“If you do not expect the unexpected, you will not find it; for it is hard to be sought out, and difficult.” - Heraclitus of Ephesus (540 - 480 BC)
Neutral and Eager
The stock market is not trading quite as cheaply as it did last fall. However, it is not hovering at staggering bubble-like ranges either. Meanwhile, a slight suspense is building for the next macro catalysts, as moderate price declines are setting up for the days ahead. Although sentiment remains debatable, there is a growing neutral crowd that’s idle, given the wait and see mode produced by pending elections and European resolutions. Yet, the combination of lower interest rates, lack of liquid alternatives and the eventual shift away from “risk aversion” contributes to favorable long-term upside potential for the US stock market. For trend followers, the 22% increase in the S&P 500 index, from its October 2011 lows, is a sign of early strength. When eliminating the escalating hourly noise, it is hard to dismiss this message highlighting slight improvement from the broad indexes. The upcoming week will test the conviction of buyers while showcasing if there are enough sellers to drum up significant volume.
Labor Mystery
Interestingly, through these unfolding events and upward trending markets, there are plenty of concerns that have not escaped the minds of decision makers and observers. Rosy market performance, of the last few months, reawakens the stringent and very skeptical crowd, which is immersed in worrisome issues. This includes lack of trust in central banks, slowing growth in Asia, lack of sustainable global growth and a combustible social unrest environment. Surely, there is some truth in the concerns but over reliance on reported fears can be overly misleading. Similarly, the true improvement in the US economy remains mixed but certainly tricky since it serves a political issue. The fourth quarter headline growth in GDP of 2.8% does not tell the full story, but is intertwined with mystery. Deciphering the chance of a recession occupies money managers but the answer remains a wildcard. “Presently, we estimate that the effect of these [Seasonal] adjustments range between +2.1 million and -1.1 million jobs in any given month. These are strikingly large numbers compared with the typical range of forecasts that often surround the monthly employment numbers” (John Hussman, January 30, 2012).
Not too Unfathomable
Despite the ongoing tense environment in Europe a looming resolution is awaited, which is both partially misunderstood and mostly fatiguing. A surprise can cause a cheerful response that can drive markets higher than the normal best-case estimates. Of course, a true European resolution to existing wounds is not fully comforting, but after downgrades and further troubling system related discoveries, the downward pressures may subside for a little. Importantly, this crisis is not new at this point and the implication of mismanagement is too great. Politics and posturing aside, several steps for reform are being taken to reach a feasible resolution. Again, markets can translate minor improvements into sensitive upside responses.
Finding analysts with expectations of solid improvement is rare, thus the gutsy contrarians can look into owning banks and risk sensitive themes as a surprise. Once again, the bias against risky assets or increased shifts towards safer assets is quite visible. Gold is the prime symbol of safety, and new waves of buyers seem ready to begin investing in it. At same time, investors seem to require safety while desiring higher returns; a combination that is not practical. Meanwhile, the Federal Reserve’s language advocates betting on risky assets for yet another year. Clearly, for the investor community, to make a collective adjustment from a conventional mindset does and will take some time.
Article Quotes:
“In the meantime, the [European] crisis continues and may superficially appear to be insoluble. Yet, there are in fact several possible solutions to stave off a near-term meltdown when Italy and Spain begin their large bond rollovers in early 2012:
• Germany (and the other economically stronger Eurozone members) can write a cheque and agree to expand the European Financial Stability Facility/European Stability Mechanism and/or give it a banking licence;
• The IMF can write a cheque using new resources from the Eurozone and rest of the world to put together a sizeable new support programme for Italy and/or Spain; or
• The ECB can write a cheque and begin to purchase much larger amounts of the relevant sovereign bonds.
It remains to be seen which solution will be chosen. It is possible, indeed likely, that the ultimate package will combine parts of each of the above.” (VOX, Bergsten and Kirkegaard, January 26, 2012)
“From an innovation perspective, two facts about health care are of importance. First, a huge amount of health care spending is wasted. A strong consensus exists on this point from health care researchers along the political spectrum. Hundreds of billions of dollars are spent on health care today with little or nothing to show for it in terms of improved health. Second, although spending more on health care today doesn't get you much, spending more on health care research gets you a lot. The increases in life expectancy from fewer deaths brought on by cardiovascular disease over the 1970-1990 period, for example, were worth over $30 trillion. Yes, $30 trillion. In other words, the gains from better health over the period 1970-1990 were comparable to all the gains in material wealth over the same period.
Looking at the future, if medical research could reduce cancer mortality by just 10 percent, that would be worth $5 trillion to U.S. citizens (and even more taking into account the rest of the world). The net gain would be especially large if we could reduce cancer mortality with new drugs, which are typically cheap to make once discovered. A reduction in cancer mortality of this size does not seem beyond reach. Medical research spending is far more valuable on the margin than medical care spending yet because we lack an innovation vision, we endlessly debate how to divide the pie while we overlook potentially huge improvements in human welfare.” (The Atlantic, January 26, 2012)
Levels:
S&P 500 Index [1316.33] – Approaching mid-summer ranges between 1300-1350. Setting up for minor declines in the near-term.
Crude [$99.56] – Struggling to climb above the $100 range after several attempts. The 15 week moving average is around $94, showcasing mostly a trendless pattern.
Gold [$1726.00] – The last quarter of 2011 formed a bottoming process around $1600. Momentum favors an upside move that’s building as the next major target stands at $1895.
DXY – US Dollar Index [78.90] – Dollar strength is currently pausing after 2+ month run. It remains in a familiar range, while failing to breakout from its recent strength.
US 10 Year Treasury Yields [1.89%] – Since August 2011, yields have mostly stayed around 2%. Risk aversion is a message that remains in place.
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, January 30, 2012
Monday, January 23, 2012
Market Outlook | January 23, 2012
“Doubt is uncomfortable, certainty is ridiculous.” - Voltaire (1694-1778)
The Path Less Paved
Doubtful expectations are being measured against the current realities in the market place. Last week reiterated the realization that lesser bad news can produce surprising upside moves. Recent reactions center around key “fearful” topics: the European breakdown might reach a resolution faster than imagined, China's hard-landing may not occur as outlined in many scripts, and bank earnings received a warmer reception than previously stated in headlines. Not to mention, the ongoing improvement of US economic numbers that paint a hopeful picture, yet demand further follow through.
Since Black Friday, November 25, 2011, the S&P 500 Index has rallied over 13%. This can be seen as a beacon of slight optimism shining out from gloom infested levels. Similarly, successful Italian and Spanish bond auctions are reviving investor confidence, while cooling part of the furious worries. Similarly, debt issuance by US banks witnessed further buying ($28.8 billion last week). Meanwhile, the volatility index has crossed below 20, which on a simple level point to a calmness of nerves. At least the indicator declares all hell is not breaking loose, unlike in July 2011. Regardless of ones preconceived notions or biases, the general market feel displays a resurgence attempt of a global recovery in which the appetite for risky assets is slowly increasing.
Risk Expected - Reward Neglected
These positive trends sparked some relief, but may not be a sign of evading the fragile market conditions. For now, a strong start to the year in broad financial indexes still remains unconvincing for conventional observers and pundits. Perhaps some of the audience is less concerned about market performance at this early stage of 2012. Plus, there is an influential crowd engulfed with politics and elections results; until resolved, stay away from making serious investment bets that count. At the same time, the anticipated fear and rush to “safety” assets continues to linger. For example, “The 21 primary dealers that trade directly with the Federal Reserve held a total of $74.7 billion of Treasuries as of Dec. 28, compared with $61.1 billion of company debt” (Bloomberg, January 17, 2012). This suggests the heavy investor positioning towards risk aversion in anticipation of further volatility. This matches the ongoing weary views of practitioners and strategists. Yet this increases the risk and reward for those betting on upside surprise. In other words, high conviction buyers can look for additional chances to find bargains for longer-term investments.
Near-term Mindset
Chart patterns and odd makers point to the increased potential of a near-term pause. With trading volume down, and believers of a recovery shaky, the pending corrections have many on edge. Yet perhaps it is too premature to conclude on impact of this earnings season, as 119 companies in the S&P 500 Index report earnings this week. The takeaway from the fundamental results can produce substantial clues and serve as a confirmation to vital big picture trends.
Fighting the present trend is disturbing the pessimists, while confusing few rational minds. Age-old theories of “don't fight the Fed,” buy and hold, and blue chips investments are textbook sayings that have lost believers in recent years. Applying these views in recent years has been frustrating, given the turbulent markets; however, today one should not dismiss the value of pure and classical fundamental investment approaches. Perhaps, those classical sayings are suited for a market run in a new cycle while stakeholders flush out irresponsible practices from previous bubbles.
Article Quotes:
“Certainly, in a low-yield environment, the prospect of above-average returns from a nimble and savvy hedge fund manager is particularly alluring. And while pension funds – who make up a growing proportion of the hedge fund investment base – aren’t all that happy with the returns they earned (or failed to earn) from hedgies last year, they don’t see that many alternatives out there.…..That said, small startup funds run by former star traders with great pedigrees might be among the best bets out there. The smaller a fund, the more nimble it can be; it’s hard for a behemoth fund to add value, since the number of stocks in which it can take a large enough stake to make a difference to returns is more limited. Pros who spend their working lives winnowing through the array of hedge funds out there – there are more of them, it seems, than Taco Bell outlets – say that a smaller fund that can venture beyond the world of ultra-liquid, ultra-efficient large cap stocks – where it can prove impossible to find an edge that will pay off – stands a better chance of beating an index.” (The Fiscal Times, January 20, 2012)
“The United States has the largest and most technologically powerful economy in the world, a per capita gross domestic product of $47,200 and a gross national purchasing power that equals those of China and Japan. Our national economy is bigger than those of Russia, Britain, Brazil, France and Italy combined.Our huge GDP is no accident. We have a market-oriented economy where most decisions are made independently by individuals and individual businesses….Meanwhile, in China, government still peers over the shoulder of inventors and ordinary Internet users. India still fights a legacy of corruption in too many places, at too many levels. In Europe, red tape has stifled many small businesses. .During a meeting in Mumbai with three dozen business millionaires in their twenties and thirties, I asked a simple question: Which market would you most like to access? Almost unanimously, the answer was the United States. U.S. companies remain world leaders in information technology, bioscience, nanotechnology and aerospace. The evidence is clear not only in the development of products such as the iPad and iPhone but also in new patents. Last year, U.S. firms captured more than 50 percent of all U.S. patents; they received twice as many corporate patents as Japan, which came in second.” (Washington Post, Former U.S. ambassador to India, January 19, 2012)
Levels:
S&P 500 Index [1315.38] – Climbing back to July 2011 levels in a third wave of a recovery process that began in October 2011. Intermediate-term trends are beginning to turn positive.
Crude [$98.46] – Hovering around $100 as the range bound trading continues, although struggling to climb back up to $114.83 May highs.
Gold [$1653.00] – Partially approaching an oversold entry point for buyers. Yet, the present behavior is not showing the similar buyer appetite as witnessed the last few years.
DXY – US Dollar Index [81.51] – A potential for a minor inflection point approaching in the near-term, however, the dollar’s recovery remains intact.
US 10 Year Treasury Yields [2.02%] – Retesting the 2% level which is close to the 50 day moving average of 1.97%. Barley moving as traders awaited catalysts from macro events or policy changes.
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 Path Less Paved
Doubtful expectations are being measured against the current realities in the market place. Last week reiterated the realization that lesser bad news can produce surprising upside moves. Recent reactions center around key “fearful” topics: the European breakdown might reach a resolution faster than imagined, China's hard-landing may not occur as outlined in many scripts, and bank earnings received a warmer reception than previously stated in headlines. Not to mention, the ongoing improvement of US economic numbers that paint a hopeful picture, yet demand further follow through.
Since Black Friday, November 25, 2011, the S&P 500 Index has rallied over 13%. This can be seen as a beacon of slight optimism shining out from gloom infested levels. Similarly, successful Italian and Spanish bond auctions are reviving investor confidence, while cooling part of the furious worries. Similarly, debt issuance by US banks witnessed further buying ($28.8 billion last week). Meanwhile, the volatility index has crossed below 20, which on a simple level point to a calmness of nerves. At least the indicator declares all hell is not breaking loose, unlike in July 2011. Regardless of ones preconceived notions or biases, the general market feel displays a resurgence attempt of a global recovery in which the appetite for risky assets is slowly increasing.
Risk Expected - Reward Neglected
These positive trends sparked some relief, but may not be a sign of evading the fragile market conditions. For now, a strong start to the year in broad financial indexes still remains unconvincing for conventional observers and pundits. Perhaps some of the audience is less concerned about market performance at this early stage of 2012. Plus, there is an influential crowd engulfed with politics and elections results; until resolved, stay away from making serious investment bets that count. At the same time, the anticipated fear and rush to “safety” assets continues to linger. For example, “The 21 primary dealers that trade directly with the Federal Reserve held a total of $74.7 billion of Treasuries as of Dec. 28, compared with $61.1 billion of company debt” (Bloomberg, January 17, 2012). This suggests the heavy investor positioning towards risk aversion in anticipation of further volatility. This matches the ongoing weary views of practitioners and strategists. Yet this increases the risk and reward for those betting on upside surprise. In other words, high conviction buyers can look for additional chances to find bargains for longer-term investments.
Near-term Mindset
Chart patterns and odd makers point to the increased potential of a near-term pause. With trading volume down, and believers of a recovery shaky, the pending corrections have many on edge. Yet perhaps it is too premature to conclude on impact of this earnings season, as 119 companies in the S&P 500 Index report earnings this week. The takeaway from the fundamental results can produce substantial clues and serve as a confirmation to vital big picture trends.
Fighting the present trend is disturbing the pessimists, while confusing few rational minds. Age-old theories of “don't fight the Fed,” buy and hold, and blue chips investments are textbook sayings that have lost believers in recent years. Applying these views in recent years has been frustrating, given the turbulent markets; however, today one should not dismiss the value of pure and classical fundamental investment approaches. Perhaps, those classical sayings are suited for a market run in a new cycle while stakeholders flush out irresponsible practices from previous bubbles.
