“The poetry is all in the anticipation, for there is none in reality” Mark Twain (1835-1910)
Collective rising
Since October 2011, crude and stocks (S&P 500 Index) prices have recovered from the summer losses to revisit levels last reached in May 2011. This is an interesting observation for two main reasons: First, this illustrates the synchronized movement in prices of major asset classes. Secondly, last spring ended up being a precursor to violent summer months. Now, these actions draw similar comparisons and trigger a question: Are investors are too complacent? If so, it is assumed it will justify further price declines. Plenty to be seen before that is answered. In terms of market tops, the current setup does not quite match the 2007 pattern, in which the phrase “synchronized sinking” marked a global peak. Surely, it’s a hard case to claim that markets are geared to mildly crash when overall volume is so low; trust in the system is mostly fragile, while skepticism has yet to evaporate.
For the past few weeks, price corrections have been long awaited in global markets. For example, the Nasdaq 100 index continues its noteworthy move by rising over 27% since August 2011,(led by Apple and IBM). Speculators wonder if this sharp move needs a breather, along with broad markets. Many continue to point out that investor sentiment is picking up, but betting against top performing stocks has mainly backfired against sellers. Clearly, macro catalysts are mostly centered around Europe's ability to fight through issues and China's level of slowdown from persistent growth. However, these fears are not a new discovery but create near-term suspense.
Beyond Business
Much of today’s market action is focused on anticipation of financial reforms, speculating on Federal Reserve actions, and the big reward lies in comprehending the tax and political structure. Asset managers in the post-2008 era face beyond the business-as-usual tasks of identifying growth, conducting value from distressed assets or conducting their own pricing methodology for appropriate pricing. Overhanging legal changes create suspense and reemphasize the value of managing and adjusting to legal risks and costs. “America’s share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year, despite some benign tweaks to the law. A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee. It’s a wonder the jobless rate isn’t even higher than it is.” (The Economist, February 18, 2012). Again, legal changes in financial services create near-term worries but eventually, this will take its course in a new era.
Resolve
Quite evident without clarity of the new rules of engagement, there is noticeable reluctance by business owners to make aggressive decisions. Similarly, investors have not fully committed to risky assets while awaiting confirmation on strengthening labor data and election results. However, the points above are both well known and confusing for the causal observer in day-to-day headlines. Importantly, there is scarcity in quality ideas, and picking the right one presents upside potential. Perhaps the complacency is more applicable to money managers who struggle to overcome hesitancy and fear. Eventually, risk-aversion is not a growth solution or an ideal form of risk management. Thus, the existing sideline capital will have to take on further risk to get competitive returns.
Article Quotes:
“Why are Chinese households buying a defensive asset [gold] in a time of rapid growth? One reason could be the fear of inflation, which peaked at 7 per cent in mid 2011. But gold-buying by households has increased over the past two years regardless of inflation numbers rising or falling. … A better explanation could be the lack of alternatives for households that are the best savers in the world. In an economy lacking financial sophistication and depth, options are limited to savings accounts, which offer negative real returns, stocks listed on one of the two national exchanges, or else property. … Property is the other alternative. But Chinese knew of the country’s infamous ghost cities long before the international media. Knowing that yield was irrelevant, as many of these properties will never be rented out, locals knowingly bought them as speculative capital assets. Now prices have collapsed in many areas, locals are much more wary of pouring capital into an asset that may never offer a reliable return.” (Financial Times, February 16, 2012).
