Market Outlook | August 4, 2014

“The Siren waits thee, singing song for song.” Walter Savage Landor (1775-1864)

Siren Heard

Last Thursday (July 31), stirred a loud siren of market danger that’s been long awaited. Perhaps, it was a mild nudge to rethink the definition of “risk” or simply a one day plunge at month’s end. Either way there is enough to ponder on pending market correction as participants digest the first signs of a notable sell-off.

Previously silenced skeptics suddenly woke-up just like the volatility index,which stood near death for an extended period. Finally, a day where the broad indexes from Nasdaq to S&P 500 witnessed a drop of more than 1%. A bloody day in the terms of the financial market. Out of panic or curiosity, participants did not quite feel like they did in the autumn of 2008 or the summer of 2011 in which turbulence quickly swept in. However, today, the looming drama appears to be in the early chapters given the early cool off from the multi-year bullish run. Knee-jerk panic is natural, but getting some answers on global growth, interest rate polices and valuable sentiment indicators is vital at this junction. Money managers are forced to consider a move or at least a theme driven thesis to understand how the perception of risk can change.

The wake-up call is not only found in market peaking or in the rise of volatility, but the strength of the U.S. dollar is noteworthy from the macro landscape. Is there a rush for safety? Potential bankruptcy talks from Argentina to Ukraine to Egypt are taking hold despite the vibrant talk of frontier market bond issuance, especially in Africa. Yes the status-quo has encouraged risk-taking and created desperation for the yield seeking investors, but, ongoing investor demands for higher yields comes with risks and at some point the market will acknowledge the hidden risks that have been conveniently omitted. Essentially, layers and layers of risks have been ignored and a gut check waits in August. The songs of reality check are slowly being sung and general inflection points will bring forth unpleasant realities.

Memories Ignited

Portuguese bank problems in July reinforced some of the forgotten memories of the '08 crisis and the volatile conditions of the Euro-zone. In fact, the Portuguese stock market index is down more than 10% for the year; silently the turmoil continues even if the topic is nothing new to European market observers.

Amazingly, calmness was felt for months when viewing the bond yields of Spain or Greece in recent months. One would be surprised to see how low the yields declined following the Euro-zone crisis that consumed markets in recent summers. Basically, the Southern European bonds began to mirror the turbulence index (VIX), suggesting that risk is low and concerns were deemed as over-rated. Yet, how can professionals act surprised? Junk bond issuance and false hope of recovery were quite visible for critical observers. In fact, signs of trend shift in risk is taking place:

“Investors pulled $578.9 million from U.S. junk-bond exchange-traded funds yesterday alone, with BlackRock Inc. (BLK)’s $11.8 billion and ETF (HYG) seeing $362.8 million of withdrawals, according to Bloomberg data. Shares of BlackRock’s iShares iBoxx and High Yield Corporate Bond ETF have plunged 2 percent in the past week to the lowest since October, Bloomberg data show” (Bloomberg, August 1,2014).

Silencing the skeptics will be hard, just as justifying the concept of "low risk" is awfully difficult. From domestic policy matters to foreign policy blunders and movements, maintaining the status-quo is harder than it was during the last two autumns. There is plenty of room for doubt. First, Fed officials scream for a hawkish stance in interest rate policies. Russian capital out flow as result of sanctions and tensions is not to be ignored on financial implications to the Euro-zone. Defending the old Fed script is a daunting task without a bit of near-term eruption or dramatic response that resets the disconnect between reality and perception.

Unconvincing Growth

As if there were not enough reminders of slowing growth, crude price decline reinforces the expansion in supply and weakens global demand. Surely, crude prices have faced selling pressure and reached multi-week lows. Similarly, if key economies were strengthening at a desired pace then interest rates would not be this low. Critical questions were asked before, but now these issues can become mainstream matters ahead of mid-term elections.

Putting parts together, weak commodity demand, unimpressive growth in Western economies, and financial crisis symptoms in Europe are factors that dampen sentiment. Not to mention, foreign policy uncertainties (various regional power struggles), which have risen incrementally giving less “happy times” in those believing in globalization. Challenges ahead and ultimately managing and surviving the turbulence are the rewards for any trader and money manager. Intriguing times and intense days are ahead.

Articles Quotes:

“The annual rate of inflation in the euro zone fell further below the European Central Bank's target in July, and to its lowest level since October 2009.The decline is a setback to the ECB which, in June, launched a series of measures designed to boost growth and start to move the inflation rate back toward its goal of just below 2.0%. It is too soon for those measures to have had an impact, but the further drop in the rate at which consumer prices are increasing underlines the severity of the threat confronting policy makers. Eurostat said consumer prices were just 0.4% higher than in July 2013, as the inflation slowed from 0.5% in June. The inflation rate has now been below 1.0% for 10 straight months…. Low inflation is a particular problem for the euro zone because it makes it more difficult for companies, households and governments in southern Europe to cut their high debts and recover from the currency area's twin banking and fiscal crises.” (Wall Street Journal, July 31, 2014)

“China has acknowledged the existence of a new intercontinental ballistic missile said to be capable of carrying multiple nuclear warheads as far as the United States, state-run media reported Friday (August 1). A government environmental monitoring centre in Shaanxi said on its website that a military facility in the province was developing Dongfeng-41 (DF-41) missiles, the Global Times reported. The DF-41 is designed to have a range of 12,000 kilometres (7,500 miles), according to a report by Jane's Strategic Weapon Systems, putting it among the world's longest-range missiles…..China's military is highly secretive, and the Global Times said it had not previously acknowledged the existence of the DF-41. The original government web post appeared to have been deleted on Friday, but the newspaper posted a screengrab. China's defense ministry in January responded to reports that it had tested a hypersonic missile delivery vehicle by saying that any military experiments were ‘not targeted at any country and at any specific goals’. It made the same response last December when asked about reports that it had tested the DF-41.Tensions between Washington and Beijing have risen in recent months over territorial disputes with US allies in the East and South China Seas, and cyber-hacking. Beijing has boosted its military spending by double digit amounts for several years as it seeks to modernise its armed forces, and now has the world's second biggest military outlays after the US.” (Channel NewsAsia, August 1st, 2014)


Levels: (Prices as of close August 1, 2014)

S&P 500 Index [1,925.15] – For several weeks, the 1980 level appeared to be a key resistance level. Now, last week's sell-off confirms that buyer’s momentum is being exhausted in near-term. Yet, further confirmations are needed as a move below 1850 can reset thoughts on perceived risks.

Crude (Spot) [$97.88] – June’s sell-off was followed by further price weakness in July. For a while, supply expansions have raised questions if further down slide waits, and certainly it has in the near-term.

Gold [$1,285.24] – Trading near its 200 day moving average. Several notable peaks including a top on August 2013 at $1,419, then a stall at $1,385 in late March 2014 and recently another peak on July 11 at $1,340. Basically, the downtrend in Gold prices remains intact over the big picture and moments of resurgence have been short-lived.

DXY – US Dollar Index [81.02] – Strength visible throughout July. In fact, since May 9, 2014 the dollar index has gained momentum and is setting up for a potential macro turning point.

US 10 Year Treasury Yields [2.49%] – Several signs suggest that yields are bottoming somewhere between 2.40-2.50%. The last two years showcase this point when viewing the charts. Yet, surpassing the 2.70% has been a challenge as many wonder about this mixed economic growth combined with demand for safer assets.


Dear Readers:

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

Market Outlook | July 28, 2014

“Truth indeed rather alleviates than hurts, and will always bear up against falsehood, as oil does above water.” Miguel de Cervantes (1547 - 1616)

Massive Anticipation

The upcoming week may provide clarity on numerous fronts ranging from key economic data to corporate earnings. Much anticipation awaits as record highs have been achieved numerous times by US stock market. At the same time, improvement is expected in the economic data despite weak first quarter GDP. Monthly labor numbers as usual are set to cause a knee-jerk reaction. Meanwhile, the Federal Reserve interest rate decision will draw a large global audience hoping for a different message, hint or tweak. A rising stock market has not told the full story of real economic concerns, but now the perception of improving conditions is picking up momentum. Perception or not, skepticism is plenty and there is no shortage of doubters who have been proven wrong on a call of massive collapse. Extreme views aside, over 800 companies plan to share their quarterly earnings report as sustainability of future growth becomes scrutinized. It is fair to assume that any guidance or hints of future earnings growth will have a suspenseful and sensitive crowd looking to react via buying or selling shares. In a way, stakes are much higher today given the resounding bull market that has taken new highs, this has surprised plenty.

Status-quo Revisited

First, the Fed has preached that the economy is improving. Secondly, the bond market has suggested that economic growth in not impressive as 10-year yields have failed to reach above 3%. Thirdly, the stock market is rosy and powerful while humming to two themes: 1) The lack of options in low rate environment makes US stocks relatively attractive. 2) The combination of cost-cutting and share buy-back (reduction of shares available for purchase) leads to high stock prices. Cost-cutting is not quite organic growth nor is it a symbol of robust economic strength. Finally, a Fed driven rally reduces the fear displayed by the volatility index.

At the same time, the power of the Federal Reserve is in full display; the global engine for driving markets and doubters has not been rewarded. Now, the Fed expects further optimism, not in sentiment or share prices but, in real economy data. Perhaps, if anticipations are too high then disappointments are building up this week where an abundance of data points will be digested, however a new midsummer script awaits for the overall sentiment.

Mounting Catalysts

Foreign events related to Eurozone economy, Middle East power struggle, commodity supply-demand dynamics and sentiment to globalization ahead have all shown signs of being shaky. Despite the very low volatility that has soothed market observers, the pundits on the foreign policy side have witnessed more turbulence in foreign relations highlighted by Ukraine and Russia. Emerging market decline from 2013 still lingers as the Developed Markets Rally is stretching its surprising momentum. Many have wondered, how can financial markets ignore these uncertain behaviors and tensions? Or at least, for how long can key macro events be ignored? Maybe at some point these day-to-day market events become catalysts of noteworthy proportion.