Article Quotes:
“Certainly, in a low-yield environment, the prospect of above-average returns from a nimble and savvy hedge fund manager is particularly alluring. And while pension funds – who make up a growing proportion of the hedge fund investment base – aren’t all that happy with the returns they earned (or failed to earn) from hedgies last year, they don’t see that many alternatives out there.…..That said, small startup funds run by former star traders with great pedigrees might be among the best bets out there. The smaller a fund, the more nimble it can be; it’s hard for a behemoth fund to add value, since the number of stocks in which it can take a large enough stake to make a difference to returns is more limited. Pros who spend their working lives winnowing through the array of hedge funds out there – there are more of them, it seems, than Taco Bell outlets – say that a smaller fund that can venture beyond the world of ultra-liquid, ultra-efficient large cap stocks – where it can prove impossible to find an edge that will pay off – stands a better chance of beating an index.” (The Fiscal Times, January 20, 2012)
“The United States has the largest and most technologically powerful economy in the world, a per capita gross domestic product of $47,200 and a gross national purchasing power that equals those of China and Japan. Our national economy is bigger than those of Russia, Britain, Brazil, France and Italy combined.Our huge GDP is no accident. We have a market-oriented economy where most decisions are made independently by individuals and individual businesses….Meanwhile, in China, government still peers over the shoulder of inventors and ordinary Internet users. India still fights a legacy of corruption in too many places, at too many levels. In Europe, red tape has stifled many small businesses. .During a meeting in Mumbai with three dozen business millionaires in their twenties and thirties, I asked a simple question: Which market would you most like to access? Almost unanimously, the answer was the United States. U.S. companies remain world leaders in information technology, bioscience, nanotechnology and aerospace. The evidence is clear not only in the development of products such as the iPad and iPhone but also in new patents. Last year, U.S. firms captured more than 50 percent of all U.S. patents; they received twice as many corporate patents as Japan, which came in second.” (Washington Post, Former U.S. ambassador to India, January 19, 2012)
Levels:
S&P 500 Index [1315.38] – Climbing back to July 2011 levels in a third wave of a recovery process that began in October 2011. Intermediate-term trends are beginning to turn positive.
Crude [$98.46] – Hovering around $100 as the range bound trading continues, although struggling to climb back up to $114.83 May highs.
Gold [$1653.00] – Partially approaching an oversold entry point for buyers. Yet, the present behavior is not showing the similar buyer appetite as witnessed the last few years.
DXY – US Dollar Index [81.51] – A potential for a minor inflection point approaching in the near-term, however, the dollar’s recovery remains intact.
US 10 Year Treasury Yields [2.02%] – Retesting the 2% level which is close to the 50 day moving average of 1.97%. Barley moving as traders awaited catalysts from macro events or policy changes.
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, January 16, 2012
Market Outlook | January 16, 2012
“Clear thinking requires courage rather than intelligence.” - Thomas Szasz (1920-present)
Accepting the Expected
Much of the weekend’s discussion revisits the belabored concerns related to European downgrades. For the most part, there have been no surprises as some wonder if Germany’s outlook upgrade actually stirs up a positive reaction, versus the negative responses to the inevitable downgrade of France and other nations. Of course, further chatter hovers around the magnitude of potential damages to fragile markets. The debate in the Eurozone will live on and the political twist will take its own course. As for participants, there are a few things to digest and balance amidst the flurry of fearful headlines. As witnessed before, downgrades and downturns do grab headlines, but the overall implications can be easily misunderstood.
Short-term traders will focus on bank exposure to toxic debt and clues from earnings reports, while weighing the potential reawakening of extreme volatility levels. These key discussion points can trigger memories back to the summer of 2011, a period of explosive volatility mixed with sensitive responses to unpleasant debt realities. However, this time around, the shock element does not appear on the same frenzied scale, yet we are approaching a period that will strongly test buyers’ conviction.
Meanwhile, the puzzle of slowing growth in Asia will keep money managers in suspense. The rapidly emerging Chinese economy is poised to slow down a little, while the developed Japanese economy has been struggling. Both cases reaffirm the existing relative strength argument of the US market, given lack of alternatives. Yet, the impact of slowing global growth on earnings of multi-national US companies is a major puzzle for those invested in US equities.
Sentiment Clarity
Longer-term investors are trying to grasp the true and confusing sentiment of recent months, while seeking to identify buy points. One side argues sentiment is picking up steam and pointing toward some confidence restoration. When combining the improving labor numbers and stock market rally, there is a case to be made for a minor reawakening of buyers’ faith. Perhaps, much of the attention toward this improvement is attributed to the AAII Investor Sentiment data, which has stayed to be positive (49% bullish and 17.2% bearish). Similarly, the Volatility Index is much lower than previous months as well. This points to the calmness of the US stock market in recent months
On the other hand, European worries are still closer to the higher end of the range when looking at credit spreads, demonstrating extreme fear in investors’ expectations. Similarly, in the US many analysts and hedge fund managers expect a lot of weakness in their targets. Common examples for weak forecasts include those centering around: a slowing global economy, weak earnings, declines in home prices, and hard-landing in China. These are some of the many lists of concerns crafted by strategists and so-called financial experts in opinion pieces.
As a follow up one should ask, if there are more reasons to sell than buy, then why wouldn't everyone bet on a collapse? This is especially a question that should be asked when the reasons to buy appear to be more akin to wishful thinking than a trend. For now, the glaring reasons to purchase assets are either to bet on surprises in improving numbers or to speculate the global angst is overblown. In any case, the roaring guesswork of the quantitative easing 3 announcement is a wildcard that’s gearing up to spark mixed reactions. Not to mention, the election year plays a bigger role in the timing of stimulus announcements. As the perceived risk continues to escalate there is a reward to capture in specific areas for patient participants.
Currency Feel
Last year, a run up in Gold prices confirmed a vote against most currencies and a form of showcasing displeasure in the action of central banks. This year, investors are expressing a similar opinion by betting against the Euro. Interestingly enough, the CFTC showcased total shorts of $25.9 billion for the Euro. Simply, this highlights the migration toward a strengthening US Dollar. This points to risk-aversion that is looming in nearly all financial markets. Perhaps in due time a collective recognition of excessive risk-aversion can retrace financial markets to a normal patterns.
Article Quotes:
“Mistakes directly leading to the deaths of 200 passengers are a very different beast than mistaken economic forecasts, which (as part of a group of culprits including Wall Street greed, regulator incompetence, and home-buyers' ignorance) indirectly led to a great and devastating recession. But like the pilots, the Fed's failure was not a matter of education or training. These were among our greatest economic thinkers. Quite like the pilots, they trusted the mechanics of a complex system they did not fully understand, especially the connection between the housing and financial markets. Amazingly, in retrospect, they often emphasized inflation concerns over housing concerns and the health of Wall Street. (‘Markets are now so much more developed and sophisticated that maybe it's different this time,’ Dino Kos told Greenspan.)…. It was total systemic failure, from 2006 into 2008, to diagnose a crisis and act to stop it, based partly on overconfidence that, in the economy, we had built an unstallable machine -- that the plane could, quite certainly, fly itself.” (The Atlantic, January 13, 2012).
“Fakery is not dead, of course. In 2009, roughly 30% of mobile phones in the country [China] were thought to be shanzhai—a popular term for clever fakes. The Business Software Alliance, a trade group, claims that nearly four-fifths of the software sold in China in 2010 was pirated. In December the US Trade Representative issued its annual report on the world’s most “notorious” counterfeit markets. Of the 30-odd markets identified, eight were in China. Some, such as Beijing’s Silk Street market, are well-known. The report also points the finger at Taobao, an online marketplace owned by Alibaba, China’s biggest e-commerce firm. That may be unfair. Taobao has clamped down so hard recently that it is enduring protests by angry vendors. Still, as China grows richer, life is growing harder for fakers. A recent study of China’s luxury market by Bain, a consultancy, concludes that “demand for counterfeit products is decreasing fast.” McKinsey, another consultancy, found that the proportion of consumers who said they were willing to buy fake jewellery dropped from 31% in 2008 to 12% last year.” (The Economist, January 14, 2012).
Levels:
S&P 500 Index [1277.81] – Slightly above the fragile state of 1280. Overall, short-term momentum is positive, but bound for a further test from buyers.
Crude [$98.70] – Narrow trading arrange forming between $95-100; a range last seen in the summer months, but a near-term deadlock for buyers and sellers.
Gold [$1635.50] – A four-month decline is attempting to settle around the $1600-1650 range. Recovery attempts will be revisited this week.
DXY – US Dollar Index [81.51] – Multi-month appreciation in the dollar confirms the global strength. Positive momentum has built since the frenzy mode in summer 2011.
US 10 Year Treasury Yields [1.86%] – Continues to head lower near all-time lows, with a further reiteration of risk-aversion. September 2011 lows of 1.67% are a key level to watch in weeks ahead.
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.
Accepting the Expected
Much of the weekend’s discussion revisits the belabored concerns related to European downgrades. For the most part, there have been no surprises as some wonder if Germany’s outlook upgrade actually stirs up a positive reaction, versus the negative responses to the inevitable downgrade of France and other nations. Of course, further chatter hovers around the magnitude of potential damages to fragile markets. The debate in the Eurozone will live on and the political twist will take its own course. As for participants, there are a few things to digest and balance amidst the flurry of fearful headlines. As witnessed before, downgrades and downturns do grab headlines, but the overall implications can be easily misunderstood.
Short-term traders will focus on bank exposure to toxic debt and clues from earnings reports, while weighing the potential reawakening of extreme volatility levels. These key discussion points can trigger memories back to the summer of 2011, a period of explosive volatility mixed with sensitive responses to unpleasant debt realities. However, this time around, the shock element does not appear on the same frenzied scale, yet we are approaching a period that will strongly test buyers’ conviction.
Meanwhile, the puzzle of slowing growth in Asia will keep money managers in suspense. The rapidly emerging Chinese economy is poised to slow down a little, while the developed Japanese economy has been struggling. Both cases reaffirm the existing relative strength argument of the US market, given lack of alternatives. Yet, the impact of slowing global growth on earnings of multi-national US companies is a major puzzle for those invested in US equities.
Sentiment Clarity
Longer-term investors are trying to grasp the true and confusing sentiment of recent months, while seeking to identify buy points. One side argues sentiment is picking up steam and pointing toward some confidence restoration. When combining the improving labor numbers and stock market rally, there is a case to be made for a minor reawakening of buyers’ faith. Perhaps, much of the attention toward this improvement is attributed to the AAII Investor Sentiment data, which has stayed to be positive (49% bullish and 17.2% bearish). Similarly, the Volatility Index is much lower than previous months as well. This points to the calmness of the US stock market in recent months
On the other hand, European worries are still closer to the higher end of the range when looking at credit spreads, demonstrating extreme fear in investors’ expectations. Similarly, in the US many analysts and hedge fund managers expect a lot of weakness in their targets. Common examples for weak forecasts include those centering around: a slowing global economy, weak earnings, declines in home prices, and hard-landing in China. These are some of the many lists of concerns crafted by strategists and so-called financial experts in opinion pieces.
As a follow up one should ask, if there are more reasons to sell than buy, then why wouldn't everyone bet on a collapse? This is especially a question that should be asked when the reasons to buy appear to be more akin to wishful thinking than a trend. For now, the glaring reasons to purchase assets are either to bet on surprises in improving numbers or to speculate the global angst is overblown. In any case, the roaring guesswork of the quantitative easing 3 announcement is a wildcard that’s gearing up to spark mixed reactions. Not to mention, the election year plays a bigger role in the timing of stimulus announcements. As the perceived risk continues to escalate there is a reward to capture in specific areas for patient participants.
Currency Feel
Last year, a run up in Gold prices confirmed a vote against most currencies and a form of showcasing displeasure in the action of central banks. This year, investors are expressing a similar opinion by betting against the Euro. Interestingly enough, the CFTC showcased total shorts of $25.9 billion for the Euro. Simply, this highlights the migration toward a strengthening US Dollar. This points to risk-aversion that is looming in nearly all financial markets. Perhaps in due time a collective recognition of excessive risk-aversion can retrace financial markets to a normal patterns.
Article Quotes:
“Mistakes directly leading to the deaths of 200 passengers are a very different beast than mistaken economic forecasts, which (as part of a group of culprits including Wall Street greed, regulator incompetence, and home-buyers' ignorance) indirectly led to a great and devastating recession. But like the pilots, the Fed's failure was not a matter of education or training. These were among our greatest economic thinkers. Quite like the pilots, they trusted the mechanics of a complex system they did not fully understand, especially the connection between the housing and financial markets. Amazingly, in retrospect, they often emphasized inflation concerns over housing concerns and the health of Wall Street. (‘Markets are now so much more developed and sophisticated that maybe it's different this time,’ Dino Kos told Greenspan.)…. It was total systemic failure, from 2006 into 2008, to diagnose a crisis and act to stop it, based partly on overconfidence that, in the economy, we had built an unstallable machine -- that the plane could, quite certainly, fly itself.” (The Atlantic, January 13, 2012).
“Fakery is not dead, of course. In 2009, roughly 30% of mobile phones in the country [China] were thought to be shanzhai—a popular term for clever fakes. The Business Software Alliance, a trade group, claims that nearly four-fifths of the software sold in China in 2010 was pirated. In December the US Trade Representative issued its annual report on the world’s most “notorious” counterfeit markets. Of the 30-odd markets identified, eight were in China. Some, such as Beijing’s Silk Street market, are well-known. The report also points the finger at Taobao, an online marketplace owned by Alibaba, China’s biggest e-commerce firm. That may be unfair. Taobao has clamped down so hard recently that it is enduring protests by angry vendors. Still, as China grows richer, life is growing harder for fakers. A recent study of China’s luxury market by Bain, a consultancy, concludes that “demand for counterfeit products is decreasing fast.” McKinsey, another consultancy, found that the proportion of consumers who said they were willing to buy fake jewellery dropped from 31% in 2008 to 12% last year.” (The Economist, January 14, 2012).
Levels:
S&P 500 Index [1277.81] – Slightly above the fragile state of 1280. Overall, short-term momentum is positive, but bound for a further test from buyers.
Crude [$98.70] – Narrow trading arrange forming between $95-100; a range last seen in the summer months, but a near-term deadlock for buyers and sellers.
Gold [$1635.50] – A four-month decline is attempting to settle around the $1600-1650 range. Recovery attempts will be revisited this week.
DXY – US Dollar Index [81.51] – Multi-month appreciation in the dollar confirms the global strength. Positive momentum has built since the frenzy mode in summer 2011.
US 10 Year Treasury Yields [1.86%] – Continues to head lower near all-time lows, with a further reiteration of risk-aversion. September 2011 lows of 1.67% are a key level to watch in weeks ahead.
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, January 09, 2012
Market Outlook | January 9, 2012
“Storms make oaks take deeper root.” - George Herbert (1593-1633)
Quarreling with Growth
As usual, plenty of skeptics and experts are cautiously digesting the improving labor numbers. Yet, the Friday job data generated a sense of improvement and enhanced the curiosity of investors’ reactions. Of course at this junction, the labor debate sparks more political fireworks than an increased curiosity on market directional view. Clearly in an election year, data can be misinterpreted or understated to fulfill self-serving political messages, as expected. Therefore the scrutiny will continue, and at times the interpretations of “true” employment data can lead to some confusion. Meanwhile, savvy and seasoned investors are gearing to look past the rhetoric while grasping the impact of economic improvement in the stock market. Grasping the disconnect between the economy and stock market is both a puzzling and rewarding task.