“Steubenville is one of scores of new boom towns springing up along the American Appalachians, from Ohio and Maryland, to West Virginia, Pennsylvania and New York, all of them beneficiaries of the shale gas revolution, a new technology that allows access to abundant reserves of natural gas trapped within the rock. The results are startling. It’s not just the mini-boom in business investment. It’s also meant that for the first time in more than 40 years, the US is close to achieving its goal of energy self-sufficiency. Energy costs have fallen so sharply that Methanex Corporation, the world’s biggest methanol maker, recently announced it was dismantling its factory in Chile and reassembling it in Louisiana, perhaps the biggest example yet of the new found fashion for “onshoring”. This is just one of any number of similar decisions that stem from the shale gas revolution. Dow Chemical plans a new propylene unit in Texas by 2015. Formosa Plastics similarly proposes a $1.5 billion investment in ethylene-related plants in the same state, while both US Steel and Vallourec are planning multi-million dollar investments in new steel capacity to meet demand for shale gas extraction.” (The Telegraph, February 18 2011)
Levels:
S&P 500 Index [1361.23] – Few points removed from May 2011 intra-day highs of 1370.58. Uptrend is well established.
Crude [$103.24] – Early signs of a breakout after a dull multi-month sideways patter. Breaking above $105 might get buyers enticed to revisit last spring’s highs of around $114.
Gold [$1711.50] –Most near-term trading falling between $1610 and $1750 price range. A break above or below this range can provide a definitive trend picture.
DXY – US Dollar Index [79.33] – Consolidating in the near-term. Trading in line with its 50-day moving average, demonstrating lack of movement.
US 10 Year Treasury Yields [2.00%] – About a year ago, yields stood between 3.40-3.60% range, which showcases a significant decline in rates tied to federal reserve polices.
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, February 20, 2012
Monday, February 13, 2012
Market Outlook | February 13, 2012
“Even cowards can endure hardship; only the brave can endure suspense.” Mignon McLaughlin (1913-1983)
Suspenseful set-up
After a strong run in global stock markets and improvements in US labor results, the credibility of this ongoing recovery faces a suspenseful and eager crowd. The sustainability of a cheerful stock market raises few additional near-term questions. Since October 2011, the uneasy investor feeling showed signs of relative calmness, as showcased by a significant decline in volatility and markup in prices of risky assets. Ironically, it was around early fall 2011, when bad news became exhausted as the gloom and doom estimates appeared too extreme. In fact, claims of European collapse seemed far-fetched and evidence of great depression-like traits were not conclusive.
In other words, the skeptic crowd grew into a larger audience from summer to fall 2011 before losing steam in the past four months. At the same time, the optimistic group is charged up so far in 2012, and will continue to loudly gain further confidence for months ahead. Interestingly enough, both extreme crowds are stubborn in their views but maintain equally high conviction levels. However, the cool-headed outside observer might see a pending period of neutrality. Chart observers are quick to point out that the S&P 500 index is nearing and needing a mild breather at current levels. After all, it’s only natural to have price corrections as it provides a period for all to digest the dislocation between reality and perception. Importantly, assessing risk in sensitive periods is too tricky, and filtering headlines is vital for a better market read. Now, there is a desperate yet nagging desire to decipher the next macroeconomic catalyst.
Reigniting
Much of the last three years has seen a focus on policymakers’ implementation of stimulus-driven resolutions. Now capital allocators are not quite convinced by the proposed government-driven solutions while pondering the prospects of further quantitative easing. Similarly, it’s unclear if the labor number improvements are tangible rather than a clever presentation of economic data. Obviously, the magnitude of economic recovery will determine further talks of Federal Reserve stimulus efforts, while reigniting familiar and passionate debates. The mysterious part of both policymaking and crisis aversion should entice speculators to make bold moves. Basically, the doubt element related to governance risk will persist, especially as financial services reform remains a top priority. Simply put, that’s the new reality that investors will have to accept rather than fight.
Near-term challenges
The multi-month positive performance does not necessarily demonstrate that money managers are buying aggressively or showing signs of complacency. Yet those purchasing shares of US assets since last quarter are looking to hedge or take some profits in days ahead. Investors who strive in periods of high turbulence have been desperately waiting on the sidelines. Thus, volatility traders are too eager to unleash and participate in wild swings. Meanwhile, bargain hunters and value seekers will have to stay focused on selective entry points while not losing perspective of the big picture. Discipline, more often than not, has proved to be more rewarding than chasing short-term trends.
