Market Outlook | December 8, 2014

“Trust the instinct to the end, though you can render no reason.” (Ralph Waldo Emerson 1803-1822)

Magical Perspective

Several weeks ago in mid-October, the S&P 500 index stood around 1,850, volatility picked up a bit and Crude was above $80. Then a remarkable turnaround took place in less than two months: Stock markets continued to re-accelerate from short-term worries, Crude demise decelerated with urgency and rising volatility evaporated at a fast pace. A mild twist and turn was witnessed as the end result restored the bull market. Responses from broad indexes illustrate the lack of worry of external macro events.

During this same period, the Dollar did not flinch while maintaining its strength; while commodity related currencies and indexes seem more fragile than imagined. The Crude demise reminds risk-takers that commodities cycle is regrouping after peaking from last decade’s upside momentum. Various explanations aside, the commodities cycle strongly coincides with most Emerging markets such as Russia and Brazil, which are seeing their currencies and stock markets sell-off rapidly. This marks a sour period for economies heavily reliant on oil and other commodities.

The themes are well defined for now, the status-quo is more understood and ugly surprises seem rare. Thus, panic and anxiety about US markets have been silenced again as we head into year-end. Amazingly, perception seems more vital for financial markets than real economy, perhaps. Wage and job growth are tricky measures of well-being, but the stock market is an easier indicator to frame a positive perception. Conditions in European economies are not overly rosy, this includes in Germany and France. More data points await, but a softer growth is not a new discovery. As stock values rise easily there is a feeling that conditions are improving. That’s the magic of perception, after all.

Trust Emboldened

In the “Fed investors trusted,” so inevitably any break to this trend is most likely to be driven by Central Banks. Considering all options is the situation that awaits in looking ahead. The Fed created a magical appreciation in stock value, erasing volatility and skepticism. The same familiar themes keep repeating:

1) Investors flocking to stocks and other risky assets due to lack of alternatives.
2) Anticipation of further QE in Europe – following US and UK footsteps.
3) Volatility at very low levels as the Fed driven script is successful to synchronize investors responses.
4) Developed markets favored in this climate than Emerging Markets.

For many years these themes above resurfaced and betting against them has not been overly wise. At this stage, guessing the market or volatility turning point is a daunting task that would be categorized as near gambling. Yet, one has to wonder about pending catalysts in the months and years ahead. As the brilliance of the Federal Reserve is touted in academic and media outlets, the nature of risk-reward still exists. The Fed might have eliminated the severe volatility in recent years, but can the Fed eliminate the nature of risk-reward? The same reward the Fed created surely can become the undesired risk.

Sanity Check

Plenty of economic data points have illustrated the struggles of global markets since 2008. From China’s data to consumer demand to wage growth, there are data points that illustrate a concerning element. As US real estate and stock prices rise in a profound manner, sentiment and perception are easily and generally influenced. If perception is more powerful than reality, then one shouldn't be surprised if this perception turns negative very quickly. The mere fact that volatility is low does not suggest it will be lower for a decade or so. The low-rate environment, albeit a three decade trend, is not quite a given for next 30 years, either. The multi-year highs in the Dollar index and multi-year lows in commodities remind us that sudden shifts do occur.

Article Quotes:

“I have long been worried that the European Central Bank has been slow to address the threat of deflation. But a fall in energy prices is not a good reason for panic because deflation can be good, bad or something in between. In the depression of the 1930s it was undoubtedly bad, because it reflected excess supply and deficient demand. In the late 19th century it was good. During the misnamed Great Depression of 1873-96, there was average annual real growth of 2 per cent despite a decline in the general price level, spurred by shrinking land values and falling prices in older industries. The experience of falling energy prices comes closer to the 19th century example than the 1930s. The problem with a malign deflation is that consumers defer spending decisions because they expect things to become cheaper. Yet history suggests that a rise in real incomes resulting from falling energy prices is more likely to encourage people to spend. That said, there are other very powerful deflationary forces at work in the eurozone, such as the restrictive German fiscal diktat and an ECB monetary policy that is delivering below-target inflation of just 0.3 per cent. By putting downward pressure on inflation, the fall in energy prices will add to the pressure on the ECB to move to full US-style quantitative easing.” (Financial Times, John Plender, December 7, 2014)

“With U.S. output at a 31-year high and imports at the lowest level since 1995, producers seeking the best possible price for crude are straining at having to keep sales at home. Removing the ban could erase an imbalance between U.S. and foreign crude prices by expanding the market for shale oil… The Government Accountability Office, Congress’s investigative arm, in an October report concluded that exports may lower pump prices by as much as 13 cents a gallon, even as they raise U.S. oil prices. That would happen because gasoline is pegged to Brent, a global benchmark price, rather than West Texas Intermediate, GAO said” (Bloomberg, December 5, 2014)

Levels: (Prices as of close: December 5, 2014)

S&P 500 Index [2,075.37] – Since the October 15th lows, the index has gained 14% to yet another all-time high. A dramatic turnaround to the established bullish trend. No tangible signs or clues of a stop forming at this stage.

Crude (Spot) [$65.84] – Struggling to find a bottom. The intra-day lows on December 1st of $63.72 suggest some sign of a desperately needed clue. Nonetheless, the price reflects low investor demand and expanding supply, and that realization has led to a powerful sell-off.

Gold [$1,209] – Another attempt to stay above $1,200. Inability to stay above this mark may signal another wave of selling. For now, the long drawn out bottoming process remains intact.

DXY – US Dollar Index [89.33] – The explosive run continues. The next critical range is passing the 90 range to re-ignite continuation of these multi-year highs. Momentum for the dollar continues to be positive.

US 10 Year Treasury Yields [2.30%] – The last two months showcase a form of stability between the 2.20-2.40% range. June 2007 highs of 5.32% seem far removed. In a similar manner, the July 2012 lows of 1. 37% seem farther away (in terms perception) than closer at this point.







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 | December 1, 2014

“In times of rapid change, experience could be your worst enemy.” (Jean Paul Getty, 1892-1976)

Rapid Reminders

A year ago (2013) some Emerging Market economies like Brazil and Turkey saw their stock markets collapse. Around the same period, gold prices began to crumble reminding investors that cycles do turn very quickly. In fact, the gold bugs fixation was overly enthusiastic with ambitious forecasts that seem rather moot now. The biased and hyped opinions dominated financial circle discussions but eventually the market behavior has the last say (or laugh).