One noticeable trend from the labor data showcases the growth of manufacturing in the US (302,000 out of 2.4 million jobs created since February 2010). This is a growing theme that should be explored for years ahead. The last six months have showcased manufacturing job growth. “The United States is particularly strong in machinery, chemicals and transportation equipment, which together make up nearly half of the exports.” (New York Times January 5, 2011). This can set the stage for 2012, when selecting manufacturing related stocks can be a fruitful investment exercise. In addition, the broad market environment favors stocks, given the low returns in fixed income. As risk tolerance returns to normal levels, the appetite for risk can translate to inflow into stocks. For now, the volatility index (VIX) is showcasing some form of calmness as it trades below its 20 month moving average.
Leftovers
At the start of last decade, observers dwelled on the meaning of bubbles. Last year, plenty of time and energy was spent deciphering the ugly truth, or associated risk, of sovereign debt. A generation of participants is now quite accustomed to bubbles, such as the NASDAQ in 2000 and credit markets in 2008. Therefore, these events are influential in stirring further fear of additional bubbles. For example, during the last three years we have collectively witnessed the bubble discussions transforming to governance risk, and that lingers as a global concern in any given trading day. Basically, the pressure of financial leadership shifted not only to central banks, but to policy makers. Although this fact is hard to swallow for the business community, it ends up being a necessary process in facing up to accumulating debt concerns. Similarly, correcting past mistakes is not a novel or pretty task when confronting the harsh truth.
Entering this year, doubters will continue pounding the table on a few potential bubbles linked to commodities and emerging markets. There are numerous points to address with matters related to peaks in Gold and China. Both themes are on the radar and rank high among bubbles of interest. The concern with China hovers around the peak in residential housing and potential social unrest. However, even though the case for bubble bursting will resurface in daily journals, the timing remains tricky, given that it’s a weak year for emerging markets, and surprises are usually on the menu.
Banking on America
If the relative strength of the US is a reoccurring theme, then the relative attractiveness of US banks should not be easily dismissed. First, US banks appear to be in better shape than European banks, which have to restructure their debt ($1.3 trillion in 2012). Secondly, banks have traded at cheap valuation, to a point where taking the risk is worth an early look. The Financial Index (XLF) is down 64% since peaking in June 2007. For example, a company like Bank of America was battered and bruised in the headlines as it flirted with $5 per share, given the associated risks. Yet for speculators seeking “not so overvalued” ideas, there are not many places to go, and banks are appealing. Clearly, there is no denial that banks are a neglected theme where fear of ongoing bad news clouds the perception of many. However, those betting against the US financial sectors may eventually realize very bad news eventually becomes grossly exhausted.
Article Quotes:
“Thanks to productivity improvements, the U.S. also remains the world’s largest value-add manufacturer, at 24%, versus 15.1% for second-place China and 14.8% for third-place Japan. In a recent and widely disseminated report, Boston Consulting Group argues that with Chinese wage rates continuing to rise, the U.S. will start to see a significant amount of manufacturing activity shifting back to these shores by 2015, as the U.S.-China labor-cost differential narrows. The shift will be especially pronounced, the consulting firm predicts, in seven manufacturing sectors: transportation, electrical equipment and appliances, furniture, plastics and rubber products, machinery, fabricated metal products, and computers/electronics. As companies in those sectors “reshore” manufacturing operations, BCG says, they could create 2 million to 3 million jobs in the U.S. To be sure, many manufacturers will continue to produce goods globally, too, whether to comply with local-content laws, to enable speedy access to global markets, or, where labor costs remain a big component of total costs, to continue to take advantage of low-wage environments. (CFO Magazine, December 1, 2011)
“Since the financial crisis, black swans have been all the rage. Rare is the pundit discussion about the financial order which leaves this rare bird un-cited, or for that matter unsighted. Now everyone is seeing black swans everywhere, suggesting that the cognitive bias might have shifted. Are we on the verge of denying the existence of white swans? Are we in danger of denying the possibility of the existence of normalness? Martin Wolf, of the Financial Times, has coined the term ‘Taleb Distribution’ to describe the fact that the world, as well as the shape of the bell curve distributions we use to graphically represent it, may be wider than we thought. Perhaps, Wolf suggests, the two tails of the alleged bell curve are fatter than we thought. Perhaps there are probability distributions which give the appearance of being normal distributions, but in fact are not. In such a case, treating financial crises as once-in-a-century black swans may not quite capture the whole of the picture. Perhaps swan sightings will occur more often than a random distribution around a mean would suggest. Perhaps problems big enough to shake the entire system are not once-a-century events, but once-a-decade events.” (Forbes, January 5, 2012)
Levels:
S&P 500 Index [1277.81] – Since October 4 lows, the index has appreciated by nearly 19% as the extension of a fourth quarter is visible in the early part of this year. Index is now trading above 200 day moving average, yet buyers and sellers will debate the merits of the index.
Crude [$101.56] – Like stocks, crude has risen since early October. Above $100 is a theme that’s picking up momentum. Meanwhile in the near-term, Crude’s ability to stay above $105 will be watched with heightened curiosity.
Gold [$1616.50] – Several month of decline creates a set up around $1600, where buyers seek to reenter, while sellers point out the declining momentum. Yet the recent message states that investors are not rushing to buy Gold and questions if an appreciating Dollar is inversely impacting the alternative currency.
DXY – US Dollar Index [81.24] – Strengthening Dollar remains a key macro theme. The 11% rise since spring 2011 is not to be taken lightly for trend followers.
US 10 Year Treasury Yields [1.95%] – The five month average stands at 1.98%, which illustrates the ongoing low rate patterns. In addition, an average below 2% is slowly becoming a norm these days.
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.
Quarreling with Growth
As usual, plenty of skeptics and experts are cautiously digesting the improving labor numbers. Yet, the Friday job data generated a sense of improvement and enhanced the curiosity of investors’ reactions. Of course at this junction, the labor debate sparks more political fireworks than an increased curiosity on market directional view. Clearly in an election year, data can be misinterpreted or understated to fulfill self-serving political messages, as expected. Therefore the scrutiny will continue, and at times the interpretations of “true” employment data can lead to some confusion. Meanwhile, savvy and seasoned investors are gearing to look past the rhetoric while grasping the impact of economic improvement in the stock market. Grasping the disconnect between the economy and stock market is both a puzzling and rewarding task.
One noticeable trend from the labor data showcases the growth of manufacturing in the US (302,000 out of 2.4 million jobs created since February 2010). This is a growing theme that should be explored for years ahead. The last six months have showcased manufacturing job growth. “The United States is particularly strong in machinery, chemicals and transportation equipment, which together make up nearly half of the exports.” (New York Times January 5, 2011). This can set the stage for 2012, when selecting manufacturing related stocks can be a fruitful investment exercise. In addition, the broad market environment favors stocks, given the low returns in fixed income. As risk tolerance returns to normal levels, the appetite for risk can translate to inflow into stocks. For now, the volatility index (VIX) is showcasing some form of calmness as it trades below its 20 month moving average.
Leftovers
At the start of last decade, observers dwelled on the meaning of bubbles. Last year, plenty of time and energy was spent deciphering the ugly truth, or associated risk, of sovereign debt. A generation of participants is now quite accustomed to bubbles, such as the NASDAQ in 2000 and credit markets in 2008. Therefore, these events are influential in stirring further fear of additional bubbles. For example, during the last three years we have collectively witnessed the bubble discussions transforming to governance risk, and that lingers as a global concern in any given trading day. Basically, the pressure of financial leadership shifted not only to central banks, but to policy makers. Although this fact is hard to swallow for the business community, it ends up being a necessary process in facing up to accumulating debt concerns. Similarly, correcting past mistakes is not a novel or pretty task when confronting the harsh truth.
Entering this year, doubters will continue pounding the table on a few potential bubbles linked to commodities and emerging markets. There are numerous points to address with matters related to peaks in Gold and China. Both themes are on the radar and rank high among bubbles of interest. The concern with China hovers around the peak in residential housing and potential social unrest. However, even though the case for bubble bursting will resurface in daily journals, the timing remains tricky, given that it’s a weak year for emerging markets, and surprises are usually on the menu.
Banking on America
If the relative strength of the US is a reoccurring theme, then the relative attractiveness of US banks should not be easily dismissed. First, US banks appear to be in better shape than European banks, which have to restructure their debt ($1.3 trillion in 2012). Secondly, banks have traded at cheap valuation, to a point where taking the risk is worth an early look. The Financial Index (XLF) is down 64% since peaking in June 2007. For example, a company like Bank of America was battered and bruised in the headlines as it flirted with $5 per share, given the associated risks. Yet for speculators seeking “not so overvalued” ideas, there are not many places to go, and banks are appealing. Clearly, there is no denial that banks are a neglected theme where fear of ongoing bad news clouds the perception of many. However, those betting against the US financial sectors may eventually realize very bad news eventually becomes grossly exhausted.
Article Quotes:
“Thanks to productivity improvements, the U.S. also remains the world’s largest value-add manufacturer, at 24%, versus 15.1% for second-place China and 14.8% for third-place Japan. In a recent and widely disseminated report, Boston Consulting Group argues that with Chinese wage rates continuing to rise, the U.S. will start to see a significant amount of manufacturing activity shifting back to these shores by 2015, as the U.S.-China labor-cost differential narrows. The shift will be especially pronounced, the consulting firm predicts, in seven manufacturing sectors: transportation, electrical equipment and appliances, furniture, plastics and rubber products, machinery, fabricated metal products, and computers/electronics. As companies in those sectors “reshore” manufacturing operations, BCG says, they could create 2 million to 3 million jobs in the U.S. To be sure, many manufacturers will continue to produce goods globally, too, whether to comply with local-content laws, to enable speedy access to global markets, or, where labor costs remain a big component of total costs, to continue to take advantage of low-wage environments. (CFO Magazine, December 1, 2011)
“Since the financial crisis, black swans have been all the rage. Rare is the pundit discussion about the financial order which leaves this rare bird un-cited, or for that matter unsighted. Now everyone is seeing black swans everywhere, suggesting that the cognitive bias might have shifted. Are we on the verge of denying the existence of white swans? Are we in danger of denying the possibility of the existence of normalness? Martin Wolf, of the Financial Times, has coined the term ‘Taleb Distribution’ to describe the fact that the world, as well as the shape of the bell curve distributions we use to graphically represent it, may be wider than we thought. Perhaps, Wolf suggests, the two tails of the alleged bell curve are fatter than we thought. Perhaps there are probability distributions which give the appearance of being normal distributions, but in fact are not. In such a case, treating financial crises as once-in-a-century black swans may not quite capture the whole of the picture. Perhaps swan sightings will occur more often than a random distribution around a mean would suggest. Perhaps problems big enough to shake the entire system are not once-a-century events, but once-a-decade events.” (Forbes, January 5, 2012)
Levels:
S&P 500 Index [1277.81] – Since October 4 lows, the index has appreciated by nearly 19% as the extension of a fourth quarter is visible in the early part of this year. Index is now trading above 200 day moving average, yet buyers and sellers will debate the merits of the index.
Crude [$101.56] – Like stocks, crude has risen since early October. Above $100 is a theme that’s picking up momentum. Meanwhile in the near-term, Crude’s ability to stay above $105 will be watched with heightened curiosity.
Gold [$1616.50] – Several month of decline creates a set up around $1600, where buyers seek to reenter, while sellers point out the declining momentum. Yet the recent message states that investors are not rushing to buy Gold and questions if an appreciating Dollar is inversely impacting the alternative currency.
DXY – US Dollar Index [81.24] – Strengthening Dollar remains a key macro theme. The 11% rise since spring 2011 is not to be taken lightly for trend followers.
US 10 Year Treasury Yields [1.95%] – The five month average stands at 1.98%, which illustrates the ongoing low rate patterns. In addition, an average below 2% is slowly becoming a norm these days.
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, January 03, 2012
Market Outlook | January 3, 2012
“No river can return to its source, yet all rivers must have a beginning.” - Native American Proverb
Digesting Twelve Months
Taking a directional stock market view was rough given various swings throughout the year. Most sellers found plenty of reasons to sell when uncertainty triggered thoughts and sparked interlinked reactions of a rush to safety. Some buyers tried to pick bottoms here and there, but after all simply holding positions turned out to be as good as trading in and out. 2011 presented a clutter of events that are historical in nature and with glimpse of overreaction in between.
For writers and financial reporters who romanticized the collapse of empires, it certainly created exuberance, or at least a vindication of sorts for long-time bears. For policymakers flooded with endless pressure, the unfolding events simply accelerated the aging process with grief and misleading solutions. Truth seekers were glorified by eventual discoveries and unpleased by politics as usual, while the real truth was more confusing than glaring. For financial students, a few terms such as risk analysis, volatility and money management seemed theoretical in some instances yet too basic at times.
These were challenging and interesting times indeed. When considering the gloomy facts that we confronted in the past six month, the possibility of pent up demand is quietly brewing. Yet upsides moves are not always a declaration of comfort, but a fragile gauge of improving moods.
No Endings and Unclear Beginnings
In any cycle, it is safe to assume that greed and fear will persist as fundamental human traits. An age old discussion continues as these patterns get tiresome but their real merits live on. These days, more than greed, deciphering the justified fears is the challenge. Generally, the attitude toward business, and the government roles in stimulus matters have not been comforting. Plus, heated attitudes create a stalemate for moving ahead in most western countries. Ongoing deadlocks were not quite imaginable at times, but once the label “crisis” is thrown around then it surely turns into politics as usual.
Meanwhile, those evaluating assets, as they did for the last 30 years, will have to make adjustments or face consequences in this era. If we’ve reached an “end of financial services as we knew it” before 2008, then we are in the early innings of a new cycle of a cloudy outlook. At least in the near term, pending US elections, Eurozone resolution, chatter of bubble reform and emerging market momentum is in the minds of participants. While the changing landscape of the labor environment combined with rising commodities rapidly converts financial data into social unrest and further mass awakening.
Gearing Ahead
Yearly predictions are thought provoking, entertaining or noisy for some, but present a new spark of energy, whether good or bad. As stated by few, predictions usually end up being mostly wrong and even surprises turnout to be realities. Lots of time is spent by strategists deciphering the biggest themes and surprises. Clearly, the obvious event of high interest is the day to day coverage and speculation surrounding the US election. 2012 might finally suggest there is a fatigued crowd ready to march on after the electric 2011, which highlighted chatter of policymaking risks and crisis management banter.
In any given year, value seekers buy value like stocks, momentum chasers chase momentum, new money goes wild in new areas and short-sellers seek dismal setups. This largely remains business as usual for the most part. Yet, if politics and financial markets remain closely tied to day to day events, long-term holders will not be fully comforted. And now, in early 2012, the question to ask more than the big year-to-year themes is how to grasp the mindset of longer-term players.
