Market Outlook | September 15, 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)

Summer Shifts

The summer presented two massive trends: Strengthening of the Dollar and ongoing decline in Crude prices. For a long while the weakening dollar combined with the stable rise of Crude prices has been regarded as a “normal” macro occurrence. Basically, the status-quo that’s been ingrained in many analysts’ expectations may change their tune. Pundits in the past few days have addressed the Dollar’s multi-week run as well as its best run in 17 years. Part of the strength in the greenback is driven by further ECB rate cuts and stimulus. Perhaps, the recent ECB decision has stirred further changes in currency markets:

“Many central banks have simply given up the pretense of independent monetary policy, and the ECB's move will lead them further down that path. That, in turn, creates challenges for currency traders, who have long relied on differentiation in interest-rate outlooks to determine which currencies to buy or sell. It makes it difficult to pick standalone winners, even if traders have lately done well betting on broad-based losses for nearly all currencies against the dollar.” (Wall Street Journal, September 14, 2014)

The strengthening Dollar trend awaits the Fed for clarity this week, of course, especially as attention shifts to interest rates, which remain a top priority for observers. The slow awakening to changing Dollar dynamics can impact the big picture script. Analysts will have to dissect the Dollar’s impact on corporate balance sheets and how those perceptions may play out. For now, the multi-week run is slowly digested and speculators debate the sustainability.

Meanwhile, the commodities sell-off of 2013 is now brightly reflected in Crude prices as well. Therefore, it raises questions about a weak global demand or the expanding supply, especially in the US. It is fair to say both are market moving factors. The slowdown in the global economy is playing its part suggests further hint to the sluggish economic factors, not just in Europe, but in emerging markets as well. This is primarily led in China where the slowdown is accumulating.


Turning Points?

So many inflection points in the past twelve months have come and gone. Several macro shifts were talked about (e.g. rates, euro zone struggles, etc.) have also come and gone. Surely, interest rates are on top of the list as usual. It remains suspenseful and mostly guess work. Meanwhile, it was a year ago that “Septaper” dominated headlines. Surely, that coined term came and went as well. At the same time, US 10-year yields consensus rates were expected around and above 3%, but never quite got there either. Meanwhile, few minor sell-offs of around 4-5% in S&P 500 index did not lead to a massive sell-off, but rather a rush by participants to buy on weakness. Essentially this has led to more days of stock indexes reaching record highs with evaporating volatility and hardly any major “earth shattering moves.” Certainly, complacency has been visible for too long.

Thus, here we are in another autumn, six years removed from 2008, a period when all out panic defined the financial climate. A reset of sorts has redefined the perception of risk. Yet now, at a multi-year bull cycle, the destiny of stocks embarks to new levels, and justifying the run is a classic question that has reappeared. The hints from dollar and crude movements is one matter, but the reversal in volatility and interest rates may have a bigger say than the former on stock performance. Psychologically, there are two factors in play: 1) Unlike other times in the past two years, skeptics appear very cautious to challenge the status quo 2) The combination of upcoming mid-term elections and worsening foreign affairs can spark sudden change in sentiment. For now, the obvious answer is not presented, but the hints accumulate from various markets and directions.

Near-Term Hints

The challenge in deciphering hints is sorting the noise from the substance. The anticipated Fed meeting should provide guidance on interest rate policies. For some observers and speculators, volatility (VIX) bottomed around 11.24 on August 25, 2014. Similarly, US 10-year yields marked their lows on August 15, 2014 at 2.30%. Finally, the S&P 500 fell below 2000, a self-proclaimed psychological range that’s created some buzz. All suggest vital hints that may potentially alter the status quo of low rates, low turbulence and higher markets. It is too early for many given the prior false signals, but there are enough hints to build on. Basically, the tide is shifting even if it is not convincing on a mass level. Regardless of pending events or comments/words from policymakers, the market has silently spoken for those willing to listen. From dollar to crude and from rates to volatility, there is unease mixed with newer trends that are mildly tangible but surely visible.

Article Quotes:

“China's factory output grew at the weakest pace in nearly six years in August while growth in other key sectors also cooled, raising fears the world's second-largest economy may be at risk of a sharp slowdown unless Beijing takes fresh stimulus measures. The output data, combined with weaker readings in retail sales, investment and imports, pointed to a further loss of momentum as the cooling housing market increasingly drags on other sectors from cement to steel and saps consumer confidence. Industrial output rose 6.9 percent in August from a year earlier - the lowest since 2008 when the economy was buffeted by the global financial crisis - compared with expectations for 8.8 percent and slowing sharply from 9.0 percent in July…. China's economy got off to a weak start this year as first-quarter growth cooled to an 18-month low of 7.4 percent. Beijing responded with a flurry of stimulus measures that pushed the pace up slightly to 7.5 percent in the second quarter, but soft July and August data suggest the boost from those steps is rapidly waning.” (Reuters, September 13, 2014)

Eurozone: “The key problem is that in most countries it is impossible to generate a credible commitment to reduce spending in the future, let alone by the staggering amounts required by a tax cut of 5% of GDP. Take the two biggest and most celebrated consolidation plans Europe has seen – Finland and Sweden in the 1990s. Over the period 1992–1996, Finland’s primary deficit should have been reduced by 11.4% of GDP, of which 12.1% in spending cuts; the corresponding figures for Sweden over the 1993–1997 period were 10.6% and 6.8% of GDP, respectively. The IMF took these enormous figures at face value in its recent database on discretionary changes in fiscal consolidations. However, in my own research I have shown that these cuts are based on the announced plans by the incoming governments. The reality turned out to be very different – at the end of the period, Finland cut its primary spending by a mere 0.4% of GDP, and Sweden by 3.6%. But one need not go so far back into the past. In almost one whole year of work, the spending review initiated by the Italian government in 2013 – without a doubt the most thorough and serious such attempt so far in Italy – has identified at most €10 billion (about 0.6% of GDP) of spending cuts, most of which are still highly controversial and subject to political approval. As of now, nobody knows what fraction will be effectively implemented, or when.” (VOX EU, September 13, 2014)


Levels: (Prices as of close September 12, 2014)

S&P 500 Index [1985.54] – The glorified 2000 landmark point created some hype for bulls and observers, but sustaining those gains is questionable. Buyer’s momentum seems wobbly based on last week’s pattern.

