“We must embrace pain and burn it as fuel for our journey.” - Kenji Miyazawa (1896-1933)
Realignment and Realities
At this point of the cycle, the question is whether or not we have endured enough pain. Following a lost decade, triggered by the peak in 2000, the longer-term cycle supports a few ugly years ahead for traditional assets. It’s quite evident we are in a period of deleveraging, with a reassessment of sovereign risk and a makeover of financial systems. Through this cycle, Europe reminds us of the consequences of a fragile banking system and the interlinked nature of the debt crisis. For strategists, this fails to restore confidence in previous models designed to forecast the next five to ten years. There will indeed be reshuffling in sectors where unraveling constrains the pace of a recovery.
Beyond the political noise and radical financial resolutions, the markets themselves demonstratively showcase the lack of confidence coinciding with the failure of stimulus efforts. As usual, reacting to the truth is unfortunately more painful than the artful process plaguing fund managers. Of course, weak periods spark further emotional responses as frustration echoes in participants and even politicians. Usually an election year in the US has some relevance on market behavior; notably, the third year of a presidential cycle typically generates some optimism for a turnaround. However, this time the impact on the business cycle may be unlike previous years, given the growing list of financial and economic worries. The robust status of the developed world, or capitalism, is not too comforting for a global investor. This is entering unchartered territory for private and public decision makers and risk managers of this generation. The stakes are higher, while the experience to deal with crisis is rarely taught in business schools or banking training programs.
Essentially, more time is needed to accept the new realities before sparking a tangible change. Common bullish clichés have been nearly used up since February 2011. Examples include: valuations are cheap, faith in pending intervention, “Don’t fight the Fed,” and historical evidence of markets ending up higher. Those applying these concepts have noticed the market forces are too entrenched in lingering debt and economic issues. Therefore, when making timely trades one should stay cautious, so as to not lose the essence of this backdrop. Basically, denial was the mistake leading to and from the events of 2008. Thus, maybe now enough observers, consumers, and policymakers are begrudgingly adjusting overall expectations in line with truth. Before being washed up with growing negative sentiments, one should not forget that in its current state the US offers relative attractiveness, even in this secular bear market.
Safe for Now
Accumulating shocks forced investors to scramble for liquidity or safety. After all, when in crisis human nature dictates self-preservation behavior. It is simply a collective response to cling to basic investment approaches while deleveraging. Gold, Treasuries and the US dollar remind us that a “reset” of new realities translates into inflow toward the liquid assets which are perceived to be safe. In looking ahead, assuming that “safe” assets are immune to underperformance may be equally troublesome once the dust settles. In due time, tracking movement away from liquid instruments can provide some clues as to shifts in risk appetite. For now, shelter is in high demand while other benchmarks are not putting up a relative fight to attract risky capital.
Navigating Year-End
Entering a new season, and a new quarter, brings some hopeful thoughts for those with the ability to quickly erase memories. Last quarter damaged most equity and commodity managers. It was a historic July to September period, when considering annual lows in stock markets, very low yields, currency adjustments and interventions, low bond offerings and tense government deliberations. Interestingly, last month witnessed the Dollar higher, while Gold showed its first major dent in a while. Now, the S&P 500 and the commodity index (CRB) are down over 10% for the year. Managers are faced with either doubling down to play catch up before year-end or throwing in the towel with desperate macro conditions. Surely, both positions are discomforting in a period of liquidity, obsession and increased sensitivity. Therefore, in the near-term, closely watching the impact of currency adjustments, actual results of the European resolution and Federal Reserve action can serve as indicators for potential catalysts within this downturn.
Article Quotes:
“Why should we have any confidence that a deal can be done this year, given how badly the Greek support package has been handled? Since most of the public thinks a default has already taken place, would there really be that much of a shock from a ‘hard default’, as distinct from a negotiated exchange offer? Yes. It’s not the write-offs of Greek state debt as such that would be the problem, but the possible consequences to the stability of the euro area payments system. If the Greek government does not have the cash to pay for essential services as well as debt service, say in December, then it might have to resort to its powers under Article 65 of the latest version of the European treaty. Those allow for limits on the otherwise free movement of capital for the purposes of taxation, or ‘supervision of financial institutions’, as well as “public policy or public security.” (Financial Times, October 2, 2011)
“From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.” (Michael Lewis, Vanity Fair, November, 2011)
Levels:
S&P 500 Index [1131.42] – Flirting near annual lows and few points removed from 15 day moving average of 1171. Meanwhile, the glaring lows are being closely watched and sit at 1101.54.
Crude [$79.20] – Buyers in the past few weeks found $80 attractive after heavy selling at $92 and $100. Buyers’ patience is tested as the commodity continues its five month decline.
Gold [$1622.30] – Back to early August’s pre-frantic ranges, between 1600 and 1650. From September 6 peak to September 26, the commodity declined over 15%. The ultimate test will come in weeks ahead while the uptrend and positive annual return remains intact.
DXY – US Dollar Index [78.55] – Maintaining an uptrend that sparked last month, however the follow through is not fully convincing. Next key and previously familiar level stands around 80.
US 10 Year Treasury Yields [1.91%] – No major signs of a recovery while trading at the lower range of recent lows.
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.
Monday, October 03, 2011
Monday, September 26, 2011
Market Outlook | September 26, 2011
“Considering how dangerous everything is, nothing is really very frightening.” - Gertrude Stein (1874-1946)
When weakening economic realities are mirrored in financial markets, then there is not much debate as to the current conditions. In other words, previous stimulus efforts may have held up equity markets while failing to inspire tangible growth. The low rate policy and other stimulus efforts are not deceiving those involved, as the truth is slowly being discovered. In short, when reality harshly confronts subjective perception the outcome is profound. That’s the daunting downtrend in nearly all asset classes and developed economies. Importantly, the financial system is less welcoming for those mapping out plans from six months to three years. Price declines tend to flush out existing fears and “deflate” prior hopeful estimates. Of course, this is an ugly but necessary process that’s taking place as the S&P 500 Index attempts to hold 1120, while other international indexes sit at annual lows.
Fragile Banking
Through this puzzle, the central banks are trying to restore confidence against an less forgiving crowd. When Quantitative Easing 2 ended in June of this year, a dose of uncertainty was already looming, and clearly contributed to July’s explosive negative market response. Perhaps, medication creates more side effects, and the rest is more about clinging to survival. This theory will be tested especially after the disappointing result of QE2, which has augmented the number of skeptical observers. Thus, participants will digest the pending results of further low rates, along with the potential Quantitative Easing part 3. Let’s not forget, three Federal Reserve officials dissented last week, showcasing lack of agreement. It remains a tense period in which the central bank can hardly afford to lose credibility from participants or political establishments. However, the verdict of recent Fed actions remains too early to judge.
Simply put, it’s hard to dismiss bank downgrades (US and Europe), and ongoing legal and balance sheet pressures persisting daily. Interestingly, Bank Index (BKX) peaked on February 18, 2011 a few months ahead of the rest of the broad and emerging markets. Thus, this negative sentiment in place has been noticed by insiders. Clearly, the environment is beyond bubble bursting, or reshuffling of risk appetite by investors. Basically, the current banking environment remains too tricky to deal with and fragile.
Directional Discomfort
There is enough discomfort to go around for buyers and sellers of various asset classes. As a start, Gold owners feel slightly shaken by the recent pause within the well-defined upside momentum. Plus, fund redemptions are forcing mangers to sell winners, with Gold being one of the few winners in recent months. Thus, selling pressure in the commodity (i.e., quasi currency) is triggering some questions for future trends. At the same time, the US dollar uptick is now a mild trend that is slowly making a strong macro statement against other currencies, as well as the “inverse Gold” trade.
In terms of global equities, heavy betters against emerging markets or US stocks fear a potential sharp recovery heading into year-end. There is not much comfort in doubling down on downtrend moves after the Emerging Market index (EEM) has already dropped nearly 30 percent since May 2, 2011. Although it has been a profitable trade to go against markets, reversals are inevitable which can test even the strongest convictions. This seems comforting to those who envision a sustainable downside move that would take us back to 2008 ranges. However, this remains a rather aggressive point to claim, even with a battered sentiment.
On the other side, buyers looking for “cheap” value are contemplating the realities behind improving fundamentals. The pace of M&A deals has slowed, and hesitancy has increased in business decisions. Therefore, sticking to previous estimates leads to mismatched expectations. Value seekers sway between deciding if prices are cheap enough and exercising further patience. Waiting for confirmations seems like the easier path, but with year-end approaching risk takers may look to jump in ahead of the fourth quarter. To add further spice, a slowing China, increasing volatility and an unresolved Europe can drive many more to the sidelines or hunting for “safe” assets. Yet, cash does not pay much with low rates, equities have not paid due to weak performance and momentum themes such as commodities are slowing. Thus, pent up demands for new investments are bound to light up soon enough.
Types of Sellers
1. Profit takers on previous positions
2. Unenthused by fundamentals and earning potentials
3. Forced to sell based on fund redemptions or liquidation
4. Reducing overall exposure due to a lack of faith in the financial system
For any participant, understanding the nature of sellers in each asset might provide the next clue for when to buy, or the magnitude of the selling pressure. During jittery periods, investment models will have to adjust to these dynamics, as emotional responses are leading decisions. Most can agree that comfort is a scarce commodity, discomfort appears relatively normal, and fear is in abundance.
Article Quotes:
“The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return. … A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.” (The Economist, September 24, 2011)
“Although China may look like a rising economic and political competitor today, that situation could quickly reverse. The wildly erroneous predictions of "Japan as Number 1" three decades ago should warn the outside world not to over-react to the "China threat". Punitive US measures in response to China's mercantilist trade and currency policies and disregard for intellectual property rights, however justifiable on the merits, could create the impression in China that the US has created, or at least hastened and deepened, its economic stagnation. The United States should avoid providing the CPC regime any excuse to claim the United States is the cause of China's woes. If the Chinese people as a whole ever adopt that view, US-China relations could be poisoned for decades… The United States and the international community should also recognize that, as China's economy deteriorates, any confrontational military maneuvers are likely to be met with escalation rather than compromise. (Asia Times, September 15, 2011)
Levels:
S&P 500 Index [1136.43] – Barely holding above early August lows, while attempting to bottom out above 1120. It closed at the lower end of the recent range.
Crude [$80] – Along with global equities, the commodity topped out in early spring. Currently the challenge is to stay above $80.
Gold [$1689] – Previously, 1750 marked a key level for buyers to reenter. Yet, the selling pressure is mounting in the near-term, as it remains above its 200 day moving average of 1520.
DXY – US Dollar Index [78.50] – April to August provided a dull and neutral period. There has since been an explosive upside move of 7% as of August 29.
US 10 Year Treasury Yields [1.83%] – Multi-generational lows. 1.67% marks the intraday lows reached on September 23.
http://markettakers.blogspot.com
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.
When weakening economic realities are mirrored in financial markets, then there is not much debate as to the current conditions. In other words, previous stimulus efforts may have held up equity markets while failing to inspire tangible growth. The low rate policy and other stimulus efforts are not deceiving those involved, as the truth is slowly being discovered. In short, when reality harshly confronts subjective perception the outcome is profound. That’s the daunting downtrend in nearly all asset classes and developed economies. Importantly, the financial system is less welcoming for those mapping out plans from six months to three years. Price declines tend to flush out existing fears and “deflate” prior hopeful estimates. Of course, this is an ugly but necessary process that’s taking place as the S&P 500 Index attempts to hold 1120, while other international indexes sit at annual lows.
Fragile Banking
Through this puzzle, the central banks are trying to restore confidence against an less forgiving crowd. When Quantitative Easing 2 ended in June of this year, a dose of uncertainty was already looming, and clearly contributed to July’s explosive negative market response. Perhaps, medication creates more side effects, and the rest is more about clinging to survival. This theory will be tested especially after the disappointing result of QE2, which has augmented the number of skeptical observers. Thus, participants will digest the pending results of further low rates, along with the potential Quantitative Easing part 3. Let’s not forget, three Federal Reserve officials dissented last week, showcasing lack of agreement. It remains a tense period in which the central bank can hardly afford to lose credibility from participants or political establishments. However, the verdict of recent Fed actions remains too early to judge.
Simply put, it’s hard to dismiss bank downgrades (US and Europe), and ongoing legal and balance sheet pressures persisting daily. Interestingly, Bank Index (BKX) peaked on February 18, 2011 a few months ahead of the rest of the broad and emerging markets. Thus, this negative sentiment in place has been noticed by insiders. Clearly, the environment is beyond bubble bursting, or reshuffling of risk appetite by investors. Basically, the current banking environment remains too tricky to deal with and fragile.
Directional Discomfort
There is enough discomfort to go around for buyers and sellers of various asset classes. As a start, Gold owners feel slightly shaken by the recent pause within the well-defined upside momentum. Plus, fund redemptions are forcing mangers to sell winners, with Gold being one of the few winners in recent months. Thus, selling pressure in the commodity (i.e., quasi currency) is triggering some questions for future trends. At the same time, the US dollar uptick is now a mild trend that is slowly making a strong macro statement against other currencies, as well as the “inverse Gold” trade.
In terms of global equities, heavy betters against emerging markets or US stocks fear a potential sharp recovery heading into year-end. There is not much comfort in doubling down on downtrend moves after the Emerging Market index (EEM) has already dropped nearly 30 percent since May 2, 2011. Although it has been a profitable trade to go against markets, reversals are inevitable which can test even the strongest convictions. This seems comforting to those who envision a sustainable downside move that would take us back to 2008 ranges. However, this remains a rather aggressive point to claim, even with a battered sentiment.
On the other side, buyers looking for “cheap” value are contemplating the realities behind improving fundamentals. The pace of M&A deals has slowed, and hesitancy has increased in business decisions. Therefore, sticking to previous estimates leads to mismatched expectations. Value seekers sway between deciding if prices are cheap enough and exercising further patience. Waiting for confirmations seems like the easier path, but with year-end approaching risk takers may look to jump in ahead of the fourth quarter. To add further spice, a slowing China, increasing volatility and an unresolved Europe can drive many more to the sidelines or hunting for “safe” assets. Yet, cash does not pay much with low rates, equities have not paid due to weak performance and momentum themes such as commodities are slowing. Thus, pent up demands for new investments are bound to light up soon enough.
Types of Sellers
1. Profit takers on previous positions
2. Unenthused by fundamentals and earning potentials
3. Forced to sell based on fund redemptions or liquidation
4. Reducing overall exposure due to a lack of faith in the financial system
For any participant, understanding the nature of sellers in each asset might provide the next clue for when to buy, or the magnitude of the selling pressure. During jittery periods, investment models will have to adjust to these dynamics, as emotional responses are leading decisions. Most can agree that comfort is a scarce commodity, discomfort appears relatively normal, and fear is in abundance.