Long-term Clarity
Based on escalating volatility some may argue markets are too short-term natured than usual, especially when policymakers think, or are forced to think, in narrow timeframes. Although this point seems glaringly obvious in certain conditions let us not forget that serious and influential capital finds a way to evaluate ideas from a 3-5 year outlook before deploying capital. That said, for long-term players, taking a few steps back may be as appropriate as making big bets. Examining, tracking and following these three areas can spearhead a framework for 2012:
1. Understanding the traits of the current and dynamic currency markets
2. Grasping the global landscape of capital inflow and outflow, while covering the less know mainstream facts
3. Clarity of the two points above can lead to selective buying in discounted assets or a bet against overvalued areas
Currency Shifts
For over a decade, observers have witnessed a depreciating dollar that peaked in mid 2001. Of course, decline in currency value is not to be confused with a loss of leadership as the dominant currency. Frankly, panicky moments demonstrated the global rush to hold US dollars. Now, a trend reversal is setting up, in which the dollar appreciates versus other major currencies. Any strength in the greenback does not erase the competing alternatives that range from Gold to the Euro to another emerging currency. On the other hand, the gap to overtake the dollar is not narrow; however, this year may jumpstart an era where the dollar strengthens while its dominance is tested from various angles. In addition, the Euro remains in an unsettled condition, but assuming a currency collapse might be premature at this stage.
Emerging Puzzle
The ongoing and heated debate circulates around the sustainability of emerging markets. China’s market is not quite understood and the mystery keeps many on the edge for now. Bubble-like traits in China have persisted since 2007, while by most accounts economic strength is visible, despite questionable reporting. The China 25 Index (FXI) is down 52% from its peak in 2007. Perhaps, those expecting demise should note that a slowdown is not a new trend but a potential continuation of an existing trend. Coming into last year, the inflation and housing worries in China were issues not only for pundits to address, but pointed out by government members as well.
Emerging market growth rates have attracted plenty of capital inflow last decade equaling $70 billion in investments to BRIC countries. (EPFR Global Data) At the same time, finding enthusiastic investors these days is not as easy as before, given the fragile nature of interconnected markets and increasing skepticism. On one hand, the US showcases a relative attractiveness, but that’s mainly for safety. Therefore, growth seekers will eventually continue looking into developing and frontier markets for higher returns. Eventually, the competition within the BRIC countries is bound to increase as much as the ongoing debate of developed versus emerging markets. In the long-term reward awaits for nations with the ability to engineer soft landing while maintain relative stability.
Selective Purchase
For larger money managers, buying “cheap” has been a theme in recent years. Distressed assets especially in Europe are trading at a discount as European banks continue to sell assets. Clearly, there are plenty of desperate sellers forced to meet liquidity needs. Simply, unfolding macro events have created an appealing marketplace for patient and aggressive buyers in a period where risk is less favorable. Buying at current levels may not be too appealing by consensus measures, but opportunistic players are taking note. Similarly, declining valuation in select sectors are known and expected to spark further merger & acquisitions. In fact, these trends are visible in technology and new media space.
Article Quotes:
“If the eurozone does not want to embrace capital controls, it has only two alternatives: make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure. The first option is the American way, which also demands that the buyers bear the risks inherent in public or private securities. The taxpayer is not called upon, even in extreme cases, and states can go bankrupt. The second option is the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt. Because all the member states provide one another with free credit guarantees, interest rates for government securities can no longer differ in accordance with creditworthiness or likelihood of repayment. The less sound a country is, the lower its effective expected interest rate. The socialist way follows necessarily from the free access to the printing press that has so far characterized the eurozone. As long as banks – and thus governments, which sell their debt to the banks – can draw cheap credit up to any amount from the European System of Central Banks, Europe will remain volatile. The exodus of capital will continue, and enormous compensation claims of the European core’s central banks, particularly the German Bundesbank and the Dutch central bank, will pile up.” (Project Syndicate, December 29, 2011)
“If Chinese perfidy should shut down the route through the South China Sea, Japanese crude carriers from the Middle East could simply swing south of Sumatra, cross the Lombok Strait, and sail up the east coast of the Philippines. Studies have concluded that the detour would add three days to sailing times and perhaps 13.5% to shipping costs; an annoying inconvenience, perhaps, but also not an energy or economic Armageddon. The bloviating about the vulnerability and critical importance of the South China Sea maritime route can probably be traced to the fact that it is an international waterway and therefore a suitable arena for the United States to flex its "freedom of the seas" muscle. Smaller nations bordering the South China Sea welcome the US as a counterweight to China in their sometimes bloody but low level conflicts over fishing and energy development issues. Any US attempt to lord it over the Lombok Strait in a similar fashion would presumably not be welcomed by Indonesia, which exercises full, unquestioned sovereignty over the waterway.” (Asian Times, December 22, 2011)
Levels:
S&P 500 Index [1257.60] – Staying above 1250 has proved to be difficult for a sustainable period. Near-term is hovering around a 200 day moving average.
Crude [$98.83] – An explosive fourth quarter rally showcases a resurgence in buyers’ demand.
Gold [$1531] – Cooling off from a multi-year run. Early September marked a turning point as the commodity enters a multi-week downtrend.
DXY – US Dollar Index [80.29] – The second half of 2011 saw the dollar bottom and strengthen while setting the stage as a key macro theme for months ahead.
US 10 Year Treasury Yields [1.87%] – Trading at the low end of a three decade decline. The next noticeable range stands at the intra-day lows of September 23rd at 1.67%.
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.
Digesting Twelve Months
Taking a directional stock market view was rough given various swings throughout the year. Most sellers found plenty of reasons to sell when uncertainty triggered thoughts and sparked interlinked reactions of a rush to safety. Some buyers tried to pick bottoms here and there, but after all simply holding positions turned out to be as good as trading in and out. 2011 presented a clutter of events that are historical in nature and with glimpse of overreaction in between.
For writers and financial reporters who romanticized the collapse of empires, it certainly created exuberance, or at least a vindication of sorts for long-time bears. For policymakers flooded with endless pressure, the unfolding events simply accelerated the aging process with grief and misleading solutions. Truth seekers were glorified by eventual discoveries and unpleased by politics as usual, while the real truth was more confusing than glaring. For financial students, a few terms such as risk analysis, volatility and money management seemed theoretical in some instances yet too basic at times.
These were challenging and interesting times indeed. When considering the gloomy facts that we confronted in the past six month, the possibility of pent up demand is quietly brewing. Yet upsides moves are not always a declaration of comfort, but a fragile gauge of improving moods.
No Endings and Unclear Beginnings
In any cycle, it is safe to assume that greed and fear will persist as fundamental human traits. An age old discussion continues as these patterns get tiresome but their real merits live on. These days, more than greed, deciphering the justified fears is the challenge. Generally, the attitude toward business, and the government roles in stimulus matters have not been comforting. Plus, heated attitudes create a stalemate for moving ahead in most western countries. Ongoing deadlocks were not quite imaginable at times, but once the label “crisis” is thrown around then it surely turns into politics as usual.
Meanwhile, those evaluating assets, as they did for the last 30 years, will have to make adjustments or face consequences in this era. If we’ve reached an “end of financial services as we knew it” before 2008, then we are in the early innings of a new cycle of a cloudy outlook. At least in the near term, pending US elections, Eurozone resolution, chatter of bubble reform and emerging market momentum is in the minds of participants. While the changing landscape of the labor environment combined with rising commodities rapidly converts financial data into social unrest and further mass awakening.
Gearing Ahead
Yearly predictions are thought provoking, entertaining or noisy for some, but present a new spark of energy, whether good or bad. As stated by few, predictions usually end up being mostly wrong and even surprises turnout to be realities. Lots of time is spent by strategists deciphering the biggest themes and surprises. Clearly, the obvious event of high interest is the day to day coverage and speculation surrounding the US election. 2012 might finally suggest there is a fatigued crowd ready to march on after the electric 2011, which highlighted chatter of policymaking risks and crisis management banter.
In any given year, value seekers buy value like stocks, momentum chasers chase momentum, new money goes wild in new areas and short-sellers seek dismal setups. This largely remains business as usual for the most part. Yet, if politics and financial markets remain closely tied to day to day events, long-term holders will not be fully comforted. And now, in early 2012, the question to ask more than the big year-to-year themes is how to grasp the mindset of longer-term players.
Long-term Clarity
Based on escalating volatility some may argue markets are too short-term natured than usual, especially when policymakers think, or are forced to think, in narrow timeframes. Although this point seems glaringly obvious in certain conditions let us not forget that serious and influential capital finds a way to evaluate ideas from a 3-5 year outlook before deploying capital. That said, for long-term players, taking a few steps back may be as appropriate as making big bets. Examining, tracking and following these three areas can spearhead a framework for 2012:
1. Understanding the traits of the current and dynamic currency markets
2. Grasping the global landscape of capital inflow and outflow, while covering the less know mainstream facts
3. Clarity of the two points above can lead to selective buying in discounted assets or a bet against overvalued areas
Currency Shifts
For over a decade, observers have witnessed a depreciating dollar that peaked in mid 2001. Of course, decline in currency value is not to be confused with a loss of leadership as the dominant currency. Frankly, panicky moments demonstrated the global rush to hold US dollars. Now, a trend reversal is setting up, in which the dollar appreciates versus other major currencies. Any strength in the greenback does not erase the competing alternatives that range from Gold to the Euro to another emerging currency. On the other hand, the gap to overtake the dollar is not narrow; however, this year may jumpstart an era where the dollar strengthens while its dominance is tested from various angles. In addition, the Euro remains in an unsettled condition, but assuming a currency collapse might be premature at this stage.
Emerging Puzzle
The ongoing and heated debate circulates around the sustainability of emerging markets. China’s market is not quite understood and the mystery keeps many on the edge for now. Bubble-like traits in China have persisted since 2007, while by most accounts economic strength is visible, despite questionable reporting. The China 25 Index (FXI) is down 52% from its peak in 2007. Perhaps, those expecting demise should note that a slowdown is not a new trend but a potential continuation of an existing trend. Coming into last year, the inflation and housing worries in China were issues not only for pundits to address, but pointed out by government members as well.
Emerging market growth rates have attracted plenty of capital inflow last decade equaling $70 billion in investments to BRIC countries. (EPFR Global Data) At the same time, finding enthusiastic investors these days is not as easy as before, given the fragile nature of interconnected markets and increasing skepticism. On one hand, the US showcases a relative attractiveness, but that’s mainly for safety. Therefore, growth seekers will eventually continue looking into developing and frontier markets for higher returns. Eventually, the competition within the BRIC countries is bound to increase as much as the ongoing debate of developed versus emerging markets. In the long-term reward awaits for nations with the ability to engineer soft landing while maintain relative stability.
Selective Purchase
For larger money managers, buying “cheap” has been a theme in recent years. Distressed assets especially in Europe are trading at a discount as European banks continue to sell assets. Clearly, there are plenty of desperate sellers forced to meet liquidity needs. Simply, unfolding macro events have created an appealing marketplace for patient and aggressive buyers in a period where risk is less favorable. Buying at current levels may not be too appealing by consensus measures, but opportunistic players are taking note. Similarly, declining valuation in select sectors are known and expected to spark further merger & acquisitions. In fact, these trends are visible in technology and new media space.
Article Quotes:
“If the eurozone does not want to embrace capital controls, it has only two alternatives: make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure. The first option is the American way, which also demands that the buyers bear the risks inherent in public or private securities. The taxpayer is not called upon, even in extreme cases, and states can go bankrupt. The second option is the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt. Because all the member states provide one another with free credit guarantees, interest rates for government securities can no longer differ in accordance with creditworthiness or likelihood of repayment. The less sound a country is, the lower its effective expected interest rate. The socialist way follows necessarily from the free access to the printing press that has so far characterized the eurozone. As long as banks – and thus governments, which sell their debt to the banks – can draw cheap credit up to any amount from the European System of Central Banks, Europe will remain volatile. The exodus of capital will continue, and enormous compensation claims of the European core’s central banks, particularly the German Bundesbank and the Dutch central bank, will pile up.” (Project Syndicate, December 29, 2011)
“If Chinese perfidy should shut down the route through the South China Sea, Japanese crude carriers from the Middle East could simply swing south of Sumatra, cross the Lombok Strait, and sail up the east coast of the Philippines. Studies have concluded that the detour would add three days to sailing times and perhaps 13.5% to shipping costs; an annoying inconvenience, perhaps, but also not an energy or economic Armageddon. The bloviating about the vulnerability and critical importance of the South China Sea maritime route can probably be traced to the fact that it is an international waterway and therefore a suitable arena for the United States to flex its "freedom of the seas" muscle. Smaller nations bordering the South China Sea welcome the US as a counterweight to China in their sometimes bloody but low level conflicts over fishing and energy development issues. Any US attempt to lord it over the Lombok Strait in a similar fashion would presumably not be welcomed by Indonesia, which exercises full, unquestioned sovereignty over the waterway.” (Asian Times, December 22, 2011)
Levels:
S&P 500 Index [1257.60] – Staying above 1250 has proved to be difficult for a sustainable period. Near-term is hovering around a 200 day moving average.
Crude [$98.83] – An explosive fourth quarter rally showcases a resurgence in buyers’ demand.
Gold [$1531] – Cooling off from a multi-year run. Early September marked a turning point as the commodity enters a multi-week downtrend.
DXY – US Dollar Index [80.29] – The second half of 2011 saw the dollar bottom and strengthen while setting the stage as a key macro theme for months ahead.
US 10 Year Treasury Yields [1.87%] – Trading at the low end of a three decade decline. The next noticeable range stands at the intra-day lows of September 23rd at 1.67%.
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, December 19, 2011
Market Outlook | December 19, 2011
“The courage to imagine the otherwise is our greatest resource, adding color and suspense to all our life.” - Daniel J. Boorstin (1914-2004)
Suspense & Setbacks
Hopes for a recovery in the financial markets find a way to fade away after a few spurts in the day to day action. Marching to the tune of positive economic data has mostly failed to spark a rally. The reality, and perception, driving barometers are at a standstill where trepidation plays a bigger role than confidence restoration. Clearly, over the past three years debt concerns are slowly being understood as the discovery process reveals more complexities than imagined. Yet policymakers might be running out of tools or flexibility. That’s the question plaguing participants who feel the suspense of currencies, interest rates, stocks and elections.
As to the reaction of liquid markets, we can surmise that near-term disappointment explains the majority of the story. Firstly, the realization of the European summit resolution was hardly a declaration of victory which became too clear. Secondly, the desperate expectation of easing by the Federal Reserve did not quite deliver a message of further “medicine,” as desired by most. Perhaps the overreliance on a “fix” or “injection” is a problem in itself, but the short-term solution continues in seeking the cheers of the crowd. The mantra is to simply survive another month while delaying the inevitable crisis that has shaken, but not broken, the system.
Further attempts by leaders to “sweet talk" the markets has so far failed to muster the much publicized year-end rally. Plus, some would point out that a QE2 style stimulus is already priced into the market. Improving labor numbers remains the wildcard to take optimism from a thought to a believable trend. Either way, the stakes are high, as they’ve been elevated for several quarters, and sensitive reactions are bound to continue.