Crude (Spot) [$92.27] – The downtrend continues and confirms the massive shift in trends since late June. Trading around $92, which was last seen around January 2014. Signs of a minor selling relief are apparent despite the well-defined cycle weakness.

Gold [$1,241.25] – Broke below June lows of $1,242. A few months ago this range triggered a buy point; however, this time around perhaps buyers are reexamining the revealing decline in commodities. The next critical level was $1,192, which was reached in July 2013. The commodity sell-off theme has become convincing.

DXY – US Dollar Index [83.73] – The last 90 days showcased a powerful run in the dollar. In July 2013, the index peaked at 84.75 which is few points away from Friday’s close. Chartists are wondering if this run is set to pause around 84 after this explosive surge.

US 10 Year Treasury Yields [2.61 %] – The recent move from 2.32% to above 2.60% triggers questions of whether or not this run can keep up. Perhaps, a few more weeks are needed as the 3% benchmark serves as the more meaningful 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 | September 8, 2014

“All deception in the course of life is indeed nothing else but a lie reduced to practice, and falsehood passing from words into things.” (Robert Southey 1774-1843)

Simplicity Glorified

Hindsight gives the impression to investors that the market is simple. The current story goes: Invest your money in 2009 in US stocks and the rest is nothing but an upside gains. Eventually lack of turbulence mixed with lax view of risks enables the market conductors to gather additional believers with all-time highs. Wealth creation via stock ownership is expanding from theory to actual dollars and cents. The status quo in the recent years’ serves as powerful evidence of the simplicity of markets and the power of the Fed. Regardless of the various causes, the effect is quite clear and the oversimplification is picking up momentum, and typically that’s when critical details are omitted.

This development begs a few questions besides relying on the known trend. Is it a grave mistake to think the US economy is recovering at the pace of the all-time high stock market? Isn’t it too relaxed to think the Eurozone risk has calmed down? Are corporate profits sustainable? Are ignored macro issues (i.e. Ukraine /Russia) going to spark a market response? In a world where there is no scarcity of opinions plenty has been said. However, the historical data screams of simple maneuvering leading to higher share prices. For years the disconnect between stocks and real economy has been digested; however, this cycle (post 2008) embarks on a new level of day-to-day deception that should trouble even the most profitable of bulls as much as the gloom and doomers whose timing has been off. The concept of low rates and low volatility are creating even more complacency and discouraging the skeptics.

Grasping the Script

Where is the reward in belaboring past results? This is a question haunting investors of all kinds as the autumn season moves in to full gear. There is trickery in perception, and even more data may be deceptive. Important to remember that analysts are only humans pretending to know the future, but are really just hoping for luck. The suspense in markets is trying to grasp the script that’s driving the thought process. Then there is the anticipation to when the script might change, which can leave many mesmerized, humbled or simply amazed by the crowd response. The labor conditions are not so robust and even the Fed has made that point clear. The much discussed data point will center on participation rate:

“The participation rate, which indicates the share of working-age people in the labor force, decreased 0.1 percentage point to 62.8 percent, matching the lowest since 1978.” (Bloomberg, September 5, 2014)

Financial markets stumbled into a new era with advanced technologies impacting trading, further talks of regulations and ongoing evolution of complex products, but the human element of emotions (fear, greed etc.) never goes away. The desire to break new record highs mixed with crowd chasing returns is to be expected. Basically, investing in large brand names (e.g. Dow 30) enables companies to expand profits due to large distribution access, while borrowing at favorable low rates has helped corporate profits. Sure, that’s one version that’s closer to a tangible reality, but the brutal truth is becoming clearer. Politics and other distractions aside, speculators of all kinds must reconsider the difference between wealth creation and a robust economy. For now, the bearish sentiment is at lows that have not been seen in over two decades. It suggests that confidence is growing and that the script has been magical, especially for the S&P 500 index.

Brewing Hints

Emerging markets (EM) have recovered this year, considering the over 23% move since February 3rd lows. Despite the sluggish economy, the EM indexes are roaring which is surely a global theme at this point. Interestingly, recovery in EM has not translated to gains in commodities despite both being correlated in the past.

Meanwhile, the dollar recovery is stunning in some ways, and presently is the most meaningful macro move over the last few months. As the ECB continues to cut rates, the US has contemplated raising rates in turn benefiting the Dollar. Perhaps, there is a rush that awaits to purchase European stocks given the success of US stocks with low rate polices. Central banks have seen the US script working and replicating it seems appealing and convincing. After all, as stated above when simplicity works convincing many are convinced easily and complexities are ignored. In the case of Eurozone, the growth has been sluggish and well documented. Perhaps, the biggest hint of them all is how low rates do not spur growth. Thus, if Europe replicates what has been tried; then it surely feels like desperation, and that they are in need of potential “miracle.” Of course surprises are always possible. This illustrates how the market has succeeded in eliminating skepticism and volatility, but when simplicity fails typically the truth is recognized in an ugly fashion. Timing the inevitable is miraculous as well, but ignoring these danger sings is fully reckless.

