climate. In the recovery mode, optimism was restored and volatility significantly reduced, and soon, coping with unknown risk measurement was the ultimate test for portfolio managers. As usual, risk aversion, leading into more established currencies and commodities, is worth tracking. Thus far, hard assets have risen in 2014 and there are early signs of rotation into safe/established assets, given ongoing emerging market political and financial turmoil.

Meanwhile, China’s slowing growth is a topic that’s been murmured about, but its impact on the developed market is still being understood. Plus, the recent announcement of a wider trading band for the Yuan over the weekend, although anticipated, suggests more fluctuation in currency markets. The reaction is causing some suspense as to how traders would react in the near-term toward weaker Chinese currency and impact on global stocks. Surely, policy changes like this can be historic and transitions can cause some mild disruptions. Nonetheless, this is a new dynamic to the currency market and the impact on Chinese stocks is yet to be determined. The Chinese index (FXI) has remained cheap relative to US markets, and now the currency policy may serve as a catalyst to spark a response.

New cycle

The instrumental factor that’s driven market appreciation is low interest rate policies, and certainly that has impacted how investors demanded higher-yielding assets.

“Our results show that, in emerging markets, issuance would have been significantly lower without QE since 2009. A counterfactual analysis shows that issuance without QE would have been broadly half of the actual issuance since 2009, with the gap increasing in late 2012. In advanced economies, the impact of QE was less strong and concentrated in early 2009, mainly as a reflection of the MBS rather than Treasury purchases.” (ECB, Global Corporate Bond Issuance, March 2014).

The taper era remains a wildcard from a period where risk-taking has been encouraged and rewarded. How this will change has been asked but not answered. Again, the US 10 year Treasury yield is below 3%, the stock market is near all-time highs and EMs are less stable; these are the known themes. We are in more or less a vulnerable stage of this cycle, as assets are not valued cheaply. How will this shape up in the next 1-2 years? Which moves first: Either rates up and stocks down or otherwise? Mapping out a plan on interest rates and asset prices is challenging risk managers. Clearly, the disconnect between the real economy and the stock market is dangerous (despite crafty explanations) and the warning has been felt but not always heard. The messaging of the Fed or the response to the Fed’s message is clearly a vital sign where an inflection point can be felt. Already, the S&P 500 index showed signs of cracking in January. Thus, a repeat of price retreat is not far fetched. Catalysts are plenty for bigger moves, especially in the early stages of the taper era. The question is timing, and with limited ideas, risky assets serve a purpose and eager investors desire risk. Balancing the need for returns versus unmasked realities is the art for money managers.




Article Quotes:

“Major US banks are running away from lending to highly leveraged buyouts, industry statistics show. Bank of America, JPMorgan Chase, Wells Fargo and Citigroup have all fallen far down the list of top LBO lenders in 2014 after regulators pressed changes that would have made such loans more expensive. Stepping away from such business will surely crimp profits and is one example of how new regulations are forcing changes to the banking sector. BofA earned roughly $140 million in 2013 from financing new LBOs, sources said. The banks, which were all among the top 11 LBO lenders in 2011 to 2013, could do no better than No. 18 in 2014, according to Thomson Reuters LPC statistics shared exclusively with The Post. The change comes after the Office of the Comptroller of the Currency (OCC) stepped up a campaign last year against such highly leveraged buyout financing. The OCC and the Federal Reserve in the fall told the major banks if they funded new LBOs that had greater than six times debt-to-earnings before interest, taxes, depreciation and amortization (Ebitda) ratios, they would have to consider them non-conforming loans and hold more cash against them, sources said.” (New York Post, March 13, 2014)

“Skilled immigration is of great importance to the US, representing 16% of US workers with a bachelor’s degree, and 29% of the growth of this labour force over the period 1995-2008. Presently, proponents for increased skilled immigration argue that it supports economic growth, and some have gone so far as to say that the alternative would be paramount to ‘national suicide.’ Opponents believe skilled immigration is already too high and hurts the outcomes of citizen workers. In particular, Bill Gates has stated that Microsoft hires four additional employees to support each skilled worker brought into the US through the H-1B visa program. Matloff (2003) instead argues that US companies use skilled immigrants to displace older citizen workers that have higher salaries. Our research proposes a more subtle relationship than that suggested in the public discourse on immigration or from more aggregate models of international worker flows. We study the way in which the hiring of skilled immigrants affects the employment structures of US firms using employer-employee data from the US. While OLS and IV specifications find increases in total skilled employment by the firm with increases in skilled immigrant employment, we find evidence that employment expansion is greater for younger natives than their older counterparts.” (VOX, March 16, 2014)




Levels: (Prices as of close March 14, 2014)

S&P 500 Index [1841.13] – Very optimistic observers are wondering if 1900 wasn’t reached due to a momentum slowdown. Yet, for the upcoming week, holding above 1840 can trigger restoration of the ongoing bullish run. Notably, the January 15 highs of 1850.84 might have suggested a vital hint during the early sell-off this year.

Crude (Spot) [$98.89] – March 3 highs of $105.22 marked a peak in the recent run. The 200-day moving average sits at the all-too-familiar $100 range. Therefore, staying above $100 will be retested; if not, negative momentum might continue to build for months ahead.

Gold [$1368.75] – Since late December, the commodity is up nearly 15%, which suggests a recovery run after a weak 2013 performance. The next noteworthy target is $1400 (or $1419.50), which was a key resistance point in September 2013.

DXY – US Dollar Index [79.44] – The downtrend is intact, as new lows have been achieved consecutively in recent weeks. The next noteworthy low is not far removed. It stands at 78.91, which was set in February of last year.