Currency Waves
The anticipated deciphering and speculation of the relationship in key currencies creates unease, which is looming as volatility is increasing, given the chatter over faith in the Euro. In addition, with over 46% of S&P 500 companies’ earnings coming from overseas, the impact of currencies is at center stage for decision makers in equity markets as well. Much focus on the currency markets is attributed to the messy Euro concerns. On the other hand, the Dollar bottomed and continues to appreciate in the second half of the year. The greenback reasserts its strength as the world’s reserve currency, at least for now, given its attractive liquidity and lack of competing options, not to mention the capital flight from euro-zone banks. Furthermore, this invokes existing doubts and mixed feeling for owners of Gold who are looking at the popular commodity as a tool for expressing a currency view.
Basically, Gold is commonly viewed as the alternative to paper assets, and even claimed a safe asset. For chart followers, it is the momentum of trade that captured further fans across key milestones. Generally, the assumed thought process suggested further easing policies by the Federal Reserve were viewed as a damaging blow to paper. In turn, that attracted several gold bulls ranging from retail to institutional investors. Perhaps this is another reason for Gold’s resurgence? The downtrend invites participants who waited for a discount. However, if the stimulus efforts do not come to fruition, others wonder if the selling in Gold will continue given its current downtrend.
Rotating Themes
Courage may pay more than imagined, even if talks of recession and political deadlock continue to reemerge in common conversations. The unknown is what scares and excites participants bracing to map out the first quarter. For a while themes around finding higher yields dominated the herd mindset, given the low rate environment. Then, paying up for safe haven assets became in high demand. The “do nothing” approach works for few, and some wait to buy on discounts based on a favorable valuation phrase thrown by long-term investors. Relying on the influential theme patterns may not answer long-term needs and has proved to be riskier than advertised. Of course, blindly accepting fear driven tools is a costly proposition, in case opportunities are missed. The puzzle continues, but the worst case scenarios have been pondered enough to overly shock observers. Nevertheless, upside surprises are available today on a selective basis, for those patient enough to dig deeper.
Article Quotes:
“I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; ….. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain” (Richard Fisher, Federal Reserve Bank of Dallas speech, December 16, 2011)
“Back in 1951, the Fed minutes record central bankers discussing to what extent they should help the White House fund its growing deficit, what limit to set on long-term interest rates, and how much debt they should monetise. Go back to Greece. It is able to issue bills at such low yields by manipulating the banks – bankrupt without the help of the central bank, they have little choice but to do what it wants – and by ignoring the legal terms of its bonds. Greek bills and bonds should have equal status in the “voluntary” default being negotiated with European banks. But Greece has ruled that bills will not be subject to the losses being discussed for the bonds. The European Central Bank, perhaps the biggest holder of Greek debt, will also be excluded from losses, even as Europe’s commercial banks are pressured by their governments to take part. All of this manipulation amounts to different forms of taxation, often well-hidden. The bill issues are a tax on Greece’s savers, who could have earned far more if their bank bought similar-maturity bonds. Likewise, the Fed’s actions back in 1951 were a tax on bond buyers, who earned less than they would have done without Fed manipulation.” (Financial Times, December 18, 2011)
Levels:
S&P 500 Index [1219.66] – Attempting to hold a familiar 1220 range slightly below the 50 day moving average. If there is failure to hold above this point, technical observers will point to 1160 as the worst case near-term set up.
Crude [$93.53] – In a minor downtrend after failing to hold $100. First peak on November 18 at $103, and a recent on December 5 at $102, showcases the lack of further catalyst for an upside move.
Gold [$1594] – A four month decline remains in place. Buyers’ appetite at $1600 to be tested in the near-term. Any further break will spur doubts of a stalling momentum.
DXY – US Dollar Index [80.29] – The strength in the Dollar is a noticeable trend since last May with the index up around 10%.
US 10 Year Treasury Yields [1.84%] – Below 2% begs the question of the established downtrend combined with a reflection of risk aversion. Since the summer, the inverse relationship between the Dollar is noteworthy, setting the stage for early 2012.
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.
Suspense & Setbacks
Hopes for a recovery in the financial markets find a way to fade away after a few spurts in the day to day action. Marching to the tune of positive economic data has mostly failed to spark a rally. The reality, and perception, driving barometers are at a standstill where trepidation plays a bigger role than confidence restoration. Clearly, over the past three years debt concerns are slowly being understood as the discovery process reveals more complexities than imagined. Yet policymakers might be running out of tools or flexibility. That’s the question plaguing participants who feel the suspense of currencies, interest rates, stocks and elections.
As to the reaction of liquid markets, we can surmise that near-term disappointment explains the majority of the story. Firstly, the realization of the European summit resolution was hardly a declaration of victory which became too clear. Secondly, the desperate expectation of easing by the Federal Reserve did not quite deliver a message of further “medicine,” as desired by most. Perhaps the overreliance on a “fix” or “injection” is a problem in itself, but the short-term solution continues in seeking the cheers of the crowd. The mantra is to simply survive another month while delaying the inevitable crisis that has shaken, but not broken, the system.
Further attempts by leaders to “sweet talk" the markets has so far failed to muster the much publicized year-end rally. Plus, some would point out that a QE2 style stimulus is already priced into the market. Improving labor numbers remains the wildcard to take optimism from a thought to a believable trend. Either way, the stakes are high, as they’ve been elevated for several quarters, and sensitive reactions are bound to continue.
Currency Waves
The anticipated deciphering and speculation of the relationship in key currencies creates unease, which is looming as volatility is increasing, given the chatter over faith in the Euro. In addition, with over 46% of S&P 500 companies’ earnings coming from overseas, the impact of currencies is at center stage for decision makers in equity markets as well. Much focus on the currency markets is attributed to the messy Euro concerns. On the other hand, the Dollar bottomed and continues to appreciate in the second half of the year. The greenback reasserts its strength as the world’s reserve currency, at least for now, given its attractive liquidity and lack of competing options, not to mention the capital flight from euro-zone banks. Furthermore, this invokes existing doubts and mixed feeling for owners of Gold who are looking at the popular commodity as a tool for expressing a currency view.
Basically, Gold is commonly viewed as the alternative to paper assets, and even claimed a safe asset. For chart followers, it is the momentum of trade that captured further fans across key milestones. Generally, the assumed thought process suggested further easing policies by the Federal Reserve were viewed as a damaging blow to paper. In turn, that attracted several gold bulls ranging from retail to institutional investors. Perhaps this is another reason for Gold’s resurgence? The downtrend invites participants who waited for a discount. However, if the stimulus efforts do not come to fruition, others wonder if the selling in Gold will continue given its current downtrend.
Rotating Themes
Courage may pay more than imagined, even if talks of recession and political deadlock continue to reemerge in common conversations. The unknown is what scares and excites participants bracing to map out the first quarter. For a while themes around finding higher yields dominated the herd mindset, given the low rate environment. Then, paying up for safe haven assets became in high demand. The “do nothing” approach works for few, and some wait to buy on discounts based on a favorable valuation phrase thrown by long-term investors. Relying on the influential theme patterns may not answer long-term needs and has proved to be riskier than advertised. Of course, blindly accepting fear driven tools is a costly proposition, in case opportunities are missed. The puzzle continues, but the worst case scenarios have been pondered enough to overly shock observers. Nevertheless, upside surprises are available today on a selective basis, for those patient enough to dig deeper.
Article Quotes:
“I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; ….. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain” (Richard Fisher, Federal Reserve Bank of Dallas speech, December 16, 2011)
“Back in 1951, the Fed minutes record central bankers discussing to what extent they should help the White House fund its growing deficit, what limit to set on long-term interest rates, and how much debt they should monetise. Go back to Greece. It is able to issue bills at such low yields by manipulating the banks – bankrupt without the help of the central bank, they have little choice but to do what it wants – and by ignoring the legal terms of its bonds. Greek bills and bonds should have equal status in the “voluntary” default being negotiated with European banks. But Greece has ruled that bills will not be subject to the losses being discussed for the bonds. The European Central Bank, perhaps the biggest holder of Greek debt, will also be excluded from losses, even as Europe’s commercial banks are pressured by their governments to take part. All of this manipulation amounts to different forms of taxation, often well-hidden. The bill issues are a tax on Greece’s savers, who could have earned far more if their bank bought similar-maturity bonds. Likewise, the Fed’s actions back in 1951 were a tax on bond buyers, who earned less than they would have done without Fed manipulation.” (Financial Times, December 18, 2011)
Levels:
S&P 500 Index [1219.66] – Attempting to hold a familiar 1220 range slightly below the 50 day moving average. If there is failure to hold above this point, technical observers will point to 1160 as the worst case near-term set up.
Crude [$93.53] – In a minor downtrend after failing to hold $100. First peak on November 18 at $103, and a recent on December 5 at $102, showcases the lack of further catalyst for an upside move.
Gold [$1594] – A four month decline remains in place. Buyers’ appetite at $1600 to be tested in the near-term. Any further break will spur doubts of a stalling momentum.
DXY – US Dollar Index [80.29] – The strength in the Dollar is a noticeable trend since last May with the index up around 10%.
US 10 Year Treasury Yields [1.84%] – Below 2% begs the question of the established downtrend combined with a reflection of risk aversion. Since the summer, the inverse relationship between the Dollar is noteworthy, setting the stage for early 2012.
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, December 12, 2011
Market Outlook | December 12, 2011
“Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.” - Karl Von Clausewitz (1780-1831)
Reflective Period
We are counting down to close out a year that felt like 2008, in which all challenging setups were on the brink of happening. Meanwhile, the perception of a doomsday scenario did not fully materialize as scripted by the most fervent skeptics. The word “crisis” is appropriately used at times, while overused or misunderstood at some junctions. Notably, the July and September collapses this year were not overnight downturns, and the drivers of those shocks seem bound to resurface down the road.
Three years after the bailout of US banks, the historical pattern is glaringly revisited in Europe. This fragile period can be described as persistent global panic. In between, there are more than a few up days creating breathing room from the gloomy suffocation. Perhaps a glimpse of stability will begin to welcome early thoughts of a surprising and promising year in 2012. However, that’s an extreme and unconventional view as most anticipate further recession from Emerging Markets.
Investor’s Angle
An investor cannot afford to be a spectator during crucial inflection points, especially when buying opportunities loom in selective areas. In other words, the noise from political crowds, constant naysayers, and sensational headline creators is known to overstate the fear while understating the power of the unknown. Clearly, the sharp rise and fall of the volatility indexes showcases the disbelief in spurts. Thus, long-term implication risk may not be reflected in broad indexes, and the impact of good or bad policies are not quite measurable. Innovative driven ideas are desperately worth pursuing for those policies.
An edgy and fatigued financial crowd is now watching the S&P 500 index flirting with a positive finish for the year, a noteworthy result for scoreboard watchers. Most nations will struggle to claim a positive stock market return. So far this year, Brazil (EWZ) shows -22%, India (INP) is far worse at -34% and Emerging Markets (EEM) stands at -17%. The fact that the US is ahead of the crowd, and relatively attractive, might be one positive takeaway. Picturing any stability in broad indexes may not have been easy to visualize in early October, especially if thoughts were guided by headlines. However, there is no comfort in expecting the bad news to die down; yet resolutions are bound to be reached just enough to calm the screams of fear. Navigating quickly and dodging major falls is puzzling, and enhance the challenge for those managers measured on a monthly basis.
Governance & Confidence
During the debt ceiling saga, we learned bickering by government officials does not create a favorable market environment. In the summer, Congress’s resolution created a “super committee” which bought more time while failing to tackle the issue, given political constraints. Similar traits were echoed last week towards a resolution for Europe, where real fixing is postponed for now. Delay tactics are becoming business as usual; eventually, anticipating policymakers’ call ends up spooking or calming markets at different times. The debt crisis era provides plenty of reasons to trigger risk-aversion, but awaiting government decisions contribute to headaches for intermediate-term investors. Perhaps it is another reminder that government officials’ interests are too focused in the short-term. Not only that, money managers and the doubts of future consequences do not leave the minds of strategist and long-term investors.
The charged debate of government involvement has intensified and will live on, especially during election cycles. Yet, for any recovery there is a crowd willing to credit the stimulus to actions to the Federal Reserve. Perhaps the end of QE2, in the end of June, illustrated that wounds do not heal fast and “medication” is necessary. The recent operation twist or chatter of further easing contributes to dependence on interventions, whether direct or indirect. Meanwhile, the other camp yells “deception” to address the handling of sovereign debt concerns. Those lacking confidence in the policymakers’ decisions continue to buy into the Gold story. As convenient as it may be, Gold prices have slowed down in recent weeks and resurgence in momentum will be cautiously awaited as a vital macro event.
Article Quotes:
“Unlike the U.S. bubble, a bubble burst in China wouldn’t spell doom for the homeowner – in China, real estate investment is a vehicle for saving, not borrowing, and required down payments are 30 percent to 40 percent, limiting debt levels. Instead, local governments will take the brunt of the slowdown or bubble burst as result of their heavy reliance on real estate revenues. As mentioned, local governments will experience a significant loss of revenue, and not just from a decline in land sales: local governments also rely on income from construction and the production of raw materials that goes into construction. In 1994, fiscal decentralization reformed China’s revenue sharing system, effectively reducing local governments’ share of the central revenue stream while increasing their responsibility for providing social goods…. Though mortgage defaults would be rare, social discontent would likely blossom over lost equity. Social instability would also have political consequences for local governments. As important as growth rates are in promotion calculations, levels of social unrest may play an even bigger role – large and visible protests are a sure way to get demoted in the Chinese political system.” (The Diplomat, December 10, 2011)
“As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.” (Bloomberg, December 11, 2011)
Levels:
S&P 500 Index [1255.19] – Surpassing 1260, and around the 200 day moving average, serves as a short-term hurdle. The fall rallies have yet to showcase a sustainable breakout which remains a talking point from daily traders.
Crude [$99.41] – $95-100 range has become a familiar place in the past several weeks. It is hard to ignore the developing uptrend.
Gold [$1709] – Attempting to settle down before a potential reacceleration. Currently the commodity is in a 3+ month decline.
DXY – US Dollar Index [78.06] – Current pricing is in line with the 5 and 125 week moving averages, suggesting the lack of a major move despite currency discussions.
US 10 Year Treasury Yields [2.06%] – Barely moving week over week as the 2% range is becoming quite normal.
--
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.
Reflective Period
We are counting down to close out a year that felt like 2008, in which all challenging setups were on the brink of happening. Meanwhile, the perception of a doomsday scenario did not fully materialize as scripted by the most fervent skeptics. The word “crisis” is appropriately used at times, while overused or misunderstood at some junctions. Notably, the July and September collapses this year were not overnight downturns, and the drivers of those shocks seem bound to resurface down the road.
Three years after the bailout of US banks, the historical pattern is glaringly revisited in Europe. This fragile period can be described as persistent global panic. In between, there are more than a few up days creating breathing room from the gloomy suffocation. Perhaps a glimpse of stability will begin to welcome early thoughts of a surprising and promising year in 2012. However, that’s an extreme and unconventional view as most anticipate further recession from Emerging Markets.