Article Quotes:
“The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return. … A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.” (The Economist, September 24, 2011)
“Although China may look like a rising economic and political competitor today, that situation could quickly reverse. The wildly erroneous predictions of "Japan as Number 1" three decades ago should warn the outside world not to over-react to the "China threat". Punitive US measures in response to China's mercantilist trade and currency policies and disregard for intellectual property rights, however justifiable on the merits, could create the impression in China that the US has created, or at least hastened and deepened, its economic stagnation. The United States should avoid providing the CPC regime any excuse to claim the United States is the cause of China's woes. If the Chinese people as a whole ever adopt that view, US-China relations could be poisoned for decades… The United States and the international community should also recognize that, as China's economy deteriorates, any confrontational military maneuvers are likely to be met with escalation rather than compromise. (Asia Times, September 15, 2011)
Levels:
S&P 500 Index [1136.43] – Barely holding above early August lows, while attempting to bottom out above 1120. It closed at the lower end of the recent range.
Crude [$80] – Along with global equities, the commodity topped out in early spring. Currently the challenge is to stay above $80.
Gold [$1689] – Previously, 1750 marked a key level for buyers to reenter. Yet, the selling pressure is mounting in the near-term, as it remains above its 200 day moving average of 1520.
DXY – US Dollar Index [78.50] – April to August provided a dull and neutral period. There has since been an explosive upside move of 7% as of August 29.
US 10 Year Treasury Yields [1.83%] – Multi-generational lows. 1.67% marks the intraday lows reached on September 23.
http://markettakers.blogspot.com
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.
Monday, September 19, 2011
Market Outlook | September 19, 2011
“Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgment, repeated every day.” - Jim Rohn (1930-2009)
Much attention is consumed on the “failure” of various systems, plans and policies. The European banking system is in shambles, and the residues of the sovereign debt crisis have not fully played out. These are tiresome topics desperately needing resolution, as the era of postponement is no longer viable. The pain felt from the real economy contributes to a lack of patience in the audience.
In the near term, the Federal Reserve is already providing dollar liquidity to European banks. In a sensitive environment bad news is magnified (downgrades or weak growth), while infecting or at least influencing other economies at a rapid pace. There is no escape from this matter, even for the strongest economy in Europe. “Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital” (Reuters, September 18, 2011). This is a historic period where the Eurozone is being redefined, with desperate times leading to ugly and unimaginable results.
Harsh Landscape
Overnight scrambles, quick solutions and projection of confidence are required by European leaders during this “reconstruction” period. Plus, the details of the current banking procedures, along with consequences of alternative solutions, are sensitive just as much as complex. In other words, the pressing problems are too cumbersome for any political slogans in Europe or the US. Obviously, the nature of governing and conducting markets inevitably includes political and stimulus constraints. This theme merely sums up most of this year, especially in Europe when dealing with various nations. Interestingly, the bailout debate (similar to the US banks in 2008) is not erasable from near term memories, and heated debates are only normal at this point.
Relative Realities
Despite the backdrop of worries, the downtrend message took a brief breather in broad index performance. The S&P 500 index appreciated, by more than 5% last week. Major indexes are climbing back in an attempt to break even for the year. Albeit, it’s a slow and “temporary” recovery process, after the severe August demise. The relative argument of the US is on the radar for investment managers. Clearly, a significant shift to treasuries, as well as the Dollar, in recent months reiterates that message loudly. Select investors can afford to be choosy in purchasing as majority managers flirt with safer positions.
After the entire saga, the relative argument reminds us that the leadership in financial markets is in the US, at least for now. Growth seekers are not too impressed in this setup, as much as distressed, along with value asset buyers who can find opportune ideas. Further clues lie in the next few days, as to the faith of quantitative easing, and intermediate term interest rate policy. Curious minds have wondered if central bank tools are overly exhausted, especially with low historic rates. Others wonder if the summer sell-offs created such a deeply beaten up sentiment, in which a bottoming process formed in mid to late autumn. Continued stabilization in pricing, along with declining volatility, can provide an upside surprise in the fourth quarter.
Finally, emerging markets have not distinguished themselves in terms of absorbing the stock market in recent risk aversion. Brazilian Index (EWZ) is down 24% and the Chinese index (FXI) dropped by 20.4% since April 8. 2011. Interestingly, both countries are cooling off from multi-decade run, especially in housing. Meanwhile, during the same period, the S&P 500 Index lost 8.4%. That said, Brazil and China’s influential role for upcoming years is a vital macro mystery. However, the investor response showcases that many are not piling capital to developed markets. Instead, capital allocators are glued in on the survival tactics of the developed world.
Article Quotes:
“In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller. In an apparent paradox, the same Census Bureau database that told us that median household income was essentially unchanged in 2007 versus 2000 also tells us that the middle class enjoyed a higher income growth rate than did either the overall economy or the rich—and therefore that their income gap versus the rich had actually decreased… The key lies in the difference between the “median household” versus the “middle class.” The median household is a single theoretical household exactly in the middle of the entire income-ranked list of U.S. households. Conversely, the “middle class” has no official definition, but it is certainly tens of millions of households in size and presumably centered around the median household.” (The Journal of American Enterprise Institute, September 16, 2011)
“Local [Chinese] governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. ‘The inflation rate and the growth rate are conflicting with each other: it is very troubling,’ he said, describing what is known to economists as the Phillips Curve dilemma. (The Telegraph, September 17, 2011)
Levels:
S&P 500 Index [1216.01] – Climbing back to 1200 within a new define range of 1160-1220. A consolidation period following the sharp and recent sell-offs.
Crude [$87.96] – Hardly any changes from last week, as the commodity remains fragile below the $90 range.
Gold [$1794] – Early phase of consolidation, as 1750 is the next worthwhile point to test investors’ buying appetite. For now, there are no signs of alteration to the long-term uptrend.
DXY – US Dollar Index [76.59] – The follow through to the recent rally is not yet fully determined. Uptrend is intact, as the index is above its 200 day moving average.
US 10 Year Treasury Yields [2.04%] – Slight breather from risk aversion has yields back up to 2%. The 15 day moving average stands at 2.06%.
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.
Much attention is consumed on the “failure” of various systems, plans and policies. The European banking system is in shambles, and the residues of the sovereign debt crisis have not fully played out. These are tiresome topics desperately needing resolution, as the era of postponement is no longer viable. The pain felt from the real economy contributes to a lack of patience in the audience.
In the near term, the Federal Reserve is already providing dollar liquidity to European banks. In a sensitive environment bad news is magnified (downgrades or weak growth), while infecting or at least influencing other economies at a rapid pace. There is no escape from this matter, even for the strongest economy in Europe. “Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital” (Reuters, September 18, 2011). This is a historic period where the Eurozone is being redefined, with desperate times leading to ugly and unimaginable results.
Harsh Landscape
Overnight scrambles, quick solutions and projection of confidence are required by European leaders during this “reconstruction” period. Plus, the details of the current banking procedures, along with consequences of alternative solutions, are sensitive just as much as complex. In other words, the pressing problems are too cumbersome for any political slogans in Europe or the US. Obviously, the nature of governing and conducting markets inevitably includes political and stimulus constraints. This theme merely sums up most of this year, especially in Europe when dealing with various nations. Interestingly, the bailout debate (similar to the US banks in 2008) is not erasable from near term memories, and heated debates are only normal at this point.
Relative Realities
Despite the backdrop of worries, the downtrend message took a brief breather in broad index performance. The S&P 500 index appreciated, by more than 5% last week. Major indexes are climbing back in an attempt to break even for the year. Albeit, it’s a slow and “temporary” recovery process, after the severe August demise. The relative argument of the US is on the radar for investment managers. Clearly, a significant shift to treasuries, as well as the Dollar, in recent months reiterates that message loudly. Select investors can afford to be choosy in purchasing as majority managers flirt with safer positions.
After the entire saga, the relative argument reminds us that the leadership in financial markets is in the US, at least for now. Growth seekers are not too impressed in this setup, as much as distressed, along with value asset buyers who can find opportune ideas. Further clues lie in the next few days, as to the faith of quantitative easing, and intermediate term interest rate policy. Curious minds have wondered if central bank tools are overly exhausted, especially with low historic rates. Others wonder if the summer sell-offs created such a deeply beaten up sentiment, in which a bottoming process formed in mid to late autumn. Continued stabilization in pricing, along with declining volatility, can provide an upside surprise in the fourth quarter.
Finally, emerging markets have not distinguished themselves in terms of absorbing the stock market in recent risk aversion. Brazilian Index (EWZ) is down 24% and the Chinese index (FXI) dropped by 20.4% since April 8. 2011. Interestingly, both countries are cooling off from multi-decade run, especially in housing. Meanwhile, during the same period, the S&P 500 Index lost 8.4%. That said, Brazil and China’s influential role for upcoming years is a vital macro mystery. However, the investor response showcases that many are not piling capital to developed markets. Instead, capital allocators are glued in on the survival tactics of the developed world.
Article Quotes:
“In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller. In an apparent paradox, the same Census Bureau database that told us that median household income was essentially unchanged in 2007 versus 2000 also tells us that the middle class enjoyed a higher income growth rate than did either the overall economy or the rich—and therefore that their income gap versus the rich had actually decreased… The key lies in the difference between the “median household” versus the “middle class.” The median household is a single theoretical household exactly in the middle of the entire income-ranked list of U.S. households. Conversely, the “middle class” has no official definition, but it is certainly tens of millions of households in size and presumably centered around the median household.” (The Journal of American Enterprise Institute, September 16, 2011)
“Local [Chinese] governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. ‘The inflation rate and the growth rate are conflicting with each other: it is very troubling,’ he said, describing what is known to economists as the Phillips Curve dilemma. (The Telegraph, September 17, 2011)
Levels:
S&P 500 Index [1216.01] – Climbing back to 1200 within a new define range of 1160-1220. A consolidation period following the sharp and recent sell-offs.
Crude [$87.96] – Hardly any changes from last week, as the commodity remains fragile below the $90 range.
Gold [$1794] – Early phase of consolidation, as 1750 is the next worthwhile point to test investors’ buying appetite. For now, there are no signs of alteration to the long-term uptrend.
DXY – US Dollar Index [76.59] – The follow through to the recent rally is not yet fully determined. Uptrend is intact, as the index is above its 200 day moving average.
US 10 Year Treasury Yields [2.04%] – Slight breather from risk aversion has yields back up to 2%. The 15 day moving average stands at 2.06%.
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.
Monday, September 12, 2011
Market Outlook | September 12, 2011
“Courage is the art of being the only one who knows you're scared to death.” - Harold Wilson (1916 - 1995)
The rules of engagement, these days, are being redefined for investors, consumers, borrowers and lenders. For one, the turbulent conditions of the developing world are beyond finding growth and more related to establishing stability in the system. This weekend, the fear of a Greece bankruptcy looms; which is not a surprise to anyone. Rather, past denials and delays are catching up rapidly in this bitter but well known matter. Meanwhile, chatter of the downgrade of French banks serves as another addition to the “fear” menu. Similarly, money market mangers continue to adjust overall risk exposure, which contributes further to an abnormal period in financial systems. Secondly, through this unstable sentiment, the emerging market growth rate is being questioned by investors who piled on with high return expectations from recent years. Inflation worries might be overblown, but remain a topic of high interest. When combining the preceding interlinked issues, it becomes quite inevitable to foresee heavy government involvement in currency usage, demand for problem solving and coverage of ongoing stimulus efforts.
The gigantic challenges misinterpreted by most and dramatized by others, for a recovery, are not easy when adding political constraints and a depleted investor sentiment. Clearly, the confluence of macro issues paints the chaotic landscape of major stock price swings that are biased to the downside. A synchronized global resolution that appeases all key economies is not practical. That’s the harsh reality facing global markets and stakeholders. Therefore, the consequence of select compromises and future pain can fuel conflicts in international rulemaking. It is a very edgy environment in which negotiations are tense, especially in the Eurozone. It is quite clear there are more questions at hand that hint to the magnitude of pending declines. After all, for years human behaviors have showcased big capital favors momentum, along with a sense of calmness to reestablish a new wave of growth ideas. Unlike 2008, we are not correcting from a new bubble, but rather confronting the residues of over-borrowing. There is a cost to ignoring and delaying, and that’s where we stand these days.
Rush for Hideouts
The highly trending behavior is focused on perceived safe instruments. The pace of rotation into US treasuries, Gold and other safe currencies has picked up investor demand. Basically, seeking a temporary shelter does not necessarily translate to long-term growth prospects. This era can be rewritten as the great rush for hideouts, which has been fruitful from a return perspective.
The US dollar recovery is receiving some attention after a noticeable breakout in its chart pattern. The dollar index (DXY) is witnessing a revival, given this recent one month run which is moderately newsworthy. One of the few big themes to see is trend reversals which trigger a sense of excitement, for good or bad. Of course, spurts of upside runs in the greenback have been seen before; however, the multi-year decline is the real story when looking at the full picture. Now, a rising dollar is anticipated to inversely impact crude prices and make a competitive appeal versus other currencies (e.g. Franc and Yen). This should have eager currency traders intensely awaiting a follow through in the days and weeks ahead. Glaringly, this rotation to the dollar is a further emphasis of present safety concerns, which matches the overarching theme that is too dominant.
Digest and React
Hedge fund’s August returns demonstrated that investment models were not quite equipped for the turbulent summer months. Especially when considering the year to date numbers in which the small cap index is down 14%, and the Morgan Stanley cyclical index has declined by 21%. That is a significant dent that leaves an impact for momentum chasers and casual purchasers. In addition, the recent selling in financials is caused by adjustment to risk management, while others sold on all out panic.
Yet, there is some value to decipher in US markets, while a sense of urgency is not required to reinvest in the same old models. Instead, enterprising leaders will have to adjust to new business models and valuation methodology. Similarly, at some point portfolio managers will have to dive in to some buy ideas while managing the new era expectations. Interestingly, sell-orders continue to come in from Japan to Europe which delays the bottoming process. Awareness of hold ups and the extension of irrational behavior may be prized for cycle winners. Courageous moves are discouraged for now, due to high volatility, but rebuilding portfolios today while seeing beyond the temporary madness is the bigger reward for next decade.
Article Quotes:
“In theory, making the state into a purely financial investor rather than an operating partner…should be beneficial: entrepreneurs, not bureaucrats, run the business. Practice is rarely so neat. Cities back companies that provide local jobs. That affects acquisitions and disposals, where factories are built and where research takes place. Worse, China’s private-equity industry has become another lucrative billet for the children of powerful officials. It is also troubling that little is disclosed about the operations and returns of these public funds. Many may be managed cleverly and provide money for municipalities and jobs for their citizens; others, though, may turn out to be financial black holes. Equally troubling, they receive favourable attention from local governments, to the disadvantage of China’s most dynamic sector, its truly private companies. ..Taken collectively, these iterations of state engagement reflect how China’s government has not only held on to economic control but found subtle ways to extend it. (The Economist, September 3, 2011)
“One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade.” (Financial Times, September 9, 2011)
Levels:
S&P 500 Index [1154.23] – Over the last 20 days the index averaged around the 1175-1177 range. Yet, it was not long ago when the S&P 500 traded around 1300. Thus, it is a fragile state indeed, where a move below 1120 can open flood gates for further panic.