Similarly, the spectacular growth of some EM seems like an old classic movie script. The record highs for EM fund (EEM) were last seen in October 2007. Active participants must be careful when digesting passionate views from so called pundits and analysts. A dogmatic approach (ignoring clues) to market comes with a heavy penalty when the script changes.

This year the strength of the dollar (relative to other currencies) has turned into a vital macro trend. At the same time, crude prices have dramatically decelerated by resetting all types of expectations and forcing analysts to reexamine implications from consumers to oil rich nations. Intended or unintended consequences are lurking, but the trend for oil is much clearer.

Sudden, unexpected shifts should serve as a collective reminder. How many expected Gold below $1,200 and Crude below $70? Not many! Perhaps these are lessons to recall when thinking ahead to the next theme and the next year. Beloved themes and ideas can crumple quickly where a proper time to react can be limited. That’s been the message from currencies and commodities, and there is wisdom to take away and apply for other markets in the near-future. Invincibility for a trend is not an option, but timing is always an intriguing challenge.

Dissecting the Narrative

For few years, stocks have been the “reliable and rewarding” global investment, especially in US equities. Investors have witnessed positive returns and that itself speaks the loudest for short-term decisions. Essentially, the current stock market dynamics create comfort and builds false future assumptions, too.

“According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment increased from 49.12% up to 52.15%. This marks the eighth straight week that bullish sentiment has been above its bull market average of 38.6%, which is also the longest streak we have seen in 2014.” (Bespoke, November 28, 2014)

When risk taking is fueled further by low interest rate climates then it further justifies the lack of alternatives. So the suspense of interest rate directions has not been overly mysterious (in hindsight). Rather, it’s been one sided—Low and lower. In a similar manner the volatility measures continue to dip lower, reaffirming further calmness. In 2015 -How low can rates and volatility go? The conditioning from the Fed’s actions and messages may trouble many to see a world of rising rates or rising volatility. For now arguing both is rather visionary and not backed by near-term performance.

Importantly, lessons from the supply-demand dynamics for crude suggest that one day/moment reality sinks in and prices adjust quickly and the cheerleading analysts will depart from their charged views. It may seem normal to keep thinking low rates equal higher stock prices for the months ahead. Yet, it's rather adventurous to expect this and that is the unknown risk. The mental challenge of thinking something is predictable and to be expected is a dangerous approach as record highs blind participants. Thus, the mystery for the next equity move awaits as for now, and the record highs are celebrated.

The Mindset

The claim that equities are the favorable investment is gaining more merit, more acceptance and raising fears of participants— being hubristic is not deemed as a major factor in the claim. The last 24 months have proved to the casual observers that naysayers are missing out on an upside. The psychological impact of missing an opportunity leads to a rush of capital allocation and that’s been a theme for months and months. Amazingly calling bubbles in stocks have been the wrong choice from a timing perspective, and moving ahead it is a test of nerves for those looking to double down on the risk-reward.

An overriding theme that shapes minds revolves around interest rates, as usual. No matter how many data points cross the wires, the endgame for risk-takers is: Where do I allocate capital? Even if the real economy is not vibrant, even if small business health is not fully resorted, there is more emphasis on chasing returns. The buyback magic that lowers the shares of stocks is an influential trend that should not be dismissed. Corporate profit is a powerful statement, but weakness in sales may surprise many ahead. Planning for surprises is what most analysts struggle to do and the herd mentality is less willing to hear and, perhaps, this is the time to reshape the mindset before 2015.

Interconnected Message

On one end interest rates are low because of the soft global growth from Eurozone to Emerging Markets and even the not so robust growth in the US. Meanwhile, the decline in crude prices reflects slower and weaker global growth. In both cases, the economic growth is slow when viewing it through the oil and interest rate patterns that are screaming. There is a weakening economy that’s masked by heating stock markets; and surely this message is hardly surprising these days.

How much longer can this economic weakness be ignored? The conductors of financial markets might have an edge in crafting a message to justify the unimpressive economic conditions and impressive stock behavior as good progress. As for interest rates, there is a mysterious element that lingers with the ECB awaiting to decide on easing policy. The world fixated on easing policy (i.e QE) has shaped the status-quo and it feels like the norm, but safe to say it is not fully understood. However, the unimpressive economic conditions are being slowly understood by various indicators.

Article Quotes:

“Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades… Oil and gas provide 68 percent of Russia’s exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 31 percent against the dollar since June.” (Bloomberg, November 30, 2014)

“The ECB warned that riskier corporate bonds and some forms of bank debt are already looking overpriced as investors search for yield in an environment of ultra-low interest rates. The central bank identified an abrupt reversal of this search for yield as the main danger to financial stability in the region. That threat would be exacerbated if, as expected, the ECB extends its purchases of asset-backed securities and covered bonds to include mass government bond buying, a policy which works in part by boosting the prices of riskier assets… While there were signs of “excessive froth” in the market for high-yield corporate bonds and some Cocos – a form of bank debt which behaves like equity should a bank fail – the ECB’s report found that “normal” corporate bonds and equities did not show any indications of overvaluation. The problem highlights a challenge facing central banks across the world. Many monetary authorities have taken on more responsibility for safeguarding the health of the financial system, while at the same time pursuing an aggressive monetary policy that some believe has done more to spur asset prices than revive growth.” (Financial Times, November 27, 2014)

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

S&P 500 Index [2067.56] – The second half of the year has displayed that the index can stay around or above 2000. The August and October corrections led to a bounce back to 2000, which continues to shape a more bullish signal. Yet, the 200 day moving average of 1935 seems further removed now than mid-October.

Crude (Spot) [$66.15] – The massive break-down continues. The break below $80 added further pressure; and shockingly and quickly the lows reached $65.69 last week. This massive drop is a realization of a long awaited supply-demand imbalance as emotion driven responses will need time to settle.

Gold [$1,194] – Stuck below $1,400 and attempted to bottom at $1,200. Downtrends since the July highs of $1,340 reinforce the lost momentum within the cycle peak. A quick recovery does not seem feasible, but stabilization around $1,200 appears practical.

DXY – US Dollar Index [88.35] – The mid-summer eruption of the index led to a critical shift of strengthening the dollar. The shift is setting multi-year highs, and surely reshaping the currency markets.

US 10 Year Treasury Yields [2.16%] – Yields are struggling to stay above 2.20%. Recently, resistance built around 2.60%. Any move below 2% is most likely to trigger responses. For now, annual highs of 3.05% seem very far removed.