Investor’s Angle
An investor cannot afford to be a spectator during crucial inflection points, especially when buying opportunities loom in selective areas. In other words, the noise from political crowds, constant naysayers, and sensational headline creators is known to overstate the fear while understating the power of the unknown. Clearly, the sharp rise and fall of the volatility indexes showcases the disbelief in spurts. Thus, long-term implication risk may not be reflected in broad indexes, and the impact of good or bad policies are not quite measurable. Innovative driven ideas are desperately worth pursuing for those policies.
An edgy and fatigued financial crowd is now watching the S&P 500 index flirting with a positive finish for the year, a noteworthy result for scoreboard watchers. Most nations will struggle to claim a positive stock market return. So far this year, Brazil (EWZ) shows -22%, India (INP) is far worse at -34% and Emerging Markets (EEM) stands at -17%. The fact that the US is ahead of the crowd, and relatively attractive, might be one positive takeaway. Picturing any stability in broad indexes may not have been easy to visualize in early October, especially if thoughts were guided by headlines. However, there is no comfort in expecting the bad news to die down; yet resolutions are bound to be reached just enough to calm the screams of fear. Navigating quickly and dodging major falls is puzzling, and enhance the challenge for those managers measured on a monthly basis.
Governance & Confidence
During the debt ceiling saga, we learned bickering by government officials does not create a favorable market environment. In the summer, Congress’s resolution created a “super committee” which bought more time while failing to tackle the issue, given political constraints. Similar traits were echoed last week towards a resolution for Europe, where real fixing is postponed for now. Delay tactics are becoming business as usual; eventually, anticipating policymakers’ call ends up spooking or calming markets at different times. The debt crisis era provides plenty of reasons to trigger risk-aversion, but awaiting government decisions contribute to headaches for intermediate-term investors. Perhaps it is another reminder that government officials’ interests are too focused in the short-term. Not only that, money managers and the doubts of future consequences do not leave the minds of strategist and long-term investors.
The charged debate of government involvement has intensified and will live on, especially during election cycles. Yet, for any recovery there is a crowd willing to credit the stimulus to actions to the Federal Reserve. Perhaps the end of QE2, in the end of June, illustrated that wounds do not heal fast and “medication” is necessary. The recent operation twist or chatter of further easing contributes to dependence on interventions, whether direct or indirect. Meanwhile, the other camp yells “deception” to address the handling of sovereign debt concerns. Those lacking confidence in the policymakers’ decisions continue to buy into the Gold story. As convenient as it may be, Gold prices have slowed down in recent weeks and resurgence in momentum will be cautiously awaited as a vital macro event.
Article Quotes:
“Unlike the U.S. bubble, a bubble burst in China wouldn’t spell doom for the homeowner – in China, real estate investment is a vehicle for saving, not borrowing, and required down payments are 30 percent to 40 percent, limiting debt levels. Instead, local governments will take the brunt of the slowdown or bubble burst as result of their heavy reliance on real estate revenues. As mentioned, local governments will experience a significant loss of revenue, and not just from a decline in land sales: local governments also rely on income from construction and the production of raw materials that goes into construction. In 1994, fiscal decentralization reformed China’s revenue sharing system, effectively reducing local governments’ share of the central revenue stream while increasing their responsibility for providing social goods…. Though mortgage defaults would be rare, social discontent would likely blossom over lost equity. Social instability would also have political consequences for local governments. As important as growth rates are in promotion calculations, levels of social unrest may play an even bigger role – large and visible protests are a sure way to get demoted in the Chinese political system.” (The Diplomat, December 10, 2011)
“As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.” (Bloomberg, December 11, 2011)
Levels:
S&P 500 Index [1255.19] – Surpassing 1260, and around the 200 day moving average, serves as a short-term hurdle. The fall rallies have yet to showcase a sustainable breakout which remains a talking point from daily traders.
Crude [$99.41] – $95-100 range has become a familiar place in the past several weeks. It is hard to ignore the developing uptrend.
Gold [$1709] – Attempting to settle down before a potential reacceleration. Currently the commodity is in a 3+ month decline.
DXY – US Dollar Index [78.06] – Current pricing is in line with the 5 and 125 week moving averages, suggesting the lack of a major move despite currency discussions.
US 10 Year Treasury Yields [2.06%] – Barely moving week over week as the 2% range is becoming quite normal.
--
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, December 05, 2011
Market Outlook | December 5, 2011
“The only limits are, as always, those of vision.” - James Broughton (1913-1999)
Desperate and Desired Actions
Last week resulted in major moves and clever interpretations, leading to a positive twist in global markets. Debatable as it may be, the move by the world’s central bankers to add liquidity has been highly influential on asset prices and temporarily relieves tension. Eventually, growing political and business pressure in Europe should force bold resolutions.
For now, the mindset regarding long-term consequences appears less relevant. Decision makers in powerful positions, and the majority of money managers, are too focused on survival mode or merely capitalizing near-term opportunities. The daunting task for a money manager is not to simply follow the suspense of the real economy or chase ideas as a headline observer. Similarly, the “politics as usual” tactics of leaders adds flavor to the news interpretation. Yet this is not a novel concept, which suggests increasing public frustration may continue and play out on political fronts, given the impending election year. Mystical or practical, a “leadership” move projecting confidence is desperately needed, and a glimpse of faith is usually welcomed by participants. The psychology of markets is quick to accept forces related to perception and quick to dismiss substantive facts. This is mind twisting indeed.
Lingering Residue
The significant one week rally is bound to face few challenges. First, mechanical market practitioners will point out the lack of volume to support the spurts of appreciation. Secondly, those assessing policies claim stimulus efforts are desperate measures by central banks and politicians. Thirdly, the lack of improvement in labor numbers and noteworthy changes in the key fundamentals contribute to the issue. Finally, the angst and loss of confidence are risk elements which are not quite common for the current generation of leaders. In other words, as public sentiment loses hope when applying the familiar psychological game of illusionary numbers, it becomes difficult to spur creativity. Let’s not forget that pessimism among investors has yet to reverse at this point. “Bearish sentiment [according to AAII survey], expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 39.4%. This is the highest level of pessimism since October 6, 2011. This is also the third consecutive week that bearish sentiment has been above its historical average of 30%.” (Forbes, December 2, 2011).
The Art of Facts
Mixed economic numbers, with favorable headline numbers, but with a fragile non-improving US labor market, left the crowd puzzled into the weekend. The post-Thanksgiving week began with trepidation as investors deciphered the consecutive down days from prior weeks. As a start, we were due for a stock market bounce, as a year-end push is up against the clock; while a practical resolution in the real economy cannot turn rosy on an overnight announcement. Regardless of working with illusion or facts, there is no real comfort in being a trend trader. Importantly, turbulence in equity markets has declined since October, despite all the crisis noise. Interestingly, the volatility index is not screaming of agitation and fear, unlike other barometers, as was seen in early July and late August of this year. The calming effect is being noted by outsiders who may look to chase returns while courageous risk-takers are trying to heal wounds.
Leaning on Surprises
The S&P 500 index is now barely positive for the year at 1.1%, as the surprise bet is to picture further upside moves that would extend into early to mid-2012. Presently, few observers wonder if financials and small cap indexes are able to climb into positive territory as well. Perhaps it is too much to ask for now. Of course, safety is scarce (nearly non-existent) as the confirmation of upside causes will be critical in weeks ahead. Actually, if bad news is truly exhausted this will be proven in the few days ahead.
Article Quotes:
“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe….Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.” (David Beckworth, Economonitor, December 4, 2011)
“The genesis of the recent funding problems for eurozone banks has come not from the euro markets, but from the dollar markets. In the boom years, these banks greatly increased their dollar assets (in the form of loans and securitised debt instruments), and funded these activities not by increasing bank deposits, but by short term borrowing in the interbank markets and the money markets. This is a vulnerable position, involving both a liquidity mismatch (long dated assets funded by short dated liabilities), and also the need for cross-border or cross-currency borrowing. In recent weeks, the deterioration in the eurozone debt crisis has undermined confidence in the solvency of eurozone banks, and dollar financing for them has dried up… This happened in a similar manner at the end of 2008, and at that time the Fed chose to alleviate the problem of dollar funding for foreign banks by increasing its swap facilities with foreign central banks, especially the ECB. This programme became very large, peaking at $580 billion, which represented about a quarter of the Fed’s total balance sheet at the time.” (The Financial Times, December 2, 2011)
Levels:
S&P 500 Index [1244.28] – Hovering near 1250 as the 200 day moving average stands at 1264.95. Signs of bottoming as the momentum shows early signs of turning.
Crude [$100.96] – Maintaining the uptrend established in early October. Flirting at the much talked about “$100” level, while confronting an infection point.
Gold [$1747.00] – After an autumn breather, the commodity is gearing up for a reacceleration. Climbing back to 1840 will be the next noteworthy point for buyers.
DXY – US Dollar Index [78.06] – Similar to 2008 and 2009, the dollar is attempting to recover. Previously, both periods of appreciation failed to hold. However, the dollar index is slightly positive for the year.
US 10 Year Treasury Yields [2.03%] – No major trend shift. Remains in a 30+ year downtrend while trading near the lows of the range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Desperate and Desired Actions
Last week resulted in major moves and clever interpretations, leading to a positive twist in global markets. Debatable as it may be, the move by the world’s central bankers to add liquidity has been highly influential on asset prices and temporarily relieves tension. Eventually, growing political and business pressure in Europe should force bold resolutions.
For now, the mindset regarding long-term consequences appears less relevant. Decision makers in powerful positions, and the majority of money managers, are too focused on survival mode or merely capitalizing near-term opportunities. The daunting task for a money manager is not to simply follow the suspense of the real economy or chase ideas as a headline observer. Similarly, the “politics as usual” tactics of leaders adds flavor to the news interpretation. Yet this is not a novel concept, which suggests increasing public frustration may continue and play out on political fronts, given the impending election year. Mystical or practical, a “leadership” move projecting confidence is desperately needed, and a glimpse of faith is usually welcomed by participants. The psychology of markets is quick to accept forces related to perception and quick to dismiss substantive facts. This is mind twisting indeed.
Lingering Residue
The significant one week rally is bound to face few challenges. First, mechanical market practitioners will point out the lack of volume to support the spurts of appreciation. Secondly, those assessing policies claim stimulus efforts are desperate measures by central banks and politicians. Thirdly, the lack of improvement in labor numbers and noteworthy changes in the key fundamentals contribute to the issue. Finally, the angst and loss of confidence are risk elements which are not quite common for the current generation of leaders. In other words, as public sentiment loses hope when applying the familiar psychological game of illusionary numbers, it becomes difficult to spur creativity. Let’s not forget that pessimism among investors has yet to reverse at this point. “Bearish sentiment [according to AAII survey], expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 39.4%. This is the highest level of pessimism since October 6, 2011. This is also the third consecutive week that bearish sentiment has been above its historical average of 30%.” (Forbes, December 2, 2011).
The Art of Facts
Mixed economic numbers, with favorable headline numbers, but with a fragile non-improving US labor market, left the crowd puzzled into the weekend. The post-Thanksgiving week began with trepidation as investors deciphered the consecutive down days from prior weeks. As a start, we were due for a stock market bounce, as a year-end push is up against the clock; while a practical resolution in the real economy cannot turn rosy on an overnight announcement. Regardless of working with illusion or facts, there is no real comfort in being a trend trader. Importantly, turbulence in equity markets has declined since October, despite all the crisis noise. Interestingly, the volatility index is not screaming of agitation and fear, unlike other barometers, as was seen in early July and late August of this year. The calming effect is being noted by outsiders who may look to chase returns while courageous risk-takers are trying to heal wounds.
Leaning on Surprises
The S&P 500 index is now barely positive for the year at 1.1%, as the surprise bet is to picture further upside moves that would extend into early to mid-2012. Presently, few observers wonder if financials and small cap indexes are able to climb into positive territory as well. Perhaps it is too much to ask for now. Of course, safety is scarce (nearly non-existent) as the confirmation of upside causes will be critical in weeks ahead. Actually, if bad news is truly exhausted this will be proven in the few days ahead.
Article Quotes:
“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe….Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.” (David Beckworth, Economonitor, December 4, 2011)
“The genesis of the recent funding problems for eurozone banks has come not from the euro markets, but from the dollar markets. In the boom years, these banks greatly increased their dollar assets (in the form of loans and securitised debt instruments), and funded these activities not by increasing bank deposits, but by short term borrowing in the interbank markets and the money markets. This is a vulnerable position, involving both a liquidity mismatch (long dated assets funded by short dated liabilities), and also the need for cross-border or cross-currency borrowing. In recent weeks, the deterioration in the eurozone debt crisis has undermined confidence in the solvency of eurozone banks, and dollar financing for them has dried up… This happened in a similar manner at the end of 2008, and at that time the Fed chose to alleviate the problem of dollar funding for foreign banks by increasing its swap facilities with foreign central banks, especially the ECB. This programme became very large, peaking at $580 billion, which represented about a quarter of the Fed’s total balance sheet at the time.” (The Financial Times, December 2, 2011)
Levels:
S&P 500 Index [1244.28] – Hovering near 1250 as the 200 day moving average stands at 1264.95. Signs of bottoming as the momentum shows early signs of turning.
Crude [$100.96] – Maintaining the uptrend established in early October. Flirting at the much talked about “$100” level, while confronting an infection point.
Gold [$1747.00] – After an autumn breather, the commodity is gearing up for a reacceleration. Climbing back to 1840 will be the next noteworthy point for buyers.
DXY – US Dollar Index [78.06] – Similar to 2008 and 2009, the dollar is attempting to recover. Previously, both periods of appreciation failed to hold. However, the dollar index is slightly positive for the year.
US 10 Year Treasury Yields [2.03%] – No major trend shift. Remains in a 30+ year downtrend while trading near the lows of the range.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, November 28, 2011
Market Outlook | November 28, 2011
“The most important American addition to the World Experience was the simple surprising fact of America. We have helped prepare mankind for all its later surprises.” - Daniel J. Boorstin (1914-2004)
The General Feel
Most of the second of half of the year, there have been screams of a further rush to safer assets. This is typical when markets digest the alarming discovery of causes and effects of the credit crisis. Those results have adversely played out in various assets. Inflection points were overly anticipated and discussed by pundits, but the clear message is a global downturn. The selling floodgates that opened in July 2011 persist and stick in the minds of those contemplating investment.
As usual, jittery participants and confused pundits are most likely to blend the European issues with US political deadlocks and other social displeasures. Images can influence collective thoughts, but at some point the existing wounds open up wider, or heal faster, than expected. In fathoming the least visible, the European crisis is somewhat progressing since the harsh reality is being confronted. Eventually pending measures to stop the bleeding are inevitable, as the ECB attempts to provide liquidity. Yet for a buy and hold investor, the cost (based on perception) may seem very hefty when assessed by present behaviors. Perhaps unconventional thought of a recovery will be tested in the next few weeks, starting early this week. After all, further downgrades of sovereign rates, combined with the lowering of growth projections is to be expected. Both are barely a shock or new discovery.