At the end of the day, interest rates and currency reactions may set the tone rather than mild or massive wars that may potentially stir up. The U.S. dollar has shown strength last month; interest rates have appeared to bottom out. And if the U.S. economy improves then both indicators are set to make a statement. Importantly, both the dollar and interest rates should provide the needed tools to unlock the “game-changing” catalysts that are highly sought after. Yet, any disappointment in economic growth is set to stagger the hopeful who have bought into the stronger second half of this year. If earnings do not create some temporary view of positive results then the sentiment could shatter even if the status-quo suggests calmness and the continuation of rising share prices.

In short, the watershed week ahead will spit out tons of data points. Connecting the results and drumming up a new script will be left up to the Fed. But there is not much room for error (or disappointments) to defend the status-quo of low rates, low volatility and higher share prices. The Fed is expected to convince the market that the plan is progressing as desired. The crowd thus far has been rewarded in trusting the Fed, but the old script might be close to worn out. All-time highs and record–highs are equally losing their luster especially without a strong substance to explain the present and future conditions.

Article Quotes

“Bullard then discussed how close the FOMC’s monetary policy settings are to normal. In response to the financial crisis, the FOMC lowered the policy rate to zero and implemented outright asset purchases. While the FOMC began tapering the pace of asset purchases in January 2014, Bullard noted that the two main policy actions have not been reversed so far. That is, the Fed balance sheet is still large and increasing, and the policy rate remains at the zero lower bound. Bullard measured the distance of the monetary policy stance from normal using a simple function that depends on the distance of the policy rate from its normal level and on the distance of the size of the Fed balance sheet relative to GDP from its long-run average. This version puts equal weight on the policy rate and the balance sheet, he noted. In these calculations, the normal level of the policy rate was set at 5.5 percent, the average value of the federal funds rate from January 1975 to March 2014. The long-run average size of the Fed balance sheet as a percent of GDP was set at 7.4 percent, the average value over the same period. “Currently, the function measuring the distance of the policy stance from normal shows a high value, far from pre-crisis levels,” he said. Thus, there is a mismatch. “The macroeconomic goals of the Committee are close to being met. However, the policy settings of the Committee are far from normal,” Bullard said. “While this mismatch is not causing macroeconomic problems today, it takes a long time to normalize policy and the mismatch may cause problems in the years ahead as the economy continues to expand.” (Federal Reserve of St Louis, July 17, 2014)

“We argue here – building on discussions we began during the World Economic Forum Summit on the Global Agenda 2013 – that the rise in global financial-market integration implies an even broader set of drivers of the future roles of international currencies. In particular, we maintain that the set of drivers should include the institutional and regulatory frameworks for financial stability. The emphasis on financial stability is linked with the expanded awareness of governments and international investors of the importance of safety and liquidity of related reserve assets. For a currency to have international reserve status, the related assets must be useable with minimal transaction-price impact, and have relatively stable values in times of stress. If the risk of banking stress or failures is substantial, and the potential fiscal consequences are sizeable, the safety of sovereign assets is compromised exactly at times of financial stress, through the contingent fiscal liabilities related to systemic banking crises. Monies with reserve-currency status therefore need to be ones with low probabilities of twin sovereign and financial crises. Financial stability reforms can – alongside fiscal prudence – help protect the safety and liquidity of sovereign assets, and can hence play a crucial role for reserve-currency status…International capital flows yield many advantages to home and host countries alike. Yet the international monetary system still faces potential challenges stemming from unanticipated volatility in flows, as well as occasionally disruptive spillovers of shocks in centre-country funding conditions to the periphery. With the events around the collapse of Lehman Brothers, disruption in dollar-denominated wholesale funding markets led to retrenchment of international lending activities.” (VOX, July 26, 2014)

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

S&P 500 Index [1978.22] – As all-time highs are only few points removed, traders will ask if the 1980 level is a hurdle for days ahead.

Crude (Spot) [$102.09] – Mainly stuck between $102-104 range. Attempting to stabilize after a strong sell-off in June.

Gold [$1,292.75] – Buyers momentum faded around $1320. Trades closely will watch the action near the 50 and 200 day moving averages. Perhaps, another drop may suggest that $1340 on July 11th is a short-lived rally.

DXY – US Dollar Index [81.02] – The month of July has seen a stronger dollar. From 79.74 to 81.02 may not seem like a big move. However, for this currency index it is quite noteworthy upside move.

US 10 Year Treasury Yields [2.46%] – Last seven trading days have demonstrated that yields are not fragile enough to go below 2.43-2.40% ranges. Perhaps, a bottoming process in anticipation of



Dear Readers:

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

Market Outlook | July 14, 2014

“There is no terror in a bang, only in the anticipation of it.” Alfred Hitchcock (1899-1980)

Eagerness for substance

The last few months and weeks have reignited a spark of hubris mixed with a feeling of semi-invincibility by the bulls, showing that maybe a logical reset or reality check is highly anticipated. With the NASDAQ down 1.7% and a nearly 4% drop in the Russell 2000 (small cap index) last week, this is still not enough to alter the established strength.

An outcry for potential pre-crisis traits, as witnessed in 2007, is commonly found in financial literature. Yet all this chatter is hardly influential for market-moving forces, which overwhelmingly paint a one-sided view. Basically, “Nothing but upside” is the simple mantra and chant when markets go up, despite the bewildered crowd of market observers and veteran risk takers. Surely the “terror” of waiting for collective collapse/correction has been greater than actual market pain experienced in terms of share prices and volatility.

For nearly a year and surely half a year, for bears, it was difficult to comprehend the divergence between the roaring large-company shares and not-so-glorious economic data points. Talks of negative GDP either in the US or Europe made for good discussion points, but were shrugged off in daily market actions. Mainly, the consensus expects a better second half and that bravado is picking up steam, especially in GDP.


“Federal Reserve Bank of Chicago President Charles Evans said Friday it’s pretty unlikely the economy will suddenly grow fast enough to drive him to move forward his expected timing of the central bank’s first interest rate increase. Speaking to reporters, Mr. Evans said he could envisions a scenario where economic growth accelerated very sharply relative to expectations, inflation moved back toward the Fed’s target and wage gains returned to their historic levels.” (Wall Street Journal, July 11, 2014)

The realization that identifying events or data of weakness is not enough to claim an ultimate top is occurring. Too many false alarms take a toll, even if the top is closer than before. It’s fair to say that a 1% down day in the S&P 500 index would be an early sign of worry.

Hint searching

On May 28th, when the US 10 year yield reached a new low of 2.44%, it became difficult to proclaim that growth in the US was strongly visible. Surely, this is another twist to the script, as the 3% level once reached in late 2013 seemed so far. Perhaps, bond markets realized and could not ignore the less convincing economic growth in labor and wages. In fact, even Wall Street is struggling to make impressive revenue as in past years with declining trading activities. Perhaps, one should quickly realize this economy needs to show tangible strength. It is a messy recovery all around. Cheerleaders can cheer and markets can reward, but logic is not so simple, even when the consensus suggests a full-blown bull market.

As for stocks, corporate profit marches to its own beat and low rates only suggest further rotation into a sizzling or overheating stock market. Flow after flow poured into US stocks (and developed markets), and that was a massive train that could not slow down or seek other alternative areas.

It was unbearable to watch bears of all kinds surrendering when they saw volatility approach near-death. Meanwhile, the crowd anointing the Fed as the authority could not stop quoting the famous saying: “Don’t fight the Fed.” Pointing out the misleading perception of a bull market did not merit financial reward, from the gloom-and-doomers waiting for collapse to others who thought danger in foreign policy mishaps would actually turn into a bleeding stock market. Russia, Ukraine, Iraq and rest of the Middle East came and went as the China slowdown story started to get old. In fact, the China collapse story has been heard enough, and after a year of emerging market collapse, any susceptibility to downfall in BRICs did not overly shock. Now, the global growth pace is debatable as bargain hunters reexamine positions.

Another minor signal

European stocks last week sent an alarm to participants as memories of Eurozone collapse were contemplated, albeit briefly. In a period when many have surrendered to the concept that market collapse is around us, it would take Portuguese bank health concerns to stir some skepticism or search for safety. Maybe a follow-through of old European banking and system-related worries would give sellers enough reasons to exit. Meanwhile, earnings are expected with eagerness, but will vary by industry and specific names. Reaching a conclusive answer might take a few more days or weeks. Tech, biotech and other growth areas may set the tone, but the macro secret or magic is unclear. Pundits speculate, but this week needs to showcase that concerns are legitimate as much as growth. The Fed script has not lost its luster, but expectations are higher and higher by the day. Thus, risk management has been long contemplated, but waiting for the unexpected is a suspenseful task for buyers and sellers alike.