Crude [$87.40] – There is a recent struggle to reach above $90. The 50 day moving average stands at 91.10, and serves as a near-term hurdle for buyers.
Gold [$1851.00] – Flirted with 1900, while uptrend is intact. Buyer interest remains around 1750 in the recent reacceleration.
DXY – US Dollar Index [77.19] – Up by 5.10% since August 29, 2011. A break above 76 signals a positive technical signal.
US 10 Year Treasury Yields [1.91%] – Closed at annual lows. Well below the 15 month moving average of 2.88%. Investor mindset is adjusting to a new range below 2%.
http://markettakers.blogspot.com
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.
The rules of engagement, these days, are being redefined for investors, consumers, borrowers and lenders. For one, the turbulent conditions of the developing world are beyond finding growth and more related to establishing stability in the system. This weekend, the fear of a Greece bankruptcy looms; which is not a surprise to anyone. Rather, past denials and delays are catching up rapidly in this bitter but well known matter. Meanwhile, chatter of the downgrade of French banks serves as another addition to the “fear” menu. Similarly, money market mangers continue to adjust overall risk exposure, which contributes further to an abnormal period in financial systems. Secondly, through this unstable sentiment, the emerging market growth rate is being questioned by investors who piled on with high return expectations from recent years. Inflation worries might be overblown, but remain a topic of high interest. When combining the preceding interlinked issues, it becomes quite inevitable to foresee heavy government involvement in currency usage, demand for problem solving and coverage of ongoing stimulus efforts.
The gigantic challenges misinterpreted by most and dramatized by others, for a recovery, are not easy when adding political constraints and a depleted investor sentiment. Clearly, the confluence of macro issues paints the chaotic landscape of major stock price swings that are biased to the downside. A synchronized global resolution that appeases all key economies is not practical. That’s the harsh reality facing global markets and stakeholders. Therefore, the consequence of select compromises and future pain can fuel conflicts in international rulemaking. It is a very edgy environment in which negotiations are tense, especially in the Eurozone. It is quite clear there are more questions at hand that hint to the magnitude of pending declines. After all, for years human behaviors have showcased big capital favors momentum, along with a sense of calmness to reestablish a new wave of growth ideas. Unlike 2008, we are not correcting from a new bubble, but rather confronting the residues of over-borrowing. There is a cost to ignoring and delaying, and that’s where we stand these days.
Rush for Hideouts
The highly trending behavior is focused on perceived safe instruments. The pace of rotation into US treasuries, Gold and other safe currencies has picked up investor demand. Basically, seeking a temporary shelter does not necessarily translate to long-term growth prospects. This era can be rewritten as the great rush for hideouts, which has been fruitful from a return perspective.
The US dollar recovery is receiving some attention after a noticeable breakout in its chart pattern. The dollar index (DXY) is witnessing a revival, given this recent one month run which is moderately newsworthy. One of the few big themes to see is trend reversals which trigger a sense of excitement, for good or bad. Of course, spurts of upside runs in the greenback have been seen before; however, the multi-year decline is the real story when looking at the full picture. Now, a rising dollar is anticipated to inversely impact crude prices and make a competitive appeal versus other currencies (e.g. Franc and Yen). This should have eager currency traders intensely awaiting a follow through in the days and weeks ahead. Glaringly, this rotation to the dollar is a further emphasis of present safety concerns, which matches the overarching theme that is too dominant.
Digest and React
Hedge fund’s August returns demonstrated that investment models were not quite equipped for the turbulent summer months. Especially when considering the year to date numbers in which the small cap index is down 14%, and the Morgan Stanley cyclical index has declined by 21%. That is a significant dent that leaves an impact for momentum chasers and casual purchasers. In addition, the recent selling in financials is caused by adjustment to risk management, while others sold on all out panic.
Yet, there is some value to decipher in US markets, while a sense of urgency is not required to reinvest in the same old models. Instead, enterprising leaders will have to adjust to new business models and valuation methodology. Similarly, at some point portfolio managers will have to dive in to some buy ideas while managing the new era expectations. Interestingly, sell-orders continue to come in from Japan to Europe which delays the bottoming process. Awareness of hold ups and the extension of irrational behavior may be prized for cycle winners. Courageous moves are discouraged for now, due to high volatility, but rebuilding portfolios today while seeing beyond the temporary madness is the bigger reward for next decade.
Article Quotes:
“In theory, making the state into a purely financial investor rather than an operating partner…should be beneficial: entrepreneurs, not bureaucrats, run the business. Practice is rarely so neat. Cities back companies that provide local jobs. That affects acquisitions and disposals, where factories are built and where research takes place. Worse, China’s private-equity industry has become another lucrative billet for the children of powerful officials. It is also troubling that little is disclosed about the operations and returns of these public funds. Many may be managed cleverly and provide money for municipalities and jobs for their citizens; others, though, may turn out to be financial black holes. Equally troubling, they receive favourable attention from local governments, to the disadvantage of China’s most dynamic sector, its truly private companies. ..Taken collectively, these iterations of state engagement reflect how China’s government has not only held on to economic control but found subtle ways to extend it. (The Economist, September 3, 2011)
“One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade.” (Financial Times, September 9, 2011)
Levels:
S&P 500 Index [1154.23] – Over the last 20 days the index averaged around the 1175-1177 range. Yet, it was not long ago when the S&P 500 traded around 1300. Thus, it is a fragile state indeed, where a move below 1120 can open flood gates for further panic.
Crude [$87.40] – There is a recent struggle to reach above $90. The 50 day moving average stands at 91.10, and serves as a near-term hurdle for buyers.
Gold [$1851.00] – Flirted with 1900, while uptrend is intact. Buyer interest remains around 1750 in the recent reacceleration.
DXY – US Dollar Index [77.19] – Up by 5.10% since August 29, 2011. A break above 76 signals a positive technical signal.
US 10 Year Treasury Yields [1.91%] – Closed at annual lows. Well below the 15 month moving average of 2.88%. Investor mindset is adjusting to a new range below 2%.
http://markettakers.blogspot.com
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.
Tuesday, September 06, 2011
Market Outlook | September 6, 2011
“There is nothing so strong or safe in an emergency of life as the simple truth.” - Charles Dickens (1812-1870)
At the start of the summer, very few ideas presented an excitement of innovation or growth. That did not change much throughout the season. The majority of the summer focused on the game of survival for investment managers. As August drew to an end it marked some relief for observers, after a month of discussions surrounding debt ceiling, downgrades, very sharp down days, escalated fears, system breakdown and rapid movement toward “safe havens.” The scramble away from risk is the glaring theme, and visible in lower treasury yields, for further shelter in Gold and rotation into the Swiss Franc. This shift is nauseating for the day to day news follower, but the currency, bond and commodity markets continue to point to the same message of seeking safety. Rather dull for those searching for growth ideas. Dreadfully, investors are adjusting to new realities and expectations.
The start of a new month and season does not erase all those fierce summer memories right away, or reignite confidence restoration at a desired pace. In fact, some are wondering if “safe” assets are forming a new bubble. Perhaps it is premature to declare that the obsession with risk-aversion is hitting extreme ranges. Importantly, traditional assets such as stocks and fixed income are failing to meet risk and return parameters. “In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.” (Reuters, September 5, 2011). Clearly, this is a period where the appetite for risk is declining and kneejerk recovery thoughts are taking longer than expected. More so, the change in behavior by fund managers alters some patterns, while opening up few alternative opportunities, due to pending legal or mandate shifts.
The inverse relationship between stock prices and volatility appears to set the framework between now and year-end. In terms of judging sentiment, a break below 1120 for the S&P 500 would spark worrisome selling pressure, at least from a chart observer’s perspective. At the same time, the volatility index (VIX) is hovering above 30 range, which is less inviting for buy and hold managers. This makes it even less stable for businesses leaders to plan ahead with any clarity. Clearly, this creates a troublesome environment for policymakers, who must stay nimble in their messaging. In other words, it is vital to avoid adding fuel to the fire. Similarly, staying idle is merely not an option when facing the pressure of election year.
Naturally, the thought stimulus (i.e. QE3), which comes up at times as skepticism, remains too high along with lower cooperation. The growing “annoyance” theme is picking up momentum when considering recent discussions of bailouts, currency wars, taxes, and other trends in international business. Thus, sideline observers sense no rush to buy traditional assets while having the convenience of waiting for even cheaper prices in the future.
Two sensitive themes that can spark early hints for any imminent recovery:
1) Fragile Banking Status
In Europe the sovereign debt crisis is affecting banks greatly. As usual, Financials lead on the way up or down. Over two years of Euro-zone troubles, combined with bailouts and interventions, contribute to the selling pressure. The frenzy and panic is in full force as crisis resolution continues to play out.
For a few trading days investors realized that the euro zone problem is not quite the same as that faced by American banks. Despite US banks’ clean-up efforts of 2008, the ongoing worries are hard to shake off. Large US banks feel the residue of greed and neglect driven practices that continue to persist through headline risk. This is highlighted by Bank of America's heavy stock price correction, and other recent legal risks, that deflate any confidence in an already depleted macro climate. Regardless of the low borrowing rate, the sentiment is too beaten up. Calmer minds point out that banks were profitable in the second quarter, and value investors will flirt with entry points.
2) Economic Enigma
On one hand, the job discussion is, as usual, back at the social and political forefront. Meanwhile, the US GDP growth (or lack thereof) is in the minds of economic projectors, influencers and decision makers. Various observers are struggling to “spin” a good story as to the job’s report, which continues to restate previously known information.
For a decade, much emphasis in emerging market growth kept earnings of larger companies intact. These days, the much anticipated global indicator is closely tied to China’s growth. Recently, a bank reduced the Chinese GDP estimates to 8.2% from 8.5%, sparking some early concerns. Inflation worries have lingered, but any slowdown here is cautiously tracked, given the tense global market. Any upside surprise element in this data can spark a hint of recovery. Otherwise, reemphasis of the weakening trend is all too common these days.
Article Quotes:
“The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro. That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime. Today, the logic of that strategy has become even more compelling. The benefits of euro membership are also clear to many other small economies. Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors…. The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.” (Project Syndicate, September 5, 2011)
“Economies usually need around $4 dollars of capital to produce $1 of output. On this basis, China needed to invest 40 per cent of its GDP to create the capital required for its 10 per cent growth. To increase the ratio of capital to output (which is part of the convergence story), China's investment had to grow even faster – which it did. …China's huge saving reflects the high retained profits of state-owned enterprises, giving room to absorb the bad debts within the overall government sector. Thus it's possible to map-out a set of adjustments which would keep China on a high-growth track. …But China's policy challenges (reducing savings, getting consumption up and the current account surplus down) seem infinitely easier than the challenges faced by America, which has to narrow the huge budget deficit by raising taxes and rein in the external deficit by expanding exports.” (Business Spectator, September 5, 2011)
Levels:
Prices based as of September 2, 2011.
S&P 500 Index [1173.97] – New range between 1150-1200. No major changes since last week. Heavy resistance around 1200, while breaking below 1120 can spark further selling.
Crude [$86.45] – After failing to hold $100, the commodity is trading between $85-90 as a long-term trend is fuzzy.
Gold [$1875.25] – Brief pause followed by an acceleration nearly testing the August 22 highs of 1877.
DXY – US Dollar Index [74.75] – Four month average continues to hover within the current tight range, around 74.
US 10 Year Treasury Yields [1.98%] – Closing at annual lows as breaking below 2.00%, significant yet another decline in trends. Previously, the lows of December 2008 stood at 2.03%.
http://markettakers.blogspot.com
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.
At the start of the summer, very few ideas presented an excitement of innovation or growth. That did not change much throughout the season. The majority of the summer focused on the game of survival for investment managers. As August drew to an end it marked some relief for observers, after a month of discussions surrounding debt ceiling, downgrades, very sharp down days, escalated fears, system breakdown and rapid movement toward “safe havens.” The scramble away from risk is the glaring theme, and visible in lower treasury yields, for further shelter in Gold and rotation into the Swiss Franc. This shift is nauseating for the day to day news follower, but the currency, bond and commodity markets continue to point to the same message of seeking safety. Rather dull for those searching for growth ideas. Dreadfully, investors are adjusting to new realities and expectations.
The start of a new month and season does not erase all those fierce summer memories right away, or reignite confidence restoration at a desired pace. In fact, some are wondering if “safe” assets are forming a new bubble. Perhaps it is premature to declare that the obsession with risk-aversion is hitting extreme ranges. Importantly, traditional assets such as stocks and fixed income are failing to meet risk and return parameters. “In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.” (Reuters, September 5, 2011). Clearly, this is a period where the appetite for risk is declining and kneejerk recovery thoughts are taking longer than expected. More so, the change in behavior by fund managers alters some patterns, while opening up few alternative opportunities, due to pending legal or mandate shifts.
The inverse relationship between stock prices and volatility appears to set the framework between now and year-end. In terms of judging sentiment, a break below 1120 for the S&P 500 would spark worrisome selling pressure, at least from a chart observer’s perspective. At the same time, the volatility index (VIX) is hovering above 30 range, which is less inviting for buy and hold managers. This makes it even less stable for businesses leaders to plan ahead with any clarity. Clearly, this creates a troublesome environment for policymakers, who must stay nimble in their messaging. In other words, it is vital to avoid adding fuel to the fire. Similarly, staying idle is merely not an option when facing the pressure of election year.
Naturally, the thought stimulus (i.e. QE3), which comes up at times as skepticism, remains too high along with lower cooperation. The growing “annoyance” theme is picking up momentum when considering recent discussions of bailouts, currency wars, taxes, and other trends in international business. Thus, sideline observers sense no rush to buy traditional assets while having the convenience of waiting for even cheaper prices in the future.
Two sensitive themes that can spark early hints for any imminent recovery:
1) Fragile Banking Status
In Europe the sovereign debt crisis is affecting banks greatly. As usual, Financials lead on the way up or down. Over two years of Euro-zone troubles, combined with bailouts and interventions, contribute to the selling pressure. The frenzy and panic is in full force as crisis resolution continues to play out.
For a few trading days investors realized that the euro zone problem is not quite the same as that faced by American banks. Despite US banks’ clean-up efforts of 2008, the ongoing worries are hard to shake off. Large US banks feel the residue of greed and neglect driven practices that continue to persist through headline risk. This is highlighted by Bank of America's heavy stock price correction, and other recent legal risks, that deflate any confidence in an already depleted macro climate. Regardless of the low borrowing rate, the sentiment is too beaten up. Calmer minds point out that banks were profitable in the second quarter, and value investors will flirt with entry points.
2) Economic Enigma
On one hand, the job discussion is, as usual, back at the social and political forefront. Meanwhile, the US GDP growth (or lack thereof) is in the minds of economic projectors, influencers and decision makers. Various observers are struggling to “spin” a good story as to the job’s report, which continues to restate previously known information.
For a decade, much emphasis in emerging market growth kept earnings of larger companies intact. These days, the much anticipated global indicator is closely tied to China’s growth. Recently, a bank reduced the Chinese GDP estimates to 8.2% from 8.5%, sparking some early concerns. Inflation worries have lingered, but any slowdown here is cautiously tracked, given the tense global market. Any upside surprise element in this data can spark a hint of recovery. Otherwise, reemphasis of the weakening trend is all too common these days.