Message Heard
October’s market appreciation was followed up by a mass exodus by previous holders. Simply, sellers dominate the daily market action and news flow is overly focused on the accumulated challenges of the credit crisis. At this junction of the year, the S&P 500 index is down nearly 8% for the year. Along with poor broad index performance, the themes causing disruption have resurfaced in various forms.
Investors have voiced their displeasure:
• Demanding more liquidity: Staying liquid is even more appealing during escalating volatility, and widening European sovereign spreads. All year, observers witnessed a continual rotation to US Dollar and US treasures, especially in periods when “all hell breaks loose” (relatively speaking of course). This relative US edge argument seems mystical at times, but has proven to be real in several panic sessions.
• Favoring liquidity over yield: The recent investor attitude suggests that earning very small gains in cash is better than get burnt by hope. Basically, the average investor’s conclusion is that it’s too blurry for comfort when speculative grade bonds are linked with default fears.
• Hesitancy in illiquid assets. Investors are not at ease with duration risk in long-term assets, given the uncertainty and scarcity in capital. Unless there are deeply discounted prices, larger firms are less willing to navigate value oriented opportunities in less liquid areas. Plus, an increased capital requirement for banks, (i.e., Basil III) allows less flexibility.
Little Room for Surprises
These weak points above are poised for turnout to reverse into upside contrarian play. This dislocated environment has dismissed traditional patterns, while reversals continue to fail. Interestingly, there is an eager crowd willing to buy cheap or desperately looking for catalysts that can capture collective minds.
For one, the talks of quantitative easing 3 (purchase of treasuries or mortgage backed securities) are resurfacing at times. In the months ahead, further stimulus is not off the table. Secondly, value investors who have watched for a better entry point are weighing the bargains after the declining month of November. In addition, the commodity/dollar relationship is displaying early shifts as well. Finally, deadlocks find a way to disentangle. If Eurozone leaders, key members in Congress, or Federal Reserve decision makers reach a bold agreement then the results can seep through financial markets. Yet despite the daily dose of fear projections, it’s in the best interest of powers that be to restore calmness to this inevitable reform. Basically, surprises ahead are easier to visualize than betting on surprises, which is a courageous and highly neglected theme.
Article Quotes:
“The strategic nature of competition between China and the US in the Asia-Pacific will be murky for the time being. However, China has gained more stakes when dealing with the US. It is hard to say whether the US holds more advantages in China's neighboring area. The potential for economic cooperation between China and its neighboring countries is great…. Naval disputes are only a small part of East Asian affairs. The US and other countries seek to defend private interests by taking advantage of them. As long as China increases its input, it will make countries either pay the price for their decision or make them back the doctrine of solving maritime disputes through cooperation…. No one dominant force is wanted. China has more resources to oppose the US ambition of dominating the region than US has to fulfill it. As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security.” (Global Times China, November 18, 2011)
“Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges….European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat…. European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator…The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and dessert.” (Financial Times, November 27, 2011)
Levels:
S&P 500 Index [1158.67] – Several down days in a row showcase a severe selling period this month. The peak of 1277 on November 8, 2011 established a noteworthy downturn.
Crude [$97.41] – An explosive two month run is slowing. Consolidation around the 200 day moving average creates a near-term tug of war between buyers and sellers.
Gold [$1685.50] – It is fair to conclude that the momentum run is facing a mild pause. Buyers seemed interested at $1600, and their appetite to purchase is soon to be tested.
DXY – US Dollar Index [78.06] – Nearly up 10% since the lows of May 2011. An explosive rise in the dollar is noticeable especially in early September,
US 10 Year Treasury Yields [1.96%] – Below 2%, but not quite 1.67% as seen in late September. Trading at deeply oversold levels, suggesting a near-term recovery in yields.
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 General Feel
Most of the second of half of the year, there have been screams of a further rush to safer assets. This is typical when markets digest the alarming discovery of causes and effects of the credit crisis. Those results have adversely played out in various assets. Inflection points were overly anticipated and discussed by pundits, but the clear message is a global downturn. The selling floodgates that opened in July 2011 persist and stick in the minds of those contemplating investment.
As usual, jittery participants and confused pundits are most likely to blend the European issues with US political deadlocks and other social displeasures. Images can influence collective thoughts, but at some point the existing wounds open up wider, or heal faster, than expected. In fathoming the least visible, the European crisis is somewhat progressing since the harsh reality is being confronted. Eventually pending measures to stop the bleeding are inevitable, as the ECB attempts to provide liquidity. Yet for a buy and hold investor, the cost (based on perception) may seem very hefty when assessed by present behaviors. Perhaps unconventional thought of a recovery will be tested in the next few weeks, starting early this week. After all, further downgrades of sovereign rates, combined with the lowering of growth projections is to be expected. Both are barely a shock or new discovery.
Message Heard
October’s market appreciation was followed up by a mass exodus by previous holders. Simply, sellers dominate the daily market action and news flow is overly focused on the accumulated challenges of the credit crisis. At this junction of the year, the S&P 500 index is down nearly 8% for the year. Along with poor broad index performance, the themes causing disruption have resurfaced in various forms.
Investors have voiced their displeasure:
• Demanding more liquidity: Staying liquid is even more appealing during escalating volatility, and widening European sovereign spreads. All year, observers witnessed a continual rotation to US Dollar and US treasures, especially in periods when “all hell breaks loose” (relatively speaking of course). This relative US edge argument seems mystical at times, but has proven to be real in several panic sessions.
• Favoring liquidity over yield: The recent investor attitude suggests that earning very small gains in cash is better than get burnt by hope. Basically, the average investor’s conclusion is that it’s too blurry for comfort when speculative grade bonds are linked with default fears.
• Hesitancy in illiquid assets. Investors are not at ease with duration risk in long-term assets, given the uncertainty and scarcity in capital. Unless there are deeply discounted prices, larger firms are less willing to navigate value oriented opportunities in less liquid areas. Plus, an increased capital requirement for banks, (i.e., Basil III) allows less flexibility.
Little Room for Surprises
These weak points above are poised for turnout to reverse into upside contrarian play. This dislocated environment has dismissed traditional patterns, while reversals continue to fail. Interestingly, there is an eager crowd willing to buy cheap or desperately looking for catalysts that can capture collective minds.
For one, the talks of quantitative easing 3 (purchase of treasuries or mortgage backed securities) are resurfacing at times. In the months ahead, further stimulus is not off the table. Secondly, value investors who have watched for a better entry point are weighing the bargains after the declining month of November. In addition, the commodity/dollar relationship is displaying early shifts as well. Finally, deadlocks find a way to disentangle. If Eurozone leaders, key members in Congress, or Federal Reserve decision makers reach a bold agreement then the results can seep through financial markets. Yet despite the daily dose of fear projections, it’s in the best interest of powers that be to restore calmness to this inevitable reform. Basically, surprises ahead are easier to visualize than betting on surprises, which is a courageous and highly neglected theme.
Article Quotes:
“The strategic nature of competition between China and the US in the Asia-Pacific will be murky for the time being. However, China has gained more stakes when dealing with the US. It is hard to say whether the US holds more advantages in China's neighboring area. The potential for economic cooperation between China and its neighboring countries is great…. Naval disputes are only a small part of East Asian affairs. The US and other countries seek to defend private interests by taking advantage of them. As long as China increases its input, it will make countries either pay the price for their decision or make them back the doctrine of solving maritime disputes through cooperation…. No one dominant force is wanted. China has more resources to oppose the US ambition of dominating the region than US has to fulfill it. As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security.” (Global Times China, November 18, 2011)
“Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges….European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat…. European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator…The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and dessert.” (Financial Times, November 27, 2011)
Levels:
S&P 500 Index [1158.67] – Several down days in a row showcase a severe selling period this month. The peak of 1277 on November 8, 2011 established a noteworthy downturn.
Crude [$97.41] – An explosive two month run is slowing. Consolidation around the 200 day moving average creates a near-term tug of war between buyers and sellers.
Gold [$1685.50] – It is fair to conclude that the momentum run is facing a mild pause. Buyers seemed interested at $1600, and their appetite to purchase is soon to be tested.
DXY – US Dollar Index [78.06] – Nearly up 10% since the lows of May 2011. An explosive rise in the dollar is noticeable especially in early September,
US 10 Year Treasury Yields [1.96%] – Below 2%, but not quite 1.67% as seen in late September. Trading at deeply oversold levels, suggesting a near-term recovery in yields.
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, November 21, 2011
Market Outlook | November 21, 2011
“A pessimist is a person who has had to listen to too many optimists.” - Don Marquis (1878-1937)
Buyer’s Fatigue
It was not too long ago, in the summer of 2007, when pessimism or a cautious outlook became too unpopular among general investors. Even in the post 2008 era, previous damages were not quite understood until a few months ago when the glaring European crisis reinforced the fundamental issue of debt management. These days, the majority of buyers appear too fatigued of holding onto shares, while becoming exhausted of “bad” news and frustrated with a lack of genuine good news. Even when buying relatively cheap, the rewards are small and short-lived gains are rapidly erased. The more this happens, participants will become quick to lose patience and willing to sell even faster based on sensitive headlines. Perhaps this not only explains the pattern for the second half of the year but it is also reflected in last week’s events. Simply, less of a willingness to hold assets goes hand in hand with high volatility and the increasing cost of default insurance.
For specific financial insiders, previous fundamental training is not as handy in the current environment. Traditional principles such as valuations, momentum, and assumptions on rates or credit ratings are pointing to abnormal. Clearly, government and social stability is a fragile topic without a manuscript. After all, the European reconstruction period is fully underway with nauseating talks of a Eurozone break up. Perhaps those consequences are hard to quantify, thus the ongoing risk aversion remains the prevailing theme.
Fragile Edge
The US relative edge, versus alternative markets, is still intact, for those willing to see. In some measures US banks appear in better shape, in terms of balance sheet clean up, when compared with European banks. Nonetheless, American banks’ stocks have seen more punishment than reward in the past few months. In a world where there is no escape from broad risk or varying geographic exposure, the frustration inevitably persists as rational thinking takes time to reestablish. Plus, the US bank exposure to European assets is a mystery that’s bound to unfold. Meanwhile, patience is challenged for any risk takers across asset classes. A manic pattern lingers as the recent turbulence echoes July and September lows.
A few breathers here and there have kept US broad indexes from a truly ugly and irrevocable place. We start the short holiday week with the S&P 500 index down only 1.5% for the year. That’s better than the EEM (Emerging Market Index), which is down nearly 19% since January. Interestingly, the daring crowd dwindles fast, but betting against markets after consecutive downside moves does not come with guarantees either. The concept of relative edge faces political risk as managers desperately place their chips for salvaging some hopeful year-end gains.
Surprise Elements
Elements of upside surprises remain scarce at the moment, not only in Europe or the US, but China as well. Basically, it is hard to locate glaring data for better sentiment or changes of current downtrend and deadlocks. This is a tough place to be for those looking to buy at a discount or at attractive prices. Rewriting rules, reforming old behaviors and endlessly walking in uncharted territory is a risk that’s hard to comprehend and accept collectively. Thus the brave must distinguish blind gambling with a favorable risk-reward profile. At the same time, mood swings are too common even when it all seems too bleak.
Article Quotes:
“Indeed, all the gold controlled by the US government, which has by far the world’s largest official reserves, equals just 3 per cent of America’s official debt, which just passed the $15,000bn mark. Even Italy, a particularly large holder of bullion (in third place globally with the 10th largest economy) would be able to retire less than 6 per cent of its enormous sovereign debt if it were to dump its 2,451 tonnes. But while the dollar amounts may be paltry, Mr Bernanke must grasp that the symbolism is anything but. It is a mark of creeping distrust in the unofficial reserve currency, which nervous central bankers see being printed by the trillions even as America’s political leadership shows no sign of dealing with its daunting fiscal challenges. Fiscal worries are even more acute for the number two and three reserve currencies, the euro and the yen. Central bankers are late to the gold party. Private buyers of ETFs alone have accumulated 15 times as much since their advent a decade ago as governments bought last quarter.” (Financial Times, November 17, 2011)
“Local [Chinese] government financing vehicles borrowed heavily to support an infrastructure construction spree under Beijing's four trillion yuan stimulus package introduced at the end of 2008. They are due to pay a total debt of 1 trillion yuan annually from this year until 2013 and an outbreak of defaults could peak during the period, China International Corp warned earlier. The local governments rely heavily on revenue from land sales to pay back their loans. As the property market has slowed under government policy tightening, and as it takes time for government-funded projects to generate returns, there are signs some local governments are finding it difficult to repay their loans. Local governments' 6,576 financing vehicles had debt of 10.72 trillion yuan at the end of 2010, amounting to 26.9% of China's gross domestic product accrued since the global financial crisis in 2008, the National Audit Office reported in its first audit of local government debt in June. Only 54 county governments out of nearly 2,800 in the country had zero debt, it said.” (Asian Times, November 19, 2011)
Levels:
S&P 500 Index [1215.65] – Retracing from 50 day moving average. Ability to stay above 1200 will be tested in next days ahead.
Crude [$97.41] – After a fast paced move to $100, there is early indication of a pause. The two month momentum may need a further catalyst to keep the run sustainable.
Gold [$1719.00] – Struggling to hold above $1750 as evidence of a stalling pattern continues to develop.
DXY – US Dollar Index [78.06] – Continuing its bottoming process since May 2011. The relative strength of the currency remains unharmed despite near-term swings.
US 10 Year Treasury Yields [2.01%] – Interestingly, the lows in 2008 crisis stood at 2.03%. Currently, a struggle to stay above 2.0% is further indication of risk aversion and lack of “safer” alternatives.
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.
Buyer’s Fatigue
It was not too long ago, in the summer of 2007, when pessimism or a cautious outlook became too unpopular among general investors. Even in the post 2008 era, previous damages were not quite understood until a few months ago when the glaring European crisis reinforced the fundamental issue of debt management. These days, the majority of buyers appear too fatigued of holding onto shares, while becoming exhausted of “bad” news and frustrated with a lack of genuine good news. Even when buying relatively cheap, the rewards are small and short-lived gains are rapidly erased. The more this happens, participants will become quick to lose patience and willing to sell even faster based on sensitive headlines. Perhaps this not only explains the pattern for the second half of the year but it is also reflected in last week’s events. Simply, less of a willingness to hold assets goes hand in hand with high volatility and the increasing cost of default insurance.
For specific financial insiders, previous fundamental training is not as handy in the current environment. Traditional principles such as valuations, momentum, and assumptions on rates or credit ratings are pointing to abnormal. Clearly, government and social stability is a fragile topic without a manuscript. After all, the European reconstruction period is fully underway with nauseating talks of a Eurozone break up. Perhaps those consequences are hard to quantify, thus the ongoing risk aversion remains the prevailing theme.