Articles Quotes

“Two of the world’s biggest banks have come out with very different takes on emerging-market debt. Strategists at UBS AG (UBSN)’s wealth management unit turned bearish on U.S. dollar debt of developing nations on June 26 as the securities rallied on renewed confidence that central banks will maintain their stimulus. Meanwhile, JPMorgan Chase & Co. (JPM) strategist Jan Loeys said in a report last week that the debt still offers good value compared with other options in developed nations. The contrasting views show how difficult it is to find value in markets inflated by more than five years of easy-money policies, where everything starts to look expensive to someone. Bonds of nations such as Mexico, Turkey and Russia have returned about 9 percent this year, their biggest gain since 2009. ‘We don’t think this asset class will perform as well in the second half of this year,’ said Mark Haefele, who oversees the investment strategy for $2 trillion at UBS’s global wealth management units. Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows. Last year, investors fled from emerging-market debt amid panic over the Federal Reserve’s plan to curtail its monthly asset purchases. The notes lost 8.3 percent in May and June, faring worse than most pockets of the credit markets.” (Bloomberg, July 9 2014)

“A property boom in the German capital pushed up the value of the average apartment by 27.5 per cent from 2010 to 2013, according to property researchers bulwiengesa. Prices in towns and cities across the country have soared by a fifth over the past four years. Since 2012, the average time it takes to sell a house privately has fallen by almost a fortnight to eight weeks, figures from property website immobilienscout24.de show. The lustre of what locals have dubbed betongold, literally concrete gold, has provoked concern among policy makers over the risks for financial stability. … The Bundesbank, which along with the finance ministry and regulator BaFin, sits on the Financial Stability Commission, the body tasked with maintaining the health of the financial system, said earlier this year that property prices in the big cities were now overvalued by as much as 25 per cent. Germany remains a nation of renters. The owner occupancy rate is just 53 per cent, according to Eurostat, compared with 78 per cent in Spain and a euro area average of 67 per cent. The rate has barely changed since 2010. Barriers to home ownership, such as transaction costs of around a tenth of a property’s value, are high. Strong tenants’ rights and a vibrant rental property market also help in swaying Germans from becoming homeowners. But conditions are ripe for change. At 0.15 per cent, economists view official interest rates as low for an economy expected to grow by 2 per cent this year and next. As Germany’s economy nears full capacity, borrowing costs are likely to remain on hold for at least another two years as the eurozone’s recovery stutters. There are anecdotal signs that cheap money is already shifting attitudes, with the younger generation increasingly viewing property as a sound investment. In research on Frankfurt’s property market early this year, bulwiengesa reported mounting interest from people in their 30s.” (Financial Times, July 13, 2014)



Levels: (Prices as of close July 11, 2014)

S&P 500 Index [1967.57] – Slightly off all-time highs set earlier in the month. Above 1985 or below 1960? The answer may potentially speak for the rest of the week, although low volume has persisted in recent days.

Crude (Spot) [$100.83] – Since June 20th, a sharp decline and sell-off is in full gear as the $100 point is revisited, yet again. The 200-day moving average is also near $100 and should set the tone moving ahead.

Gold [$1340.25] – Questions remain: Is $1280 is a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, a mild positive moment is visible in the last month, as the start of July should provide further answers.

DXY – US Dollar Index [80.36] –Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Since May, the pattern has been defined by a lack of meaningful movement, as reaching above 2.70% seems difficult.


Dear Readers:

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

Market Outlook | June 30, 2014

“The naked truth is always better than the best dressed lie.” Ann Landers 1918-2002

Unscathed theme

A new month awaits as the first half of 2014 draws to a close. Surely, the major themes have not been rattled. Asset prices continue to inch higher, from stocks to real estate to commodities. Yield chasing is reaching desperate levels as risk taking extends from southern European to African bonds. The belief in central bankers appears to outweigh future concerns including the macro-climate that's full of tension, from Iraq to Ukraine. A panic-like response is not on the minds of investors. Stability mixed with confidence is the script the Fed preaches, and the lack of investor alternatives is the hymn sung by participants. Desired or not, that’s the reality for those risking capital. Surely, cash is not deemed king by asset allocators, given unattractive savings rates. And inflation is not a current worry that has been heard too often and feels like a slogan in financial circles. It’s a new season, but the same ol’ policy.

The takeaway is that low rates are here to stay, with corporations continuing to borrow at ‘attractive’ borrowing rates. This is the heartbeat of this daily market movement, which continues to fully believe in and respect the powers of the Fed. Frankly, dissenting with the Fed’s policy is not an option when putting capital at risk.

Shock-averse

Low-volume days persist, and the slow summer months play a role. Last week, the discovery of a negative first-quarter GDP did not shock the market influencers, as common-sense seekers attempted to reconcile the impact of a negative GDP on future corporate profits. Certainly, drivers of GDP can be attributed to healthcare spending or the brutal winter, yet the corporate profit has not collapsed, explaining why share prices are near record highs.

The mind-numbing connection between the real economy and stock market drivers can either confuse plenty or recreate a new wave of optimists (or latecomers). Importantly, the message from the Fed boldly states that rates are set to remain low; thus, the status-quo fanatics are roaring with taking risks and not fearing recession. On the other hand, the worrisome bunch is left stranded on either missed prior opportunities or tame volatility – at least for now. Certainly, the consensus anticipates a recovery in GDP numbers in the second half of 2014, and labor numbers are touted as successes rather than emphasizing weak wage growth. Perhaps, the labor numbers this week can add further clarity if the thought of a second-half economic recovery has merits.

Limited power

Increasing collective confidence in central banks might be carried overboard when growth rates are expected to regain momentum along with job creation. Frankly, the real economy awaits policies and innovations that have been sparse and not quite robust. Money managers have struggled to assess the risk of a market top for a long while. Clues are not wrapped with warnings and known disclaimers, as the low-volatility period continues to feel abnormal– as if the market rhythm is broken. Certainly, trading revenue for financial services is struggling and performance is tricky to manage in this climate. How much power is afforded to the Fed? Some issues of small business growth, demographics, organic growth and business-friendly legislation are not all in the hands of the central bank. Thus, liveliness in real-economy growth is eagerly and desperately awaited. Surely, one day, attention will focus on real growth rather than intellectual justification of an elevated market. Thus, a surprise is awaited, and the reward for guessing is attractive today as much as prior periods in this bull market.
Articles Quotes

“In its continued push to make the yuan a global currency, China's central bank said Sunday it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centers battle with London to become the leading European offshore yuan-trading city. The People's Bank of China announced the move in two separate statements Sunday. It didn't say when it would designate the clearing banks. The French and Luxembourg central banks said Sunday they had signed agreements with PBOC allowing for greater cooperation in the oversight of their domestic yuan market. The weekend moves are the latest salvos in the race to win a major share of business in cross-border transactions in the Chinese currency. Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China's fast-growing economy. … Luxembourg, home to a powerful asset-management industry, has built strong ties with Chinese investors in recent years and currently hosts the European headquarters of China's three leading banks. Last year, former Luxembourg Finance Minister Luc Frieden cited figures showing that the country was the leading center for yuan business in the euro zone, with some 40 billion yuan in deposits, 62 billion yuan in loans from Luxembourg banks and 220 billion yuan under management in the fund industry. For China, the move to allow the yuan to be used more freely abroad aims to boost demand for the currency and reduce the amount of dollars entering the country. China still maintains a tight grip on the yuan's value, with its trading strictly controlled in the mainland market.” (Wall Street Journal, June 29, 2014)


“Initial public offerings priced from January 1 to June 26 were worth $26.5 billion. This was up from $5.7 billion in the same period last year and 123% higher than the same period in 2007, which at $11.9 billion was the previous record since Dealogic started recording the data in 1995. Piers Coombs, head of UK equity capital markets at Canaccord Genuity, said the combination of improved sentiment in the equities markets and a desire to launch IPOs before the ‘political risk’ of the UK general election, due by May 2015, had helped drive flotation activity in London. He said a busy first quarter had been followed by some ‘indigestion’ in the second. He predicted the market would be back on ‘an even keel’ over the third quarter. Among shares that have underperformed since flotation by their private equity sponsors in recent months are motoring organisation the AA, over-50s holiday and insurance group Saga (both backed by Permira, CVC Capital Partners and Charterhouse Capital Partners), online travel firm eDreams Odigeo (Ardian and Permira) and retail chain Pets at Home (Kohlberg Kravis Roberts).” (Financial News, June 30, 2014).

Levels: (Prices as of close June 27, 2014)

S&P 500 Index [1960.69] – A recent move from 1860 to 1960 triggered potential re-acceleration of the bullish run. Yet, 1960 marks a hurdle for the index in the near-term based on the last three days of last week.

Crude (Spot) [$105.74] – The recent spike is now slightly pausing. Certainly, the move from $100 to $107 reawakened the sensitivity of oil prices when it comes to turbulence in the Middle East. Yet the justification of this move needs some tangible follow-ups.

Gold [$1311.75] – Questions remain: Is $1280 a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, mild positive momentum has been visible in the last month, and the start of July should provide further answers.

DXY – US Dollar Index [80.36] – Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Once again, surpassing 2.65% has proven to be difficult and the very low rate environment is playing out again. May lows of 2.40% are on the radar as annual lows, and the next moves in upcoming trading days can trigger directional hints.


Dear Readers:

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

Market Outlook | June 23, 2014

“Never ignore a gut feeling, but never believe that it's enough.” (Robert Heller 1826–1878)

Trend reinforced

The near death of volatility combined with record-high stocks are numbing by now. This is nothing new, if you’re only watching the scoreboard of known index performances. Still, it never ceases to amaze as an ongoing theme of recent years, where the Fed’s messaging is the powerful force. Equally, some money managers have been talking down the market, given unimpressive economic growth rates, and macro unrest is brewing despite being ignored for a long while. Various sour or risky realities from all angles are barely impacting sentiment, which also is rather remarkable. Thus, the daily news flow and implication analysis of risk managers do not match the Fed-led rally that loudly proclaims the death of risk and the appreciation of share prices in a calm process.

There are some concerns from oil markets regarding Iraq, barely highlighting the macro concerns in the Middle East. Surely, the impact is first felt in commodities, as resource-based concerns linger. The consensus view anticipates crude will accelerate, as it has in prior tension-filled periods. Yet impacting the rest of the equity and bond markets remains a suspenseful question. For now, even bond markets are not viewing the Iraq concerns as a worry. So far, not much turbulence has been witnessed, even with weaker earnings, which are not at the forefront of investor discussion. Perhaps, domestic worries in the US, Eurozone and China are replacing foreign policy-related worries. Not to mention, mid-term election implications and less certainty by voters in the US are in the back of the minds of some managers. Accumulating factors build up for those looking to think a step or two ahead, but presently, those thoughts do not carry much weight in day-to-day trading.

Old questions

The paradox of a one-sided market: The vocal bearish skeptics have struggled to wrestle down bulls, who are actually gaining more momentum despite the lack of many days of 1% or higher moves in broad indexes. Yellen's support of this status quo welcomes yet another quarter where risk allocation is revisited closely. How much deploying of new capital to equities awaits? What's the peak potential given record highs? Perhaps, the Fed provided some hints of pausing.