Dear Readers:

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

Market Outlook | November 24, 2014

“Worry is a cycle of inefficient thoughts whirling around a center of fear.” (Corrie Ten Boom 1892-1983)
The “Simple” Tale

As 2014 draws to a close, the theme of easing from ECB to Japan to China is the key market driver— following the footsteps of US policies, of course. After all it is simple to understand: lower rates lead to higher stock prices and that's the slogan being presented and perceived by most market participants. The last few years serve as stark evidence of this slogan, and now that trend has turned into a quasi-marketing pitch masterminded by Central Banks.

The continued demise of volatility after a brief awakening this fall further confirms the strength of this resilient US stock market. Close observers will point to small cap underperformance and other worries of sustainability, but the “cautious” crowd is struggling to get mass following. The Gold aficionados and those fearing inflation have quieted down a bit after revisiting prior assumptions. The dollar is strengthening, inflation is hardly a worrisome topic and Gold prices are much lower than most expected. Similarly, beyond a 10% broad index correction, the downside pressure for stocks has been limited for equity markets.

Even European yields are much lower than imagined when compared to 2011, as the orchestrators of financial markets continue tout their brilliance via easing. Thus, believers keep piling on risk as the desperate search for yield is a reality. Turbulence in all angles has disappeared and the reappearance early this fall was short-lived. The list of issues that were feared to cause market shock (i.e. earnings, weak economy and macro instability), now seems less likely to catch the attention of risk takers. As the balance tilts again towards optimism, some see it as a result of limited option for capital to seek reliable returns. Strange dynamics shape perception, which eventually turns into a temporary (or extended) reality. Complexity aside, the herd mentality is sticking to this story with the Fed's reinsurance serving as a confidence booster.

Cycles & Sense

The commodities markets continue to reflect the fundamentals of supply-demand as well as the impact of cycles. As Crude prices showcased in recent months, in a world of slow demand and expanding supply (especially in the US via drilling), eventually come under pressure. Perhaps, the supply-demand dynamics are making more sense and are clearer for commodities than other mysterious markets. Fair to say, the boom and bust nature of commodity cycles is natural and easily understood in hindsight, of course.

Not to mention, the decade old boom in commodities reached a peak from a cyclical point of view. Most of the commodity run-up in the 2000’s was driven by Emerging Markets demand, and slowing demand has been visible even before the supply expansion. Nonetheless, for speculators digesting the oil and gold prices demise the answer might be more tangible to grasp without much mystery to dissect. Surely, the drop in oil prices sparks talk of countries negatively impacted and potential impact on foreign policies; also further regulatory discussions of commodity trading rumblings continue. However as the postmortem analysis continues for oil and other commodities, plenty of noise distracts from the basic root of market-moving forces. At the same time now that commodity prices are much lower, the impact on consumer behavior, international trade and corporate earnings begs further questions.

Deceivingly Obvious?

The parade around US stocks is not a new theme; however, the remarkable run impresses further at each record high. Reconciling why prices are going up (and why the status-quo might change) requires a few questions and explanations. Is it share buybacks that lower the supply of available stocks or lack of alternatives in this messy world? Is it the demise of commodities or the promising revival of US economy? Is it mainly Fed/interest rate driven or a reflection of optimism for very large corporations?

Although, presented as a simple tale, in the current trends in stocks may not be quite cut and dry like the boom and bust of commodities. These questions above are debated by writers of articles, casual financial observers and speculators alike. Yet, the perception of stocks being the relative favored solution in this climate is widely accepted. Awaiting surprises is a healthy approach even if all seems too simple, too sure and deceivingly obvious. Until, the rate hike expectations change dramatically the status-quo seems unshakable.

Meanwhile, the Fed is changing the script (on key indicators for economic health) as we go, thus having a basis to make future predictions is more of a wild card. The moment the trust in the Fed breaks this calmly scripted tale can face a dark awakening. For now, punditry is not going to manufacture fear or hint of rate hike timing. Living in the present seems a practical and safe approach for most investors.

Article Quotes:

“Why focus on wages and prices now when much of the developed world is concerned about deflation, or a decline in economy-wide prices? As I said at the start, everyone is focused on wages—for different reasons. The real median income in the United States is still 8 percent lower than it was in 2007. Some of the reasons for sluggish wage growth are unique to the current expansion, including the creation of a preponderance of low-wage jobs; the still large number of part-time workers (10 percent more now than before the recession) and the gap in wage growth between full- and part-timers; the ability of U.S. companies to shift production to low-wage countries; and the greater share of compensation flowing to health benefits. The unsolved question is what to do about it. Faster economic growth, the obvious solution, remains elusive as economists debate whether potential GDP has slowed permanently, in which case cyclical solutions can only do so much. In the long run, an economy can only grow as fast as the growth in the labor force and productivity, neither of which is showing much oomph. For its part, the Fed seems determined to see wages rise before it begins to normalize its benchmark rate. Given the wide gap between zero and some neutral rate, waiting for a signal from wages will be too late. It may seem like a trivial point now, with neither prices nor wages posing any kind of an immediate threat. But when the economy is finally able to walk without assistance, it is important for policymakers, in particular, to know if they are looking forward or looking back.” (Caroline Baum, The Manhattan Institute, November 18, 2014)

“The UK government delivers services and support such as defense, and financial and social protection. Sharing the costs is part of contributing to UK society. If all income tax is devolved, people living in Scotland will pay no taxes directly from their income for these quintessential UK services. That would weaken the ties that bind all member nations of the UK and erode the solidarity at the heart of it. Second, the UK is ceding a large part of its revenue base and its ability to manage the economy. Income tax accounts for 27 per cent of UK tax revenues. The result is that, for the first time in 300 years, a UK government would no longer have control over its power to raise income taxes. It could be left in a position where it determines the rate of income tax only to find it impossible to implement in Scotland, Wales and Northern Ireland. And its proposals in England could be voted down if it had no majority there. It would no longer be master in its own house… If we do not find a similar settlement we risk ending up with the same institutional strictures of the eurozone: an integrated monetary union without a fiscal union. No one voted forthat.” (Financial Times, Alistair Darling, November 23, 2014)

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

S&P 500 Index [2063.50] – Intra-day highs of 2071 set the benchmarkfor next record highs as the re-acceleration continues.