Article Quotes:
“The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro. That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime. Today, the logic of that strategy has become even more compelling. The benefits of euro membership are also clear to many other small economies. Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors…. The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.” (Project Syndicate, September 5, 2011)
“Economies usually need around $4 dollars of capital to produce $1 of output. On this basis, China needed to invest 40 per cent of its GDP to create the capital required for its 10 per cent growth. To increase the ratio of capital to output (which is part of the convergence story), China's investment had to grow even faster – which it did. …China's huge saving reflects the high retained profits of state-owned enterprises, giving room to absorb the bad debts within the overall government sector. Thus it's possible to map-out a set of adjustments which would keep China on a high-growth track. …But China's policy challenges (reducing savings, getting consumption up and the current account surplus down) seem infinitely easier than the challenges faced by America, which has to narrow the huge budget deficit by raising taxes and rein in the external deficit by expanding exports.” (Business Spectator, September 5, 2011)
Levels:
Prices based as of September 2, 2011.
S&P 500 Index [1173.97] – New range between 1150-1200. No major changes since last week. Heavy resistance around 1200, while breaking below 1120 can spark further selling.
Crude [$86.45] – After failing to hold $100, the commodity is trading between $85-90 as a long-term trend is fuzzy.
Gold [$1875.25] – Brief pause followed by an acceleration nearly testing the August 22 highs of 1877.
DXY – US Dollar Index [74.75] – Four month average continues to hover within the current tight range, around 74.
US 10 Year Treasury Yields [1.98%] – Closing at annual lows as breaking below 2.00%, significant yet another decline in trends. Previously, the lows of December 2008 stood at 2.03%.
http://markettakers.blogspot.com
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.
Monday, August 29, 2011
Market Outlook | August 29, 2011
“Courage is not the absence of fear, but rather the judgment that something else is more important than fear.” Ambrose Redmoon (1933–1996)
A minor breather to the summer turmoil, as the market held from hitting another new low. Overall, there transpired a desperately needed relief, with a near 5% weekly rally in the S&P 500 Index. Again, this upside move is part of a short-lived bounce, and not necessarily reflective of improving fundamentals. The long-term picture is too fuzzy for policymakers who are consumed with handling damage control. Crisis management includes European debt crisis that affects the Euro banking system while adjusting the currency imbalances. Speculating might be thrilling for some, or very costly for others, while investing requires no major rush.
The current realities still showcase fragile sentiment and waning trust in US and European policymakers. That’s difficult (but possible) to shake off with lack of visible growth, which makes owning shares not vastly appealing for less involved and longer-term participants. Increasing sensitivity, in the response to data points, can be frustrating especially with overall bias favoring declines. Surely, the downside risks maybe overhyped at times, or unknown, as an all-out panic continues to linger since late July. Of course, sentiment is hard to change overnight but known to sway in due time. At least for now, the focus is on “repairing” as much as “building;” a painful process that requires patience for growth seekers.
Even the optimist cannot deny the challenges of business cycle growth and policymaking constraints to reach a trending setup. When removing sensationalism and pending elections (at least for a second), the economic numbers paint a grim perspective. An estimate around 1% GDP growth in the US can trigger rude confirmation or surprises. Basically, the odds and definition of a recession are bound to be thrown around. These days, reigniting quick cheers by central bankers is not as easy, and political limits are less inviting for creativity as well. At some point, accumulating bad news becomes overly exhausted, yet it may take longer than envisioned.
Investment themes appear limited, given extreme behaviors in gold prices, yields, volatility, stocks, and sentiment. If the big picture is murky for the majority, and fear is priced at a premium, then an opportunity lingers for big risk takers. For now, three themes are worth watching between now and year-end.
I. Emerging Market Discomfort - For the last several months, inflation worries in China and Brazil have been a dominant, popular and pragmatic discussion points. More recently, long-term investors are reexamining the projected growth rate expectations, especially in China. If there are disappointments, then the relative argument is bound to benefit US markets to some degree. Clearly, it is not simple to overweigh one country versus another, given an interlinked global stock market. Many wonder if the slowness is already priced in, and a bottoming process is due. Again, the macro indicators will have a bigger influence in shaping the bias of this theme.
II. Currency and Commodity Patterns - The sustainability of Gold prices are on the list of suspenseful matters, after other commodities began their correction since the Spring. Minor pullbacks were witnessed last week in Gold. As usual, any decline in the metal begs many to ask “is this the top?” Premature as it might be, there will be lots of chatter on Gold’s ability to hold above $1800, versus achieving the next psychological landmark of $2000. Inversely, a recovering Dollar can readjust the mindset of stale consensus belief. Recent rotation into Swiss Franc needs to calm down, as well as concerns in the Yen. The macro clues can become clearer once the scrambling for a “safe haven” is fully established. For now, it remains too speculative with no trend reversal, as interest rates will play a role in this puzzle.
III. Bargain Hunting - In terms of picking up value, it may take time for ideas to materialize, as the pressure mounts to identify the right companies and catalysts. On the other hand, few trading ideas present themselves for the active participant. Banks recuperating from irrational sell-offs and some consumer based sectors (i.e. retailers) are poised to follow. This stems from overly depressed expectations of consumer driven areas. The Bank Index (BKX), at one point, traded 41% below its winter 2011 highs. Early signs of a recovery took place, as value oriented buyers debated the merits of the early recovery.
At this junction, if one is to take a bullish outlook for the rest of the year, then a very selective approach is required, along with close monitoring. Let’s say the conservative best case scenario is to make up the summer loses, then the broad indexes are about 6%-10 removed (1250-1300 on S&P 500 index). Of course, the odds for an upside surprise increases if volatility peaks at current levels. That can provide an extra boost for a much higher move. Therefore, it may be wise (from a reward perspective) to find unique ideas, as opposed to blindly betting on broad markets to capitalize on the limited opportunities.
Article Quotes:
“One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes.” (Interview with David Graeber, August 26, 2011)
“From America's perspective, what may be the most important distinction between Japan then and China now is that Japan was a lever against which global pressure could be exerted on the Soviet Union as an ideological and economic opposite. This same rationale, that China could be leverage against the Soviet Union in the midst of the Cold War, was very much what initially motivated Henry Kissinger and Nixon to begin their dialogue with China. But now China's economic growth alone has made it the closest near-peer competitor to the US, and its ongoing embrace of authoritarian politics make it an easy proxy for the role of ideological foe which the Soviet Union long held. A country once used as leverage by the United States is now the country against which the United States most needs leverage.” (Asian Times, August 27, 2011)
Levels:
S&P 500 Index [1176.80] – Early pattern of stabilization developing between 1150-1200. Any significant move below 1120 can reignite a new wave of panic selling.
Crude [$85.37] – Revisiting ranges from late February around $85. Further evidence needed for the downtrend to slow down.
Gold [$1788.00] – Establishing a new mark around $1740-1800. This run appears extended in the near-term and due for some correction. On Friday, it closed 9% above the 50 day moving average.
DXY – US Dollar Index [73.81] – Around 74 marks a multi-month trading range. Barely any noteworthy activity for trend followers.
US 10 Year Treasury Yields [2.18%] – At the low end of its historic pattern. The yields today were last seen during the shock of 2008 and 1949-50 eras.
http://markettakers.blogspot.com
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.
A minor breather to the summer turmoil, as the market held from hitting another new low. Overall, there transpired a desperately needed relief, with a near 5% weekly rally in the S&P 500 Index. Again, this upside move is part of a short-lived bounce, and not necessarily reflective of improving fundamentals. The long-term picture is too fuzzy for policymakers who are consumed with handling damage control. Crisis management includes European debt crisis that affects the Euro banking system while adjusting the currency imbalances. Speculating might be thrilling for some, or very costly for others, while investing requires no major rush.
The current realities still showcase fragile sentiment and waning trust in US and European policymakers. That’s difficult (but possible) to shake off with lack of visible growth, which makes owning shares not vastly appealing for less involved and longer-term participants. Increasing sensitivity, in the response to data points, can be frustrating especially with overall bias favoring declines. Surely, the downside risks maybe overhyped at times, or unknown, as an all-out panic continues to linger since late July. Of course, sentiment is hard to change overnight but known to sway in due time. At least for now, the focus is on “repairing” as much as “building;” a painful process that requires patience for growth seekers.
Even the optimist cannot deny the challenges of business cycle growth and policymaking constraints to reach a trending setup. When removing sensationalism and pending elections (at least for a second), the economic numbers paint a grim perspective. An estimate around 1% GDP growth in the US can trigger rude confirmation or surprises. Basically, the odds and definition of a recession are bound to be thrown around. These days, reigniting quick cheers by central bankers is not as easy, and political limits are less inviting for creativity as well. At some point, accumulating bad news becomes overly exhausted, yet it may take longer than envisioned.
Investment themes appear limited, given extreme behaviors in gold prices, yields, volatility, stocks, and sentiment. If the big picture is murky for the majority, and fear is priced at a premium, then an opportunity lingers for big risk takers. For now, three themes are worth watching between now and year-end.
I. Emerging Market Discomfort - For the last several months, inflation worries in China and Brazil have been a dominant, popular and pragmatic discussion points. More recently, long-term investors are reexamining the projected growth rate expectations, especially in China. If there are disappointments, then the relative argument is bound to benefit US markets to some degree. Clearly, it is not simple to overweigh one country versus another, given an interlinked global stock market. Many wonder if the slowness is already priced in, and a bottoming process is due. Again, the macro indicators will have a bigger influence in shaping the bias of this theme.
II. Currency and Commodity Patterns - The sustainability of Gold prices are on the list of suspenseful matters, after other commodities began their correction since the Spring. Minor pullbacks were witnessed last week in Gold. As usual, any decline in the metal begs many to ask “is this the top?” Premature as it might be, there will be lots of chatter on Gold’s ability to hold above $1800, versus achieving the next psychological landmark of $2000. Inversely, a recovering Dollar can readjust the mindset of stale consensus belief. Recent rotation into Swiss Franc needs to calm down, as well as concerns in the Yen. The macro clues can become clearer once the scrambling for a “safe haven” is fully established. For now, it remains too speculative with no trend reversal, as interest rates will play a role in this puzzle.
III. Bargain Hunting - In terms of picking up value, it may take time for ideas to materialize, as the pressure mounts to identify the right companies and catalysts. On the other hand, few trading ideas present themselves for the active participant. Banks recuperating from irrational sell-offs and some consumer based sectors (i.e. retailers) are poised to follow. This stems from overly depressed expectations of consumer driven areas. The Bank Index (BKX), at one point, traded 41% below its winter 2011 highs. Early signs of a recovery took place, as value oriented buyers debated the merits of the early recovery.
At this junction, if one is to take a bullish outlook for the rest of the year, then a very selective approach is required, along with close monitoring. Let’s say the conservative best case scenario is to make up the summer loses, then the broad indexes are about 6%-10 removed (1250-1300 on S&P 500 index). Of course, the odds for an upside surprise increases if volatility peaks at current levels. That can provide an extra boost for a much higher move. Therefore, it may be wise (from a reward perspective) to find unique ideas, as opposed to blindly betting on broad markets to capitalize on the limited opportunities.
Article Quotes:
“One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes.” (Interview with David Graeber, August 26, 2011)
“From America's perspective, what may be the most important distinction between Japan then and China now is that Japan was a lever against which global pressure could be exerted on the Soviet Union as an ideological and economic opposite. This same rationale, that China could be leverage against the Soviet Union in the midst of the Cold War, was very much what initially motivated Henry Kissinger and Nixon to begin their dialogue with China. But now China's economic growth alone has made it the closest near-peer competitor to the US, and its ongoing embrace of authoritarian politics make it an easy proxy for the role of ideological foe which the Soviet Union long held. A country once used as leverage by the United States is now the country against which the United States most needs leverage.” (Asian Times, August 27, 2011)
Levels:
S&P 500 Index [1176.80] – Early pattern of stabilization developing between 1150-1200. Any significant move below 1120 can reignite a new wave of panic selling.
Crude [$85.37] – Revisiting ranges from late February around $85. Further evidence needed for the downtrend to slow down.
Gold [$1788.00] – Establishing a new mark around $1740-1800. This run appears extended in the near-term and due for some correction. On Friday, it closed 9% above the 50 day moving average.
DXY – US Dollar Index [73.81] – Around 74 marks a multi-month trading range. Barely any noteworthy activity for trend followers.
US 10 Year Treasury Yields [2.18%] – At the low end of its historic pattern. The yields today were last seen during the shock of 2008 and 1949-50 eras.
http://markettakers.blogspot.com
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.
Monday, August 22, 2011
Market Outlook | August 22, 2011
“If everyone is thinking alike, then somebody isn't thinking.” - George S. Patton (1885-1945)
As the last days of summer approach, they may provide a breather to participants from the ongoing negative sentiment. There aren’t many magical descriptions to summarize the sharply fallen markets, which continue to witness a frenzy like behavior. The S&P 500 is nearly down 11% for the year. This somewhat reflects the slowdown in global economy, along with waning investor expectations of future earnings. As usual on price declines, the correlation between various sectors is high in a period where volatility increases. That's simply a textbook setup, and reiterated the obvious, in which irrational behaviors are quite vibrant. As Birinyi Associates reminds us, that stock correlations are at all-time highs. “The average 50-day correlation of S&P 500 members to the index has risen to the highest levels since the market bottomed in 1987.” (August 19, 2011).
Navigating the Mess
Unfortunately, it is only natural to lump all bad news into one big “fire.” Specifically, when political matters are blended into market behaviors, it can be confusing and lost in translation. Similarly, grasping the ongoing finger pointing of economic decisions should not be confused with a nostalgic reflection of past economic policies. The subsequent kneejerk response fails to address the richness of the current multilayered mess. Frankly, debating the merits of the recent correction is not a fruitful practice for an investor, given that we’ve already established weakness from all angles (at times nauseating). At this point, blindly picking broad market bottoms is rather bold even for the seasoned observer. Yet, stashing away cash or over reliance on “safe assets” should present worries itself to those feeling too comfortable.
Importantly, isolating the magnitude of each worrisome item shall be the artful skill needed for weeks ahead. Staying firm and not making definitive statements is the challenge for any participant. Distinguishing labor weakness from European bank risks, to visionary long-term growth stories, is vital. Of course, all themes have their own place, and each carry a varying risk and reward. For example, US banks are underestimated for the cleaner balance sheet, as compared to 2008. Yet, the European bank noise makes it blurry, and leading some companies to trade cheaply. For example, the US Bank index (BKX) is down over 36% since February 2011, as the declines are at a much more rapid pace than any other sector. “At the moment, the Financial sector has the lowest trailing 12-month P/E of the ten sectors at 10.62” (Bespoke Investments, August 19, 2011). In due time, rational drivers can overtake emotional responses. Today, that is not visible in the trading patterns, and further fear can linger through the fall.