Article Quotes:

“The ECB has had years to plan asset purchases (QE Lite), yet Mr. Draghi dodged all questions about the scale. You might conclude that there is still no real agreement on the course of action. Little wonder since Germany’s member of the ECB board – Sabine Lautenschlaeger – said only two months ago that QE is unthinkable except in an “emergency”, and no such emergency exists. By default, the ECB is making the same mistake as the Bank of Japan in its dog days, trying to buy time with half measures, hoping that global recovery will lift Europe off the reefs without anything being done. They may get away with this, but there is a very high risk that Europe will instead remain trapped in mass unemployment, with ever rising debt ratios. The overall policy settings remain contractionary. Monetary policy is still too tight. Fiscal policy is too tight. Bank regulations are too tight. Little is in fact being done to stop a deflationary psychology taking hold across half of Europe. Nobel laureate Joe Stiglitz warns of a depression running through most of this decade. Mr. Draghi said he hopes to ‘significantly stir’ the ECB’s balance sheet back towards the levels of 2012 (€3.1 trillion). That means a €1 trillion boost, and there begins the first big confusion. Much of this will be in the form of cheap loans to banks (TLTROs) in exchange for collateral. As the IMF said earlier this summer, this not remotely akin to QE. The ECB is not taking the risk on its own balance sheet. The monetary mechanism is entirely different, and far less powerful.” (Telegraph, September 5, 2014)

“China’s weak demand for electronics parts and other goods made in Asian countries has economists scratching their heads. U.S. economic growth is picking up, and if history is any guide, this should lead to stronger demand for Chinese-assembled electronics. That in turn should fire demand for electronics parts supplied from across Asia. Something is different this time. South Korea is China’s main source of intermediary goods for computers and other electronics. But Korea’s exports to China declined between May and July. Exports from Taiwan to China also have been subdued. Officials in Seoul worry that China is moving up the value chain, producing its own higher-end electronic parts, and eating Korea’s lunch in the process…. Over time, as China does move up the value chain, HSBC sees risks for Korea and Taiwan. Countries like Thailand, that currently compete with China in lower-end manufacturing of computers, could benefit as China exits some segments.” (Wall Street Journal, September 5, 2014)


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

S&P 500 Index [2,007.71] – About a month ago, S&P made an intra-day low of 1,904. Since then it has not looked back and has gained over 5%. The infatuation with the 2,000 level continues, with September 4th highs (2,011.17) being the next all-time high range for traders.

Crude (Spot) [$93.29] – Downtrend continues. Since the July highs of $107, the commodity has dropped significantly. August lows of around $92 set the benchmark for new lows.

Gold [$1,271.50] – The rally from $1,200 lacks vigor and momentum. The next hurdle remains at $1,300, which has been a struggle for buyers. Since September 9, 2011 Gold has dropped from peaking at $1,895. That downtrend is still intact as short-lived rallies have failed to produce a noteworthy recovery.

DXY – US Dollar Index [83.73] – Explosion continues. After bottoming in May, the last few months have seen a stronger dollar. Critical trends shift as the ECB looks to lower interest rates in turn making the dollar stronger. A game changer of sorts potentially brews, many looking at summer 2013 highs of 84.75 as the next critical level.

US 10 Year Treasury Yields [2.45%] – After testing 2.35% on three occasions recently, rates settled above 2.40%. The last five trading days suggest a new upside move, but a follow through is eagerly awaited.


Dear Readers:

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

Market Outlook | September 2, 2014

“The person who in shaky times also wavers only increases the evil, but the person of firm decision fashions the universe.”(Johann Wolfgang von Goethe 1749-1832)

Themes Rehashed

As August draws to a close, the month's theme only rehashed the unanimously accepted bull market that roared yet again. Of course, the dynamics of extended period low interest rates, low volatility and low regard for fear are brightly reflected in key indexes. Surely, the few sirens of danger have come and gone. Short-lived worries in financial markets were briefly attributed to rate hikes. As usual, the desperate yield-chasing remains an addictive habit fueled with assurance from the Fed. The central bank continues to marshal market movement and the prevailing perception of asset prices. Central banks resume the quest to justify stimulus efforts while pragmatic observers are more and more skeptical of actual growth particularly in Europe.

Meanwhile, the late summer days are known for low volume. There is a danger to making a lot of some minor moves witnessed in last two weeks. Nevertheless, there are certain victories that the bulls will point to because of record highs and the lack in selling pressures. Geopolitical events of a long-term nature, such as Ukraine tensions to fragile European economies, failed to rattle markets for now. Silently, the rising dollar and weak commodity prices are noteworthy hints that have not been fully understood by investors. That said, another month passes where risk-takers were unscathed as general sentiment turns into hubris in some circles.

Occasional Memories

Seven years ago this week, it was the quiet before the storm in Autumn of 2007— ahead of the 2008 crisis. Memories of those late bull market days linger for this generation. Back then, broad indexes flirted with all-time highs, then eventually topped in October 2007. Historic indeed. Surely, inerasable from modern memory. However, the comparison to today’s set-up might be overused as history rarely repeats in the same fashion. Yet, we know historical patterns do repeat, and there are plenty of reasons to ponder regarding a long-awaited market scare. Many sought downside protection, and others have expected a correction for several months. Thus, the test of conviction is setting up ahead (yet again) this autumn where talks of Fed policy change, mid-term elections and the questionable health of the global economy can suddenly shift the comfortable ride. One-sided markets are glorified and occasionally simplified when unwavering patterns (i.e stocks, volatility) become the norm quarter after quarter. This type of market behavior was seen from 2002-2007, therefore reflecting on the past is to be expected. As for looking ahead, fighting complacency while not overreacting to fear is the balance that can be very rewarding and key to survival for money managers.

Beyond Traditional Sentiment

Foreign policy (FP) concerns have mounted to new levels, but how exactly is that related to day-to-day market behavior? Perhaps, it is a puzzle that maybe rewarding for those willing to decipher. If S&P 500 company buybacks reduce the supply of shares and the markets go up, then that’s simply a function of the supply and demand of shares. Less to do with FP but more to do with market mechanics.