US 10 Year Treasury Yields [2.65%] – Annual lows of 2.56% were reached on February 3, 2014. Yet, surpassing 2.80% remains a challenge, suggesting a weak growth environment. Annual highs of 3.05% appear further away now, given analysts’ expectations of rising yields. Interestingly, the 200-day moving average stands at 2.67%, which is in line with Friday’s close.


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 | March 10, 2014

“Do not quench your inspiration and your imagination; do not become the slave of your model.” Vincent van Gogh (1853-1890)

Strength established

Analysts these days are torn between pointing out worrying factors for the next market movement versus praising the already known powerful bull market. Typically, when indexes reach all-time highs, the technical/chart observers will point out that the bullish run faces no resistance ahead. Junctions like this invite the common thought of “unlimited” upside potential and reawaken the sideline capital that’s been overly skeptical. Capital inflow into US markets is quite evident:

“The inflows into stock funds in the week ended March 5 marked the fourth straight week of new cash into the funds. Funds that specialize in U.S. stocks attracted $8.9 billion of the net inflows, marking their biggest inflows since late December.” (Reuters. March 6, 2014)

Equally, this sentiment comforts those adding on to further risk and participating in the upside momentum of this five-year bullish run. Importantly, in 2013, the S&P 500 index registered all-time highs on numerous occasions. Therefore, the mention of record highs at this point is hardly news or alarming for observers. This is dangerous in some ways, when price appreciation has a numbing effect as markets again march to their own rhythm. Even the Eurozone is viewed as recovering or calming down, yet the banks’ exposure to debt is worth tracking:

“Banks in the region [Eurozone] now hold about €1.75trn in government debt, equivalent to 5.7% of their assets and the highest relative exposure since 2006, according to European Central Bank data. In Italy and Spain, roughly one in every 10 euros in the entire banking system is now on loan to governments.” now on loan to governments.” (IFR, March 8, 2014).

Surely, bargain hunters in undervalued European assets might seek select investments, but overall, the crisis concerns have not fully evaporated. At least, risk reduction is not an overnight exercise as risk-takers test their luck.

Since September 2010, developed markets have performed very well versus emerging markets, and this has been highly discussed in recent periods. A massive investor exit from emerging markets is more profound given multiple weeks of consecutive capital outflow. Forward-thinking observers are facing a dilemma, asking: Does one buy emerging markets that are out of favor and relatively cheap? Or does one chase the momentum of what’s been proving to work – US equities? Both are equally challenging to answer, but it’s fair to say that EM is more of a bargain these days, and the risk-reward appropriately reflects that.

Misaligned perspectives

The dollar is now reaching a five-month low, which is a noteworthy macro theme. A weak dollar has helped US exporters further, as seen in prior years. Ongoing cost-cutting methods by corporations have led to some adjustments, which in turn leads to softening economic growth. The interest of shareholders (maximizing stockholders’ value) is naturally not always quite aligned with those seeking economic growth. Thus, the further demise of the real economy is not a topic that’s endearing to capital allocators and risk managers.

Unemployment data has its own trickery, interest rate policy comes with its own self-serving messaging purpose and the stock market reflects shareholders’ perceived value. Thus, finding the truth amidst conflicting events and trends is mind numbing to those not looking to deeply speculate on unfolding events. Settling for the simple and clear explanation of low rates and higher risk tolerance continues to convince plenty.

Basics examined

Investors continue to examine: a) Are prices relatively cheap enough? b) Does the upside offer promising returns? Investors in equities in the US contemplate this as we head into another week. As basic as this sounds, answers to these questions remain the fundamental driver in a market that is rational. In other words, if one is seeking value at bargain prices, then not too many ideas are available outside of stock-specific investments. Similarly, if one is looking for distressed assets, then the best bet appears to be waiting for the next crisis (or heavy price adjustment). Patience is required here, as assets have collectively risen in the post-2008 period. Surely, there is scarcity of ideas, especially for investors looking to deploy large capital. Equally, as the markets have long realized, there are limited safe and liquid assets that can produce yields. A game of limited options for big capital forces creates a point where capital is invested based on relative options rather than stellar fundamentals. That being said, shocks have been averted, as “safer” assets are being redefined. Importantly, signs of irrational behaviors are seeping through and markets are creating their own realities. At some point, the basic questions will be asked, but for now, some realities are conveniently deferred.

Article Quotes:

“This year Western firms’ giant bet on the emerging world will come under more scrutiny. Most multinationals are far more profitable in emerging markets than Vodafone. American firms made a 12% return on equity in 2012, roughly in line with their global average. But having grown fast, profits are now falling in dollar terms. There has been a long bout of share-price underperformance as investors have lost their euphoria. An index run by Stoxx, a data firm, of Western firms with high emerging-market exposures has lagged the broader S&P 500 index by about 40% over three years. And the recovery in the rich world will mean there will be more competition for resources within firms. All this will bring strategic questions into sharp relief. Divisional chiefs from Brazil or Asia will no longer get a blank cheque from their boards. Although the average company has prospered, there have been disasters; plenty of firms and some whole industries need a rethink. The emerging-market rush may end up like a giant version of the first internet boom 15 years ago. The broad thrust was right but some big mistakes were made. The companies suffering a slowdown in profits come in three buckets. Consumer firms including Coca-Cola, Nestlé, Unilever and Procter & Gamble have suffered a gentle weakening in demand and a currency drag.” (The Economist, March 8, 2014)