Crude (Spot) [$76.51] – The multi-month decline continues. Below $80 sparks another wave of concern as November 14th lows of $73.25 are closely watched. A 32% decline since summer highs is significant and may cause watchers to wonder if the bleeding is poised to slowdown.

Gold [$1,190.00] – Struggling below $1,200 as the multi-month decline lives on. Several occasions in the last year and half suggest strong odds for recovery at $1,200, but the weakness has not alleviated.

DXY – US Dollar Index [88.31] – Strength continues. The dollar strength reflects the continued easing pattern in Europe and China. Relative appeal of the dollar remains intact.

US 10 Year Treasury Yields [2.30%] – For about two months yields have failed to surpass 2.40%, reaffirming the low rate environment. This month the narrow range stands between 2.27-2.39% and appears firm for now.

**
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 futureinvestment performance of any securities or strategies discussed.

Market Outlook | October 20, 2014

“Things sweet to taste prove in digestion sour.” (William Shakespeare 1564-1616)

Digestion

September 19th marked a wake-up call for markets and now the digestion period is in full gear. In the game of speculation, the hunt for catalysts is usually sought after, but after bigger events the postmortem analysis creates further buzz. Risk is not avoidable, once the choice is made to participate in the speculation game. Of course before the mid-September cooling, the complacent market saw turbulence priced low and optimism priced too high. Surely, that led to an inevitable adjustment as investor appetite turned a bit sour.

Sudden but major changes do not occur on a quarterly basis and timing; the markets serve as a mystery that creates intrigue. This October plunge has brought back the dramatic flair of fragile markets. For the current generation of participants, sell-off or crisis are not unusual considering the 2011 mild panic and 2008 historic crisis. Surely, even in the “silent” and “not so silent” bull market of recent years had enough skeptics traumatized by past events. As usual, the great unknown is figuring out when will the market decide to make a big move? When do participants collectively decide to sell-off or shy away from risk? And of course, at what point does selling become exhaustive or when does the market turn back its less turbulent ways? These questions were pondered this weekend in articles and discussions as well as occupying the minds of investors. Either way, a healthy correction ends up serving as a mere sanity check for all.

Mild Shock

Relative to the first nine months of the year, the recent moves require further and sober digestion, especially at the extreme ranges of last week: On October 15th, the S&P 500 index reached lows of 1820.66, the US 10 year yields touched 1.86%, and the volatility index (VIX) peaked at 31.06. It was a period where the mild panic kicked in and emotional responses took over rational thoughts of any kind. Meanwhile, Crude hit $79.78 briefly on October 16th putting an exclamation point to the current cycle slowdown. Are all these exaggerated levels at extremes or warning signs? The market has responded. Now investors' reactions will determine how the year ends from here. General sentiment is leaning towards buying stocks and appears to support adding further risk.

It is no secret that negative market moving elements were brewing even before late September considering dollar strength and commodity weakness. Sure, a few periods of sell-off attempts were briefly witnessed in the beginning of the year and in the spring. Both corrections failed to leave a lasting effect.

Thinking Ahead

At this junction rational minds wonder if the “improving economy” story lives on. Oil prices are now dramatically down and borrowing rates remain low. Does this fuel the consumer driven economy? In terms of housing markets, the refinancing trends continue:

“A gauge of U.S. mortgage refinancing jumped 10.6 percent last week, the most since early June, the Mortgage Bankers Association said Wednesday. The share of home-loan applicants seeking to refinance climbed to 58.9 percent, the highest since mid-February, from 56.4 percent, the group said. In December of 2012, after the 30-year average rate hit a record low of 3.31 percent in November, borrowers wanting to refinance accounted for 84 percent of applications.” (Bloomberg, October 17, 2014)

Consumers may benefit from lower oil and heating prices according to some. That’s to be explored, but as for Energy investors, the price declines have hurt the commodity as well as the stocks. The energy fund (XLF) has dropped nearly 24% from June 27th to October 17th. A theme that has changed dramatically for investor’s fortune, but the impact on economy will be shortly discovered.

Before this autumn the Eurozone conditions worsened despite chatter of further stimulus. Like the 2011 lessons, Europe is trying to shake-off the damaging conditions of no growth. In addition, the Russia-Ukraine tension stirs further instability along with China, Iran and other macro developments. Not to mention, 2013 reflected massive sell-offs in Emerging Markets. Thus the sudden inter-connected panic that stirred is not overly shocking. Now sensitivity grows for short while where data points might be biased towards negative interpretations. In addition, countries that heavily rely on Oil to drive their economies will feel the effect as well, which can spark a changing geopolitical landscape (more on this below).



Unsynchronized

Perhaps the economy may revive from sluggish conditions, but market related concerns can persists. For a while the cycle between real economies versus stock prices seemed disjointed and uncorrelated. In the past many asked: How can stocks rise if the real economy is not stellar? Now, the same folks may ask: How can the economy rise if stocks are shaky? Fragile markets await corporate earnings, investor sentiment, and the Fed’s script. The reliance on the Fed, reduction of shares available, and lack of alternatives have dramatically benefited stocks in the last five years. The art of all this is the understanding that the market drums to its own beat better than the economy. To assume both move the same direction is a flaw, but to dismiss it is equally flawed, too. The rest is risk taking and dealing with the Fed’s messaging which thus far has been influential in shaping investors' minds. The pressure to keep the optimistic light on is building for the Fed. Right now enough believers may persist, but if the Fed is ever defeated psychologically then another wave of panic awaits. For now the Fed’s popularity and ability to cool concerns is still high.