In other words, market intricacies drive movements more than any actual "danger" that may materialize. At least it seems so in recent market actions. Similarly when interest rates are low, risk taking is encouraged due to relative reasons rather than the absolute health of economies. Sure headlines do not translate into an instant panic or real-time shakiness as some would initially suspect. If a terror/extremist danger surfaces in Middle Eastern countries (and beyond) then how is one calculating the damages on global trade and global indexes? Is one able to? Is the impact even meaningful? If sanctions in Russia expand, how is the potential danger to the Eurozone translated into share price damage? Not to mention an escalating war in various regions is part of the consideration, as well. Surely, these are unanswered questions and markets have not fully bothered to contemplate the outcomes, unlike FP experts who passionately debate potential consequences. Plenty of day-to-day headlines can serve as an excuse for "selling" equities at this point, but other traditional financial/economic factors are sounding the alarm for those willing to listen.

1) Eurozone weakness persists:

a. Fragile conditions across key European economies

"Germany is teetering on the edge of recession. France is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago. Since these three countries account for two-thirds of euro-zone GDP, growth in places like Spain and the Netherlands cannot make up for their torpor." (The Economist, August 30, 2014).

b. Russian sanctions by EU persists further doubts to interconnected economies

"Russia’s ban on imports of western food could cost the European Union an annual 6.7 billion euros ($9 billion) in lost production, according to ING Groep NV." (Bloomberg, August 20, 2014)

2) Despite rising shares of Emerging Market indexes this year, growth is visibly slowing:

a. Brazil faces technical recession after months of weakness

"Gross domestic product shrank by 0.6 percent in the April-June period from the previous three months, after contracting a revised 0.2 percent in the first quarter." (Bloomberg, August 29, 2014).

b. Chinese economy has slowed down for a while and evidence has grown recently

"The drop in the official [Chinese] PMI in August was broad-based, with the biggest falls in output and new orders. New export orders also fell but by a smaller margin, indicating that manufacturing weakness last month was primarily the result of lackluster domestic demand." (Financial Times, September 1, 2014)

3) Crude oil demand is down along with other commodities reiterating less global growth:

“The IEA[International Energy Agency] cut estimates for oil demand growth this year and next after the annual expansion in fuel consumption slowed to 700,000 barrels a day in the second quarter, the lowest level since early 2012… While demand growth will rebound next year, the pace will be 90,000 barrels a day slower than previously expected because of lower estimates for China and Russia.” (Bloomberg, August 12, 2014).

Big Picture Perspective

These are three macro factors that point to less stable growth conditions when compared to the last decade. Also, the three catalysts are worth tracking weekly between now and year end. Potentially these factors may impact corporate profits and sentiment alike. Despite fear being out of fashion this is the time to reexamine. At least any damage to perception can stir an unknown response. A smooth-sailing market has plenty to justify, what’s the next upside hurdle if it is already at all-time highs? Fed appears to be in the late innings of the stimulus plan. The same can be said about the buyback phenomenon. Thus, a trend shift is not wishful thinking or a fear mongering tactic (many got it wrong before); rather, it is more tangible than in 2013 or 2012. Even the most optimistic bulls must wonder what is the next upside target when all bullish dreams have been fulfilled.


Article Quotes:

"The European Central Bank has talked up the chances of launching a bond-buying programme to ward off deflation and having led markets down that path there could be a serious adverse reaction if it does not follow through. ECB President Mario Draghi pledged on Aug. 7 to use all necessary means to avoid deflation, including ‘quantitative easing’ if necessary. He upped the ante at a U.S. Federal Reserve symposium in Jackson Hole on Aug. 22 by insisting ‘all the available instruments’ would be used to preserve stability. Markets needed no more invitation to start pricing in QE, no matter how difficult it remains for other ECB policymakers to swallow. Long-term borrowing rates for euro zone governments from Germany to the ‘periphery’ in Spain tumbled to new record lows and the euro currency shed almost 2 percent against the dollar. Ten-year German bond yields shed 26 basis points in August, the biggest monthly fall since January, and 30-year yields lost 31 bp, the biggest loss since May 2012. Equivalent Spanish yields dropped half a percentage point. If the ECB does not meet market expectations, government bond yields could spike in countries like Italy, which is already back in recession, and fellow high-debtor Spain. Deutsche Bank estimates bond investors have now factored in a 50-70 percent probability of some ‘QE-infinity type’ programme from the ECB." (Reuters, September 1, 2014).


“EM’s ‘fragile five’ back under pressure: The two moons that govern the fortunes of emerging market investors are starting to wane in unison. China’s investment spending – the lodestar for EM commodity exporters – is slowing and the US Federal Reserve is sounding more hawkish toward unwinding monetary stimulus. The last time such a lunar aspect held sway – in early 2014 – EM market mayhem ensued. Hit particularly hard were the currencies, equities and bonds of the so-called ‘fragile five’ countries – Brazil, South Africa, Indonesia, India and Turkey. But is history set to repeat itself this time around? ‘Growth in emerging markets has been driven by Chinese demand and easy global liquidity, but both of these are now under pressure,’ says Maarten-Jan Bakkum, strategist, emerging markets equity at ING Investment Management.’ Generally, EM equity is probably less vulnerable than EM debt . . . because EM hard currency debt markets have been pushed up more by liquidity (under the easy money conditions supported by the US Fed),’ Mr Bakkum adds. His concerns are underlined by Institute of International Finance (IIF) statistics published this week showing that estimated portfolio inflows to EM assets fell sharply in August to $9bn, down from a monthly average of $38bn between May and July.” (Financial Times, August 28, 2014).