Article Quotes:
“About 11 per cent of the world’s people are over 60 at the moment. In the next 25 years that will double, to almost a fifth, and one in six of those people will be over 80, according to a forthcoming book, Global Aging in the 21st Century, by sociologists Susan McDaniel of the University of Lethbridge and Zachary Zimmer of the University of California. While this is affecting every country and region – even sub-Saharan Africa is now seeing a very fast rise in its proportion of seniors – some countries are being hit very hard. While 12 per cent of Chinese are now over 60, in two decades, there will be more than 28 per cent. Brazil faces a similar blow. It will be very difficult for countries that are only just emerging from poverty to suddenly face huge elder-care costs. Peak people will be an age when jobs compete for workers rather than vice versa. The cheapest labour will vanish. We’re already seeing this: Because China is aging very fast, its dwindling working-age population is turning down the lowest-paid jobs and pushing up the minimum wage sharply, as well as the once-minimal costs of social services: Stuff from China will stop being cheap, because the Chinese aren’t young.” (The Globe & Mail, February 11, 2012)
“And as David Rothkopf points out in his incisive and timely new book, Power Inc, the pendulum has swung sharply from public to corporate in the last generation. That has changed the character of the US economy. ‘In the past there was a tight connection between economic growth leading to jobs creation, which in turn led to broad wealth creation,’ Mr. Rothkopf says. ‘Those links no longer seem to work.’ While profits have been soaring for the past two years, the US economy is now beginning to add enough jobs to reduce the headline rate. But at this speed it will still take until 2020 to restore those lost since 2007 and make up for population growth. For a small share of Americans, strong income growth is back. But for most of those now finding jobs, wages are well below the starting salaries in previous recoveries. ‘Two-tier’ corporations, such as Caterpillar and Chrysler, which hire new people on less than half the wages of older ones and with fewer benefits, are becoming typical.” (Financial Times, February 12, 2012)
Levels:
S&P 500 Index [1342.64] – Stalling around 1350, a level that triggered sell-offs in May and July 2011. Once again, that key level is being tested and setting the psychological barometer.
Crude [$98.67] – Hardly any significant movement the last 50 days. A tight trading range between $96-102.
Gold [$1711.50] –Struggling to move above 1750, last visited in mid-November. Once again, momentum is stalling and ability to stay above $1610 can provide clue on overall buyers’ appetite.
DXY – US Dollar Index [79.11] – Remains in an intermediate-term uptrend as it trades above its 200-day moving average. The dollar is setting up to strengthen in the near-term.
US 10 Year Treasury Yields [1.98%] – For over a month, sitting in a narrow range between 1.80%-2.20%. Until further macro catalysts, this pattern should continue to hold.
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.
Suspenseful set-up
After a strong run in global stock markets and improvements in US labor results, the credibility of this ongoing recovery faces a suspenseful and eager crowd. The sustainability of a cheerful stock market raises few additional near-term questions. Since October 2011, the uneasy investor feeling showed signs of relative calmness, as showcased by a significant decline in volatility and markup in prices of risky assets. Ironically, it was around early fall 2011, when bad news became exhausted as the gloom and doom estimates appeared too extreme. In fact, claims of European collapse seemed far-fetched and evidence of great depression-like traits were not conclusive.
In other words, the skeptic crowd grew into a larger audience from summer to fall 2011 before losing steam in the past four months. At the same time, the optimistic group is charged up so far in 2012, and will continue to loudly gain further confidence for months ahead. Interestingly enough, both extreme crowds are stubborn in their views but maintain equally high conviction levels. However, the cool-headed outside observer might see a pending period of neutrality. Chart observers are quick to point out that the S&P 500 index is nearing and needing a mild breather at current levels. After all, it’s only natural to have price corrections as it provides a period for all to digest the dislocation between reality and perception. Importantly, assessing risk in sensitive periods is too tricky, and filtering headlines is vital for a better market read. Now, there is a desperate yet nagging desire to decipher the next macroeconomic catalyst.