“On March 5, during an annual meeting of its legislature, Beijing announced that it is increasing its military budget by 12.2 percent, to a total of $131.6 billion in 2014. While still less than a third of the $496 billion that Defense Secretary Chuck Hagel proposed in February for the U.S. military in 2015, it still represents a significant expansion, even after two decades of double-digit growth in the PLA's [People’s Liberation Army] official budget. But few doubt that the grand total allocated to China's military is yet higher, and many in the U.S. government wish they had more insight into the method to the darkness surrounding the PLA. There is general consensus that China, like many nations, spends more on its military than it reports: In February, the U.S. Defense Intelligence Agency said that China's military budget reached $240 billion in 2013, according to Bloomberg. As the most salient data point of China's military, Beijing's official budget gets a lot of attention. And that's largely because there's little other information that comes with it. ‘The single number, without any accompanying detail, represents the sum total of public transparency by the world's second-largest defence spender and the fastest rising military power, pored over by intelligence agencies and military experts from around the world in an effort to glean any clues about China's future strategic intentions,’ reported the Financial Times.” (Foreign Policy, March 7, 2014)

Levels: (Prices as of close March 7, 2014)

S&P 500 Index [1878.04] – Reached all-time intra-day highs of 1883.47, which will serve as a very near-term barometer. The bullish run has been confirmed, especially in the recent move above 1840.

Crude (Spot) [$102.58] – Barely moved relative to prior week. Prices seem stuck in the $100-105 range. Buyers and sellers are reconsidering the recent moves and reassessing whether prices are justified, given supply output in recent months.

Gold [$1345.25] –Nearly a 13% rise since the lows late last year. The first wave of a recovery bounce is materializing. The second wave of recovery is being questioned in terms of further momentum to get near or past $1400.

DXY – US Dollar Index [79.69] – Most of February witnessed a decline in the dollar. This is a common trend, but a move below 80 triggers some questions about a pending trend in the near-term.

US 10 Year Treasury Yields [2.78%] – Impressive move back to the 50-day moving average (2.78%). Showcases signs of recovery in economic data. Reaching 3% is the ultimate test that can set the tone for the first half of 2014.



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 | March 3, 2014

“Thoughts are forces.” Ralph Waldo Trine (1866-1958)

Forces behind resilience

Throughout the last 12 months or so, moments of edginess have persisted but failed to materialize into an actual major sell-off. In fact, hindsight shows that the momentum of markets is a force that marches to its own rhythm in digesting the importance of key events. As long as participants have a “thought” that the prevailing theme supports risk-taking, then stock market rallies remain, like a self-fulfilling prophecy. Of course, improving signals of economic strength or corporate earnings are needed to fuel a rally. In some cases, glimpses of improvement have been hinted at in the last five years when tracking government data at face value. Certainly, the low point of 2008 and early 2009 still serves as a benchmark and a worst-case scenario. At this stage, one has to wonder about whether the numerous occasions may have signaled looming troubles but been misleading, too. Amazingly, a few concerns have come and gone as stock markets approach new highs:

1) Disconnect between the pace of real economic growth and stock market appreciation
2) Geopolitical events and socio-economic-driven tensions across various established and emerging nations
3) Emerging market growth slowdown, capital outflows and a few currency crises
4) Uncertainty around taper discussions and QE plan changes
5) Questionable sustainability of high corporate profits
6) US government dysfunction, including a period of shutdown
7) Regulatory risk associated with banks and increased regulatory cost for various industries
8) Shifting sentiment toward business leaders and excessive skepticism of past business models

Drumming to its own beat

Despite all these day-to-day issues related to the topics above, the US broad indexes live in their own reality and at their own pace of creating value for shareholders. Also, everyone has his or her own perception and interpretation of what transpires. Perhaps, the wise have agreed that limited investment options and a limited number of shares in larger companies end up contributing to the ongoing run of record highs. Not many markets, currencies or ideas are deemed as safe or relatively attractive as the US markets. Sure, that’s been true for a long while. Capital outflow from developing nations and into US assets further illustrates investors’ perception. Political and international antics aside, the markets know how to puzzle participants, or maybe broad indexes are unfazed by unfolding events, surprising observers plenty. Driven by illusion or not, the basis for market movements so far has been diffused or misunderstood. In some cases, expectations are so low that outperforming (i.e. earnings) has become a justifiable “reality.”

Surely, retirement accounts and pension funds have recouped pre-crisis losses, and the optimism has become a force that’s a bit beyond reason but in line for experts. Toppling this bullish run has been categorized as a dangerous activity, and fighting the Fed is seen as an intimidating act against the status quo. Yet, a new month is here, and the tiresome argument of invincibility is not enough to deflect and ignore all the pressures to this cyclical run. Risk managers are not in a position to rewrite the definition of risk, but rather confront the risky conditions of a market that has promoted and rewarded risky assets. Amazingly, the doubters of turbulence are now armed with historical performance as their biggest evidence, and that in itself is known to spark trouble ahead.

Brewing catalysts

Unfolding events in the Ukraine saga will impact energy prices, specifically in crude and natural gas. Clearly, gas has big implications for EU, and Russian gas supply and markets will begin to track this, at least in commodities. Plus, international oil companies that have signed deals in Ukraine might feel some impact on revenues. Whether this will serve as a catalyst for risk-aversion broadly is questionable for now, as the political jabbing continues to make noise. As stated above, a lot of crisis events have come and gone unnoticed or without being harmful to this lively script favoring US equities. However, the looming and accumulating factors in the recent saga over energy and strategic global powers can stir some sense of unease. Of course, lack of stability hurts both EU and Russia, where sensitivity is high in this inter-connected world. Not to mention, capital outflow from BRIC nations has been a sensitive theme itself, especially in 2013. Even this year, the trend continues:

“Withdrawals from U.S.-based ETFs investing in emerging-market equities and bonds totaled $11.3 billion this year, already surpassing the redemption of $8.8 billion for the whole of 2013, according to data compiled by Bloomberg.” (Bloomberg, February 27, 2014).