Levels: (Prices as of close August 29, 2014)

S&P 500 Index [2,003.37] – From August 7th lows to Augusts 26th highs, the index gained over 5%, highlighting an explosive month while surpassing the 2000 mark. Given all these bull mark achievements, expectations are set even higher as the room for disappointment increases as well.

Crude (Spot) [$95.96] – After a very steep sell-off, there are mild signs of bottoming. August 21st lows of $92.50 suggest that the selling pressure is on pause. The $200 day moving average is nearly at $100 ($99.77); observers wait to see if a sustainable bounce is in play.

Gold [$1,292.00] – Stuck in the $1,300 range for a while. Has settled at a neutral place and is lacking momentum on either direction. In the near-term reaching above $1,320 can trigger additional questions, otherwise it is range bound.

DXY – US Dollar Index [82.74] – Since early May, a convincing upside moves with very limited interruption. One of the more notable summer trends as the Euro is expected to weaken.

US 10 Year Treasury Yields [2.36%] – Potential bottoming around 2.35% based on last week’s action. Further evidence is needed to confirm that there is a change in rate directions.

Market Outlook | August 25, 2014

“Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that's creativity.”(Charles Mingus, 1922-1979)

Narrative Reflected

When larger corporations have low borrowing cost, low tax structures, low wages, low supply of shares (via buybacks), low volatility and massive scale global distribution, then what did investors expect? Surely, this set-up leads to multiple record highs in the share prices of large companies. Basically, it explains the favorable stock market momentum from various angles. Of course, it is easier to see the key drivers today versus a few years ago in a one-sided bull market. In hindsight, analysts or money managers that have narrowed their thesis in this manner were absolutely right in betting on a bullish stock market. And here we are in summer 2014, and yet again the US stocks are at near all-time highs despite endless macro and foreign policy concerns that loom for next decade. However, markets react profoundly to relevant indicators while being in the habit of ignoring other worrisome parts.

Certainly, directional index guesses are one matter for risk-takers, but identifying the big driving forces such as interest rates, desirable tax treatment and internationally diversified corporate revenue stream is vital.

Two Worlds

Imagine all the perceived market moving factors and noise between 2009 and today. Frankly, it seems to boils down to a few items that are a bit more influential than the nitty-gritty fundamentals. Albeit, the key forces listed above do end up impacting corporate profits enough to keep the ongoing capital inflow in to US equities. Of course, this favorable set up for share prices does not quite apply in same manner for mid-to-small companies that impact most of the real economy on daily basis. For example here is one perspective:

“Across the U.S., small-business lending has been stuck in a slow, grinding recovery behind most other types of business and consumer loans. At the end of the first quarter, banks held $585 billion in loans to small businesses, up 1% from last September but still 18% less than the peak of $711 billion in 2008, according to the Federal Deposit Insurance Corp” (Wall Street Journal, August 17, 2014).

Perhaps, the much belabored “disconnect” between street level economy and the financial market is becoming tangible for causal participants. The Federal Reserve could not even pull off a magical approach to the struggles in the labor market as outlined last Friday. An artful presentation of reality from the Fed has its limits, even if timing is unknown. Simply ignoring the wounds of this recovery via technically maneuvered stock market appreciation is an insult to most experts. After the bailouts, the financial markets were under scrutiny, but the reward of owning S&P 500 companies has evaporated those prior concerns. Even if mid-to-small business concerns arose in the background, the rising market has found a way to sooth some of the pain while rewarding shareholders. In turn, this has boosted confidence for Fed believers; whether this is for good or for bad will be discovered soon.

Catalyst Search

As summer is winding down, the low borrowing costs are stirring up again to new heights. As the attention is obsessively focused on interest rates, other factors are set to change too. For example, if share buybacks reduce, then there is enough to muster critical questions for this bull market. Perhaps, pending changes are forming:

“Companies in the S&P 500 bought back $120bn of shares in the quarter to June 30, down from $159bn in the first quarter, which was the second-largest amount ever, according to preliminary data from S&P Dow Jones Indices.” (Financial Times, August 24, 2014)

For a while, deferring concerns have been the fashionable approach of policymakers. Perhaps, the deference is to prevent an all-out panic in response to an unsolvable problem. August has also been a roller-coaster, a reflection of the nature of the recent market examination. Early in the month, volatility spiked after a few danger signs. Nonetheless, that was short-lived and led to a quick return back to the status-quo of explosive markets and a decline in worries. Notably, the last two months the dollar has strengthened and a follow-through is eagerly awaited as a key catalyst. Collapse in crude prices all summer and slowing momentum in Gold reinforce that a commodity spike is not worrisome either.

The narrative may appear set to change, unlike the past few years, but collective comfort in status-quo also delays shifts in sentiment. Forecasting a top has been close to a “miracle work” and feels like a nearly impossible task. Equally, betting against Central Banks requires courage, but lacks evidence of success in recent years. Importantly, real economy woes are hard to ignore, but expressing a directional view (via bet) in the market is an artful task by itself .