Digging Through the Maze
In extreme periods, such as the current market state, it becomes easy to conclude or muddle along with consensus. As volatility declines and perception normalizes, the hunt for fundamental ideas is bound to resurface. Even in the heart of this turmoil there are selective companies that held in on a relative basis. For example, retailers such as BJ Wholesale (BJ) have demonstrated increased revenue in their grocery stores and specialty services. Similarly, the pharmaceutical researcher, Pharmaceutical Product (PPDI), showcased solid fundamentals last quarter while a potential takeover is being discussed. Thus, few companies, from Consumer Staples to Utilities, can offer dividends and longer-term appreciations for those who are patient and slightly imaginative.
Clearly, picking “growth stories” is very spotty and frustrating. Yet, given the limitation of investment ideas, it helps to prepare purchasing ideas to fully benefit from pending momentum. To reach that point, broad indexes would need to showcase price stabilization. For now, the attention on stimulus plans by the Federal Reserve, and slowdown rate in emerging markets, will serve center stage.
Article Quotes:
“One of the most striking aspects of the eurozone crisis is that bond markets have not discriminated between causes of excessive debt. Greece was denied credit and had to go begging to Brussels for a bailout, not because it had taken part in the real estate bubble but because it had abused entry to the eurozone to enjoy a public borrowing spree. Ireland was denied credit because, even though its public finances were in solid shape, it had allowed its banks to overwhelm them. Italy is perhaps the most remarkable case of all. It is now threatened with loss of credit, not because of any post-euro borrowing, nor because of its current budget deficit (which is not much higher than Germany's). Rather, it is being punished for sins committed in the 1980s and early 1990s when it built up its public debt to levels that the markets have suddenly decided are unsustainable. What we are seeing, in other words, is a wholesale revision of the rules about debt that have held true for decades.” (Foreign Policy, August 18, 2011)
“The only quantitative evidence offered for this is that stock market turnover is now 150%, which, after a quick piece of mental arithmetic, implies that investors are holding stocks for an average period of only 8 months. So over the last ten years there seems to have been no discernible move to shorter holding periods – indeed the numbers are if anything a little higher at the end of the decade than at the beginning. And where turnover does increase this is unsurprisingly during the highly turbulent times of the dot.com crash from 2001 to 2003, and the credit crunch in 2008 and 2009. That apart, holding periods are pretty steady at around 3-4 years. And that of course doesn’t mean that managers only stay invested in companies for that length of time: a lot of turnover is because of investors coming in and out of the fund, or decisions by the manager to increase or reduce holdings, rather than to sell up and walk away. (Fundweb, August 5, 2011)
Levels:
S&P 500 Index [1123.53] – Trying to hold 1120 while approaching intra-day lows of August 6 at 1101.54.
Crude [$82.26] – Since May 2, the commodity has decreased by 28%. Failing below $85 signifies a new era of weakness.
Gold [$1848.00] – Since January 25, Gold has risen by nearly 40%. Uptrend intact as a shelter against paper assets.
DXY – US Dollar Index [74.24] – Barely above annual lows reached on May 6, 2011 at 72.96. Interestingly, since that period the Dollar has mostly hovered around 74 as the 50 day moving average stands at 74.71.
US 10 Year Treasury Yields [2.06%] – The intra-day lows of 1.97% on August 11 were a few points below the 2008 mark of 2.o3%. An illustration of the rush to treasuries as yields has declined from annual highs of 3.76% in February 2011. Basically, from a historical perspective this is an unchartered territory.
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
Monday, August 15, 2011
Market Outlook | August 15, 2011
"Courage is fire, and bullying is smoke" - Benjamin Disraeli (1804-1881)
Volatility like fire burns the fearful dangerously or feeds the daring sizably. The outcome depends on the participants’ firm stance especially in periods where rational thinking has taken a major backseat. These panic driven periods have been shown to favor the cool headed, who’ve adequately geared up for looming surprises. Officially, we've moved from a bombardment of bad news to all out frenzy, resulting in an undue responsiveness to the headline noise. Beyond policy makers, gimmicks, snap back rallies, and a lack of feasible alternatives, it is awfully hard to find a positive substantive argument. Moreover, last week provided wild swings as desperate observers awaited market stabilization. As usual, executing on the unthinkable might be the most rewarding as one extreme follows an opposite extreme (rising stock prices) while understanding that some extremes last longer than imagined.
Throughout history, autumn has produced memorable hysterias, notably in 1929, 1987 and 2008. Despite this history, many speculate the summer turmoil collectively captured the majority of this year’s grief. On the other hand, the S&P 500 index declined 18% from July 21 to August 9. That is a dramatic move in and of itself relative to past performance, which may prove a simple and effective catalyst to tempt buyers. Value seekers argue for "cheap" timely entry into areas of fundamental strength, including selected technology and banking stocks. Meanwhile, cycle examiners remind us that shareholders may benefit during the run-up to the U.S. presidential election. Importantly, the current state of safety and risk are consciously being reassessed. Yet, it remains a tricky period to evaluate risk, and safer investment options remain in U.S. debt and Gold which continue to experience inflow.
More Politics than Usual:
It’s quite convenient to draw direct links between market behavior and political sentiment. Typically, the largest market fluctuations tend to stir up popular conversation. Of course, the U.S. sovereign debt downgrade raised questions of political leadership. Consequently, the U.S. “political risk” is higher than usual, reflecting the underlying bitterness and stalemate. To be fair, this was equally reflected in the rise of volatility and poor sentiment. Similarly, when leaders attempt to calm markets it backfired, especially during trading hours. This was especially apparent when examining the remarks by the President and Fed chairman last week. Thus, there are some financial professionals requesting less government involvement in U.S. and European markets. Unfortunately, that's mostly wishful thinking, and makes for better political rhetoric than confidence restoration. Practically, the political constraints are a growing risk for asset managers. Navigating shrewdly is the only option for risk allocators.
Further Disruptions
A series of interventions has added further suspense to the ongoing turbulence. First, the ban on short selling by various global regulators revisits the knee jerk reaction of U.S. equities in 2008 (SEC ban of shorting financials). The countries, among others enacting this practice, include South Korea, Turkey and Greece. Although, disallowing investors from betting on declines does not necessary translate to stopping price declines. It leads to less liquid markets, while asset managers scramble for near-term solutions. Secondly, the more substantial intervention is related to currency depreciation, encapsulated in the larger “currency wars”. The U.S. Dollar Index has stayed above annual lows since May 4, 2011, and for macro observers this is a noteworthy inflection point as the much feared demise of the greenback has not materialized. However, the plot has thickened, as central bankers used their influence to weaken the Yen and Franc. At the same time, significant correction in Gold prices may contribute to further instability in the currency markets. This may not be enough to claim a 6-9 month trend, but it certainly underscores a potentially developing macro shift.
Finally, the much heated debate of quantitative easing is bound to resurface. The mixed message from the Federal Reserve of targeting lower rates is being contemplated, but skepticism of pending plans is growing rapidly. Generally, the saying goes “Don’t fight the Fed!” However, with the lack of trust in intervening parties and the failure of QE2, a daunting task lies ahead for all involved parties. For now, the observer is left to speculate on outcomes, as policy makers dig to find a positive spin in various data releases. It certainly makes for a sensitive and tense period.
Article Quotes:
“Our main finding is that outward spillovers from Germany’s growth to other countries have been low and have remained modest in recent years. In contrast, spillovers, especially from the US, followed by the UK as a distant second, have been larger and have increased over time, even after controlling for the effect of outsized spillovers during the crisis. Based on full sample estimates including a crisis dummy, the effect of a 1% growth shock in Germany measured by the peak cumulative response of other countries is about 0.1%, the lowest of all the large countries. Moreover, spillovers from Germany have decreased in recent years, halving to only 0.05%. Japan’s impact on the rest of the world has similarly decreased. The analysis suggests that countries reliant on external rather than domestic sources of growth generate smaller spillovers. This is the case with Germany, whose growth is powered by global growth, which implies that inward spillovers are large but the outward spillovers are small.” (VOX Centre for Economic Policy Research, August 15, 2011)
“Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said that they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries. But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%. Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates.” (The Carnegie Asia Program, August 12, 2011)
Levels:
S&P 500 Index [1178.81] – Attempting to stabilize at 1150-1200. It was deeply oversold, and remains in a fragile zone.
Crude [$85.38] – The commodity peaked on May 2, 2011 around a period where the Dollar bottomed. Once again, the $85-90 range can define a new trending range.
Gold [$1742.60] – Taking a breather after sharper moves towards historic highs. In the near-term, the narrow range resides somewhere between $1740 and 1780, while maintaining a well defined uptrend.
DXY – US Dollar Index [74.59] – A bottoming process developing around $74 in the past three months.
US 10 Year Treasury Yields [2.25%] – Rush to safety has driven yields to levels last seen around December 2008. For now, gains hold slightly above the lowest point of the year at 2.03%.
http://markettakers.blogspot.com
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.
Volatility like fire burns the fearful dangerously or feeds the daring sizably. The outcome depends on the participants’ firm stance especially in periods where rational thinking has taken a major backseat. These panic driven periods have been shown to favor the cool headed, who’ve adequately geared up for looming surprises. Officially, we've moved from a bombardment of bad news to all out frenzy, resulting in an undue responsiveness to the headline noise. Beyond policy makers, gimmicks, snap back rallies, and a lack of feasible alternatives, it is awfully hard to find a positive substantive argument. Moreover, last week provided wild swings as desperate observers awaited market stabilization. As usual, executing on the unthinkable might be the most rewarding as one extreme follows an opposite extreme (rising stock prices) while understanding that some extremes last longer than imagined.
Throughout history, autumn has produced memorable hysterias, notably in 1929, 1987 and 2008. Despite this history, many speculate the summer turmoil collectively captured the majority of this year’s grief. On the other hand, the S&P 500 index declined 18% from July 21 to August 9. That is a dramatic move in and of itself relative to past performance, which may prove a simple and effective catalyst to tempt buyers. Value seekers argue for "cheap" timely entry into areas of fundamental strength, including selected technology and banking stocks. Meanwhile, cycle examiners remind us that shareholders may benefit during the run-up to the U.S. presidential election. Importantly, the current state of safety and risk are consciously being reassessed. Yet, it remains a tricky period to evaluate risk, and safer investment options remain in U.S. debt and Gold which continue to experience inflow.
More Politics than Usual:
It’s quite convenient to draw direct links between market behavior and political sentiment. Typically, the largest market fluctuations tend to stir up popular conversation. Of course, the U.S. sovereign debt downgrade raised questions of political leadership. Consequently, the U.S. “political risk” is higher than usual, reflecting the underlying bitterness and stalemate. To be fair, this was equally reflected in the rise of volatility and poor sentiment. Similarly, when leaders attempt to calm markets it backfired, especially during trading hours. This was especially apparent when examining the remarks by the President and Fed chairman last week. Thus, there are some financial professionals requesting less government involvement in U.S. and European markets. Unfortunately, that's mostly wishful thinking, and makes for better political rhetoric than confidence restoration. Practically, the political constraints are a growing risk for asset managers. Navigating shrewdly is the only option for risk allocators.
Further Disruptions
A series of interventions has added further suspense to the ongoing turbulence. First, the ban on short selling by various global regulators revisits the knee jerk reaction of U.S. equities in 2008 (SEC ban of shorting financials). The countries, among others enacting this practice, include South Korea, Turkey and Greece. Although, disallowing investors from betting on declines does not necessary translate to stopping price declines. It leads to less liquid markets, while asset managers scramble for near-term solutions. Secondly, the more substantial intervention is related to currency depreciation, encapsulated in the larger “currency wars”. The U.S. Dollar Index has stayed above annual lows since May 4, 2011, and for macro observers this is a noteworthy inflection point as the much feared demise of the greenback has not materialized. However, the plot has thickened, as central bankers used their influence to weaken the Yen and Franc. At the same time, significant correction in Gold prices may contribute to further instability in the currency markets. This may not be enough to claim a 6-9 month trend, but it certainly underscores a potentially developing macro shift.
Finally, the much heated debate of quantitative easing is bound to resurface. The mixed message from the Federal Reserve of targeting lower rates is being contemplated, but skepticism of pending plans is growing rapidly. Generally, the saying goes “Don’t fight the Fed!” However, with the lack of trust in intervening parties and the failure of QE2, a daunting task lies ahead for all involved parties. For now, the observer is left to speculate on outcomes, as policy makers dig to find a positive spin in various data releases. It certainly makes for a sensitive and tense period.
Article Quotes:
“Our main finding is that outward spillovers from Germany’s growth to other countries have been low and have remained modest in recent years. In contrast, spillovers, especially from the US, followed by the UK as a distant second, have been larger and have increased over time, even after controlling for the effect of outsized spillovers during the crisis. Based on full sample estimates including a crisis dummy, the effect of a 1% growth shock in Germany measured by the peak cumulative response of other countries is about 0.1%, the lowest of all the large countries. Moreover, spillovers from Germany have decreased in recent years, halving to only 0.05%. Japan’s impact on the rest of the world has similarly decreased. The analysis suggests that countries reliant on external rather than domestic sources of growth generate smaller spillovers. This is the case with Germany, whose growth is powered by global growth, which implies that inward spillovers are large but the outward spillovers are small.” (VOX Centre for Economic Policy Research, August 15, 2011)
“Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said that they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries. But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%. Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates.” (The Carnegie Asia Program, August 12, 2011)
Levels:
S&P 500 Index [1178.81] – Attempting to stabilize at 1150-1200. It was deeply oversold, and remains in a fragile zone.
Crude [$85.38] – The commodity peaked on May 2, 2011 around a period where the Dollar bottomed. Once again, the $85-90 range can define a new trending range.
Gold [$1742.60] – Taking a breather after sharper moves towards historic highs. In the near-term, the narrow range resides somewhere between $1740 and 1780, while maintaining a well defined uptrend.
DXY – US Dollar Index [74.59] – A bottoming process developing around $74 in the past three months.
US 10 Year Treasury Yields [2.25%] – Rush to safety has driven yields to levels last seen around December 2008. For now, gains hold slightly above the lowest point of the year at 2.03%.
http://markettakers.blogspot.com
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.
Monday, August 08, 2011
Market Outlook | August 8, 2011
Market Outlook | August 8, 2011
“Anything you build on a large scale or with intense passion invites chaos.” - Francis Ford Coppola (1939-present)
Tension Released
Selling has unleashed in matter of a few days, because of the overdue debt ceiling resolution, currency adjustment by central bankers, depreciating Yen and Franc, and the ongoing Eurozone debt crisis, leading to the eventual S&P downgrade of the US credit rating. Digesting recent events over a month alone would have been too much to ask. Well, now we know what happens when the “bad news” events combust in a synchronized manner at a pace faster than expected. In an interlinked global equities market, shockwaves are felt uniformly.