Reigniting
Much of the last three years has seen a focus on policymakers’ implementation of stimulus-driven resolutions. Now capital allocators are not quite convinced by the proposed government-driven solutions while pondering the prospects of further quantitative easing. Similarly, it’s unclear if the labor number improvements are tangible rather than a clever presentation of economic data. Obviously, the magnitude of economic recovery will determine further talks of Federal Reserve stimulus efforts, while reigniting familiar and passionate debates. The mysterious part of both policymaking and crisis aversion should entice speculators to make bold moves. Basically, the doubt element related to governance risk will persist, especially as financial services reform remains a top priority. Simply put, that’s the new reality that investors will have to accept rather than fight.
Near-term challenges
The multi-month positive performance does not necessarily demonstrate that money managers are buying aggressively or showing signs of complacency. Yet those purchasing shares of US assets since last quarter are looking to hedge or take some profits in days ahead. Investors who strive in periods of high turbulence have been desperately waiting on the sidelines. Thus, volatility traders are too eager to unleash and participate in wild swings. Meanwhile, bargain hunters and value seekers will have to stay focused on selective entry points while not losing perspective of the big picture. Discipline, more often than not, has proved to be more rewarding than chasing short-term trends.
Article Quotes:
“About 11 per cent of the world’s people are over 60 at the moment. In the next 25 years that will double, to almost a fifth, and one in six of those people will be over 80, according to a forthcoming book, Global Aging in the 21st Century, by sociologists Susan McDaniel of the University of Lethbridge and Zachary Zimmer of the University of California. While this is affecting every country and region – even sub-Saharan Africa is now seeing a very fast rise in its proportion of seniors – some countries are being hit very hard. While 12 per cent of Chinese are now over 60, in two decades, there will be more than 28 per cent. Brazil faces a similar blow. It will be very difficult for countries that are only just emerging from poverty to suddenly face huge elder-care costs. Peak people will be an age when jobs compete for workers rather than vice versa. The cheapest labour will vanish. We’re already seeing this: Because China is aging very fast, its dwindling working-age population is turning down the lowest-paid jobs and pushing up the minimum wage sharply, as well as the once-minimal costs of social services: Stuff from China will stop being cheap, because the Chinese aren’t young.” (The Globe & Mail, February 11, 2012)
“And as David Rothkopf points out in his incisive and timely new book, Power Inc, the pendulum has swung sharply from public to corporate in the last generation. That has changed the character of the US economy. ‘In the past there was a tight connection between economic growth leading to jobs creation, which in turn led to broad wealth creation,’ Mr. Rothkopf says. ‘Those links no longer seem to work.’ While profits have been soaring for the past two years, the US economy is now beginning to add enough jobs to reduce the headline rate. But at this speed it will still take until 2020 to restore those lost since 2007 and make up for population growth. For a small share of Americans, strong income growth is back. But for most of those now finding jobs, wages are well below the starting salaries in previous recoveries. ‘Two-tier’ corporations, such as Caterpillar and Chrysler, which hire new people on less than half the wages of older ones and with fewer benefits, are becoming typical.” (Financial Times, February 12, 2012)
Levels:
S&P 500 Index [1342.64] – Stalling around 1350, a level that triggered sell-offs in May and July 2011. Once again, that key level is being tested and setting the psychological barometer.
Crude [$98.67] – Hardly any significant movement the last 50 days. A tight trading range between $96-102.
Gold [$1711.50] –Struggling to move above 1750, last visited in mid-November. Once again, momentum is stalling and ability to stay above $1610 can provide clue on overall buyers’ appetite.
DXY – US Dollar Index [79.11] – Remains in an intermediate-term uptrend as it trades above its 200-day moving average. The dollar is setting up to strengthen in the near-term.
US 10 Year Treasury Yields [1.98%] – For over a month, sitting in a narrow range between 1.80%-2.20%. Until further macro catalysts, this pattern should continue to hold.