Article Quotes:

“The trade and investment figures are hard to verify, too. According to one source used by Mr. [Howard] French, “China’s Export-Import Bank extended $62.7 billion in loans to African countries between 2001-2010, or $12.5 billion more than the World Bank.” Other figures go even higher. What is clear, at any rate, is that Chinese people and money have flooded into Africa in the past decade, chiefly to buy raw materials to fuel China’s roaring economy. What is tantalizingly unclear is whether the Chinese economic onslaught is the result of a methodical policy fashioned in Beijing as part of an imperialist venture to promote “Chinese values” and dominate the continent as Europeans did a century ago, or whether it has become a self-generating process fired up by individual Chinese who are simply keen to enrich themselves without the slightest intention of kowtowing to the authorities back home. The conversations recorded by Mr. French in a dozen of sub-Saharan Africa’s 48 countries leave an impression that strongly supports the second thesis. Indeed, many of the Chinese in Africa excoriate the Communist Party back home and have dared to start new lives far away precisely to breathe fresher air—much as pioneers from Europe did when heading to the new world or to the dark continent. Many cite the Chinese ruling party’s corruption as a spur for seeking a freer climate elsewhere and even say that Africa is a lot less corrupt by comparison.” (The Economist, August 23, 2014)

“Switzerland’s two largest closely held banks are poised to publish their earnings after two centuries of secrecy. Cie. Lombard, Odier SCA, the Geneva-based bank established in 1796, is due to publish its financial statement on Aug. 28th, according to a company official who asked not to be named in line with the bank’s policy. Pictet & Cie. Group SCA, the third-biggest Swiss wealth and asset manager after UBS AG (UBSN) and Credit Suisse Group AG (CSGN), is also poised to report this month. Under pressure from regulators overseas, the two companies dropped their centuries-old partnership structures in January, bringing with it the requirement to report earnings publicly. They’re doing so as Switzerland’s private banking industry and traditional secrecy comes under unprecedented scrutiny from tax authorities in the U.S. and Europe… While Pictet and Lombard Odier haven’t disclosed which figures they will publish in the earnings, they are set to produce a trove of information for industry analysts, investors in publicly traded asset managers and the banks’ own customers regarding their performance. The banks, traditionally used by the world’s richest families to protect their fortunes, oversee about $630 billion for private and institutional clients, according to the companies.”(Bloomberg, August 22, 2014)


Levels: (Prices as of close August 22, 2014)

S&P 500 Index [1,988] – On three occasions in July, the index did not stay above 1,980 for a sustainable period. Perhaps, that suggests waning buyer's momentum. In a recent rally, the new all-time intra-day highs were set last week at 1,994. Fair to say it is an inflection point between selling pressure versus acceleration.

Crude (Spot) [$93.65] – Has dropped nearly 15% since July 20th highs showcasing that the downtrend remains intact. The January 10th lows of $91.24 are the next key target to see if the “bleeding can stop.” Supply-demand dynamics in Crude from the last two years explain most of this current move with expanding supply mixed with weakening demand.

Gold [$1,275.25] – Several pieces of evidence showcase that the $1,320 range has been a challenging hurdle for buyers. Meanwhile, the next critical point is a move below $1,240, which may delay the odds of pullbacks.

DXY – US Dollar Index [82.33] – Like July’s strong move, August is playing out as another month of strengthening the Dollar. No signs of change in momentum as macro observers watch closely.

US 10 Year Treasury Yields [2.40%] – Potential bottoming around 2.35% based on last week’s action. Further evidence is needed to confirm that there is a change in rate directions.





***

Dear Readers:

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

Market Outlook | August 18, 2014

“The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth.” (Niles Bohr 1885-1962)

Mesmerizing & Misleading

It is abundantly clear that more Central bank “stimulus” effort does not quite translate into economic growth. This tactic of low rate reinvigorating the real economy has been overly discussed in US and Europe. Yet, this discussion of stimulus has become a joke to close observers, who for several years heard the potential and promise of growth. Meanwhile, a closer look of recent evidence suggests the opposite. For example, here is one summary, “After four quarters of meager growth, the fragile economic recovery in the 18-country eurozone creaked to a halt in the second quarter” (AP, August 14, 2014). Sure the markets have translated bad news as good news because that sets the expectation more stimulus. This in-turn has driven shares much higher merely on fragile expectation, rather than substance. By any sane measure, the trickery is not only disruptive to market flow, but paints a grossly false picture of current conditions and sentiment. Cheerleading a bull market is understandable for those keeping score and tracing wealth; however basic questions need to be asked.

Growth Over-promised

If the economy was growing then why is the US 10-year yield at 2.31%? That’s one major question. Similarly, key European 10-year bonds are also trading at very low interest rates. Despite the awareness of slowing 2nd quarter growth data in Europe; it still had a positive weekly finish in European stocks. Delusional or the current “normal” remains to be determined, but that's been the nature of market dynamics for the past few years.

Surely, the low rate climate affects investor behavior more than real economic factors, which are drivers of misery, unrest and political decisions. Layers of messaging regarding economic strength are misleading. A well documented disconnect remains evident between rising stocks and the over-perceived health of economic conditions despite data that might showcase a few positive signs here and there.

Interestingly, a fair amount of skepticism about the Fed’s tactics has not led to an overly volatile market . At least it is not dramatically turbulent so far. On one end, to have a “bubble”, an overheating economy is needed, first. Certainly, this stage is not quite where it can stir a major scare at the top. On the other hand, a dull growth rate would make one think that corporations would be concerned and that shares prices would reflect that natural concern. Instead, the overwhelming demand for higher returns is more dominating than assessing absolute risk in developed markets. It remains a relative argument that the US is favored; and that is visible with the S&P 500 index near all-time highs.

Unease Revisited

The troublesome Emerging Markets (EM) climate witnessed massive sell-offs in 2013. BRICS struggled along with commodity related themes. Basically, the last decade fueled the emerging market and commodity run, and the cycle has possibly shifted from a l0ng-term cycle perspective. In the near-term, Crude is pulling back and Gold is neutral as the CRB index (commodity index) is more than 20% removed from 2011 highs. Changing dynamics were triggered in the first half of last year and similar symptoms are now reappearing. In fact, even if there has been desperation for higher yield with risk-taking highly encouraged, the lingering headline concerns are simply too hard to ignore.