Equally, Chinese bubble talks are brewing on the side as well, given low PMI manufacturing data. Therefore, the slow economic growth environment can stir agitating responses and reactions. A complacent market may not be ready to grasp the overnight panic-like responses. The tricky part is not relying on the history of the last five years as indicative of the next five months.

In terms of US markets, a few innovative areas such as technology and biotech have witnessed massive runs, especially in smaller and growth-driven companies. The run-ups here have been explosive, based on charts and technical observations. If a pullback awaits, these high-performing areas appear vulnerable where the money can exit quickly, as seen in a few emerging market countries (i.e. Turkey). Perhaps, the catalysts are adding up, a breather is needed and a reality check like earlier in the year awaits. March historically has produced periods of sell-off, and last week’s GDP numbers did not excite the optimists. Thus, the reasons for a sell-off were never scarce before, but now genuine optimism seems harder to find for seekers. Even bargain hunters may decide to wait before deploying capital to new ideas.

Article Quotes:

“The recent volatility in the offshore renminbi exchange rate has turned the spotlight on to a little-followed corner of the derivatives market that may have attracted the attention of China’s central bank. A persistent weakening of the PBOC’s onshore reference rate has been amplified in the offshore market, where the spot rate for renminbi, or CNH, slid on Wednesday afternoon to 6.113 against the US dollar, a 1.29% drop in just six trading days from 6.034 on February 18. It is the largest fall in the spot CNH rate since it was first quoted in mid-2011. Analysts believe the apparent intervention of the Chinese central bank in the currency market was designed to show that the currency could go down as well as up, but it has had the biggest impact on investors holding unhedged currency derivatives as a leveraged bet on future appreciation. Speculators piled into the trade as the CNH spot rate gained 4% against the dollar on an annualised basis in the fourth quarter last year. Deutsche Bank estimates the total of offshore renminbi structured forwards traded so far this year is already close to US$100bn, about 40% of the US$250bn traded in the whole of last year. Market observers believe the PBOC has deliberately introduced volatility to the currency market as part of larger plan to increase the market’s role in setting prices.” (IFR, March 1, 2014)

“Eurozone policymakers are struggling simultaneously to strengthen the balance sheets of banks and governments, but each is dragging down the other: banks facing large loan losses are increasing their already outsize exposure to eurozone sovereign debt, which falls in value as fears rise that the governments will be called on to bail them out. Each is therefore weakened by financial exposure to the other. One of the chief economic challenges facing the eurozone is that action taken by the ECB to stimulate lending to the private sector is being rendered ineffective by the weak condition of the banking sector. Cheaper ECB borrowing rates for banks have encouraged them to lend more to their governments, but not to businesses and consumers. Particularly in Italy, Spain, Portugal, and Greece, the ECB is now largely powerless to lower the interest rates that matter most to economic growth. European banks have been trying to repair their balance sheets by raising capital, but uncertainty over the quality of the assets they hold makes such capital expensive. Many eurozone bank stocks trade at less than book value, which means that investors believe the banks are overstating the value of their assets. Rather than raise capital, therefore, banks have resorted to cutting back on their lending. This further weakens the eurozone economy by reducing the supply of credit available to the private sector.” (Council of Foreign Relation, March 3, 2014)


Levels: (Prices as of close February 28, 2014)

S&P 500 Index [1859.45] – Continuing to make a bullish run. Showing signs of holding above 1800, but the sustainability of this momentum is showcasing resilience.

Crude (Spot) [$102.59] – In the last eight months, prices have swung from the $110 to $92 range. Yet the recent rise in crude prices since early January has been explosive.

Gold [$1332.25] – The recent bounce-back has prices reaching near the 50-day moving average. The near-term test is surpassing the $1350 point to re-accelerate further. Whether the buyers’ momentum is
intact will be tested in upcoming weeks.

DXY – US Dollar Index [79.69] – A move below 80 is the lowest close in several months. Signs of weakness in the dollar, although it’s too premature to declare based on this index.

US 10 Year Treasury Yields [2.64%] – Recent pullbacks have driven yields closer to the 200-day moving average (2.63%). Yet, the 50-day moving average sits at 2.80%.




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 | February 24, 2014

“The only alternative to co-existence is co-destruction.” Jawaharlal Nehru (1889 - 1964)

Coexisting views

In a period where US stock market indexes are showing cheerful signs, there is also growing fear and anxiety developing underneath the surface. As spotted many times last year, there is the paradoxical relationship of higher markets, which also attract worrisome behaviors and growing groans. Perhaps, it’s not overly surprising to see investors and traders focus on the “cheapness” of volatility in recent months. In fact, the lack of turbulence is not a new story. It has persisted for a long while, where the unpredictable elements were debated.. Collective acknowledgement of low volatility in US markets has been credited to the Federal Reserve policies and messaging. Surely, a shift in policies can stir some uncertainty, yet most of it has been short-lived. Thus, betting on fear is common for traders, but some here and there await an overly dramatic act of full-blown panic . Plus, given various instruments these days, more and more participants are inclined to think that a severe correction may be looming. That is known to drum up some reaction and trading activity:

“Investors traded 4.4 million Vix futures contracts in January, a 52% increase from the same period a year earlier and 38% higher than December, a rise largely attributable to a January spike in volatility and the continued popularity of exchange-traded products (ETPs) tracking short-term futures, according to … (the) Chicago Board Options Exchange (CBOE), which calculates the index.” (Risk.net, February 21, 2014)

Of course, rising markets with strong momentum also build confidence for those already owning shares and even drive up additional flow for those seeking to test their luck further. Since 2009, it has been a strong cyclical run where optimism is preferred and appears to justify current price ranges. Finally, there are those who see the danger of elevated markets and slowing global growth, but sense a relative advantage in US equities. Similarly, the more practical view suggests there are less attractive alternatives to seek at this junction. Certainly, that’s been recognized by most money managers who attempt to navigate through this tricky junction as capital continues rotation into equities.