Few calls for bubbles, demand for sell-offs and worries of over-valuations point to a lack of substance in the eyes of market influencers. Sure, warning signs are common and have been heard before. In fact, many argue valuations (compared with historical norms by some measures) are not stretched and the economy is not overheating; thus, worrying is overrated. And that’s the vibe that’s felt in the market. Not asking critical questions is not an option.

Stock markets’ disconnect with a tangible reality suggests that one or two major events outside of the Fed's scripts hardly bother investors to alter tactics. Against this backdrop, the “globalization” or “free-market” story is being reevaluated. Yet, frontier markets appear like today's version of yesterday's BRICs, with increasing bond issuance and soaring stock markets.

“Individual countries have posted some significant returns, too. Since the start of 2013, Bulgaria’s market has soared 91%, Pakistan’s has jumped 88%, and Nigeria’s has risen 47%. The strong performance is helping frontier markets – usually defined as countries that have a stock exchange but don’t meet the size and liquidity requirements to be in the emerging-markets index – to gain more acceptance in the investment community.” (Wall Street Journal, June 1st, 2014).

Limited hints

Gut feelings may not have a place in the savvy analytical work of risk managers and market participants, yet they might have value at some junction. Charts of asset prices may not be enough to look ahead when they only tell of past actions. Comfort is a common theme for risk-takers, as low risk is perceived as not wishful thinking, but a description of present action; thus, the mystery of timing lives on. Expert advice is losing voice, and even pessimists are forced to take on a positive stance these days to play catch-up or chase returns. As absurd as it is to see the majority of markets in agreement with bulls, for some it seems even sillier to fight against a market that has been rewarding for years. For now, the unanimous bullish market may breed new waves of overconfidence, which is the trait worth tracking for those looking to readjust capital deployment.

Article Quotes:

“The theme of Federal Reserve Chair Janet Yellen’s press conference this week was ‘uncertainty’ – uncertainty about what’s going to happen to interest rates, about how fast the economy will grow, about inflation. Just how uncertain is Yellen? Well, we counted: She used the word eight times in her hour-long Q&A with reporters. (‘Certain’ didn’t occur at all, according to the Fed transcript.) In her first press conference, back in March, she used the u-word only once. Nothing about the economic outlook is ever certain. So why this sudden burst of ‘uncertainty’ from the Fed chair? It’s a message to buoyant financial markets: A little caution would be welcome. ‘To the extent that low levels of volatility may induce risk-taking behavior that for example entails excessive buildup in leverage or maturity extension, things that can pose risks to financial stability later on, that is a concern to me,’ she said, choosing her words with extreme care. (Translation: We know that low interest rates can lead yield-hungry investors to do dumb things and take big risks that can hurt them – and the rest of us.)” (The Brookings Institution, June 19, 2014)


“The growing bloodshed in Iraq and Syria is being watched as keenly in China as anywhere else in the world. Indeed, the greater Middle East is becoming an ever greater focus of Chinese foreign policy. At the just-concluded sixth ministerial conference of the China-Arab States Cooperation Forum, held in Beijing, Chinese President Xi Jinping called upon his Arab counterparts to upgrade their strategic relationships with China, by deepening bilateral cooperation in areas ranging from finance and energy to space technology. This reflects China’s broader goal – established partly in response to America’s ‘pivot’ toward Asia – of rebalancing its strategic focus westward, with an emphasis on the Arab world. Of course, economic ties between China and Arab countries have been growing stronger for more than a decade, with the trade volume increasing from $25.5 billion in 2004 to $238.9 billion in 2013. China is now the Arab world’s second-largest trading partner, and the largest trading partner for nine Arab countries. Within ten years, the volume of China-Arab trade is expected to reach $600 billion. Engineering contracts and investment have also enhanced ties. From 2004 to 2013, China’s crude oil imports from Arab countries grew by more than 12% annually, on average, reaching 133 million tons per year. And China’s ‘march west’ strategy furthers its goal of safeguarding access to these resources. As the director of the State Council’s Development Research Center, Li Wei, pointed out in February, at the current rate, China will be consuming 800 million tons of oil annually, and importing 75% of its petroleum, by 2030.” (Minghao Zhao Project Syndicate, June 18, 2014)

Levels: (Prices as of close June 20, 2014)

S&P 500 Index [1962.87] – Another record high leading to a more than 8% run since the April 11, 2014 lows. Previous highs were 1955.55, not far from Friday’s close.

Crude (Spot) [$106.91] – The breakout above $104 in the last two weeks sets the stage for a period of nervous response to Iraq and other unsettling factors. Yet, one should recall that crude has gathered momentum since early May, and this is a continuation of what’s building.

Gold [$1293.00] – After bottoming around $1200 last December, there are signs of a new stage in recovery of surpassing the $1300 range. Although bulls are somewhat reenergized, more evidence is needed in a commodity that’s fighting an intermediate-term bearish bias.

DXY – US Dollar Index [80.36] – At the low end of trading over the last 15 days. Early hints of a weak dollar will resume, but convincing price action is not available.

US 10 Year Treasury Yields [2.60%] – The 2.60-2.70% range is too familiar in the past year, while below 2.50% has become a rare event. Therefore, the status-quo trend is not quite disturbed. Seven years ago, yields stood at 5.32%, the highest point, which seems so far away in this downtrend.



Dear Readers:

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

Market Outlook | June 16, 2014

“The more efficient a force is, the more silent and the more subtle it is.” (Mahatma Gandhi 1869-1948)

Curious timing

As soon as the World Cup started at 4 pm New York time, or when the market closed on Thursday (June 12), there was a market event that stood out. The Bank of England announced that rate hikes might come sooner than widely expected. The timing of the announcement and the timing of the first rate hikes are both mysterious (perhaps Friday’s full moon is one answer). A warning or a prelude? To be determined. The rapid response in the form of a rising Euro affected the mindsets of the foreign exchange participants. Interestingly, a week before, the ECB negative rate action triggered some “dovish” responses, and now the rate hike speculation game lives on, with a little added twist. Similar questions will face the Federal Reserve – certainly there are questions to ponder, from “taper” talk to an unconvincing recovery painted as a success. In coming weeks, this talk of interest rates should dominate the financial punditry.
Here is one example to set the stage for the week.

“Although the Governor [Mark Carney] is still talking about a very gradual rise in UK rates, he appeared to have changed the dovish tone of the forward guidance given by the BoE last year. This has made investors nervous, with many asking whether Fed Chair Janet Yellen may do the same in her press conference on Wednesday. This seems unlikely, because the US economic recovery is still lagging that in the UK. Nevertheless, the parameters within which investors view forward guidance, including the Fed’s ‘dots’ showing the future path for interest rates, may have been somewhat shaken.” (Financial Times, June 15, 2014)

The synchronized global low rate might have the ECB going one way, the Bank of England potentially hiking, the US pondering its next move and Japan still offering the lowest of all yields. Thus, currency markets should provide the first clue and then risk should be reassessed.

Fighting urges

For the market, it has been mainly a one-sided action, where curious and skeptical minds were mocked or lost an audience when the melt-up persisted to endless unchartered territories. Frankly, it all comes down to “don’t fight the Fed,” or any central bank, for that matter. It is the human urge to ride out confidence to the maximum and only natural for novice participants not to walk away while pesky veterans have voiced their displeasure of the risk-reward setup. It’s not pleasant to desperately chase returns and not wise to overpay again and again by assuming history repeats itself. But again, this is normal, and it surely makes markets.

Complacency had been rampant even before the start of the week. Sure, oil price pressures from macro events had been brewing before and are always a possibility. Sure, pullbacks from record multi-year highs do lead to an inevitable price retreat. Of course, the very low volatility and very low 10 year treasury yields were poised for some reversals. Massive moves aside, even a minor price recalibration from extreme ranges was to be expected. The hubris of pundits picked up during the close two Fridays ago (June 6), when the S&P 500 finished on a strong note, with volatility collapsing to new annual lows then. Entering last week, any professional with a mindset of buying shares of large companies, must have at a minimum questioned the odds of further upside gains. Now catalysts are brewing. At the same time, temptations to ride this proven wave are growing, too. But to claim there are no hints of a crisis looming is naïve or an incomplete observation.

The narrative

In the last twelve months, several catalysts have failed to bring down US stock indexes (and emerging markets in 2014, as well): the government shutdown last fall, not-so-impressive earnings results, weakness of smaller cap stock prices, debacle in foreign policy including Ukraine, near-zero headlines GDP, and other worrisome issues. One had to wonder: Why not? One clear answer is in the narrative of the Federal Reserve: the mastery of forcing risk-taking by low interest rate policies, which rewarded those who bet on stocks, which in turn led to very low volatility. Shaking up these dynamics could stem only, it seems, from changes to the Fed narrative. If all real economy and real macro, tangible issues were ignored before, then simple interest rate policies are the driver of investor mindset. “In Fed they do trust” is not a bad statement to explain this bullish cycle. So waiting for Yellen's subtle or direct signal is too vital to other market-moving forces. Dismissing the message of the conductors of the so-called financial orchestra has been deadly for money managers. Thus, the simple narrative that has produced record highs may have a slight tweak, which all must digest.