Ironically, these same worrisome issues were indentified and causally debated in the first part of 2011. Of course, the magnitude of the sell-off was the great unknown, even for the most bearish managers who have lost faith in many assets, outside of hard assets. Meanwhile, bullish managers are quite surprised at the pace of deceleration, as the unraveling has yet to settle. Extreme results are followed up by extremes and surprises, so the suspense will live on for a little while. The unleashing of “fear” turned into quick liquidation as participants ran for safety in an absolute panic. As a quick reminder, the Volatility Index (VIX) jumped by 159% from its July 1st level. Yes, fear is trading at a premium for those opportunistic observers. In other words, this paints the magnitude of broad index reactions. For reference purposes, in 2008, the VIX spiked 380% from August to October. Nonetheless, this time around, calculating and understanding a risk-free return will puzzle models of all sorts, as emotions are the key driving force. Now the anxious question revolves around the end of the bleeding and the beginning of the post mortem to this cycle, as we settle in into new realities.
Scrambling for Substance
Reliance on policymakers’ resolutions in Europe or the US has failed to produce a recovery in the past year. As a start, the debt ceiling deal seems such a long while ago and still failed to produce a cheerful reaction. Clearly, quantitative easing II did not get a warm ovation, while failing to ignite some confidence. Nonetheless, the chatter of further stimulus (for QE3) is slowly picking up volume and support. Secondly, within the desperate weekend hours, the European Central Bank concluded a decision to purchase Italian and Spanish bonds as part of a rapid response. Perhaps, another attempt to restore further faith as good news is hard to find, and it seems further than one’s imagination.
In all fairness, S&P’s rating downgrade confirms the decade old struggle of fueling growth in US business, while attempting to address the debt issue. The rating serves as a confirmation on the known rather than as an awakening to investor perception. Some savvy veterans (including the secretary of treasury and former fed chairman) may argue the calculation methodology of the downgrade and overall creditability of the rating agencies. However, that’s a moot point for all to move along in the near-term. Arguing the rating now is as noisy and less effective as the political posturing and finger pointing witnessed over the past two weeks. Hence, the reality check that is long overdue. Surely, the impact of a series of harsh realizations will be reexamined and will naturally reach equilibrium.
Calmer Digestion
The relative attractiveness of the US has not vanished over a week, as endless coverage would have you believe. That said, a few bruises take some time to heal. Importantly, a downgrade is not to be confused as a default, and in due time, this obvious point will be factored in the thoughts of capital allocators. Interestingly, there are not many alternatives to US treasuries, which remain relatively liquid so far. Of course, many have stormed into Gold, which is hardly new and bound to even extend its all-time high movement. Similarly, Yen and Franc as safe havens have witnessed inflows. However, intervention impact is worth watching for weeks to come. As to the US Dollar, here is one view:
“ ‘In [the] global economic turmoil the world is going through, what other alternative do we have at the moment but to stick with the US government instruments?’ asked a senior Oman government official” (Reuters, August 7, 2011).
Rational minds can calmly stay the course even during chaos. The built-up fear and further excuse to sell is part of human nature. Even Friday’s better than expected jobs numbers only caused a positive response for less than an hour. Plus, emerging market inflation is on the radar and remains a critical aspect of the macro picture. For most managers, deciphering China’s slowdown was on the radar before the recent plunge. Thus, fundamental catalysts were building slowly. Perhaps, all the pent up “weakness stories” are being all flushed out, as old and new realities are confronted. Soon enough, all the sideline cash will need to be put to work. As risk is redefined, history suggests that sobered minds will notice that some value (long-term investments) is worth considering. The mind games between fear and greed will reinvent itself in a new cycle. Until then, timing will remain tricky. Clear thinking is required more than usual, and visionary thoughts will be challenged by general sentiment.
Article Quotes:
“It is undeniable that the mass printing of “virtual money”, so-called quantitative easing, amounts to a deliberate debasement of the dollar, the euro and the pound. QE not only rescues banks that are bust but politically connected. As our central banks churn out cyber-credits, using them to buy our own government bonds, we’re also imposing losses on our creditors at home and abroad. The truth, largely unspoken, is that inflation and currency debasement are at the heart of the West’s strategy for tackling our massive debts. Domestic ‘monetary stimulus,’ in addition, causes money to flee our shores, so the currencies of other nations rise, making their exports less competitive. That’s why Brazil has imposed a tax on holdings of the real, trying to make it unattractive. Japan is intervening to lower the yen. Even Switzerland, the ultimate neutralist, is now engaged in ‘currency war’ – with Berne complaining loudly about Western policies causing the Swiss franc to spiral.” (The Telegraph, August 6, 2011)
“As for the downgrade itself, it may just be an expression of the obvious, not unlike the shellacking the stock market took last week. The underlying logic—of both downgrade and downturn—has been plain to see for a while. Our economy is a mess—in the long term because we’ve spent too much, and in the short term, perhaps, because we won’t spend enough. The political and ideological arguments that arise out of this contradiction make for a dismal spectacle….We’re a little like a gambler deep in the hole. The only way out of the hole is to bet more. The problem is, the guys around the table aren’t as keen as they used to be to stake us the cash to stay in. Do we walk away broke, or sell our snakeskin boots for a shot at another hand? Either way, we’re facing ruin. But it’s the doing nothing—the dithering—that might just get us shot.” (The New Yorker, August 6, 2011)
Levels:
S&P 500 Index [1199.38] – Down 7.19% last week, following a very extreme move. The break below 1280 is noteworthy, as 1200 marks a fragile but new stabilization point.
Crude [$86.88] – Closed Friday above $85 range—a level last witnessed near the start of the year.
Gold [$1628.50] – Although slightly up for the week, the commodity did not make new highs, as seen several times in the past few years. Nonetheless, 1679 intra-day highs from August 4th, as uptrend remains intact.
DXY – US Dollar Index [74.59] – Held above annual lows and turned a positive weekly return. Implication of downgrade, currency adjustments and safe haven rotation will have a lot to say. However, for over four months, a bottoming and stabilizing pattern is visible.
US 10 Year Treasury Yields [2.55%] – Further decline in yields begs questions for key target rates. In the late 2008 era and in late fall 2010, yields stabilized around 2.40. Now, few percentage points removed from that level as the recent lows stand at 2.33%.
http://markettakers.blogspot.com
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.
“Anything you build on a large scale or with intense passion invites chaos.” - Francis Ford Coppola (1939-present)
Tension Released
Selling has unleashed in matter of a few days, because of the overdue debt ceiling resolution, currency adjustment by central bankers, depreciating Yen and Franc, and the ongoing Eurozone debt crisis, leading to the eventual S&P downgrade of the US credit rating. Digesting recent events over a month alone would have been too much to ask. Well, now we know what happens when the “bad news” events combust in a synchronized manner at a pace faster than expected. In an interlinked global equities market, shockwaves are felt uniformly.
Ironically, these same worrisome issues were indentified and causally debated in the first part of 2011. Of course, the magnitude of the sell-off was the great unknown, even for the most bearish managers who have lost faith in many assets, outside of hard assets. Meanwhile, bullish managers are quite surprised at the pace of deceleration, as the unraveling has yet to settle. Extreme results are followed up by extremes and surprises, so the suspense will live on for a little while. The unleashing of “fear” turned into quick liquidation as participants ran for safety in an absolute panic. As a quick reminder, the Volatility Index (VIX) jumped by 159% from its July 1st level. Yes, fear is trading at a premium for those opportunistic observers. In other words, this paints the magnitude of broad index reactions. For reference purposes, in 2008, the VIX spiked 380% from August to October. Nonetheless, this time around, calculating and understanding a risk-free return will puzzle models of all sorts, as emotions are the key driving force. Now the anxious question revolves around the end of the bleeding and the beginning of the post mortem to this cycle, as we settle in into new realities.
Scrambling for Substance
Reliance on policymakers’ resolutions in Europe or the US has failed to produce a recovery in the past year. As a start, the debt ceiling deal seems such a long while ago and still failed to produce a cheerful reaction. Clearly, quantitative easing II did not get a warm ovation, while failing to ignite some confidence. Nonetheless, the chatter of further stimulus (for QE3) is slowly picking up volume and support. Secondly, within the desperate weekend hours, the European Central Bank concluded a decision to purchase Italian and Spanish bonds as part of a rapid response. Perhaps, another attempt to restore further faith as good news is hard to find, and it seems further than one’s imagination.
In all fairness, S&P’s rating downgrade confirms the decade old struggle of fueling growth in US business, while attempting to address the debt issue. The rating serves as a confirmation on the known rather than as an awakening to investor perception. Some savvy veterans (including the secretary of treasury and former fed chairman) may argue the calculation methodology of the downgrade and overall creditability of the rating agencies. However, that’s a moot point for all to move along in the near-term. Arguing the rating now is as noisy and less effective as the political posturing and finger pointing witnessed over the past two weeks. Hence, the reality check that is long overdue. Surely, the impact of a series of harsh realizations will be reexamined and will naturally reach equilibrium.
Calmer Digestion
The relative attractiveness of the US has not vanished over a week, as endless coverage would have you believe. That said, a few bruises take some time to heal. Importantly, a downgrade is not to be confused as a default, and in due time, this obvious point will be factored in the thoughts of capital allocators. Interestingly, there are not many alternatives to US treasuries, which remain relatively liquid so far. Of course, many have stormed into Gold, which is hardly new and bound to even extend its all-time high movement. Similarly, Yen and Franc as safe havens have witnessed inflows. However, intervention impact is worth watching for weeks to come. As to the US Dollar, here is one view:
“ ‘In [the] global economic turmoil the world is going through, what other alternative do we have at the moment but to stick with the US government instruments?’ asked a senior Oman government official” (Reuters, August 7, 2011).
Rational minds can calmly stay the course even during chaos. The built-up fear and further excuse to sell is part of human nature. Even Friday’s better than expected jobs numbers only caused a positive response for less than an hour. Plus, emerging market inflation is on the radar and remains a critical aspect of the macro picture. For most managers, deciphering China’s slowdown was on the radar before the recent plunge. Thus, fundamental catalysts were building slowly. Perhaps, all the pent up “weakness stories” are being all flushed out, as old and new realities are confronted. Soon enough, all the sideline cash will need to be put to work. As risk is redefined, history suggests that sobered minds will notice that some value (long-term investments) is worth considering. The mind games between fear and greed will reinvent itself in a new cycle. Until then, timing will remain tricky. Clear thinking is required more than usual, and visionary thoughts will be challenged by general sentiment.
Article Quotes:
“It is undeniable that the mass printing of “virtual money”, so-called quantitative easing, amounts to a deliberate debasement of the dollar, the euro and the pound. QE not only rescues banks that are bust but politically connected. As our central banks churn out cyber-credits, using them to buy our own government bonds, we’re also imposing losses on our creditors at home and abroad. The truth, largely unspoken, is that inflation and currency debasement are at the heart of the West’s strategy for tackling our massive debts. Domestic ‘monetary stimulus,’ in addition, causes money to flee our shores, so the currencies of other nations rise, making their exports less competitive. That’s why Brazil has imposed a tax on holdings of the real, trying to make it unattractive. Japan is intervening to lower the yen. Even Switzerland, the ultimate neutralist, is now engaged in ‘currency war’ – with Berne complaining loudly about Western policies causing the Swiss franc to spiral.” (The Telegraph, August 6, 2011)
“As for the downgrade itself, it may just be an expression of the obvious, not unlike the shellacking the stock market took last week. The underlying logic—of both downgrade and downturn—has been plain to see for a while. Our economy is a mess—in the long term because we’ve spent too much, and in the short term, perhaps, because we won’t spend enough. The political and ideological arguments that arise out of this contradiction make for a dismal spectacle….We’re a little like a gambler deep in the hole. The only way out of the hole is to bet more. The problem is, the guys around the table aren’t as keen as they used to be to stake us the cash to stay in. Do we walk away broke, or sell our snakeskin boots for a shot at another hand? Either way, we’re facing ruin. But it’s the doing nothing—the dithering—that might just get us shot.” (The New Yorker, August 6, 2011)
Levels:
S&P 500 Index [1199.38] – Down 7.19% last week, following a very extreme move. The break below 1280 is noteworthy, as 1200 marks a fragile but new stabilization point.
Crude [$86.88] – Closed Friday above $85 range—a level last witnessed near the start of the year.
Gold [$1628.50] – Although slightly up for the week, the commodity did not make new highs, as seen several times in the past few years. Nonetheless, 1679 intra-day highs from August 4th, as uptrend remains intact.
DXY – US Dollar Index [74.59] – Held above annual lows and turned a positive weekly return. Implication of downgrade, currency adjustments and safe haven rotation will have a lot to say. However, for over four months, a bottoming and stabilizing pattern is visible.
US 10 Year Treasury Yields [2.55%] – Further decline in yields begs questions for key target rates. In the late 2008 era and in late fall 2010, yields stabilized around 2.40. Now, few percentage points removed from that level as the recent lows stand at 2.33%.
http://markettakers.blogspot.com
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.
Monday, August 01, 2011
Market Outlook | August 1, 2011
“ We could never learn to be brave and patient, if there were only joy in the world.” - Helen Keller (1880-1968)
Sorting Out Messes
After a circus of a week, least to the surprise of most insiders’ expectation, congress has nearly reached a debt agreement. Perhaps, soon enough, we can resume back to issues related to job creation, weakening European condition, and rising skepticism by various participating parties. Now, with suspense cooling off, the market drivers can return to earnings season and currency reactions and patterns. Of course, the potential debt rating downgrade chatter is hovering as a political and risk management discussion.
It’s quite evident that a shortage of good news is a summer theme, just as much as a shortage of sustainable ideas. Perhaps, a shortage of common sense and brevity can be thrown in the mix as well—not to mention the overstated theme of a shortage in investable ideas. These are the thoughts that persisted last week, where volatility (measured by VIX) reached the second highest level this year, along with all-time highs in Gold prices last week. The previous highs in volatility were reached in mid-June and two weeks ago as an illustration of a turbulent summer. Meanwhile, the Gold story is too obvious, and it is sold as the “safety” barometer among casual and financial onlookers. Regardless of political messaging delays and disarray, these were minor clues from key indicators. Now, the level of panic might not have been as dramatic as desired by some political leaders in the debt ceiling crisis. Still, the question this week remains whether or not “risk” is trading at a premium, as hope is priced very “cheaply.” That is where visionaries can reexamine opportunities.
Truthful Imagination
For those plainly looking ahead, on the surface it is hard to envision improving growth numbers in earnings or economic numbers. Similarly, foreseeing a series of events to change the “beaten up” sentiment is quite challenging beyond a day or two. Simply, imagination is deeply required to see a recovery. For many weeks, the question has been: Is it bad news or is it stimulus tools that are deeply exhausted? Fatigue of hearing the message takes its toll, even if a dosage of truth is reiterated. At this point, one has to ask or seek the surprise element for upside gains, as previous crisis modes would suggest. The reward is in visualizing aggressive bets for the next 6-9 months, where markets get back to the usual illustration of perception.
Asset managers are forced to reflect to trends of the post 2008 crisis era. As a start, the lack of success in quantitative easing showcases that a stimulus package or comforting plan is not enough. At the same time, the inflationary pressures have led to rate hikes as few wonder about the promising outlook of emerging markets. This has Asian currencies rising to 14-year highs. For larger US firms, overseas earnings continue to play a bigger role. Therefore, the magnitude of Brazilian and Chinese slowdown is too interrelated, and it will have a big say in this second half.