“The inflows into stock funds in the week were the biggest in 12 weeks, according to the report, which also cited data from fund-tracker EPFR Global. Investors pulled $45 billion out of money market funds, meanwhile, marking their biggest outflows since last October. The inflows marked the third straight week of new demand for stock funds. Funds that specialize in U.S. stocks attracted $8.3 billion of the net inflows into stock funds.” (Reuters, February 21, 2014).

Surely, emerging market worries and some earnings underperformance can trigger questionable responses on a stock or company-specific basis. Yet, the S&P 500 Index is not too far off from all-time highs – a barometer that may not tell the full story, but explains the existing sentiment. Plus, worrisome headline matters have not left a lasting impression of danger and extended sell-offs.

Preparation

Plenty of suspense waits with the repositioning of major ideas and capital. A multi-year cycle run typically suggests a step closer to the inevitable ugly finish. At least that’s the mindset of risk-takers in this generation; market tops are not an archaic thought, given the 2008 and 2000 fall-outs. For all the comparison to and debates about the 1929-style crash, one cannot ignore the last decade, when two bubbles left a lasting effect but the broad indexes rose from the grave quickly, as well. Bubble-bursting thoughts have formed even before the actual formation of a bubble; thus, plenty of false singles have come and gone. In the common bubble talks, there are references to the disconnect of the economy versus stock prices. To bring down the markets, more than one catalyst is needed and participants need to believe that those catalysts are legitimate. Thus far, worrisome issues have been shrugged off despite the bearish experts’ attempts to map out and indentify specific risks that have persisted and in some cases have been misunderstood (i.e., QE, the currency crisis or fundamental concerns).

Psychological impact

So far in 2014, there has been a puzzling up-and-down occurrence that’s still being digested. Mid-January sell-offs dues to emerging market currency worries and natural pullbacks have now been recouped. “Taper” worries that partially triggered a response are now not overly a concern. The economic slowdown, which seems to be mixed with recent disappointments, has not materialized into bigger falls. Even the underperformance of companies’ revenues due to slowing emerging markets has not stirred a larger panic-like behavior, either. The psychological impact of QE might have created a remarkable sense of confidence, beyond the practical point of low interest rates, which encourages risk-taking. Perhaps, the market is not convincing people that the end of the QE era is in full gear. After all, inflation and high interest rates are not on the headline concern list.

Sentiment is proving to be as powerful as reality, and that’s the puzzling part that keeps reoccurring and leaving the average mind stunned. The mystery of markets at some point is mostly discovered, but the rest is psychological. Discovering the mystery is as challenging as understanding the prevailing psychology for a specific theme and trend. At this tricky junction, more mysteries will be discovered on a daily basis, and sorting out the relevant catalysts from the less relevant ones is where the reward lies.

Article Quotes:

“QE can alter long-term interest rates which can influence private investment and the creditworthiness of the private sector. QE has a powerful psychological impact on both asset prices and the economy and can alter expectations of future economic outcomes. Some economists call this the ‘expectations channel’ or forward guidance effect. QE involves a portfolio rebalancing effect where the Fed’s intervention in the outstanding private sector assets can alter the asset options for private portfolio composition. Some economists refer to this as the ‘wealth effect.’ QE alters the composition of the private sector’s assets by changing the “moneyness” of the private sector’s assets. Some might call this ‘monetization,’ but it’s important to frame this correctly so as to avoid concluding that the Fed is ‘printing money.’ While technically true, the Fed is also ‘unprinting’ a T-bond. Depending on how the policy is implemented QE could potentially drive down the value of the dollar relative to other currencies which could alter foreign trade balances.” (Orcam Financial Group, Cullen Roche, February 10, 2014)

“The conventional wisdom is that, when confronted by a bear, you should lie motionless until it loses interest (or assumes that you are dead) and leaves you alone. But there are different species of bear, with some more likely to be deterred by bold, purposeful action. The question is how to determine the right approach when terror incarnate is staring you in the face. This scenario is helpful for thinking about the eurozone as it attempts to survive its next round of trials – beginning with the European Parliament election in May. Can it continue simply to ‘lie still,’ hoping that no new shocks arise that diminish its economic health, if not threaten its survival? Some take the sanguine view that the current ‘lie still’ approach is adequate to ensure that the eurozone economy does more than avoid decline. From their perspective, Germany’s decision over the last three years to permit actual and prospective transfers just large enough to prevent financial meltdown will somehow be enough to enable the eurozone finally to begin to recover from a half-decade of recession and stagnation. But the fact is that these transfers – that is, European Stability Mechanism-financed bailout programs and the European Central Bank’s prospective ‘outright monetary transactions’ (OMT) bond-buying scheme – can do little more than fend off collapse. They cannot boost economic output, because they are conditional upon recipient countries’ continued pursuit of internal devaluation (lowering domestic wages and prices).” (Project-Syndicate, February 21, 2014)

Levels: (Prices as of close February 21, 2014)

S&P 500 Index [1836.63] – Attempting to elevate near and past all-time highs set on January 15, 2014 (1850.84). However, last week, that target was not achieved. The index is in an intriguing trading range, given that last month, investors chose to sell at these levels. There’s a retest of previous patterns ahead.