Article Quotes:

“China is working on plans to launch its own crude oil futures contracts, in a move that could give it a key role in global oil pricing and create a rival to the London and US benchmarks that have dominated the industry for more than three decades. The Shanghai Futures Exchange is planning to extend a pilot programme for crude oil futures that it expects will be the first step in the internationalisation of its Shanghai International Energy Exchange. The country’s leading commodities bourse, which operates in Shanghai’s new Free Trade Zone, was granted regulatory approval by the CSRC last November. As the fifth-largest petroleum producing country in the world and the second-largest consumer, China produced 208m tons of crude oil in 2013 and imported a further 282m tons. But lacking a domestic crude oil futures market, import prices primarily refer to those of the New York Mercantile Exchange’s WTI and the InterContinental Exchange’s Brent crude oil contracts. … The exchange is the latest in a line of Asian firms seeking to align a rising share of consumption with greater influence over global oil prices. Japan, India and the United Arab Emirates have already launched crude oil futures, while the Chicago Mercantile Exchange has taken a stake in the Dubai Mercantile Exchange and the International Securities Exchange recently purchased the Singapore Commodity Exchange.” (IFR June 13, 2014)

“Since China joined the World Trade Organization (WTO) in December 2001, food price fluctuations in China started to be strongly correlated with those in the U.S. Between 1994 and 2001, the correlation was 40 percent. It was 62 percent between 2002 and 2013. Similarly, the correlation between consumer price index (CPI) inflation in the U.S. and China more than doubled from 23 percent between 1994 and 2001 to 59 percent between 2002 and 2013. This pattern of price correlations is interesting because food prices are an important component in the CPI. There are several possible explanations for why the correlations between food prices and between CPI inflation rates in both countries are so strong. The movement of world food prices (and other commodity prices) seems likely to be a reason, since China’s food prices are strongly correlated with world food prices (80 percent correlation between 2002 and 2013). However, the correlation between U.S. food prices and world food prices was not as strong during the same period (34 percent).” (St. Louis Fed, June 9, 2014)

Levels: (Prices as of close June 13, 2014)

S&P 500 Index [1936.16] – June 9 highs stand as the next record-high benchmark at 1955.55, following a 7% or so run since April 11. Above 1900 suggests a comfort zone for bulls. A move below 1800 could spark the first signs of panic, but for now, that’s not on the radar.

Crude (Spot) [$106.91] – Explosive upside move attributed to Iraq-related crisis. Interestingly, for weeks, a catalyst was deeply needed between $100-104. August 2013 highs of $112 may be tested if there is a further market reaction.

Gold [$1265.75] – Stuck. Attempting to regain some momentum around $1250-1300. A bottoming process is developing, and drivers for an upside move are unclear to participants.

DXY – US Dollar Index [80.36] – For more than nine months, no major movement, suggesting the dominance of the status-quo view on interest rates and risk. Unenthused and unconvincing moves for those seeking trend reversal.

US 10 Year Treasury Yields [2.60%] – In the last 12 months, the 10 year yield bottomed around 2.50% twice, and now potentially the third time. A familiar place for near-term observers, which may argue for more upside closer to the 2.70-2.80% range.





Dear Readers:

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

Market Outlook | June 9, 2014

“Truth is more of a stranger than fiction.” Mark Twain (1835-1910)

Understandably strange

This is a market that never ceases to amaze, as the run-up in stocks continues. But these days it feels like surprises are rare when speculating on the direction of interest rates, stock markets or volatility. What has been stunning is how the share price run-up continues without significant or major hiccups. Fending off various macro risks, the bull market has entered a phase where seasoned money managers so often caution publicly, but still fear missing out on the run. These mixed messages between talk and action are rather ambivalent. The fear of missing out on risk-taking (reward-seeking) opportunities is a bigger fear these days than the fear of a massive collapse.

It is rather strange that the increase in stock value does not necessarily suggest a robust increase in the economy or earnings. Sure, the job numbers are viewed as positive, but wage growth remains questionable or mysterious on a broader level. Similarly, the GDP numbers have puzzled but not shocked forward-looking participants. Near-term worries of finding sustained returns surpass any longer-term analyses of consequences. Frankly, the long term seems too far for market participants, and the Fed-dictated markets lives on.

The ongoing market mantra continues to suggest:

a) Worry less, as showcased by the collapse in volatility.

b) More and more people are feeling that “bubbles” have not expanded enough to burst.

In other words, a recovery may be the tagline for promoters of all kinds, but certainly markets cannot overheat when organically, the recovery is not actually “hot” enough. From data to data, these points continue to linger.

Subtle trends

What is not making all-time highs is equally interesting to track for trend followers. For example, the biotech index is not quite at all-time highs and has regressed from late February 2014 highs. Neither have the shares of banks (Goldman or Morgan Stanley) risen to record highs. They have struggled to replenish enough momentum for an upside move. Even the so-called homebuilders fund (XHB) has not mustered the strength to restore its annual highs. These signs of a lack of new record highs is not a suggestion of an overall top; however, they beg the question of whether this is a hint of downside, or whether these sectors will catch up to the rest of the major indexes. Certainly, emerging markets are far removed from the glory days and will attract value buyers. Perhaps, a rotation from developed markets to EM is the logical sequence of capital flow.

To be sorted

ECB’s decision about low rates hardly shocked economists, as negative rates made several headlines. This is a global phenomenon that has been witnessed in the US, UK, Japan and now the Eurozone. Dynamics that drive decisions are focused around the abnormal yield patterns, which happen to remain at the forefront of macro discussions. Importantly, can the low rate environment lead to economic growth, such as increased lending activity, and produce meaningful results in Europe? This is a question so familiar to US observers, where the Fed policies’ ability to impact the real economy is debatable. Thus, the recent yield demand and lack of it needs a regrouping or correction – a breather of sorts to redefine the meaning of risk-reward. Obviously, the risk-taking has extended to African bonds and asset-backed securities. The volatility index (VIX) closing at levels seen in 2007 reinstates the calm and boldness that are encouraged in this trading climate.

Traditionally, markets know how to humble hubris. When trading seems relatively “easy,” the danger does arise. Even if claims of caution have been exhausted, risk never evaporates. Instead, the narrative is where the catalysts form. By now, a synchronized global thinking that suggests comfort over worries has rewarded those who’ve ridden the wave. Brilliance or luck aside, we’ve learned that was the right move. However, an honest approach begs the following: How much upside news is not factored into the market? Unknown. Thus, the sequence of strange developments is identifiable, but how it will sort out is the mystery that requires risk management.

Article Quotes:

“Widespread anti-EU protest votes in last month's European Parliament elections will make it harder for many governments to pursue deficit-cutting and structural economic reforms or to deepen the integration of the 18-nation euro area. Public resistance in Germany, Europe's biggest economy, may make it impossible for the European Central Bank to go beyond last week's monetary easing measures to more radical U.S.-style asset purchases if low inflation persists or worsens. Berlin is balking at using its own healthy fiscal position to invest more in infrastructure or spur domestic demand with tax cuts that could help balance Europe's economic adjustment. European Union leaders and the ECB have done enough to restore market confidence for now by equipping the euro zone with a financial rescue fund, stricter fiscal discipline, a single banking supervisor and a de facto lender of last resort. But the political will to complete economic and monetary union looks ever weaker, especially if it requires winning public approval for changes to the EU's governing treaties. In a book published before the elections French economist Jean Pisani-Ferry argued that Europe's leaders were reluctant to give any more power to Brussels and sought to avoid controversy over further European integration.” (Reuters, June 8, 2014)


“Vietnam and other Southeast Asian countries are spooked these days by China's aggressive behavior. But the real threat to Vietnam's future may come from a different communist neighbor.Ambitious plans for hydroelectric development in the region, especially by Laos, pose a real danger to the food supply of Vietnam and Cambodia. Upstream dams will imperil the fish stocks that provide the vast majority of Cambodia's protein and could also denude the Mekong River of the silt Vietnam needs for its rice basket. Laos's drive to become the ‘battery of Southeast Asia’ is producing plenty of sparks, but not the right kind. Diplomatic tension over the dams – as well as their effect on fisheries and agriculture in a river basin that is home to more than 60 million people – threatens to drive Southeast Asian countries apart right as they are trying to present a common face toward China's increasingly brazen behavior in claiming parts of the South China Sea for itself. The whole region is caught in a hydropower frenzy, thanks in part to China's plans to build multiple big dams far upstream. Laos is building several of its own on the Mekong to generate electricity – for export. That includes the Don Sahong project, right near the Laos-Cambodia border, and the much bigger Xayaburi dam further upstream. The country of slightly more than 6 million people doesn't need more power, but it does need hard currency.” (Foreign Policy, June 6, 2014)

Levels: (Prices as of close June 6, 2014)

S&P 500 Index [1949.44] – Another record-high finish, 12% higher than February 5th lows. A melt-up from 1880, another explosive move re-confirming strength.

Crude (Spot) [$102.71] – No major change week over week. Quite a familiar place, with the 200-day moving average at $100. The wrestling match between buyers and sellers continues.

Gold [$1252.50] – Some signs of a bottom, although no strong evidence around or above the $1240 levels. Intermediate-term correction and pause is in full effect.

DXY – US Dollar Index [80.36] – Since May 8th, the dollar has confirmed stability and shown slight signs of gains.

US 10 Year Treasury Yields [2.58%] – July 2012 lows of 1.37% seem distant in time and percentage points. However, the January highs of 3.05% are on the radar, and it’s unclear when they can be achieved.





Dear Readers:

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

Market Outlook | June 2, 2014

Market Outlook | June 2, 2014

“It is no use trying to sum people up. One must follow hints, not exactly what is said, nor yet entirely what is done.” John Greenleaf Whittier (1807-1892)

Continuation

Just when optimism appears to have reached a new plateau, amazingly, the broad indexes find a way to redefine the meaning of record highs. Other historic highs last week restated the strength of this bullish run and reemphasized the power of the central bank’s script, regardless of real economy-based worries. For speculators and investors alike, the search for massive macro-driven hints and catalysts remains a desperate priority. For some naysayers, capitulation seems to be a desired path as volatility keeps drifting lower. Others attempt to maintain a healthy skepticism despite the unshakeable status quo form.

A “safer” risk taking

Interestingly, within the euphoric response, the shift toward safer assets is still visible. It’s not easy to picture a rush to safety in a period where risk is deemed safer with low volatility, as plenty are chasing attractive returns, given what has transpired in the last few years of this bullish run. Yet, there is evidence of rotation into more reliable, liquid and Fed-supported assets.