“One trader said that following the African Bank rescue, as well as problems in other emerging markets, such as Argentina, which has entered into a technical default and Russia, which continues to be embroiled in a political standoff with Ukraine, Swiss investors have become acutely aware that emerging markets bonds pay a higher yield because there is a higher risk.’”(IFR August 14, 2014)

The emerging market (EM) fund has recovered so far this year. Key indexes are entering a fragile territory where conviction regarding risks are set to be tested. Plenty of headline concerns (e.g. Russia, Iraq) continue to build, but the hints of a slowdown in EM have been hinted at since last year. The risk-reward has increased as investors realize that not many areas are keeping up with growth expectations. Plus, the strengthening of the Dollar in July may serve as a key event in the perception of risk, especially in Emerging Market currencies. Certainly, sensitivity to Federal Reserve rate decisions are highly expected to impact the mindset of EM. In an inter-connected global market this is another clue worth tracking as the Dollar maybe more attractive than EM currencies again.





Article Quotes:

“Japan is a wild card in global credit markets. The central banks of the United States, the Eurozone, and Britain are far more independent than Japan's, and their leaders coordinate policies more closely as well. But a shift in domestic political winds can change economic policies dramatically in Tokyo, as it did when Shinzo Abe led the Liberal Democrats to a huge victory in 2012. Within weeks, the Bank of Japan initiated a whatever-it-takes quest for inflation. The next general election is in 2016. If Abe's policies fail to yield growth by then, Japan could be under new management once again. A sudden disruption in the global economy's ample supply of liquidity is most likely to come from here. The Bank of Japan currently buys about $70 billion in securities every month as part of its credit easing program, which is only a bit less than the Fed bought at the height of its activities. The Fed has tapered its purchases slowly and with plenty of warning. Japan might not.’”(Foreign Policy, August 14, 2014)

“Facing sanctions from the West for its actions in Ukraine earlier this year, including the annexation of Crimea and supporting Ukrainian separatists, Russia will increasingly turn to China for its military and aerospace components. According to a RIA Novosti report citing a Russian-language report by Izvestia, ‘Russian aerospace and military-industrial enterprises will purchase electronic components worth several billion dollars from China.’ The information is based on a source ‘close to Roscosmos, Russia’s Federal Space Agency.’ According to the Roscomos source: ‘[Russia does] work with the China Aerospace Science and Industry Corporation (CASIC) … Its institutions have already offered us a few dozen items, representing a direct alternative to, or slight modifications of the elements [Russia] will no longer be able to acquire because of the sanctions introduced by the United States.’ Currently, Russia’s extensive military and aerospace industries do not source their components in China. ‘Over the next two, two-and-a-half years, until Russian manufacturers put the necessary space and military electronic components into production, plans call for the purchase of such items from China amounting to several billion dollars,’ the source adds…..If Russia is indeed looking to China for military and aerospace components, it further signals that the Beijing-Moscow relationship continues to tilt in the former’s favor. The recent $400 billion natural gas deal between the two sides also showed another aspect of the changing dynamics in bilateral relations. Reports suggest that Moscow acquiesced to Beijing’s price demands in order to seal a 30-year deal.” (The Diplomat, August 12, 2014)

Levels: (Prices as of close August 15, 2014)

S&P 500 Index [1,955.06] – Approached the all-time highs from July 25 of 1991.39. Perhaps, there is a psychological level of 2000 which may influence movements in the near-term .

Crude (Spot) [$97.35] – Very close to a 200 day moving average, ($96.07) as signs of stability and are awaited after a sharp sell-off. Over the past year or so, strong evidence suggests buyer’s interest around or below $95. This prior trend sets to be tested yet again.

Gold [$1,313.50] – Sideways patterns in place as a new definitive range has formed between $1280-1320. Yet, eclipsing annual highs will require further near-term momentum. July highs of $1340 will be on the radar for many observers.

DXY – US Dollar Index [81.42] – The recent strength that started in July remains intact. Continues to stabilize.
US 10 Year Treasury Yields [2.33%] – Downtrend in yields continues to be profound this summer. Once near 2.70%in early July, now closer to 2.30% continues to make a strong macro statement. This wave of downtrend begs the question if 2% is first more reachable than 3%.

Dear Readers:

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

Market Outlook | August 11, 2014

“Fatigue makes cowards of us all.” Vince Lombardi (1913-1970)

Mistakenly Fatigued

Another week that sparked massive global events for historians, political pundits and foreign policy makers. However, accumulating troublesome signs of globalization failed to create a bone rattling drama of sorts in highly followed and tracked US market indexes.

Russia made several headlines. Certainly that’s not new this year as participants have not shown big worries concerning implications from sanctions. Fundamentalism threatens in several regions and Iraq attacks are back making headlines, yet this seems like a fatigued story (especially for Americans) even though the dangers to globalized markets might be greater than last decade. Danger is hard to ignore even for the half-hearted onlooker. Then there is Italy, where economic weakness has been highlighted for a while, as the country entered another recession. In all three headline events, the consequences are not understood. More clarity is needed to grasp the impact on corporate balance sheets. For now, the impact on earnings and corporate profits as it relates to macro concerns does not appear as a concern issue for market participants.

Risk Conductors

Eurozone struggles and eerie long-term outlooks are not viewed as new or primary concerns for now. Perhaps, like most issues, it feels like “bad news is exhausted” as a wave of multi-day panic is not quite visible. Portugal and Greece carry prior symptoms of crisis, which still linger. Italy and Spain were on the radar of danger for a long while, too. Nonetheless, investors have chosen to trust the ECB as the provider of solution. Thus, again trusting the Fed or ECB is reflected in the very low global bond yields. This suggests investors heavily discounting risk as out of desperation for higher returns. Central banks, acting as the conductor of broad risk perception, have orchestrated a powerful inter-connected message to not fear risk or crisis. Participants blindly or wisely have followed this and those that bet against central bank policies have been ridiculed severely. Whether bullying tactics or a cherry picked script, central banks still possess and command the strength to move markets.