Crude (Spot) [$102.20] – From January 9 to February 19,there has been a quick and strong move by crude, revisiting and eclipsing the $100-per-barrel price. Yet, the sustainability of this run has a few doubters. The next few weeks are set to confirm the recent momentum.

Gold [$1316.25] – After climbing out of recent lows, the 50-day moving average stands at $1341.07. Observers wait to see a follow-through in the near-term.

DXY – US Dollar Index [80.23] – In the last 15 days, the index has mostly seen a downward decline. A glimpse of recovery waits, based on the pattern of the last six months.

US 10 Year Treasury Yields [2.73%] – Holding steady around a familiar range. The 20-day moving average is 2.70%, which is around last week’s finish.





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 | February 17, 2014

“Better be wise by the misfortunes of others than by your own.” Aesop (620 BC - 560 BC)


Demise turned bargain

In some ways, value seekers are fascinated by the bargains available in commodities and emerging markets (EM) early this year, after both themes underperformed last year. Certainly, these were two areas that were disliked and let many investors down in 2013. Recent signs of revival are not overly surprising, given that investors are known to naturally revisit neglected ideas, especially when there are signs of being cheap. In addition, investors who made good fortune in these areas in the past decade share a nostalgic feeling and play into the investor’s mindset, as well. In other words, commodity and EM bulls have promoted the fundamental case for years (and were backed by the surging prices), and now it is only a matter of participants observing that prices are relatively low. Surely, the fundamentals will not improve overnight, and crisis mode has not been cleansed. Thus, it’s fair to say the risk-reward remains colorful, from gold to BRIC nations. The risk of being a short-lived rally is a matter to consider as the rush for risk-taking continues to persist.

From the contrarian point of view, entering now seems attractive; however, the driving force behind recent resurgence is mostly about bargain hunting and a lack of investable ideas rather than the absolute attractiveness of emerging markets and commodities. Not to mention that, with US equities flirting with all-time highs, there is skepticism and a search for new rotational ideas, as well. Interestingly, it’s critical that money managers of all kinds are looking to reengineer their capital allocation process. Of course, the argument of cheapness alone is not enough and has been heard before in prior months – even in late 2013. Certainly, price drives the early wave of buyers, and whether this momentum is short lived, perception driven or legitimate remains to be seen. After all, it is a game of relative attractiveness, and January 2014 already demonstrated that these markets are wobbly; thus, the second-best option is to buy cheaply. It is not only gold and crude that are attracting investor interest; soft commodities are displaying similar patterns:

“The net-long position in arabica coffee surged 97 percent to 15,728 contracts, the highest since September 2011. Futures in New York gained 29 percent this year, the most among the 24 commodities tracked by the GSCI. In Brazil, the top producer of coffee, sugar and oranges, the driest January since 1954 drained dams and seared plants. Investors held a net-long wager in corn of 34,340 contracts. That’s the first bullish position since June and compares with a net-short of 5,314 a week earlier.” (Bloomberg, February 16, 2014).

Hints and confusions

Increased volatility was a short-term threat that came and went. After a turbulent January, a sudden reversal to a sense of normalcy has taken place. From December 26, 2013 to February 3, 2014, the volatility index rose from 11.69 to 21.48. This marked a sudden rise in expected turbulence, with ongoing concerns of emerging market currency woes. However, since the peak on February 3, 2014 (21.48), the turbulence indicator for US markets has retreated to 13.57 – a sudden drop in volatility. This brought on a sense of calm and a collective signal that market concerns are subsiding at a rapid pace. At least, that’s the hint. Similarly, the US 10 year Treasury yields peaked at 3.05% the first day of trading in January this year. Then, with ongoing turbulence and concerns about US economic growth, the shift toward safe assets drove yields below 2.60% at the start of February. Now, signs of recovery in yields are visibly matched with a decline in volatility, which continues to support a rise in stocks, as witnessed for months. It is important to state that volatility has really declined since 2008; therefore, calm seems too normal, especially in the last 3-5 years.

Amazingly, the S&P 500 index is just a few points away (less than 1%) from recouping the losses from mid-January and making record highs. The up-and-down session witnessed recently may persist in coming weeks. However, this post-2008 recovery is marching on with strength, despite changes in Fed leadership, mild currency turbulence and a never-ending appetite for equities over most assets. Now the question is, if the S&P 500 and US broad indexes are set to make new highs, what happens to the buying appetite? Is there more demand for equities? Did the volatility fears vanish quickly yet again? In a matter of 30 days, how could fortunes turn from massive nervousness to promising? Has the market settled on the acceptable theme? Is there rotation from US markets to emerging or European markets? These are all intriguing questions that desperately require answers in the weeks ahead.

The growth mystery

Clearly, there are prolonged moments of disconnect between forward-looking stocks and actual economic data – hence, the long mystery that tricks/challenges speculators and simple observers who dismiss the paradoxes and complex nature of markets. The strength of the economy is marketed by some (conveniently to make a point) and questioned by others, but the financial market responses showcase a mixed reaction. Certainly, panic is not at the forefront of deliberations.

With that being said, much attention has been dedicated to the Federal Reserve’s plans and diagnosis of current economic strength. For a while, the narrative shifted to improving economic growth and justified taper plans. That’s still the case for now. The economic strength is not clear-cut enough to make a unanimous statement. Corporate earnings in some instances showcase the pain from the emerging market slowdown, which is being felt in companies’ earnings. Plus, elevated expectations are set to disappoint at some point. GDP numbers in Japan turned out below expectations, the Eurozone is not overly convincing despite fourth-quarter growth, BRIC nations are not overly impressive and the US economy is talked up, but positive momentum needs more follow-through.