Article Quotes:

“Twenty countries depend on petroleum for at least half of their government revenue, and another 10 are between half and a quarter. These countries are clearly vulnerable to big changes in the price and quantity of oil and gas that they might sell. But which ones would have the hardest time coping? One factor that will affect them is the diversification of their economies. In countries where petroleum is responsible for a lot of revenue but not much of overall economic output, there is at least the possibility of broadening the tax base. Starting with Qatar…, all the countries depend on petroleum for less than a fifth of gross domestic product. But some of them are lousy at collecting taxes, which is the revenue they'll rely on when earnings from oil and gas decline. According to estimates compiled for 2005 to 2007 by Andreas Buehn of the Utrecht School of Economics and Friedrich Schneider of the Johannes Kepler University of Linz, the shadow economy -- or black market -- may make up more than half of Nigeria's GDP, and more than 40 percent in Chad, Russia, Myanmar, and Ivory Coast. (Of course, this may be part of the reason why petroleum revenue accounts for so much of their governments' budgets.) Recovering from a dent in government revenue would be especially tough for any of them.” (Foreign Policy, October 17, 2014)

“The unorthodox steps the European Central Bank has taken since June – including a programme of private-sector asset purchases – have caused a steep fall in the euro. The single currency is down 8.4 per cent against the dollar and 4.75 per cent on a trade-weighted basis from its peaks this year. The weaker exchange rate will ease pressure on the ECB in its fight to raise inflation back to its target of just below 2 per cent. Mario Draghi, the central bank’s president, has said the currency’s earlier strength explains 0.4 percentage points of the fall in inflation since 2012. In that year, prices were growing 2.7 per cent a year. But just as this depreciation is starting to fuel inflation, the ECB must contend with a fall in oil prices that all but wipes out the effect of a sliding currency. A weaker euro should swiftly raise the cost of imported energy. Instead, Brent crude has fallen 9 per cent in euro terms this month alone. This is the main reason why eurozone inflation fell again in September to 0.3 per cent, a five-year low – a figure confirmed by data on Thursday. A cheaper euro will also please business leaders who have long called for action to curb the value of the currency. But economists warn it is hard to tell how far this bout of depreciation will help the region’s anemic recovery. In theory, a rise in company profits should support business investment, hiring and consumption. But analysts warn that the relationship between exchange rates and export volumes is far from clear-cut.” (Financial Times, October 19, 2014)

Levels: (Prices as of close October 17, 2014)

S&P 500 Index [1886.76] – From September 19 to October 15 the index fell 9.84%. A near 10% correction has taken place with a 200 moving day average sitting at 1906.02. Interestingly, 1906 is where the market closed two Fridays ago and the 10 day moving average stands at 1906 as well. Thus, it serves as a good barometer for sentiment. Either buyer momentum is short-lived or more heavy selling awaits.

Crude (Spot) [$82.75] – Fair to say, the collapse is intact as the selling pressure mounts. Amazingly, the commodity reached below $80, albeit not for long. Overall, the action suggests oil is severely beaten up and now approaching relatively “cheap” levels for some. Potential bounce back is inevitable but the duration of any pending price recovery remains a mystery.

Gold [$1,237.75] – Since last summer, Gold has danced in a familiar territory between $1,200 and $1,360-ish. Long drawn out bottoming process. The 33% correction from October 2012 to July 2013 has left a big dent in investors’ optimism. Shaking that off has taken a while. Finding a spark for a recovery to $1,400 has been talked about but follow-through has yet to materialize.

DXY – US Dollar Index [85.91] – Following a relentless run-up in the past few months’ signs of slowing. A mild pause is taking place. Hard to deny the strengthening dollar which has served as one of the key macro shifting movements in recent months.

US 10 Year Treasury Yields [2.19%] – This year, from May to late September, yields stayed between 2.40-2.60%. The dramatic turn in last few weeks drove yields below 2% for a short while.




Dear Readers:

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

Market Outlook | October 13, 2014

“In seed time learn, in harvest teach, in winter enjoy.” (William Blake 1757-1827)

New Season

The autumn season has marked a market cycle filled with realizations of long ignored and accumulating dangers. Ultimately the inevitable reality check for the global economic and geopolitical health is more visible than before. A bullish run conducted by the Fed has headlined the script, but substance needs to back perception given share price appreciations.

At a quick glance, Emerging Markets (EEM) declined over 10% since early September. Similarly, the Nasdaq dropped around 7% since September 19th and the small cap index (Russell 2000) is down over 13% since July 1st. Various signs of weak economic data points came and went without major emphasis. Nonetheless, stocks are showing that invincibility from reality is unsustainable. The antiquated and classic Dow Jones Index is down on the year (for scorekeepers) despite the excessive cheerleading sequences of prior months. Talks of rate hikes turned out to be a mere chatter. To the surprise of many, the US 10 year Treasury yields stood below 2.30% as of Friday. The yields are dramatically low when considering analysts' expectations from the start of the year. Inflation expectations continue to be lower. This setup in rates and inflation showcases the lack of growth. Rightfully so, this creates more unease for longer-term investors.

The summer months provoked grand changes to the status-quo mindset that began since the 2008 recovery. Some of the drastic changes are highlighted by:

1) Crude prices declining at a rapid pace
2) US Dollar’s strength and momentum
3) Stock markets struggling to make new highs

Some crowds await a stock market rebound, then a rally from these levels. Surely, the power of the recent perception and the familiar patterns left create a bias towards positive sentiment. Yet, how are these current market levels deemed “cheap”? How can the current sell-off be ignored again like prior 4-5% broad US index corrections? Risk, valued so cheaply in early July, has erupted in the last 15 trading days. This awakens new sorts of thoughts. Safety may be set to trade at a premium and hope appears deeply overvalued.

Macro Climate

In last twelve months investors had a chance to prepare for potentially unsettling patterns. Sure, mid-term elections are approaching in the US which can shift political perceptions and dynamics. Amazingly, what has transpired in the last twelve months is stunning to quantify. First, Middle East nations lack any further stability, as has been documented in the past few years. Second, the Western world attempts to restore economic fruitfulness, yet revival remains extremely difficult especially in European economies . Third, events in Ukraine, fragile relationship with Russia and China, and Eurozone stimulus efforts appear enough to stir concerns. Or at least future concerns appear to be brewing. Elements of a cold war like traits reappear in some form, and the geopolitical saga will find a way to affect the day-to-day eventually. Even if macro items do not drastically drive the market; at some point, analysts will have to question impact on globalization after decades of facing various challenges.

Psychological Points

Last Wednesday the Fed sparked a massive rally, only to see Thursday and Friday turn into a selling frenzy. The ongoing theme of the Fed "saving the day" has been the mantra for this (and most) rallies, yet lack of rally during the last two days may have rattled the Fed's ability to orchestrate a rise in asset prices via confidence. In looking ahead, further declines may require the Fed to step in for further emergency actions – if we get there. Simply, the spike in turbulence (VIX) last week begs the question of the Fed's role as a last resort or next move. After all, t majority of participants believe and accept the power of the Fed-led rally. A true test has yet to play out between earnings, macro changes and whether or not recent sell-off is enough.