Gearing Up
Pressure has mounted as to the feasibility of capitalism, which has entered a territory of too many unknowns this year (more than usual). Plus, one should not deny the new regulatory framework of the Dodd-Frank Act, which is still being digested and expected to revamp the asset management world. Yet, through all this, the US democratic system, although highly manipulated at times, continues to work, and it remains a welcoming system for debates (as witnessed again this weekend). That is perhaps a relative argument, which cannot be understated, despite a fragile state for America’s economy. In due time, when confidence is restored, this point can be viewed not as a bold statement but rather a sobering observation. As to the consequences of recent policies, that remains to be seen.
Wills are tested at periods of economic slowdown. Conviction on buy ideas is mostly low. Thus, it’s a good time to isolate the political negation tactics from the natural economic slowdown—a worthwhile exercise for the upcoming weeks. As a reminder, it was last July when stocks bottomed after a turbulent spring 2010. History rarely repeats itself exactly, but a quick look back addresses that fact. Importantly, an inflection point is deeply awaited in terms of commodity reversal and US dollar recovery. Similarly, near-term traders will have to isolate knee-jerk reactions from headline news versus sustainable runs backed by fundamentals. Let’s not forget that the S&P 500 Index was down 3.92% and that Crude declined by 4.12% coming into this week. Thus, a short-lived bounce is merely inevitable, especially at the start of a new month.
Article Quotes:
“The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners…As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall…. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.” (The Telegraph, July 28, 2011)
“The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts. But, so far, that gamble isn’t working as well or as rapidly as hoped. Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans. But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction. Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary. Banking systems need more capital. The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment. But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.” (Project Syndicate July 29, 2011)
Levels:
S&P 500 Index [1292.28] – Stalled at 1340, where sellers stepped in. The next noteworthy buy level is around 1280, where technical indicators would argue for a buy point. That’s near the 200-day moving average of 1284—a target worth a closer look.
Crude [$95.75] – In the well defined range between $95-100. A break below $94 can trigger further selling pressure.
Gold [$1628.50] – The reacceleration since July 1st has led to a nearly 10% appreciation. Established uptrend is making new highs.
DXY – US Dollar Index [73.89] – Barely holding above annual lows after the deceleration in recent weeks.
US 10 Year Treasury Yields [2.79%] – Unlike the dollar, yields have failed to stay above previous lows, as the below 3% trend lives on.
http://markettakers.blogspot.com
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.
Sorting Out Messes
After a circus of a week, least to the surprise of most insiders’ expectation, congress has nearly reached a debt agreement. Perhaps, soon enough, we can resume back to issues related to job creation, weakening European condition, and rising skepticism by various participating parties. Now, with suspense cooling off, the market drivers can return to earnings season and currency reactions and patterns. Of course, the potential debt rating downgrade chatter is hovering as a political and risk management discussion.
It’s quite evident that a shortage of good news is a summer theme, just as much as a shortage of sustainable ideas. Perhaps, a shortage of common sense and brevity can be thrown in the mix as well—not to mention the overstated theme of a shortage in investable ideas. These are the thoughts that persisted last week, where volatility (measured by VIX) reached the second highest level this year, along with all-time highs in Gold prices last week. The previous highs in volatility were reached in mid-June and two weeks ago as an illustration of a turbulent summer. Meanwhile, the Gold story is too obvious, and it is sold as the “safety” barometer among casual and financial onlookers. Regardless of political messaging delays and disarray, these were minor clues from key indicators. Now, the level of panic might not have been as dramatic as desired by some political leaders in the debt ceiling crisis. Still, the question this week remains whether or not “risk” is trading at a premium, as hope is priced very “cheaply.” That is where visionaries can reexamine opportunities.
Truthful Imagination
For those plainly looking ahead, on the surface it is hard to envision improving growth numbers in earnings or economic numbers. Similarly, foreseeing a series of events to change the “beaten up” sentiment is quite challenging beyond a day or two. Simply, imagination is deeply required to see a recovery. For many weeks, the question has been: Is it bad news or is it stimulus tools that are deeply exhausted? Fatigue of hearing the message takes its toll, even if a dosage of truth is reiterated. At this point, one has to ask or seek the surprise element for upside gains, as previous crisis modes would suggest. The reward is in visualizing aggressive bets for the next 6-9 months, where markets get back to the usual illustration of perception.
Asset managers are forced to reflect to trends of the post 2008 crisis era. As a start, the lack of success in quantitative easing showcases that a stimulus package or comforting plan is not enough. At the same time, the inflationary pressures have led to rate hikes as few wonder about the promising outlook of emerging markets. This has Asian currencies rising to 14-year highs. For larger US firms, overseas earnings continue to play a bigger role. Therefore, the magnitude of Brazilian and Chinese slowdown is too interrelated, and it will have a big say in this second half.
Gearing Up
Pressure has mounted as to the feasibility of capitalism, which has entered a territory of too many unknowns this year (more than usual). Plus, one should not deny the new regulatory framework of the Dodd-Frank Act, which is still being digested and expected to revamp the asset management world. Yet, through all this, the US democratic system, although highly manipulated at times, continues to work, and it remains a welcoming system for debates (as witnessed again this weekend). That is perhaps a relative argument, which cannot be understated, despite a fragile state for America’s economy. In due time, when confidence is restored, this point can be viewed not as a bold statement but rather a sobering observation. As to the consequences of recent policies, that remains to be seen.
Wills are tested at periods of economic slowdown. Conviction on buy ideas is mostly low. Thus, it’s a good time to isolate the political negation tactics from the natural economic slowdown—a worthwhile exercise for the upcoming weeks. As a reminder, it was last July when stocks bottomed after a turbulent spring 2010. History rarely repeats itself exactly, but a quick look back addresses that fact. Importantly, an inflection point is deeply awaited in terms of commodity reversal and US dollar recovery. Similarly, near-term traders will have to isolate knee-jerk reactions from headline news versus sustainable runs backed by fundamentals. Let’s not forget that the S&P 500 Index was down 3.92% and that Crude declined by 4.12% coming into this week. Thus, a short-lived bounce is merely inevitable, especially at the start of a new month.
Article Quotes:
“The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners…As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall…. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.” (The Telegraph, July 28, 2011)
“The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts. But, so far, that gamble isn’t working as well or as rapidly as hoped. Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans. But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction. Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary. Banking systems need more capital. The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment. But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.” (Project Syndicate July 29, 2011)
Levels:
S&P 500 Index [1292.28] – Stalled at 1340, where sellers stepped in. The next noteworthy buy level is around 1280, where technical indicators would argue for a buy point. That’s near the 200-day moving average of 1284—a target worth a closer look.
Crude [$95.75] – In the well defined range between $95-100. A break below $94 can trigger further selling pressure.
Gold [$1628.50] – The reacceleration since July 1st has led to a nearly 10% appreciation. Established uptrend is making new highs.
DXY – US Dollar Index [73.89] – Barely holding above annual lows after the deceleration in recent weeks.
US 10 Year Treasury Yields [2.79%] – Unlike the dollar, yields have failed to stay above previous lows, as the below 3% trend lives on.
http://markettakers.blogspot.com
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.
Monday, July 25, 2011
Market Outlook | July 25, 2011
“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” - Friedrich Nietzsche (1844-1900)
Theatrical Deal Sealing
Obsession and anticipation over deal making is a theme that keeps the summer lively, given this unavoidable topic. At face value, it is easy to say negotiations are ugly as the political spice makes it even uglier. One big weekend deal (or lack of) attempt does not seal other long-term issues. Generally, when a politician talks like a trader by warning of market behavior or when a trader speaks like a government official, then both are equally dangerous. Veterans and shrewd observers would attest to that. In fact, some are calling this debt ceiling event “a manufactured crisis” or simply “artificial,” or other Washingtonian insiders call it a “gimmick.” Bottom-line, running a deficit is nothing new that dates back to World War II, and the Treasury Secretary can steer clear of a default, if needed. The National Center of Policy Analysis reminds us of the following:
“There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit…. The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds” (NCPA, July 20, 2011).
Posturing methods and threat of a market collapse should be neutrally watched by market observers. In other words, the gloom-and-doom consequences are well laid out (especially with nauseating Eurozone discussions); therefore, a mellow approach is heavily required.
Sensationalism makes for good entertainment and not for a solid money management. Outside the tick-by-tick and day-by-day response to chatter, placing money with high convictions in the next 6 months is the objective and challenge on hand. After all this back and forth, one should seek the actionable ideas while prioritizing noteworthy global indicators beyond the current headline matter.
A Glaring Shine
Gold perceived as a “safer” instrument continues to attract votes via buyers, as showcased by shiny past and present performance. It was July 23, 1999, when Gold bottomed at $252.80. Of course, that was a period where America was infatuated with the tech boom. The 12-year anniversary of Gold’s bottom marks a different world today, with all-time highs at the end of last week at $1602. Importantly, soon after, at the turn of the millennium, interest rates and the dollar started multi-year declines. Clearly, that’s contributed to keeping the Gold party alive and well. Yet, at some point, Gold owners must ask, is this a safe asset to own against, anticipating the dollar collapse, stock market fragility, or alternation in capitalism. Or does it have a historical appeal and can be physically felt? Bringing up these doubts sounds rather unpopular today. For now, the defined reasoning behind the ongoing run is less of a discussion, and that’s too common when momentum is in full gear Nonetheless, few biases and facts need closer evaluation, especially for the next 6-12 months. In other words, safety was one of the catalysts to own Gold, but logic eventually catches up to a frenzy of patterns.
Borderless Index
As known to all by now, borderless-driven competition has redefined the way of evaluating an index. Recently, a report confirmed that companies in the S&P 500 received 46.3% of revenues outside the United States. Notably, US technology companies had the most exposure (56.3%) to foreign sales (S&P Indices, July 2011). These trends seem rather simple and obvious, but they paint one solid picture of today’s realities.
This certainly illustrates a look back into the weakening US growth rate, which by now, doesn’t require advanced quant models to figure out. Importantly, we can point out with confidence that the S&P 500 Index is not a reflection of US economy and clearly not an economic barometer (as stated many times before). At the same time, this reflects the much talked about emerging markets expansion as well as the interlinked nature of financial markets.
Then, there is the domestic social, but really political, matter. Multi-national companies, for the most part, don’t have an allegiance to borders in a globalized world. Rightly or wrongly, this becomes a vexing topic for some patriots, but it becomes a practically stifling issue for American leaders. Not to mention, these company-specific dynamics are powerful enough to alter the behavior of a money manager when it comes to capital allocation. Finally, non US revenue trend touches on key topics related to corporate taxes (to be paid in the US), flow of investment capital, and factors affecting growth rates.
Seeking Answers
For companies with exposure to China, some near-term suspense is warranted. This has many scrambling to decipher soft vs. hard landing matters to the Chinese economy. Inflationary matters have swept the emerging markets, and this certainly is a daily discussion topic for policymakers and investors alike.
Real estate “bubbles” are resurfacing again in China as well as Brazil. The real impact of the housing slowdown is not quite understood, and at times, it is unfairly compared to the US collapse. As for now, it is evident that emerging markets have some turbulence (or skepticism) to overcome in the next few months. Interestingly, the magnitude of any slowdown can provide guidance on two major questions:
1. What will be the impact of further slowdown on earnings of multi-national companies? 2. Will investors rotate to US markets on a relative basis, given increase in the sovereign debt crisis elsewhere?
For now, both are intriguing questions, and they are worth deciphering before placing aggressive bets.
Article Quotes:
“It has been argued that banks do not need to get funds from each other, since they are now awash in reserves; but these reserves are not equally distributed. The 25 largest US banks account for over half of aggregate reserves, with 21% of reserves held by just three banks; and the largest banks have cut back on small business lending by over 50%. Large Wall Street banks have more lucrative things to do with the very cheap credit made available by the Fed than to lend it to businesses and consumers, which has become a risky and expensive business with the imposition of higher capital requirements and tighter regulations…. Fourteen states have now initiated bills to establish state-owned banks or to study their feasibility. Besides serving local lending needs, state-owned banks can provide cash-strapped states with new revenues, obviating the need to raise taxes, slash services or sell off public assets.” (Asian Times, July 21, 2011)
“People on both sides of financing French banks say the cost of debt has not changed substantially, but rather, the availability has diminished and money market funds preferring to lend overnight. Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business. At the end of June, banks in the two countries had accounted for 0.8 percent of the $1,570bn assets in prime money market funds, calculates Fitch, down from 6.1 per cent in late 2009.The 10 largest US prime money market funds reduced their total exposure to European banks by 8.7 percent on a dollar basis in June, according to the rating agency. Owners of the money market funds, chastened by a rush of withdrawals during the financial crisis in 2008, have adopted an abundance of caution.” (Financial Times, July 24, 2011)
Levels:
S&P 500 Index [1345.02] – Breaking and staying above around 1340, which has been difficult, as witnessed in February, April, and earlier this month.
Crude [$99.87] – A trend reversal established on June 27 has triggered a recovery back to the $100 level. Doubters are questioning if elevation above $100 is sustainable. Earlier this year, buying severely stalled at $105 and $110.
Gold [$1602] – A 21% rally since the lows of late January registers yet another all-time high—the most profound and well-defined positive trend this year. Since the 2008 crisis in October (24), the commodity has rallied by 124.84%—clearly a declaration of negative sentiment for paper assets. Bubble-like pattern is hard to identify for now.
DXY – US Dollar Index [74.20] – Resumption of downtrend pattern and few points from annual lows, which is critical to watch at 7269. Last four months have showcased moderate stabilization, but conjuring an uptrend is hardly visible.
US 10 Year Treasury Yields [2.96%] – Attempting to break above 3% while staying above 2.80%. A step back further illustrates the established downtrend, which has been in full gear since peaking at 6.82% in 2ooo.
http://markettakers.blogspot.com
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.
Theatrical Deal Sealing
Obsession and anticipation over deal making is a theme that keeps the summer lively, given this unavoidable topic. At face value, it is easy to say negotiations are ugly as the political spice makes it even uglier. One big weekend deal (or lack of) attempt does not seal other long-term issues. Generally, when a politician talks like a trader by warning of market behavior or when a trader speaks like a government official, then both are equally dangerous. Veterans and shrewd observers would attest to that. In fact, some are calling this debt ceiling event “a manufactured crisis” or simply “artificial,” or other Washingtonian insiders call it a “gimmick.” Bottom-line, running a deficit is nothing new that dates back to World War II, and the Treasury Secretary can steer clear of a default, if needed. The National Center of Policy Analysis reminds us of the following:
“There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit…. The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds” (NCPA, July 20, 2011).
Posturing methods and threat of a market collapse should be neutrally watched by market observers. In other words, the gloom-and-doom consequences are well laid out (especially with nauseating Eurozone discussions); therefore, a mellow approach is heavily required.