Article Quotes:

“The risk of the euro zone sliding into an economically and financially damaging spiral of deflation similar to Japan's 20-year experience from the mid-1990s is rising, according to a growing number of leading economists. This counters the prevailing consensus among policymakers, who insist there is no threat of deflation, and financial markets, which are not pricing in or positioning for such an eventuality. In its widely read annual ‘Equity Gilt Study’, Barclays drew parallels between Japan and the euro zone, concluding that the risks of a prolonged period of falling prices in the 18-nation bloc was significant. Economists at JP Morgan are more sanguine, but they wrote in a research note on Thursday that given Japan's experience, ‘no one should be surprised if it happens’. Inflation across the euro zone is falling fast, and was last measured at an annual rate of just 0.7 percent, well below the European Central Bank's target of ‘below, but close to’ 2 percent, the lowest in the developed world, and down from 3 percent barely two years ago. Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments. … The euro zone is at the very early stages of its fight to ward off deflation, while Japan took 20 years to defeat it. Consumer prices in Japan are now rising twice as fast as those in the euro zone.” (Reuters, February 13, 2014)

“Ever since the Communist Party came to power, high employment has been a priority for China’s leaders. Hu Jintao, China’s previous president, famously confided to his U.S. counterpart George W. Bush that employment was the issue, above any other, that kept him awake at night. More recently Li Keqiang, China’s premier, stated ‘Employment is the biggest thing for well-being. For us, stable growth is mainly for the sake of maintaining employment.’ In the days of the planned economy, achieving full employment was relatively easy. Rural workers were collectivized on state-managed farms and urban workers were assigned to city work units. Following reform and opening up, China’s leaders maintained high employment through annual double-digit GDP growth that became an engine for massive job creation. Such was the effectiveness of this jobs engine that in the late 1990s, when China restructured its vast network of state-owned enterprises (SOEs), making tens of millions of workers redundant, the labor market only briefly flinched before the booming economic quickly picked up the slack. However, the economic restructuring the current generation of leaders is embarking on is unlikely to offer the same luxury. There are several important reasons for this. First, the reforms will result in a prolonged period of much slower growth. Speaking last year, Chinese President Xi Jinping said, ‘China must undergo structural reforms even though it will sacrifice faster growth.’ Growth is already half the rate achieved at the height of the mid-2000s boom, with further moderations expected as the adjustment cost of reform becomes increasingly evident.” (The Diplomat, February 12, 2014)



Levels: (Prices as of close February 14, 2014)

S&P 500 Index [1838.63] – A more than 2% gain last week, propelling the index to revisit prior all-time highs. Momentum is positive, but this short-term rally needs confirmation to ensure a new wave of buying momentum.

Crude (Spot) [$100.30] – In an impressive manner, after reaching the $91 range in early January, the index has made a ferocious rally back to the commonly noted $100 range. Psychologically, this range triggers reactions, given the key psychological level. However, surpassing this $100 range proved to be difficult in late December.

Gold [$1318.60] – Signs of bottoming being confirmed. In looking ahead, $1360 can be a bigger hurdle to restore the gold bugs’ growing optimism of a further surge in prices.

DXY – US Dollar Index [80.13] – Since January 31, 2014, the index has declined mildly back to its multi-year average. It remains between September 2012 lows of $78.60 and July 2013 highs of $84.75.

US 10 Year Treasury Yields [2.74%] – Early signs that yields have bottomed after declining from 3% to 2.56% within a month. However, the 50-day moving average stands at 2.83%, a hurdle that’s closely watched.






**

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 | February 10, 2014

“When it is not necessary to make a decision, it is necessary not to make a decision.” – Lord Falkland (1610-1643)

Slow digestion

The markets have reached a sideways pattern as investors contemplate whether all-time highs are justified or further correction is needed. In some ways, new data is being processed, from labor to GDP growth. Similarly, potential new catalysts are silently brewing, but dramatic surprises have yet to faze observers. Shocks and overreactions have not seeped through the collective mindset of US equities, but the signs are there for those looking closely.

Technical and momentum observers await responses from buyers who may look to re-enter after recent pullbacks. Is there enthusiasm left, as witnessed last year? Guidance from central banks and taper plans are watched day to day, but a clear-cut answer is hardly available. And it might not be for longer than pundits claim. Labor numbers are leading to mixed responses after falling below expectations, but more supporting data is clearly needed. Sentiment trackers debate whether the recent wave of mild panic has enough fuel to trigger additional selling. Looking at emerging market (EM) indexes, those who need to sell appear to have already sold at a rampant pace based on massive outflow. A well-documented slowdown and outflow has created enough headlines to grab money managers’ attention. In fact, the focus may turn to where value seekers are now examining specific EM opportunities. After all, the growth rates of China and India last year remained higher than more mature markets. As for achieving expectations, that’s another matter that’s unknown. For now, prices in EMs may be cheap by some estimates as the downtrend cycle continues to play out. Certainly, the overall macro backdrop of BRIC and other EMs is sluggish and not overly comforting:

“HSBC's composite emerging markets index of manufacturing and services purchasing managers' surveys slipped for the second month running to 51.4 in January. It stayed under the 2013 average of 51.7 and well below the score of 64.1 posted last January.” (The Reuters, February 9, 2014)

Meanwhile, in the US, fundamental observers, on average, are not overly disappointed as companies continue to exceed analyst expectations. In fact, according to S&P CapIQ earnings:

“The current beat rate for Q4 now stands at almost 66%, slightly higher than the historical average of 65%.” (February 7, 2014).