Meanwhile, the Nasdaq index, which stayed above its 200 day moving average for so many days is being challenged now. The sudden shift is catching the attention of basic technical observers. Buyers may be enticed to buy at a very slight discount, but if that fails to induce then selling pressure looms. Some believe that earnings may tell a better-than-expected story. Others will be in suspense as they ponder the dollar's impact on earnings. Perhaps, market mood swings may turnout to be more sour that expected.

Finally, share buybacks have limited the supply of shares outstanding in recent years, contributing further to increase in share prices. Whether a gimmick or a tactical move, buybacks helped lift many large company shares. Skeptics wonder at some point if this momentum can slow as well. It is one of many factors, but the supply-demand dynamics of stocks are certainly critical. In fact increased buybacks have left a strong mark in this bullish run.
Early sell-offs are not initially over dramatized, but when various factors begin to point towards shakier conditions then deceleration occurs faster than imagined. Thus, minor clues are not to be taken lightly, especially at this cycle junction.

Article Quotes:

“Since then oil prices have dropped to nearly four-year lows, pushing the sale price of Mexico’s main crude stream well below the $83 level that is the basis for next year’s budget. One-third of Mexico’s budget is funded by oil revenue in response, the government last week paused its purchases of insurance from large investment banks against lower oil prices. according to market participants. Mexico’s growth screeched to a halt last year after the government was slow to open the public purse strings, but recent data indicated that the economy grew a stronger-than-expected 2.52 per cent in July. If the government is forced to cut spending it could put the recovery at risk.

As volatility has increased, costs have risen for the hedging programme. The latest 5m-barrel batch of put options to appear on a new US derivatives database, dated September 29 and identified by market participants as part of the deal, showed a premium of $2.77 per barrel, almost twice that of the first batch 12 days earlier. The current premium would be higher still if Mexico were to trade now. Mr. Lacaze estimated the hedging programme, for about 180m barrels of net oil exports, was less than half finished. Mexico’s hedging effort has been further complicated by new rules requiring basic deal terms with Wall Street banks to be made public in data repositories.” (Financial Times, October 12, 2014)

“At home, Chinese media each day feature news from Hong Kong but avoid images of the demonstrations themselves, and instead focus on collateral impact such as snarled traffic, empty shops and experts who highlight risks to Hong Kong’s reputation as an international finance center. As proof of U.S. backing for protests, the editorial cited alleged activity by a senior official of the National Endowment for Democracy, a foundation funded by the U.S. Congress, including meetings held with protest organizers months ago. The official, Louisa Greve, couldn’t immediately be reached. On social media, Ms. Greve has appeared to support Hong Kong’s student protesters. Her most recent post to Twitter on Oct. 4 makes reference to the United Nations’ International Covenant on Civil and Political Rights, to which Hong Kong is a party under prehandover agreements and which sets out requirements for fair and democratic elections.

For years, China’s government has tracked the activities and donations of U.S. groups like the National Endowment for Democracy. A task force of mainland scholars was set up five years ago to study “the activities of U.S. [nongovernmental organizations] in Hong Kong and their impact on Hong Kong’s politics and policies,” according to an outline of the project’s works.” (Wall Street Journal, October 11, 2014)

Levels: (Prices as of close October 10, 2014)

S&P 500 Index [1,906.13] – Since September 19th the index has fallen over 5%. Technical indicators alarms observers as the 200 day moving average stands at 1,905. The late July to early August sell-off was short-lived. Therefore, short-memory suggests an oversold bounce is due. Interestingly, the August 7th lows of 1,904 remain critical in the weeks ahead.

Crude (Spot) [$85.82] – Since June 20, 2014 the commodity has declined over 20%. From supply-demand standpoint, not quite alarming considering expanding supply and slowing demand. However, from a price movement perspective this downtrend is notable. The four month deceleration sparks a massive global trend.

Gold [$1,220.50] – Since September 9, 2011, gold prices have dropped over 35%. At around $1,200 some selling pressure may ease temporarily. No evidence of a trend change, but three years of sideways patterns confirms the sell-off from a cycle peak.

DXY – US Dollar Index [85.91] – After a surging run since July, there has been a very slight pullback. Yet, the strong dollar theme lives on. Quite a statement from the macro standpoint as the sustainability remains suspenseful.

US 10 Year Treasury Yields [2.28 %] – 2014 continues to amaze most pundits at how low rates can fall. Three percent was very short lived. Then 2.60-2.80% remained a steady range from February to April. Recently, staying above 2.60% has proven difficult as 2.26% marked the low last Thursday.

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 29, 2014

“Nature has always had more power than education.” (Voltaire, 1694-1778)

Selective Hearing

Bulls and bears continue to hear the message that they want to hear. The bullish spin is well documented. Simply put, optimism has been driven by the recent historical performance of low rates and higher stocks. More stock buybacks and less turbulence have summed up the trends for years. Lower yields and lower collective fears are the consequences of policies and sentiment. At this point all of these factors are so evident for market observers that little argument is needed to promote and glorify this multi-year market run. The scoreboard tells the story: Market bulls are more hubristic due to the several record highs and price appreciations. A period where no one wants to miss out the rally combined with high profile IPO’s surely creates the buzz of a bull market even to a casual observer.

For bears, many naysayers have overused "crisis" or “gloom and doom” outcomes dating back a few years. Some over-bet on commodities as a safe haven, particularly Gold; while others underestimated the Fed's power (as trickery or magic by some interpretations). Other cynics incorrectly screamed "top" or "bubble" to no avail. In the past some felt inflation was a critical issue for the economy. Meanwhile, others likely focused more on the rising rates as the catalyst. Another bearish argument centers on the slowing or not so vibrant real economy in Western nations. The lack of stock market correlation with fragile and weak economies was puzzling of course. Low wage growth combined with a lack of growth in small to mid-business is another matter. Bears have criticized this unhealthy set-up by stressing this climate is overly favorable to super large companies. With weak economies comes further sentiment changes, which has been long awaited by the highly bearish crowd, who were silenced in recent months.

A market breather now seems both overdue and needed if there is a natural flow to this market cycle. Amazingly, with each record high the bears' momentum appears crushed, but more than ever prior arguments are still worth keeping on the radar. Presumably, a natural response is looming.