First, the flow into US Treasuries illustrates the search for safety in terms of a liquid, reliable investment that yields around 2.50%. On an absolute level, 2.48% does not seems too enticing, but when other developed markets such as Japan (0.57%), France (1.77%) and Germany (1.36%) offer lesser yields, then the US 10-year bonds seem attractive after all. The relative game at the end of the day is what drives market behaviors. Overwhelmingly, investors expect the status quo to continue, as the consensus expects the ECB to continue this trend of lower rates.

Secondly, the success in share prices of larger companies’ shares versus small cap demonstrates a shift toward safer, recognizable firms. Cost cutting and share buybacks surely play a role in rising share prices as much as organic growth in business. Meanwhile, small cap companies’ shares have struggled this year; at times of turbulence, this has been revealed. In fact, the Russell 2000 Index is not making new record highs, but is instead 6% removed from annual highs reached on March 4, 2014.

Finally, the same point about quality can be stated about high-end real estate from London to New York. Equally, the same concept in larger and safer investments is applicable to hedge funds:

“Many investors who were burned by the volatile markets of the financial crisis have turned to big hedge funds for the more stable returns and safety of size – scale, solid infrastructure and operational security. Credit Suisse's 2014 hedge fund investor survey showed only a third of respondents would invest in a fund under $50 million, while just over half could invest in one between $50 million and $100 million and three-quarters could do so in one over $100 million.” (Reuters, June 1 2014).

Bottom line: This bullish market is not quite a fair barometer of collective participation in the real economy. Instead, even though at a glance, risk taking seems appealing and robust, for the most part this so-called recovery benefits select areas of the investment segments in which quality is still in favor. A collective recovery is still mysterious.

Limited ideas

Shifts into more liquid, reliable assets may suggest either a shortage of investable assets or lack of confidence in alternatives such as gold and emerging markets. Fed’s policy of low rates limits ones option and there is a disregard for absolute struggle of economic and fundamental recovery. If 2009 is the benchmark, then the economy and markets have come a long way toward stabilizing. Yet, the weak GDP numbers in Europe and the US are constantly ignored. Markets are hardly panicking about these less-than-stellar numbers as the consensus expects a better-growth second half.

Meanwhile, those who perceived gold to be a safe asset learned in 2013 that it is a speculative instrument that is a non-yielding asset. In an environment where yield is so scarce and in high demand, gold prices are losing their luster after a massive outflow. Not to mention, the debate between gold being a commodity or currency has been mostly settled, as gold was not immune from the commodity cool down. Plus, a speculative asset is typically viewed as risky, but in gold’s case, a multi-year run has corrected, and is now pausing and attempting to stabilize to a new era. The slowdown in emerging markets also played a role on the demand side.

Another puzzle to limited ideas is seen in increased issuance of African bonds as a new frontier market.Certainly, the yield search into Africa makes sense, considering Southern European yields have also come down notably, as noted recently by the Greek bond issuance. Subprime memories persist when thinking about the lack of investment options to meet a ferocious appetite for risk taking. Surely, the low volatility levels remind many of 2007, yet it is only human nature to find new segments of exciting opportunities. However, repeating similar mistakes of risk taking should not surprise us, especially when there is desperation to make good returns in a world where bigger capital is focused on familiar, limited options.
Article Quotes:

“After spending the past decade and more than $200 billion acquiring mines and oilfields from Australia to Argentina, China’s attention is turning to food. The world’s most populous nation is confronting a harsh reality: For every additional bushel of wheat or pound of beef the world produces, China will need almost half of that to keep its citizens fed. And in a recognition that it can’t produce enough crops and meat domestically, mainland Chinese and Hong Kong-listed firms spent $12.3 billion abroad on takeovers and investments in food, drink or agriculture last year, the most in at least a decade, data compiled by Bloomberg show. Those purchases included the largest Chinese takeover of a U.S. company when Shuanghui International Holdings Ltd. bought Smithfield Foods Inc. for $7 billion including debt. They are likely to be followed by overseas forays into beef, sheep meat and grain assets, according to the National Australia Bank Ltd.” (Bloomberg, May 30, 2014)

“First quarter Spanish GDP was tweaked lower in its latest revision. But even this modest rate of growth was only eked out thanks to still substantial government deficit spending and falling inflation. Which suggests Spain’s economy will struggle to hit escape velocity. Indeed, there are worrying signs the first quarter represented a high point – however underwhelming in the first place – for the euro zone more generally. Recent data point to a further softening. And a need for a European Central Bank policy response. Spain’s economy expanded 0.5% on the year in the first quarter, revised down from a previously reported 0.6% rise. But Edward Hugh, a Spain-based economist and respected blogger, pointed out that there’s even less growth here than meets the eye. For one thing, in money terms, the economy is stagnating. Much of what apparent growth there is comes thanks to inflation adjustment, Mr. Hugh noted. That’s because Spain was effectively in deflation during the first quarter, and a negative GDP deflator (the component in GDP data that creates the inflation adjusted figure generally referred to when talking about economic growth) is thus boosting – subtracting a negative creates a positive – reported growth.” (Wall Street Journal, May 29, 2014)

Levels: (Prices as of close May 30, 2014)

S&P 500 Index [1923.57] – Eclipsing prior record highs and setting a strong monthly finish. Since April 11 lows, the index has gained more than 6%.

Crude (Spot) [$102.71] – Over the last few months, a back-and-forth movement between the $98-102 range. No clear signs of an established new trend, and the supply-demand dynamics remain mysterious rather than clear for participants.

Gold [$1255.00] – The oversold rally from December lows ($1195.25) to March highs ($1385) proved to be short lived, as $1400 was elusive and $1200 became a quite familiar place. A multi-week low with no signs of bottoming at this junction.

DXY – US Dollar Index [80.36] – Since May 8, 2014, slight hints of a rising dollar, but mostly a sign of a stabilizing dollar.

US 10 Year Treasury Yields [2.47%] – Annual highs of 3.05% in the second day of this year actually triggered a downside move, as the annual lows of 2.40% were set last week.



Dear Readers:

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

Market Outlook | May 27, 2014

“The difference between life and the movies is that a script has to make sense, and life doesn't.” (Joseph L. Mankiewicz 1909-1993)

Experts humbled

Hedge fund managers, for the most part, might be amazed or, to put it accurately, humbled by what has transpired in the market. The unshakable trend of a record high stock market index with severely low interest rates and a nearly non-existent volatility lives on – not to mention last year’s correction in commodities and emerging markets, which have failed to regain momentum. Sure, nothing major has formed into a new trend-shifting catalyst when viewing year-over-year thus far.

For how many months and weeks can this rate-stock-volatility pattern repeat itself? Is there natural risk to all this? Is the Fed a conductor of this market script? Is the lack of global options for liquid and established assets? The value of fund managers is being questioned by those who think this speculative exercise is a lay-up when using hindsight, as some guidance is known to increase danger, of course. Whether bravado, danger or somewhere in between, moods are improving and the Q1 flow shows more capital flowing into hedge funds. Nonetheless, performance is where it counts and that has been a challenge for most managers:

“‘A lot of people were hoping this year would turn out to be a stockpickers’ market, but that has turned out to be anything but the case so far,’ says Troy Gayeski, partner and senior portfolio manager at SkyBridge, a $10.3bn investor in hedge funds based in New York. With the average hedge fund suffering the worst start to the year since the financial crisis, making just 1.2 per cent, according to the industry data provider Preqin, only a few managers, many concentrated in trading in concentrated company-specific events, have prospered.” (Financial Times, May 20, 2014)

Record highs in the S&P 500 index are nothing new, despite the colorful headlines they provide. Select areas like Tech and Biotech are reexamining the upside potential, and plenty of fundamental concerns persist in some sectors. Flight to quality is one trend that’s been seen before, with rotation to dollars and Treasuries. If this demand for quality and safe assets continues, then the argument for reduced risk-taking can be made. For now, a rise in volatility or massive risk reduction is not quite visible. It would have to be an event that finds a way to organically form despite experts’ attempt to speculate.

Continuously puzzling

Suspense is one thing and luck is another, but the drop in US 10 year Treasury Yields and surging stock markets have given a whole new meaning to status quo. The gloom-and-doom theatrics were off, the inevitable correction seems deferred and proclaiming further upside may be feared as much as betting against this market, it seems. After all, investment opinions are plentiful, but investable liquid assets offer limited options. For now, the market verdict suggests: Despite lukewarm economic growth, US stocks are favored and other developed markets are gearing up to follow a similar direction. Not quite the murmurs of “rich” valuation, pending a rise in volatility or risk of rising rates, which various money managers proclaimed across various public venues. Trepidation is natural when indexes are at uncharted territories of record highs, and follow-through to rising expectations is usually harder and harder to match. Thus, one cannot be overly amazed at the cautionary tale that’s rehashed on daily basis. Measuring the level of hubris in the market is one thing, but guessing the potential top is a daunting exercise.

Managing expectations

US midterm elections, pending Russian/Ukraine tension, election results in Europe, BRIC-related growth conditions and further earnings and economic status reports will be deeply analyzed in the summer months ahead. Yet, attention is better suited for grasping the interest rate policies of central banks, the conductors of risk-reward expectations and market tone. At this stage, the combination of more faithful bulls and discouraged short-sellers leads to a dynamic that has helped the S&P 500 index reach the 1900 range. The faithful participants will continue to test their luck. Surely, a multi-year bull market is viewed as more than luck, by any logical measures. However, how much of this luck is Fed/Central Bank driven? This is a collective question with suspense.

Grasping drivers of risk is desperately required for money managers seeking bigger rewards. Several false signals of tops in US markets have misled plenty, but there is some value to pursue in emerging markets. Emerging markets seem less risky than other markets following last year’s major price correction and immense capital outflow. Surely, a follow-through is awaited. Therefore, the market soon will determine if betting on developing markets is riskier than dabbling with long-term emerging markets. Interestingly, emerging markets (EEM) have jumped by 16% since February 3, 2014. Perhaps, a noticeable capital rotation into EM out of developed markets will provide the clearer picture of pending risk-reward perception. Maybe then the Fed-driven market will require adjustments, and with alterations, turbulence is known to follow for a bit.