Subdued responses

Even though the last few weeks witnessed a rise in volatility, there seems to be calm in turbulence. The VIX index is a common barometer for extreme reactions of fear for US stocks. December 2008 was the watershed point for fear, when the index reached 89 and quickly came down as stability resurfaced. In the last two and a half years, the index has not surpassed the level of 20 for a significant period, suggesting that worrisome, collapse-like panic selling is not quite visible. A contingent crowd is claiming complacency, which has some valid points, especially when the S&P 500 index climbed to new all-time highs.

Spring 2010 and summer 2011 witnessed bigger moves related to big-picture concerns (VIX tested over 40 ranges) but calm eventually prevailed. What were the drivers? US equities were relatively attractive and the Fed’s QE plan was in rhythm, not shocking or surprising the investor base that continued to see improving corporate earnings, unimpressive commodity promises and importantly low interest rates. Therefore, the relative argument has much more meaning for influential capital flow and market reaction. Plus, US equities were favored even though many multinational companies have notable revenue exposure from overseas companies. As 2014 begins, is there a concern like 2010 and 2011, about the budget and growth-related policies that should cause some nervous responses? Or is it external concerns of EM weakness that can stir a new wave of sell-offs? Curiosity looms on this answer, as Eurozone and developing markets will confront pending data points to make solid conclusions.

Strategizing

From a risk-reward point of view, betting on EM recovery appeals to some, while others may prefer to stay away from this theme. Equally, declining US stocks may at first glance appear attractive, but there are plenty of naysayers. In other words, the shock and awe factor is not quite glaring. The risk-aversion seekers will continue to pile into Treasuries and the US dollar, as witnessed in other crisis periods. Yet, bunkering up is a theme that’s not quite foreign in recent years. Macro observers are seeing commodities attempt to bottom, with crude surging and gold stabilizing, but last decade’s expectations of all-time highs are not quite on the radar. In a world where relative attractiveness is valued more than absolute data, changing the status-quo trend is not quite rapid. Surviving within this theme of low interest is the primary focus while exploring insignificant and significant catalysts. For now, decisions are not as important as digesting the moving parts of economic conditions, perception related to sentiment and pending market-moving policies.

Article Quotes:

“Although China has shown signs of an economic slowdown, foreign institutional investors are still betting on its cheap equity market with potential for big returns. Qualified Foreign Institutional Investors (QFIIs) opened 45 new A-share accounts in China last December, a monthly record for 2013, the China Security Depository and Clearing Co., Ltd. said in January. This marked the 24th consecutive month in which QFIIs have opened accounts in China's A-share markets and brings the total number of accounts to 612. Foreign investors have to be licensed as QFII or Renminbi QFII, two schemes created in 2002 and 2011 respectively, allowing qualified investors to trade a limited quota in China's largely isolated capital market. The State Administration of Foreign Exchange, China's foreign exchange regulator, granted 51.4 billion U.S. dollars of investment quotas to 235 QFIIs, and 167.8 billion yuan to 57 RQFIIs as of Jan. 27, 2014. … Nearly 60 percent of 1,734 listed enterprises that have released their preliminary annual reports are optimistic about how they performed last year, with 398 firms estimating that their profits surged by over 100 percent.” (People’s Daily, February 8, 2014)

“Starkman argues, three factors contributed to the disappearance of investigative journalism. Years of financial deregulation made the legal documentation that reporters relied upon to conduct their investigations – indictments, testimony, settlements – less available. The ‘stampede of the middle class into the stock market,’ Starkman writes, fueled demand for insider business intelligence and investor-oriented news, and coincided with the rise of CNBC and its ascendant strain of access reporting. And the explosion of search engines and e-commerce decimated the news industry’s traditional business model, shrinking budgets for investigative projects and making publishers more wary of upsetting advertisers. Accountability journalism, of course, is both expensive and antagonistic to corporate brands. Just as dubious subprime practices seeped into Wall Street culture, newsrooms became least equipped to examine them. Even in the early aughts, when articles in the business press questioned the rise of housing prices and mortgage loans, they typically did so for audiences of investors: these were financial products to be avoided rather than evidence of systemic corruption. Likewise, pre-crash critiques of Lehman Brothers, Citigroup, and Washington Mutual focused on their growth strategies and stock performance.” (The New Yorker, February 5, 2014)

Levels: (Prices as of close February 7, 2014)

S&P 500 Index [1797.02] – From January 15 highs of 1850 to February 5 lows of 1737.92, the index witnessed a more than 6% swing. It is now seeking to stabilize closer to 1800. Late December and early January suggested that buyers’ appetites began to fade around 1840.

Crude (Spot) [$99.88] – Inching closer to $100, last reached on December 27, 2013. An inflection point waits again at this junction. Multi-week highs achieved while the supply is expanding and demand is questionable. Therefore, the fundamentals challenge the current momentum in weeks ahead.

Gold [$1256.50] – Since July 2013, gold prices have hinted at bottoming and showed signs of regaining positive flow. Optimists envision upside moves closer to $100

DXY – US Dollar Index [80.69] – Since the lows of last October, the index has not appreciated much and remains stable. The dollar strength is not quite a dominant trend as of now.

US 10 Year Treasury Yields [2.68%] – After a sudden drop earlier this year, questions linger as to whether yields can stay near or above 3%. For now, the February 3 lows of 2.56% serve as a key benchmark.


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.