Reconciling

As October approaches, the bullish argument faces more difficult questions in preserving the status-quo's dynamics. Certainly, the Fed-led rally has been battle tested, so far surviving the “crisis” or “panic” like reaction by global investors. Not only have low interest rates and low volatility benefited from this market, but so have other technical issues.
First, the supply-demand of outstanding shares suggests that corporate buyback has played even a bigger role in accelerating share prices. As many ponder past events and implications, a potential shift in the reduction of an overall supply of shares shows that:

“Second-quarter S&P 500 buybacks decreased 27.1% compared to the prior quarter, and fell 1.6% vs. to the second quarter of 2013, S&P Dow Jones Indices” (Pension & Investments, September 23 ,2014).

Secondly, if investors look beyond the surface, small cap indexes (non-S&P 500 stocks) have shown to be weaker relative to larger names. The Russell 2000 index, a small cap barometer, has declined by nearly 8% since peaking on July 1st 2014. Unlike the Dow Jones and S&P 500 indexes, which trigger plenty of day to day attention, the smaller cap areas have not preformed in the same manner, and the ongoing weakness signals another warning sign. Perhaps this is similar to Emerging Markets' struggles of 2013, which provide investors with another perspective in which valuations are stretched and a reset is deeply needed.

Timing is everything, but timing the market is a daunting task. Nonetheless, tracking the buybacks and small cap trends can serve as catalysts that contribute to shift in the status-quo. One may argue that instead of looking for an external catalyst, it is better to track the shift in factors that contributed to this run. As all eyes are focused on interest rate policies, other indicators become even more vital.

Bigger Picture

Investor sentiment has not dramatically reacted to the unfolding global events and historical matters. There is a sense of immunity by the equity markets, which did not respond to Ukraine or extremist group threats or even other political deadlocks. Interestingly, these events did not overly sway participants to react in a negative manner. Most notably the Eurozone crisis came and went and most appear numb to the known troubles. ECB’s attempt to lower rates is not a convincing prospect especially given the Fed’s inability in the US to create a robust economy during a low rate period. Instead, we’re in a political and leadership crisis amongst the Eastern nations (Russia, China) who oppose the interest of traditional Western nations.
Many are asking the status and value of globalization at this junction. Emerging Markets had their moment, but trouble loomed. China’s growth is highly questionable, and Russia is at the forefront of reexamining relations with Western nations. Surely, corporate interest and foreign policy matters are not aligned, and markets are focused on earnings rather than the 10-20 year implications for now. However at some point, the status-quo of a higher global stock market will have to confront pragmatic realities and not only perception.

Perhaps, the dollar strength is one indicator that screams of a trend shift, or at least is sounding an alarm of sorts. Essentially, the strong dollar is changing the landscape not only for other currencies (Euro) and commodities (i.e. Gold and Crude), but soon this may impact corporate earnings. Perhaps, this may play-out in day to day stock movements. As many speculate the next catalyst or turmoil in global events, the Dollar is loudly making a wake-up call to collective assets. However, the stock-market and volatility are the indicators of a broader interest, and the numb responses to concerns have been stunning. How long can stocks live in a world of their own? How long can investors tolerate the calmness directed by the Fed? The biggest puzzle of all: how long can the status-quo drive these stocks higher based on perception rather than reality? A new season and a new month look to tackle these unanswered questions.

Article Quotes:

“Russia’s state-run OAO Rosneft said a well drilled in the Kara Sea region of the Arctic Ocean with Exxon Mobil Corp. struck oil, showing the region has the potential to become one of the world’s most important crude-producing areas. The announcement was made by Igor Sechin, Rosneft’s chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today. The well found about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said… The discovery sharpens the dispute between Russia and the U.S. over President Vladimir Putin’s actions in Ukraine. The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia’s Arctic offshore. Rosneft and Exxon won’t be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today… The development of Arctic oil reserves, an undertaking that will cost hundreds of billions of dollars and take decades, is one of Putin’s grandest ambitions. As Russia’s existing fields in Siberia run dry, the country needs to develop new reserves as it vies with the U.S. to be the world’s largest oil and gas producer… The importance of Arctic drilling was one reason that offshore oil exploration was included in the most recent round of U.S. sanctions. Exxon and Rosneft have a venture to explore millions of acres of the Arctic Ocean.” (Bloomberg, September 27, 2014)

“China is likely to delay its financial reform agenda in favor of stabilizing growth, economists and investors say, in a move that could hinder efforts to correct distortions in the economy. Deregulation of interest rates was a key plank in the ambitious reform agenda that top Communist party leaders approved last November, which promised to give market forces a “decisive” role in capital allocation… China has taken steps in recent months to impose market discipline on state borrowers. In May, the cabinet approved a pilot plan to allow local governments to sell bonds directly, rather than borrowing through opaque financing vehicles. The agency that manages SOEs also announced its own pilot aimed at raising the efficiency of state groups. But it could take years to transform SOEs and local governments into entities able to withstand a rise in borrowing costs.” (Financial Times, September 28, 2014)

Levels: (Prices as of close September 26, 2014)

S&P 500 Index [1,982.85] –For several weeks the 2,000 mark served as a critical psychological point. For now the September 19th number of 2,019 serve as a record high. Recent wobbly action and slowing momentum begs further questions about sustainability.

Crude (Spot) [$93.54] – Since 2011 the commodity has struggled to stay above the $105-110 range. On three occasions since 2012, selling pressure mounted from $105 to $90. The current sell-off is attempting to bottom yet again as $90.43 (Sept. 11) serves as a key low.

Gold [$1,213.75] – The demise in gold prices since October 2012 ($1,791) is visible. As a two year anniversary awaits from the Gold “topping” period, observers wonder if the $1,192 from July 2013 is the ultimate bottom which will satisfy sellers. $1,200 is a fragile and critical point in the weeks ahead.

DXY – US Dollar Index [85.64] – Continuation of an explosive run. Since May 2014 the index has gained over 8%, making a key macro statement by making multi-year highs. Resounding statements given the index remained in a well established trading range for a long while. A break above $84 is a big statement to solidify the dollar’s strength for eleven weeks in a row.

US 10 Year Treasury Yields [2.52%] – Once again Yields failed to stay above 2.60ish percent and in the recent past did not dip too much below 2.40%. Again, critical inflection points await as the summer lows of 2.30% from August are on the radar for observers.

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 22, 2014

“For me the greatest beauty always lies in the greatest clarity” (Gotthold Ephraim, 1729-1781).

Some Clarity

For a while now, on a daily or weekly basis, the questions surrounding the Federal Reserve’s polices examine the impact on interest rates and stock market directions. Surely, there is a mixture of some mystery and suspense. All-time highs along with rate-hike chatter create enough commotion to entice plenty into the risk-taking business. It is a guessing game of sorts that invites intense punditry and speculations.