Article Quotes:


“That interest-rate cuts [by the ECB] are on their way is now regarded as a done deal. The main lending rate will be lowered from 0.25%, probably to 0.15% or 0.1%. Much more strikingly the deposit rate paid to banks on overnight deposits, currently zero, will be lowered by a similar amount, to either minus 0.1% or minus 0.15%, in effect charging banks for funds they leave with the central bank. The ECB would thus become the first big central bank to move into negative territory, though a recent precedent has been set by the Danish central bank, which charged negative rates between July 2012 and April 2014 in order to stave off market pressures pushing up the krone, which is tied to the euro. What has been less clear is what, if anything, the ECB might do beyond this. Some easing of liquidity has been expected, for example by ceasing to sterilise its remaining holdings of government bonds bought between May 2010 and February 2012 through its ‘Securities Markets Programme,’ a euphemism for trying to arrest panic in bond markets under siege. But what has now emerged from Mr. Draghi’s speech is that the package is very likely to include measures designed to boost credit to firms in southern Europe. Mr. Draghi distinguished between two causes for low inflation, one general and one local. The general was the downward pressure on inflation across the euro area from the appreciation of the euro. Interest rate cuts should help to counter the broad disinflationary pressure arising from an overstrong currency. Money-market rates should move down to levels that discourage inflows of foreign funds.” (Economist, May 26, 2014)

“The director of an allied intelligence service once described the theft of sensitive business negotiation is as a ‘normal business practice’ in China. The Chinese government uses it to give Chinese companies an immediate advantage. China agreed to protect intellectual property when it joined the World Trade Organization (WTO) and has never really done so. The United States has in effect been asking them to play by the rules of both global trade and espionage, and the Chinese have ignored these requests. There are rules in espionage, implicit and unstated, but understood. One rule is to not overdo it; Snowden’s leaks showed that U.S. ignored this rule to its cost. Now China has been called out as well. The most likely Chinese reaction will be denial, a recitation of Snowden leaks, and threats to take action against U.S. companies. China will be tempted to retaliate. They could punish U.S. companies in China (another violation of WTO rules, not that this would bother them), they could indicate U.S. officials based on the Snowden leaks, but tit-for-tat indictments risk leading back to China’s own corruption problems. Fears of Chinese currency manipulation are wildly overstated – the Chinese economy is in bad financial shape (given the huge local debts) and can’t risk destabilizing the global economy – it would be the first victim. It would be in neither country’s interest to start a trade war. The United States could manage retaliation by letting the Chinese government know that it would take appropriate countermeasures in response. The United States is less vulnerable to Chinese pressure (even if individual U.S. companies are vulnerable). This is a case where the public good may outweigh the good of individual companies.” (Center of Strategic & International Studies, May 19, 2014).





Levels: (Prices as of close May 23, 2014)

S&P 500 Index [1900.53] – For the second time this month, 1900 was reached. Previously, the inter-day highs of 1902.17 (on May 13) marked the all-time highs. The 15-day moving average of 1883.67 sums up most of the recent trading activity around 1880. Record highs may be reached, but these ranges are too familiar early this year.

Crude (Spot) [$104.35] – April 16 highs of $104.99 are on the radar for many oil observers, and now, a few cents away from that point, the question of a further catalyst awaits.

Gold [$1298.00] – In the last several weeks, the range between 1280 and 1300 is developing as an uneventful pattern. A catalyst is deeply needed, and there are no hints from a chartist point of view.

DXY – US Dollar Index [80.04] – In the last four months, the dollar appears to have established a bottoming phase again. 79.50 seems to be the base and a stronger dollar is being closely tracked in the near-term

US 10 Year Treasury Yields [2.53%] – No major week-over-week change. This begs the question of how low yields can continue at this stage. 2.20% is the next key level, and anything below 2% can spark some uneasy responses.



Dear Readers:

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

Market Outlook | May 19, 2014

“The desire for safety stands against every great and noble enterprise.” Publius Tacitus (56 – ca. 117)

Seasonal reflection

What has changed since the end of last summer? This is a question to bring up ahead of this summer’s months, when a trend shift is pondered while the status quo continues to flex its muscles by marching on. Humbling for money managers of all sorts, real economy worries have proven unproductive when speculating on stock market indexes. Yet there is unease in moving forward – a sense of puzzling patterns or a tune that's not quite in sync.

Perhaps, identifying what has not changed in nearly nine months is easier: a high stock market, low volatility and positive investor sentiment. A hint of a crack in the bullish run occasionally teased gloomy observers, but skeptics are left to admit that timing a "collapse" is brutally difficult, with false signals being a tricky factor.

Low interest rates and high stock markets combined with a not-so-impressive economy are in place and confirm the general trend felt in September 2013. The fact is accepted, as this message has been very clear. The crowd trusted in the Fed, so the guidance for the defining script is awaited. The art of the words used by the Fed might be what the audience wants, rather than an absolute answer. So many gray areas persist: economic vibrancy, rate hike speculation, housing recovery, long-term labor market, the impact of demographics, etc. Yet, the public markets seem to indicate mixed and conflicted signals, which may explain the paradoxical holding pattern.

Grasping paradox

The search for markets’ ultimate truth is somewhere between the high demand for “safety,” growing demand for risky assets and ongoing standstill in price behaviors of key macro indicators. In other words, safety seekers continue to rotate to liquid and dollar-denominated areas. Risky asset inflows benefit from low interest rates, which are credited with enticing investors to take additional risk in search of higher return targets. Plus, the inherent low volatility creates a sense of comfort, with the perception that turmoil is not lurking. Meanwhile, the S&P 500 index, although near record highs, has not hinted at a convincing directional move. Therefore, 2014 thus far can be characterized by a standstill market action, but suspenseful discussion points offer subtle hints.

The flight to quality is seen in the rotation into liquid, dollar-denominated assets ranging from US equities to Treasuries and high-quality real estate in key cities. Clearly, the much-discussed topic of lower US 10 year yields might explain why there is distrust in economic recoveries from the US to Europe to emerging markets. Perhaps, this lack of confidence will be confirmed in a vivid and broad manner in upcoming months.

Meanwhile, the results of Ukraine and Russian sanctions have shown some behavioral changes as Russians dump the ruble.

“Russians ditched the ruble in March at the fastest pace in more than four years, official data showed, as the currency was hit by fallout from the worst standoff with the West since the Cold War over Ukraine. Central Bank data showed late last week that the total demand for foreign currency, chiefly the dollar and the euro, reached $14.9 billion in March, the highest since January 2009, the aftermath of the global financial crisis.” (Reuters, May 12, 2014)

This is another clear sign that the rush to safe assets continues in BRIC and other emerging markets. Clearly, last year, risky assets such as emerging markets witnessed massive outflow and have underperformed the US indexes. Surely, from Brazil to Turkey to Russia, social and political unrest has been felt, which gives another reason for investors to favor the US and select developed markets. This also ties into the “safety first” mentality that has persisted since the ‘08 crisis.

Dealing with what’s dealt

The endless search for hints on interest rates or vital catalysts from the Federal Reserve consumes the time of pundits. As the stakes increase at this junction, plenty of “Fed speak” speculation will get worthy or less worthy attention. However, it begs for actionable ideas and timing, which is the daunting task of active managers. It’s hard to dismiss the fact that low rates encourage taking on risk, but do not necessarily improve fundamentals or economic indicators.
It’s fair to say that growth and small-cap segments of the markets have realized that sustaining recent success is a challenge. This has led to further sell-offs throughout the year, as small caps underperformed compared to the larger US companies. Amazingly, this pullback is not stopping investors from buying on recent weakness:

“Investors poured $6.3 billion into U.S. equity ETFs in the past week, and surprisingly, about a third of that new money landed into the largest small-cap ETF in the market, the $24 billion iShares Russell 2000 ETF.” (ETF.com, May 16, 2014).

What does this say? Plenty of investors continue to believe this market rally or are potentially desperate to chase returns. The multi-year bullish run is not easily dismissed/ignored, even if known hedge fund managers proclaim that there is a top forming. Skepticism at times looks like it has lost its voice among market participants. The bullish ride is continuing, but reaching record highs is not as easy as it used to be. As stated above, some are seeking shelter in less risky assets.

Basically at this point, the good fortune for bulls will reach an inevitable end, but identifying the end game is a costly exercise that requires a bit more luck as much as skill. Accepting this is a healthier approach to risk-reward management.

Article Quotes:

“Europe’s banking crisis is unresolved. Loans to finance fixed investment continue to fall. Remarkably, the European Banking Authority’s latest stress test for the eurozone’s banks does not contemplate the possibility of deflation in its adverse scenario. The implication is clear: The banks’ capital shortfall will be understated, and the amount of new capital they will be required to raise will be inadequate. If the goal is to restore confidence and get the banking system firing on all cylinders, this is not how to go about it. … And everyone knows that Europe’s much vaunted banking union is deeply flawed. It creates a single supervisor, but only for the largest banks. It harmonizes deposit-insurance coverage but does not provide a common deposit-insurance fund. The resolution mechanism for bad banks is incomprehensible and unworkable. The associated resolution fund will possess only €55 billion ($76.6 billion) of its own capital, whereas European bank liabilities are on the order of €1 trillion. Finally, there is that pesky matter of public debt, which is still 90% of eurozone GDP. European officials propose to work this down to their target of 60% over a couple of decades. You read that right. Check back to see how they’ve done in 2034.” (Project Syndicate, May 12, 2014)

“Mexico has long languished in the shadow of Brazil when it comes to economic and financial bragging rights. But for Brazil’s big banks, faced with sluggish growth and intensifying competition at home, Mexico suddenly has a new allure. Grupo BTG Pactual opened its first Mexican office in January with a staff of 20 and began trading local stocks in March. The firm is just one step ahead of its biggest rival, Itaú BBA, the investment banking arm of Itaú Unibanco Holding, Brazil’s biggest lender. That firm expects to gain a Mexican broker-dealer license in July and begin trading by the end of the year, says Alberto Mulas, a former Mexican national housing commissioner who is CEO for Mexico at Itaú BBA. … The Brazilian banks have reason to look abroad. The attractions of their domestic market have grown dull of late. Brazil’s share in Latin America’s merger and acquisition transactions slid to 56 percent by deal value last year from 71 percent in 2008, according to data provider Dealogic, whereas its share of Latin American equity offerings fell to 41 percent from 85 percent over the same period. By contrast, Mexico is proving increasingly lucrative. The country’s share of the Latin American M&A market rose to 17 percent last year from 8 percent in 2008, whereas in equities it jumped to 34 percent from 9 percent.” (Institutional Investor, May 1, 2014)



Levels: (Prices as of close May 16, 2014)

S&P 500 Index [1877.86] – For more than three months, the index has spent most days trading between 1880 and 1840. Interestingly, a move above 1880 did not attract more buyers. And a drop below 1840 did not last long, with selling pressure pausing. It’s fair to say, this is a neutral and established range.