Fragile Edge
The US relative edge, versus alternative markets, is still intact, for those willing to see. In some measures US banks appear in better shape, in terms of balance sheet clean up, when compared with European banks. Nonetheless, American banks’ stocks have seen more punishment than reward in the past few months. In a world where there is no escape from broad risk or varying geographic exposure, the frustration inevitably persists as rational thinking takes time to reestablish. Plus, the US bank exposure to European assets is a mystery that’s bound to unfold. Meanwhile, patience is challenged for any risk takers across asset classes. A manic pattern lingers as the recent turbulence echoes July and September lows.
A few breathers here and there have kept US broad indexes from a truly ugly and irrevocable place. We start the short holiday week with the S&P 500 index down only 1.5% for the year. That’s better than the EEM (Emerging Market Index), which is down nearly 19% since January. Interestingly, the daring crowd dwindles fast, but betting against markets after consecutive downside moves does not come with guarantees either. The concept of relative edge faces political risk as managers desperately place their chips for salvaging some hopeful year-end gains.
Surprise Elements
Elements of upside surprises remain scarce at the moment, not only in Europe or the US, but China as well. Basically, it is hard to locate glaring data for better sentiment or changes of current downtrend and deadlocks. This is a tough place to be for those looking to buy at a discount or at attractive prices. Rewriting rules, reforming old behaviors and endlessly walking in uncharted territory is a risk that’s hard to comprehend and accept collectively. Thus the brave must distinguish blind gambling with a favorable risk-reward profile. At the same time, mood swings are too common even when it all seems too bleak.
Article Quotes:
“Indeed, all the gold controlled by the US government, which has by far the world’s largest official reserves, equals just 3 per cent of America’s official debt, which just passed the $15,000bn mark. Even Italy, a particularly large holder of bullion (in third place globally with the 10th largest economy) would be able to retire less than 6 per cent of its enormous sovereign debt if it were to dump its 2,451 tonnes. But while the dollar amounts may be paltry, Mr Bernanke must grasp that the symbolism is anything but. It is a mark of creeping distrust in the unofficial reserve currency, which nervous central bankers see being printed by the trillions even as America’s political leadership shows no sign of dealing with its daunting fiscal challenges. Fiscal worries are even more acute for the number two and three reserve currencies, the euro and the yen. Central bankers are late to the gold party. Private buyers of ETFs alone have accumulated 15 times as much since their advent a decade ago as governments bought last quarter.” (Financial Times, November 17, 2011)
“Local [Chinese] government financing vehicles borrowed heavily to support an infrastructure construction spree under Beijing's four trillion yuan stimulus package introduced at the end of 2008. They are due to pay a total debt of 1 trillion yuan annually from this year until 2013 and an outbreak of defaults could peak during the period, China International Corp warned earlier. The local governments rely heavily on revenue from land sales to pay back their loans. As the property market has slowed under government policy tightening, and as it takes time for government-funded projects to generate returns, there are signs some local governments are finding it difficult to repay their loans. Local governments' 6,576 financing vehicles had debt of 10.72 trillion yuan at the end of 2010, amounting to 26.9% of China's gross domestic product accrued since the global financial crisis in 2008, the National Audit Office reported in its first audit of local government debt in June. Only 54 county governments out of nearly 2,800 in the country had zero debt, it said.” (Asian Times, November 19, 2011)
Levels:
S&P 500 Index [1215.65] – Retracing from 50 day moving average. Ability to stay above 1200 will be tested in next days ahead.
Crude [$97.41] – After a fast paced move to $100, there is early indication of a pause. The two month momentum may need a further catalyst to keep the run sustainable.
Gold [$1719.00] – Struggling to hold above $1750 as evidence of a stalling pattern continues to develop.
DXY – US Dollar Index [78.06] – Continuing its bottoming process since May 2011. The relative strength of the currency remains unharmed despite near-term swings.
US 10 Year Treasury Yields [2.01%] – Interestingly, the lows in 2008 crisis stood at 2.03%. Currently, a struggle to stay above 2.0% is further indication of risk aversion and lack of “safer” alternatives.
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, November 14, 2011
Market Outlook | November 14, 2011
“Tug on anything at all and you'll find it connected to everything else in the universe.” - John Muir (1838 –1914)
Linked with Differences
There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.
In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.
Observer’s Dilemma
For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).
Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.
Down the Stretch
The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.
Article Quotes:
“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)
“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)
Levels:
S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.
Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.
Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.
DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.
US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.
--
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.
Linked with Differences
There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.
In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.
Observer’s Dilemma
For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).
Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.
Down the Stretch
The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.
Article Quotes:
“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)
“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)
Levels:
S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.
Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.
Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.
DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.
US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.
--
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, November 07, 2011
Market Outlook | November 7, 2011
“To begin with, our perception of the world is deformed, incomplete. Then our memory is selective. Finally, writing transforms.” - Claude Simon (1913-2005)
The Collective Feel
The back and forth market movements are overly focused on the latest rapid paced events. Meanwhile, the nucleus of these issues stems from the serious and inescapable damage, mostly revealed in the fall of 2008. Another week passed with the usual Eurozone drama, as fear rotates from one nation’s solvency to the next. Basically, for financial or social observers, the message is not only grim, but also fairly exhausting as similar themes keep repeating in a different form. In other words, the last three years illustrate the ongoing discussions on finding a balance between government involvement and potential resolutions, amidst conflicted political constraints.
As for navigating through investment ideas, here and there observers will point to better than expected numbers, which stimulate some momentary or illusionary hope. However, beyond the day to day noise, the consequences for the next three to five years are puzzling and even more humbling for traditional forecasters. Perhaps the bigger surprise might be the lengthy denial by policymakers to make critical and painful decisions. Others feel that pessimism evaporates in due time, but that crowd is becoming harder to find in this marketplace. Frankly, trust in forecasters is diminishing, as finger pointing is the reoccurring theme. Historians contemplate the results of globalization and the realities that have materialized in this “New World.” Yet, the changing perception of the financial system is turning to a political matter which goes beyond the realm of traditional finance. This is unchartered territory for the generations in charge (in US and Europe), who can hardly recall a manual for problem solving in the previous business cycle challenges.
Unshakeable Turbulence
With few exceptions, most trading days since early August witnessed the Volatility Index (VIX) above 30. This reiterates the lack of market stability, even after the strong broad market performance in October. Additionally, this reflects a shaky perception of governance risk and confidence in private business expansion. Interestingly, frenzied periods are not offering clarity, as edgy minds struggle to find reasonable policymaking. The majority of attention in the US is focused on the economic front in light of the jobs issue, which appears to be more talked about than resolved. Emerging markets are not as shiny as pictured in last decade either. For example, China is confronting a domestic credit crisis of some sorts, which may go ignored by some. “An estimated $580-billion in private loans were handed out in the first 10 months of this year, a number almost 10 per cent the size of the Chinese economy…China – rather than being the country that can lead the world out of its debt woes – may be the next one headed for a hard fall.” (The Globe & Mail, November 6, 2011). There is simply no escape in this environment, as other findings are bound to unfold before year-end. Interestingly, human greed, desire for new growth, or the ability to deny harsh reality appears to be one of the very few constants.
Balancing Act
It is easy to be confused, or lost, in this turbulence; one may prefer to sit on the sidelines, which is the choice for most. Currency and commodity market trends remain in limbo. Meanwhile, owning company specific shares might work on a very selective basis, as the focus is on sensitive news flow. Year-end bets have been placed, mostly last month, as optimists await a recovery for a cosmetic and minor moral boost on a positive finish. Clearly, the stakes remain too high for managers executing on investment ideas, as well as central banks implementing policies. Yet, the odds of a substantive recovery might take longer than desired, and remain cloudy to imagine.
Article Quotes:
“First, the lower the interest rate, the higher the interest rate risk. As Calabria notes, in future years, mortgage rates will certainly rise. That will make the relative value of mortgages originated at ultra-low interest rates lower. It could even cause the bank to lose money on the mortgage if its cost of funds rises above the low mortgage interest rate. Second, interest rates help to compensate banks for risk. If banks were getting higher interest rates, then they might be more willing to provide consumers more credit. But at rates like 4%, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives. Very low interest rates are a reason why banks aren't providing many mortgages these days. Banks would prefer if mortgage interest rates were higher. You can see this by their recent efforts to avoid interest risk by adjustable-rate mortgages reemerging. In the first half of 2011, they accounted for 13.4% of all originations, up from just 6.3% in 2009.” (The Atlantic, November 2011)
“Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital. We can argue over details, but the necessary formula – if they wish to save EMU -- undoubtedly entails some form of eurobonds, debt-pooling, fiscal transfers, and of course the constitutional revolution that goes with all of this. That would at least buy them time, though I doubt that even fiscal union can ever bridge the North-South gap. Italy’s travails have little to do with the parallel drama in Greece. This is not contagion in any meaningful sense. The country is suddenly under fire for the very simple reason that its economy is plunging back into deep recession, the predicable outcome of the EU’s 1930s fiscal and monetary contraction policies. The implications of a eurozone double-dip are dreadful for Italy, already grappling with a chronic loss of 40pc in labor competitiveness against Germany and a 70pc collapse in foreign direct investment since 2007.” (The Telegraph, November 6, 2011)
Levels:
S&P 500 Index [1253.23] – Holding above 1250 and facing a mild inflection point between now and year-end.
Crude [$94.26] – Facing resistance at the 200 day moving average ($94.84), as surpassing $95 is the next challenge for buyers.
Gold [$1749.00] – A tamed re-acceleration process at this point. Early fall highs above 1850 aspire buyers.
DXY – US Dollar Index [76.96] – Restoring some stability after sharp declines. It remains too early to declare a trend, given the ensuing macro events.
US 10 Year Treasury Yields [2.03%] – The 50 day average stands at 2.05% while the 5 day average equals 2.03%. Both emphasize the range bound trading in the past few days, while the big macro picture is less affected.
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 Collective Feel
The back and forth market movements are overly focused on the latest rapid paced events. Meanwhile, the nucleus of these issues stems from the serious and inescapable damage, mostly revealed in the fall of 2008. Another week passed with the usual Eurozone drama, as fear rotates from one nation’s solvency to the next. Basically, for financial or social observers, the message is not only grim, but also fairly exhausting as similar themes keep repeating in a different form. In other words, the last three years illustrate the ongoing discussions on finding a balance between government involvement and potential resolutions, amidst conflicted political constraints.
As for navigating through investment ideas, here and there observers will point to better than expected numbers, which stimulate some momentary or illusionary hope. However, beyond the day to day noise, the consequences for the next three to five years are puzzling and even more humbling for traditional forecasters. Perhaps the bigger surprise might be the lengthy denial by policymakers to make critical and painful decisions. Others feel that pessimism evaporates in due time, but that crowd is becoming harder to find in this marketplace. Frankly, trust in forecasters is diminishing, as finger pointing is the reoccurring theme. Historians contemplate the results of globalization and the realities that have materialized in this “New World.” Yet, the changing perception of the financial system is turning to a political matter which goes beyond the realm of traditional finance. This is unchartered territory for the generations in charge (in US and Europe), who can hardly recall a manual for problem solving in the previous business cycle challenges.
Unshakeable Turbulence
With few exceptions, most trading days since early August witnessed the Volatility Index (VIX) above 30. This reiterates the lack of market stability, even after the strong broad market performance in October. Additionally, this reflects a shaky perception of governance risk and confidence in private business expansion. Interestingly, frenzied periods are not offering clarity, as edgy minds struggle to find reasonable policymaking. The majority of attention in the US is focused on the economic front in light of the jobs issue, which appears to be more talked about than resolved. Emerging markets are not as shiny as pictured in last decade either. For example, China is confronting a domestic credit crisis of some sorts, which may go ignored by some. “An estimated $580-billion in private loans were handed out in the first 10 months of this year, a number almost 10 per cent the size of the Chinese economy…China – rather than being the country that can lead the world out of its debt woes – may be the next one headed for a hard fall.” (The Globe & Mail, November 6, 2011). There is simply no escape in this environment, as other findings are bound to unfold before year-end. Interestingly, human greed, desire for new growth, or the ability to deny harsh reality appears to be one of the very few constants.
Balancing Act
It is easy to be confused, or lost, in this turbulence; one may prefer to sit on the sidelines, which is the choice for most. Currency and commodity market trends remain in limbo. Meanwhile, owning company specific shares might work on a very selective basis, as the focus is on sensitive news flow. Year-end bets have been placed, mostly last month, as optimists await a recovery for a cosmetic and minor moral boost on a positive finish. Clearly, the stakes remain too high for managers executing on investment ideas, as well as central banks implementing policies. Yet, the odds of a substantive recovery might take longer than desired, and remain cloudy to imagine.
Article Quotes:
“First, the lower the interest rate, the higher the interest rate risk. As Calabria notes, in future years, mortgage rates will certainly rise. That will make the relative value of mortgages originated at ultra-low interest rates lower. It could even cause the bank to lose money on the mortgage if its cost of funds rises above the low mortgage interest rate. Second, interest rates help to compensate banks for risk. If banks were getting higher interest rates, then they might be more willing to provide consumers more credit. But at rates like 4%, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives. Very low interest rates are a reason why banks aren't providing many mortgages these days. Banks would prefer if mortgage interest rates were higher. You can see this by their recent efforts to avoid interest risk by adjustable-rate mortgages reemerging. In the first half of 2011, they accounted for 13.4% of all originations, up from just 6.3% in 2009.” (The Atlantic, November 2011)
“Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital. We can argue over details, but the necessary formula – if they wish to save EMU -- undoubtedly entails some form of eurobonds, debt-pooling, fiscal transfers, and of course the constitutional revolution that goes with all of this. That would at least buy them time, though I doubt that even fiscal union can ever bridge the North-South gap. Italy’s travails have little to do with the parallel drama in Greece. This is not contagion in any meaningful sense. The country is suddenly under fire for the very simple reason that its economy is plunging back into deep recession, the predicable outcome of the EU’s 1930s fiscal and monetary contraction policies. The implications of a eurozone double-dip are dreadful for Italy, already grappling with a chronic loss of 40pc in labor competitiveness against Germany and a 70pc collapse in foreign direct investment since 2007.” (The Telegraph, November 6, 2011)
Levels:
S&P 500 Index [1253.23] – Holding above 1250 and facing a mild inflection point between now and year-end.
Crude [$94.26] – Facing resistance at the 200 day moving average ($94.84), as surpassing $95 is the next challenge for buyers.
Gold [$1749.00] – A tamed re-acceleration process at this point. Early fall highs above 1850 aspire buyers.
DXY – US Dollar Index [76.96] – Restoring some stability after sharp declines. It remains too early to declare a trend, given the ensuing macro events.
US 10 Year Treasury Yields [2.03%] – The 50 day average stands at 2.05% while the 5 day average equals 2.03%. Both emphasize the range bound trading in the past few days, while the big macro picture is less affected.
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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