At this stage plenty of explanations have been presented (i.e. stock buybacks, lack of alternatives, risk taking encouraged, IPO boom etc.), but the market gets to have the last laugh as timing a catalytic move is more difficult to predict. As attention zooms into stocks and rates, other areas such as currencies and commodities are reflecting some reality and changing perceptions that are valuable for the months ahead. Surely, risk-taking is not a defined science, but recognizing trends and identifying potential catalysts are two ways to increase odds.

The decline in commodities is visible in gold, crude, copper and natural gas. This is less debatable as the direction is defined. In fact, the CRB (Commodity Index) peaked in May 2011; in hindsight this turned out to be a prelude to the demise of gold and crude prices. Similarly, Emerging Markets (EM) have sold-off since September 5, 2014; and, not to mention, the ongoing underperformance versus US stock indexes. Finally, the decline in commodities and EM are inversely linked with a strong dollar. Interestingly, the dollar index’s empathic run for the last several weeks sums up current global conditions. Therefore, the relationship between Commodities—EM—Dollar is vitally interconnected. What this says about US stocks and volatility has yet to be deciphered.

Visibly Sluggish

Decline in commodities and sluggish emerging markets beg other questions: Is there a slowdown in the global economy? Or are there changes to last decade’s trends? One can argue that a slowdown in EM contributes to a slowing of demand in commodities. That has been visible and correlated enough to make a convincing statement to investors. For months, talk of the Eurozone slowdown mixed with sluggish China data has lingered. Both contributors to global growth are seeking stimulus measures as an attempt to reawaken the economy.

“The People’s Bank of China is injecting 500 billion yuan ($81 billion) into the nation’s largest banks, according to a government official familiar with the matter, signaling the deepest concern yet with an economic slowdown” (Bloomberg, September 17, 2014).

Fair to say, it’s widely recognized that the global economy is slowing down. For a long while many wondered why yields are so low if key economies are growing. If these real economy woes are going to be reflected in stocks or volatility is the ultimate pressing question. Challenges for ECB to stimulate the economy will be debated and political factors will get in the way. The collective price of low rates to stimulate economies is a trick that’s been tried and certainly is not magical. A sense of desperation can be felt in Europe as QE is up for consideration. Beyond the clever technical words and hopes of economic tactical moves, the woes continue and somehow the stock markets do not reflect the pending turmoil that’s cooking slowly in the desperate “kitchen.”

Current Theme

For now US bulls are arguing that rates will remain low, volatility will stay calm and stocks run-up will have room to go. This has been heard for several years. No credible methodology has been discovered to figure out the timing or end to this. Thus, the trend lives on. Last week’s Fed message dominated financial markets, but the end result led to the same status-quo of all-time high stocks. The sideshow of hyped IPO mixed with the urgency to chase market rally distracts from macro concerns stated above, as well as foreign policy developments that are brewing. Current scripts and investor habits appear oversimplified in their promotion of risk. “Fear is not to be feared” is the ultimate and dangerous takeaway of this. However, for staunch bull participants to ignore the various signals of macro realities from larger economies and other assets is a reckless approach. Even if the day of crisis is unknown, it helps to know the few symptoms that are silently moving.

Article Quotes:

“G-20 economies have submitted individual plans to boost gross domestic product by an additional 2 percent over five years, a goal the group committed to in February. The group will say in their statement that measures proposed so far will boost GDP by 1.8 percent. Members will commit to additional action to meet their target ahead of a summit of G-20 leaders in Brisbane, Australia, in November, the official said. Even as the group discusses longer-term measures to lift economic output, officials in the U.S. and Canada are pressing for more immediate steps to boost demand… G-20 finance chiefs are considering asking investors in the communique to be vigilant against taking excessive risks, according to another official from a G-20 economy, who asked not to be identified because the talks are private. Some emerging markets argued against including the warning in the statement due to concern it could cause reactions in the financial markets, the official said. German Finance Minister Wolfgang Schaeuble told the G-20 meeting yesterday that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official, who briefed reporters on condition of anonymity in line with policy.” (Bloomberg, September 20, 2014)

“Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing's counter-investigations. Three reports published this month separately accused three Chinese companies - Tianhe Chemicals, 21Vianet and Shenguan Holdings - of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public. The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number. In the last wave of short-selling that peaked in 2011 and wiped more than $21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public. Carson Block of Muddy Waters, one of the most prominent short sellers, openly accused several Chinese companies of accounting fraud. Block said in 2012, according to several media reports, that he moved to California from Hong Kong because he had received death threats.” (Reuters, September 22, 2014)

Levels: (Prices as of close September 19, 2014)

S&P 500 Index [2,010.40] – A short-lived stay below 2,000. Another run-up last week to new record highs. Interestingly, the recent move from 2,011 (Sep 4) to 1,978 (Sep 15) did not stir enough of a reaction, this did not result in a selling pressure. Instead, the bullish bias resumed based on last weeks’ finish.

Crude (Spot) [$92.41] – In the last twelve months, crude has lost its momentum and in the past 3 months, the deceleration has been pronounced. The next critical level is closer to $90 while technical observers await for a lively bounce at current levels. Two vital takeaways from early 2012 and mid2013 suggests that $100 is where buyers have been exhausted. Perhaps, it is a hint to ongoing decline below $100.

Gold [$1,220.50] – A near $500 drop from September 2012 highs has marked a beginning of a cyclical bear market for Gold. The inability to entice buyers above $1,400 has triggered even less belief in the previous bullish story. July 5th lows of $1,192 are desperately awaited by some buyers as much as sellers. Revisiting 2012 highs for now seems ambitious.

DXY – US Dollar Index [84.73] – An explosive run in recent months. The index is up more than 6% from the lows in July 2014. Investors are awakening to the dollar strength story. The sharp rise may lead to suspicion about the sustainability; however, it is hard to deny the massive shift in the index from cycle/pattern observers.

US 10 Year Treasury Yields [2.57 %] – 2014 was mostly defined by the trend that saw yields decline from 3.04% (January 2nd) to 2.30% (August 15th). Remarkable declaration of ongoing lower yields. However, Since August 15th the downtrend has been slightly broken with a move above 2.50%. It begs the question if this trend reversal is a fundamental change or a short-lived rise in yields.

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.