Crude (Spot) [$102.02] – Struggled in the recent past to surpass $104. Meanwhile, $100 appears to be an agreeable point for buyers and sellers temporarily.

Gold [$1299.00] – Signs of bottoming around $1280 and a sluggish climb back to $1300 ranges. Ongoing demand for yielding assets and a lack of fear has not helped stir upside momentum.

DXY – US Dollar Index [80.04] – After dancing with fragile annual lows, some signs of stability to such a familiar level. July 2013 highs of 84.75 serve as the upside barometer if there is a reversal.

US 10 Year Treasury Yields [2.52%] – Interestingly, last May, new lows of 1.61% surprised participants, but that was the annual low and certainly short-lived. During the last nine months, a trading range between 2.60-2.80% became too familiar. A slip below 2.60% has signaled a noteworthy move. For now, this remains the key macro indicator that’ll drive perception.




Dear Readers:

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

Market Outlook | May 12, 2014

“Playing safe is probably the most unsafe thing in the world. You cannot stand still. You must go forward.” (Robert Collier 1885-1950)

Standstill

A waiting game is playing out in key corners of the financial markets. There is a pause-like feeling lingering as participants await a "big" catalyst (or two). Of course, the challenge for experts and novice risk takers is pinpointing the key factors for massive trend-shifting moves. At this junction, betting on massive collapse or ongoing re-acceleration is merely a guessing game rather than a collection of highly compelling arguments.

As a start, the S&P 500 index has not made a strong directional statement in eight weeks, as current ranges seem stable. Interest rates are not quite buying signs of re-accelerating or a vibrantly improving economy. US 10 year Treasury yields are well below 3%, but not quite below 2.60%. Crude prices are flirting at or around $100, not giving buyers or sellers the much-needed extra conviction or trend to make bigger moves. At this stage, the developing standstill is glaring. Risk-takers anxiously await a move in stocks, interest rates and commodities. Surely, forward thinkers are aware that positioning ahead now for pending moves is where the reward awaits.

Skittish or trendless: both seem applicable in assessing the real economic conditions. Skittish messaging is quite visible in the reaction and messaging from the Fed. On one end, the central bank is concerned about housing, while continuing to praise the "taper" and claiming a robust economy. Mixed signals of all kinds are set to test the patience of various investors. Is there a bubble that’s in late innings, or is this numbness to overstated fear? Potentially, a little of both is occurring.

Calmness – universal theme

These days, low yields are hardly a discussion point and are accepted as the norm. Even Spanish and Portuguese yield are much lower in the post-crisis period.

“Spain’s 10-year yields dropped to an all-time low as a separate report showed unemployment in the country fell last month, signaling governments in the region are overcoming the debt crisis that began in 2008. Portuguese and Irish bonds also gained as Fitch Ratings said there is potential for upgrades in the euro region’s peripheral nations.” (Bloomberg, May 6, 2014)

Basically, there is a sense of recovery and a perception that risk has vanished, at least for now. Investors, even in the most vulnerable European markets, are feeling a revival of sorts. Certainly this is hardly news, but worth noting, especially after the issuance of Greek bonds that stirred demand for yield-hungry investors. Is this desperation for yields or a lack of alternatives? It’s fair to say that “collapsing Europe” or default talk is not as prevailing when tracking investment bets versus the gloom-and-doom literature that pollutes the daily airwaves.

Talking about low levels, the volatility index is far removed from indicating hints of turbulence. Amazingly, the volatility index is not overly puzzled by the crumbling factors of slowing growth in innovation-driven themes (i.e. tech and biotech) and macro unrest potential due to fragile foreign policy as the global economy continues its search for solid footing.

Gearing up

There are hints of slowdown, unrest and wobbly sentiment resurfacing in the late spring season. As much as risk aversion has been out of favor, extracting signs of danger for evaluation is wise while not easily falling into the trap of sensational pessimism.

After all, it comes down to which assets are overvalued and which ones are undervalued. If there is a shortage of undervalued assets, then a correction is bound to occur. Money managers or proclaimed risk assessors have to decipher where a peak is. Is it in growth areas such as small cap or technology-driven areas? Is it a collective overvaluation, or is that less important when the market is more relative than absolute? Do areas in emerging markets (stocks and strength in local currencies) offer timely entry points? Is there plenty of noise on macro matters (tensions affecting commodity pricing) or is the gut-check correction about to occur in the next 3-6 months? Plenty to ponder, but maybe the time to act is during a trendless market when the majority is rather neutral, lacking conviction or waiting for further hints. The counterintuitive steps of reducing risk or finding value in areas less sought after may be rewarding. Perhaps, the standstill is calling the daring bunch in search of bigger rewards. Now is an intriguing time to answer the questions above and hope that the risk-reward concept will continue to work and the consensus chatter is just a distraction or casual entertainment.

Article Quotes:

“A serious flaw was exposed in the European Central Bank’s policy strategy this week, setting up the Euro for a potentially rough few weeks going forward. With ECB President Mario Draghi saying that the Governing Council felt ‘comfortable’ enacting further dovish policies at the June meeting once the new staff economic projections were released, the market’s growing calls for new dovish action has been materially altered into a full-blown expectation of a substantive policy change in four weeks. Market participants gleefully hopped on board the Euro bear train midway through President Draghi’s press conference on Thursday, taking the latest episode of jawboning a bit more seriously now that a veritable checkpoint down the road has been established for action that should undermine the Euro (the selling on Thursday and Friday is evidence of the market pricing in a small rate cut, with the number of basis points priced out of the Euro over the next 12-months moving from -4.3-bps on Wednesday to -11.4-bps on Friday).

Even though President Draghi indicated that the Euro exchange rate was not a policy tool, he did specifically say that it would be necessary to address if it undermined price stability. Incidentally, traders have taken this as a sign that persistently low inflation for the region is being blamed on the single currency (rather than the policies which got us to this point, of course) – and this is now the most daunting corner the ECB has painted itself into to date as it has essentially guaranteed some form of easing. We can’t say that Euro weakness into the June meeting is guaranteed; but, in the sense that market participants needed a reason to offer the Euro lower, they’ve been granted one: the ECB wants a weaker currency, and it has promised a dovish policy response in return. And the market has responded, with the EURUSD dropping from a fresh yearly high of $1.3993 on Thursday to the close of 1.3760 on Friday.” (Daily FOREX, May 10, 2014)

“China is attempting to restructure its economy, reorienting the manufacturing sector toward the production of more technology-intensive goods and expanding the service sector in order to move up the economic ladder from a middle-income country to a high-income country. Premier Li Keqiang stated in his Work Report at the National People’s Congress in March that China needs to rebalance away from investment and trade and toward domestic consumption and service industries. This is in line with the Fisher-Clark theory of structural change and a very common view that as economies modernize, they must shift from a focus on primary industry (agriculture), to secondary industry (manufacturing), to tertiary industry (services). Yet could moving up the value chain be a mistake for China? Contrary to common belief that to move up the economic ladder a nation must transition out of a focus on manufacturing to a stronger emphasis on services, we proffer the cases of the United States and Japan. The U.S. and Japan have service sectors that contribute close to 70 percent of GDP and manufacturing sectors that represent about 20 percent. Manufacturing has moved abroad to places like China and Vietnam, where labor has been far cheaper, while the services sectors in these countries have become increasingly sophisticated and skill-intensive. Both the U.S. and Japan are now mourning the loss of manufacturing jobs overseas, as sources of economic growth have diminished and economic inequality has widened. A major argument in favor of moving up the structural ladder is that increasing economic productivity should be reflected in increased modernization of sectors away from labor-intensive processes and toward more technology-infused or skill-intensive processes. This should be accompanied by a heavy policy emphasis on educating the work force, so that individuals can continue to find employment in a more mentally demanding work environment. Increased productivity will lead to a shifting out of the production possibilities frontier and sustained economic growth.” (The Diplomat, May 5, 2014)



Levels: (Prices as of close May 9, 2014)

S&P 500 Index [1878.48] – In the last two months, moving above the 1880 range has proven to be difficult or short-lived. Some signs of slowing bull market but still lacking further signs of major sell-off.

Crude (Spot) [$99.99] – The 200-day moving average and the 15-day moving average both are $100. Basically, uneventful action last week awaits any signs of movement away from a very familiar and common $100 range.

Gold [$1287.00] – Based on trading actions, a base is forming around 1280, while the upside potential lacks significant momentum. Clearly, the “hot” or “quick” money has vanished from the sector, and a range-bound action will follow in years ahead.

DXY – US Dollar Index [79.90] – Closed at annual lows. Prior lows were achieved in late October 2013, confirming the weak dollar trend.

US 10 Year Treasury Yields [2.62%] – As seen in September 2013 and January 2014, yields failed at 3% or so. In the last nine months, the 2.60% range has been rather familiar to most, but signs of a breakout are not overly convincing.



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.