Similarly, the US stock market moves on regardless of macro risks. An occasional brief hiccup within the bullish run is followed by the “same ol’ movement” that’s been the script for weeks since March 2009. Being fatigued of the ever-so-growing religious fundamentalism, political unrest to vital regions and unrecoverable economic woes are tragic in some ways, but the rewarding Fed-driven stock market can blind even the sharpest minds. However, money managers are not paid for making foreign policy decisions or identifying dangers; they are basically measured by index benchmarks and against their peers. Deeply enveloped in the financial markets world, fund managers are balancing the noise from reality, but again it all comes back to the nucleus: Central Banks. The Fed-led engineering of low rates, higher markets, increasing buy-backs and lack of alternatives is powerful enough to lift shares as observers have fully discovered. The question remains if this perception of reduced risk matches the real economy data points which have been fragile.

“The sluggish pace of recovery for both discretionary and non-discretionary services expenditures suggests that the fundamentals for consumer spending remain soft. In particular, it appears that households remain—almost five years after the end of the recession—wary about their future income growth and employment prospects.” (Federal Reserve of New York, August 6, 2014)

Hints Galore

Unlike prior periods, this market has witnessed movements of up and down 1% in recent weeks while piling on to endless excuses for sell-offs. A few sirens went off; some heard the light warnings. For example, Southern European stock indexes since late June have sold-off sharply. Same goes for the Russian index. Similarly, July 3rd marked a turning point for a reawaking of volatility index (VIX). The dollar strengthening in the month of July is not to be taken lightly, either. In terms of fundamentals, the valuation of the small cap has been questioned as they reached elevated ranges earlier this year. “Small cap stocks in the S&P 600 are down an average of 19.0% from their 52-week highs” (Bespoke, August 7, 2014).

However, collectively major hints are waiting to suggest an all-out panic. Thus, the daring have a chance to make big moves (regarding risk positioning), while the causal trend-follower waits another day or week for an obvious declaration from markets. Nothing daring about betting on higher US markets and lower volatility at this junction. Is it strange to blindly to trust the Fed or stranger to bet against the status quo? The mind numbing question enhances the suspense. Many have opinions, but market action will ultimately tell the real, hidden story.

Articles Quotes:

“There was some surprise in the market when holders of senior bonds escaped a bail-in in the rescue of Banco Espirito Santo, but perhaps there shouldn’t have been given that the European Central Bank was a major creditor of the Portuguese bank. Forcing a contribution from seniors in addition to subordinated bondholders would have posed a dilemma about what to do with the ECB’s claims, which amounted to a net €7.4bn at the end of June. Imposing losses on ECB claims would, in effect, have meant Eurozone taxpayers helping to pay for the recapitalisation, something that bank regulators and politicians have pledged to avoid under new bank resolution legislation shortly to take effect across Europe….. The new pan-European rules must be applied by the end of 2015. That will create a strict hierarchy of creditor seniority that must be followed to decide which claims should be bailed in to recapitalise financial institutions in trouble.That situation may place the ECB in peril, since it is a major creditor of many Eurozone banks. It could also leave it wide open to accusations that it has a conflict of interest when it takes direct control of bank supervision across Europe from this November.” (IFR, August 5, 2014)

“This combination of rising labor costs and low value added is clearly unsustainable. If China is to transform itself from a large trading country into a powerful one, it must raise its productivity, with the manufacturing sector adding more value to exports (and, increasingly, to goods for domestic consumption). To be sure, China’s enduring comparative advantage in processing and assembling industrial products has enabled it to retain its status as the world’s largest exporter. As massive quantities of labor-intensive processing and assembly work have been transferred to China from Japan, South Korea, Singapore, Taiwan, and Hong Kong, so have these economies’ trade surpluses. Moreover, this has contributed to large – and widely criticized – trade imbalances with the US and the European Union, the primary end markets for Chinese-processed industrial products. But, again, the data may not be what they seem. Consider China’s growing re-import trade, whereby goods that have been exported to nearby countries, particularly Hong Kong, return to the mainland. China’s re-imports have increased more than 12-fold since 2000, and now dwarf those of other re-importing leaders as a share of total trade.” (Project Syndicate, August 8, 2014)


Levels: (Prices as of close August 8, 2014)

S&P 500 Index [1,931.59] – From March 2009 lows to summer 2014 highs, the index is up nearly 200% reflecting the long-term bull market. Meanwhile, since the July 14th peak to the August 7th low point, the index dropped over 4%. A pullback is generally expected and mildly hinted, yet more pressure is needed to convince sellers.

Crude (Spot) [$97.88] – Over a 10% drop in prices since late June suggests a selling pressure in the commodity. Supply expansion is a fundamental driver that’s been long awaited. Macro events have generated less of an impact versus supply-demand dynamics. Charts suggest the next critical point is closer to $94 if a short-term bounce fails to gain momentum.

Gold [$1,305.25] – Once again back around $1,300, which has been so familiar since last summer. In fact, the 50 day moving average is $1,293 and the 15 day moving average stood at $1,299. Basically, since the massive sell-offs in early 2013, Gold has struggled to find a catalyst for an upside move.

DXY – US Dollar Index [81.02] – Since mid-May, the dollar has found a renewed momentum for an upside move. Strong signs of bottoming at current levels, July highs of 84 deemed as the next critical point, if the strength continues.

US 10 Year Treasury Yields [2.42%] – Since January, there has been a one-sided trend in which yields have relentlessly dropped from 3.05%. Interestingly, last Friday marked an intra-day low for the year at 2.34%. There is a clear message of low yields in which the 2.50% point has been breached for the third time. This raises the question if trend change is in sight.





Dear Readers:

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

Market Outlook | August 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.