Sensationalism makes for good entertainment and not for a solid money management. Outside the tick-by-tick and day-by-day response to chatter, placing money with high convictions in the next 6 months is the objective and challenge on hand. After all this back and forth, one should seek the actionable ideas while prioritizing noteworthy global indicators beyond the current headline matter.
A Glaring Shine
Gold perceived as a “safer” instrument continues to attract votes via buyers, as showcased by shiny past and present performance. It was July 23, 1999, when Gold bottomed at $252.80. Of course, that was a period where America was infatuated with the tech boom. The 12-year anniversary of Gold’s bottom marks a different world today, with all-time highs at the end of last week at $1602. Importantly, soon after, at the turn of the millennium, interest rates and the dollar started multi-year declines. Clearly, that’s contributed to keeping the Gold party alive and well. Yet, at some point, Gold owners must ask, is this a safe asset to own against, anticipating the dollar collapse, stock market fragility, or alternation in capitalism. Or does it have a historical appeal and can be physically felt? Bringing up these doubts sounds rather unpopular today. For now, the defined reasoning behind the ongoing run is less of a discussion, and that’s too common when momentum is in full gear Nonetheless, few biases and facts need closer evaluation, especially for the next 6-12 months. In other words, safety was one of the catalysts to own Gold, but logic eventually catches up to a frenzy of patterns.
Borderless Index
As known to all by now, borderless-driven competition has redefined the way of evaluating an index. Recently, a report confirmed that companies in the S&P 500 received 46.3% of revenues outside the United States. Notably, US technology companies had the most exposure (56.3%) to foreign sales (S&P Indices, July 2011). These trends seem rather simple and obvious, but they paint one solid picture of today’s realities.
This certainly illustrates a look back into the weakening US growth rate, which by now, doesn’t require advanced quant models to figure out. Importantly, we can point out with confidence that the S&P 500 Index is not a reflection of US economy and clearly not an economic barometer (as stated many times before). At the same time, this reflects the much talked about emerging markets expansion as well as the interlinked nature of financial markets.
Then, there is the domestic social, but really political, matter. Multi-national companies, for the most part, don’t have an allegiance to borders in a globalized world. Rightly or wrongly, this becomes a vexing topic for some patriots, but it becomes a practically stifling issue for American leaders. Not to mention, these company-specific dynamics are powerful enough to alter the behavior of a money manager when it comes to capital allocation. Finally, non US revenue trend touches on key topics related to corporate taxes (to be paid in the US), flow of investment capital, and factors affecting growth rates.
Seeking Answers
For companies with exposure to China, some near-term suspense is warranted. This has many scrambling to decipher soft vs. hard landing matters to the Chinese economy. Inflationary matters have swept the emerging markets, and this certainly is a daily discussion topic for policymakers and investors alike.
Real estate “bubbles” are resurfacing again in China as well as Brazil. The real impact of the housing slowdown is not quite understood, and at times, it is unfairly compared to the US collapse. As for now, it is evident that emerging markets have some turbulence (or skepticism) to overcome in the next few months. Interestingly, the magnitude of any slowdown can provide guidance on two major questions:
1. What will be the impact of further slowdown on earnings of multi-national companies? 2. Will investors rotate to US markets on a relative basis, given increase in the sovereign debt crisis elsewhere?
For now, both are intriguing questions, and they are worth deciphering before placing aggressive bets.
Article Quotes:
“It has been argued that banks do not need to get funds from each other, since they are now awash in reserves; but these reserves are not equally distributed. The 25 largest US banks account for over half of aggregate reserves, with 21% of reserves held by just three banks; and the largest banks have cut back on small business lending by over 50%. Large Wall Street banks have more lucrative things to do with the very cheap credit made available by the Fed than to lend it to businesses and consumers, which has become a risky and expensive business with the imposition of higher capital requirements and tighter regulations…. Fourteen states have now initiated bills to establish state-owned banks or to study their feasibility. Besides serving local lending needs, state-owned banks can provide cash-strapped states with new revenues, obviating the need to raise taxes, slash services or sell off public assets.” (Asian Times, July 21, 2011)
“People on both sides of financing French banks say the cost of debt has not changed substantially, but rather, the availability has diminished and money market funds preferring to lend overnight. Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business. At the end of June, banks in the two countries had accounted for 0.8 percent of the $1,570bn assets in prime money market funds, calculates Fitch, down from 6.1 per cent in late 2009.The 10 largest US prime money market funds reduced their total exposure to European banks by 8.7 percent on a dollar basis in June, according to the rating agency. Owners of the money market funds, chastened by a rush of withdrawals during the financial crisis in 2008, have adopted an abundance of caution.” (Financial Times, July 24, 2011)
Levels:
S&P 500 Index [1345.02] – Breaking and staying above around 1340, which has been difficult, as witnessed in February, April, and earlier this month.
Crude [$99.87] – A trend reversal established on June 27 has triggered a recovery back to the $100 level. Doubters are questioning if elevation above $100 is sustainable. Earlier this year, buying severely stalled at $105 and $110.
Gold [$1602] – A 21% rally since the lows of late January registers yet another all-time high—the most profound and well-defined positive trend this year. Since the 2008 crisis in October (24), the commodity has rallied by 124.84%—clearly a declaration of negative sentiment for paper assets. Bubble-like pattern is hard to identify for now.
DXY – US Dollar Index [74.20] – Resumption of downtrend pattern and few points from annual lows, which is critical to watch at 7269. Last four months have showcased moderate stabilization, but conjuring an uptrend is hardly visible.
US 10 Year Treasury Yields [2.96%] – Attempting to break above 3% while staying above 2.80%. A step back further illustrates the established downtrend, which has been in full gear since peaking at 6.82% in 2ooo.
http://markettakers.blogspot.com
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.
Monday, July 18, 2011
Market Outlook | July 18, 2011
“Wisdom is knowing what to do next, skill is knowing how to do it, and virtue is doing it.” -David Starr Jordan (1851-1931)
Collective Mystification
The past week has been a suspenseful one, in which global risk became ever harder to define, understand, and estimate—simply, an honest observation, which most should admit by now (if they have not already). Downtrends, downgrades, and pure “downers” stem from old wounds and mostly sum up the summer trading days. Importantly, healing methods via reactionary policies are too short-term oriented, and at some point, further misdiagnoses take its toll on fragile markets. Financial books will have to reassess previous teachings on the “true” safety of Treasuries and various sovereign debts. The textbook assumptions are severely challenged today, especially since a problem-solution manual is not available or agreeable. Therefore, we’re all forced to stay patient in this unwinding process.
The Federal Reserve chairman, as usual, attempted to calm participants. Unfortunately, the witty, sharp, and skeptical audience had heard this message before. Thus, this time, the cheerleading was toned down. The revival and stimulus efforts are nauseating (and recognized by Chairman Bernanke) for a crowd that is seeking fresh ideas. In other words, the initial reaction was for traders to expect more of the same: a declining dollar, rise in gold prices, and lower interest rate policies. Optimism (or further denial) is much needed as confidence creation is vital. However, identifying the substance behind the salesmanship is a demanded skill for investment officers. Thus, this leads one to ask this question: how many times can you cheer for a fundamentally flawed system? That’s a question circulating in the minds of causal or obsessed observers. In fact, the Federal Reserve of Dallas stated: “We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion 'might spook the marketplace’” (Bloomberg, July 14, 2011).
As for alternatives, China’s growth is noticeably (expectedly) slowing down, and the same applies for other emerging markets. After a decade of growth in developing countries, inflation monitoring haunts policymakers. As for the magnitude of this slowdown, that is for buyers and sellers to speculate. Yet, the long-term picture seems net positive for emerging nations as investor appetite seeks higher growth rates—a thought to keep in mind, even if near-term corrections can blur the vision of investors.
Deadlocks, Deadweights, and Dead Minds
Theatrical deliberation on mission critical issues is merely a common theme for Eurozone and congress leaders. Negotiations that are filled with deadlocks about saving dead weights, during an age-old political banter, produces some dead “minds.” Political posturing in the debt ceiling matter, combined with contemplation of rating changes by agencies, enhance the buzz (or scare). Perhaps, it’s a negotiation tactic, but it fails to add jobs or the perception of confidence. How can business run as usual without the clear guidance of major talks and hopes of a deal? The well-documented economic slowdown is a forefront political and social issue. Sadly, these restructuring topics are mostly backward looking, and they hardly create organic growth at a desired pace.
Mapping a Plan
Guts and some guesswork will be required by money managers in looking ahead for the next six months. For example, the guidelines to operate as a bank have adjusted significantly in which projecting earnings growth for the next three years is hard to predict. Similarly, the obvious deleveraging cycle in consumer markets makes housing and retail rather difficult in most markets. Near or long-term investment ideas are hard to bring back and, once identified, even harder to execute. Plus, the macro events are bound to tack on volatility, which has stayed relatively calm in the first half of the year. All this adds up for a synchronized hesitancy and occasional shocks in the weeks ahead.
Article Quotes:
“Dupont appears to be adapting nimbly to new 21st century strategies, by following a couple of key themes: global markets and agricultural industries. With its focus on emerging countries like China, Brazil and India, it projects a 10% compound increase in sales in those markets over the next five years. On the agricultural side, the company has identified the megatrend of expanding populations who demand increased food and other basic commodities, as well as the importance of genetically modified seeds and more efficient farming, to yield higher crops. This May, Dupont completed a tender offer for Danisco, a Danish maker of food and bioproducts. At the same time, the company preserves Pierre’s culture and legacy of scientific innovation. Out of about 60,000 employees, over 5,000 are scientists and engineers… It’s some comfort to remember that an industrial backbone can still drive the American economy, not just social networking enterprises that look like bubbles.” (Vanessa Drucker, Fundweb July 12, 2011)
“Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve… China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small…China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.” (The Telegraph, July 18, 2011)
Levels:
S&P 500 Index [1316. 14] – Slightly above its 50-day moving average, as near-term consolidation continues.
Crude [$97.24] – Multi-month range is between $95-100 and becoming well defined. Attempting to revisit early spring levels of trading above $100.
Gold [$1587 ] – After several previous attempts, the commodity broke above $1550 while establishing all-time highs. Momentum is intact along with it.
DXY – US Dollar Index [75.12] – Similar to Crude, trading in a tight range the last two months. Maintaining a few points above annul lows.
US 10 Year Treasury Yields [2.90%] – July 12 marked the lowest point of the year at 2.81% as a reflection of jittery broad markets. Yet, the next move appears to revisit and stall around 3%.
http://markettakers.blogspot.com
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.
Collective Mystification
The past week has been a suspenseful one, in which global risk became ever harder to define, understand, and estimate—simply, an honest observation, which most should admit by now (if they have not already). Downtrends, downgrades, and pure “downers” stem from old wounds and mostly sum up the summer trading days. Importantly, healing methods via reactionary policies are too short-term oriented, and at some point, further misdiagnoses take its toll on fragile markets. Financial books will have to reassess previous teachings on the “true” safety of Treasuries and various sovereign debts. The textbook assumptions are severely challenged today, especially since a problem-solution manual is not available or agreeable. Therefore, we’re all forced to stay patient in this unwinding process.
The Federal Reserve chairman, as usual, attempted to calm participants. Unfortunately, the witty, sharp, and skeptical audience had heard this message before. Thus, this time, the cheerleading was toned down. The revival and stimulus efforts are nauseating (and recognized by Chairman Bernanke) for a crowd that is seeking fresh ideas. In other words, the initial reaction was for traders to expect more of the same: a declining dollar, rise in gold prices, and lower interest rate policies. Optimism (or further denial) is much needed as confidence creation is vital. However, identifying the substance behind the salesmanship is a demanded skill for investment officers. Thus, this leads one to ask this question: how many times can you cheer for a fundamentally flawed system? That’s a question circulating in the minds of causal or obsessed observers. In fact, the Federal Reserve of Dallas stated: “We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion 'might spook the marketplace’” (Bloomberg, July 14, 2011).
As for alternatives, China’s growth is noticeably (expectedly) slowing down, and the same applies for other emerging markets. After a decade of growth in developing countries, inflation monitoring haunts policymakers. As for the magnitude of this slowdown, that is for buyers and sellers to speculate. Yet, the long-term picture seems net positive for emerging nations as investor appetite seeks higher growth rates—a thought to keep in mind, even if near-term corrections can blur the vision of investors.
Deadlocks, Deadweights, and Dead Minds
Theatrical deliberation on mission critical issues is merely a common theme for Eurozone and congress leaders. Negotiations that are filled with deadlocks about saving dead weights, during an age-old political banter, produces some dead “minds.” Political posturing in the debt ceiling matter, combined with contemplation of rating changes by agencies, enhance the buzz (or scare). Perhaps, it’s a negotiation tactic, but it fails to add jobs or the perception of confidence. How can business run as usual without the clear guidance of major talks and hopes of a deal? The well-documented economic slowdown is a forefront political and social issue. Sadly, these restructuring topics are mostly backward looking, and they hardly create organic growth at a desired pace.
Mapping a Plan
Guts and some guesswork will be required by money managers in looking ahead for the next six months. For example, the guidelines to operate as a bank have adjusted significantly in which projecting earnings growth for the next three years is hard to predict. Similarly, the obvious deleveraging cycle in consumer markets makes housing and retail rather difficult in most markets. Near or long-term investment ideas are hard to bring back and, once identified, even harder to execute. Plus, the macro events are bound to tack on volatility, which has stayed relatively calm in the first half of the year. All this adds up for a synchronized hesitancy and occasional shocks in the weeks ahead.
Article Quotes:
“Dupont appears to be adapting nimbly to new 21st century strategies, by following a couple of key themes: global markets and agricultural industries. With its focus on emerging countries like China, Brazil and India, it projects a 10% compound increase in sales in those markets over the next five years. On the agricultural side, the company has identified the megatrend of expanding populations who demand increased food and other basic commodities, as well as the importance of genetically modified seeds and more efficient farming, to yield higher crops. This May, Dupont completed a tender offer for Danisco, a Danish maker of food and bioproducts. At the same time, the company preserves Pierre’s culture and legacy of scientific innovation. Out of about 60,000 employees, over 5,000 are scientists and engineers… It’s some comfort to remember that an industrial backbone can still drive the American economy, not just social networking enterprises that look like bubbles.” (Vanessa Drucker, Fundweb July 12, 2011)
“Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve… China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small…China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.” (The Telegraph, July 18, 2011)
Levels:
S&P 500 Index [1316. 14] – Slightly above its 50-day moving average, as near-term consolidation continues.
Crude [$97.24] – Multi-month range is between $95-100 and becoming well defined. Attempting to revisit early spring levels of trading above $100.
Gold [$1587 ] – After several previous attempts, the commodity broke above $1550 while establishing all-time highs. Momentum is intact along with it.
DXY – US Dollar Index [75.12] – Similar to Crude, trading in a tight range the last two months. Maintaining a few points above annul lows.
US 10 Year Treasury Yields [2.90%] – July 12 marked the lowest point of the year at 2.81% as a reflection of jittery broad markets. Yet, the next move appears to revisit and stall around 3%.
http://markettakers.blogspot.com
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.
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