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, February 06, 2012
Market Outlook | February 6, 2012
“Logic: The art of thinking and reasoning in strict accordance with the limitations and incapacities of the human misunderstanding.” (Ambrose Bierce 1842 –1913)
An awakening
Recent market moves have awakened investors from the dull and fearful mindsets. A minor rejuvenation in confidence is leading to second thoughts from those who were deeply awaiting a market collapse. Europe remains essential to the global economy, as the anticipated worst case scenarios serve as a negotiation tactic than a proven fact. Similarly, the much talked about “hard-landing” in China feels like a popular and convenient opinion that lingers from the overly fear biased estimates. At the same time, it appears too early to declare a unanimous bull market across key economies.
Not good enough?
The stock market is smoothly pointing to a positive multi-month trend. Headline makers were offered plenty of cheerful and noteworthy statistics this weekend. For example, the Nasdaq closed at an 11 year high and the Dow Jones index reached its best levels since May 2008. In addition, the S&P 500 index has gained over 25% rally since October 4, 2011 lows which reinforces further strength. Interestingly, the S&P downgrade of US debt, in last August is far forgotten while the historic opinion failed to cripple a recovery. Simply, the resilience of the financial system reaffirms the relative edge of America’s economy.
Even a good market performance has its shares of doubters. Improvement in labor numbers has yet to deter naysayers, who are overly focused on the politics of an election year. As expected, those invested in political circles present a conflicted and mostly self-serving view. Obviously, identifying the usual political oriented or social banter is not enough to formulate an investment plan. Now, the stubborn gloom and doom crowd may struggle to deny the increasing drivers of a positive momentum. On the other hand, over- hyping the recent moves has its dangers of overstating the collective confidence. However, most can agree that a follow through, in this recent rally has the cheerful and the gloomy observer equally waiting in a suspenseful manner.
Near-term Digestion
A breather from the upside moves is approaching in days and weeks ahead. Amazingly enough, fear, which was trading at a significant premium is now heavily discounted. Clearly, volatility is remains in a downtrend serving as a barometer of calming nerves. The current market set up may lead to some traders to take some profits or at least hedge their winnings. Nonetheless, the overall bias favors an upside move that has weary sideline observers eagerly watching for next attractive entry points.
Looming in the background, are the day to day results from European resolution efforts. Meanwhile, a better than expected outcome can extended this rally into the late spring months. The surprise element is quite alive as long as majority of money managers continue to view the unresolved Europe ending up in a collapse. In the near-term, a back and forth debate between buyers and sellers can lead to neutral trading patterns. However, the bigger picture favors a recovery and unfairly dismissing that message over the long-term can prove to be costly.
Article Quotes:
“China’s voracious appetite for energy to feed its continued economic development will become increasingly important as the state continues its transition into an industrial powerhouse. In 2009, China just barely overtook the United States as the largest consumer of energy in the world; by 2025, its energy consumption is projected to eclipse the United States by nearly 50 percent. In order to secure access to the energy resources it needs to fuel its economy, Beijing is developing a broad range of energy sources, including investments in solar technology and hydroelectric development. Yet conventional fossil fuels, China is betting, are likely to remain dominant. As a result, Beijing is developing a robust portfolio of fossil fuel resources from a variety of locations, including the Middle East, Central Asia and the South China Sea, in an effort to reduce its vulnerability from any one source. Middle East oil must transit through the Strait of Malacca, which, as Beijing is acutely aware, poses a strategic vulnerability should any state choose to compromise the sea lines of communications by blocking the strait.” (The Diplomat, February 4, 2012)
“The UK is starting to adopt some of the most aggressive US tactics, such as dawn raids on financial institutions and plea bargains, and it recently enacted a ban on bribery that is even tougher than the US foreign corrupt practices act. The eye-watering fines that companies pay in the US may also become a reality in the UK under new proposals from the solicitor general, Edward Garnier. Mr Garnier would like to introduce deferred prosecution agreements (DPAs) akin to those across the Atlantic. The US Department of Justice netted $2.3bn from 32 deferred prosecution agreements in 2010, according to statistics gathered by Gibson Dunn, the law firm. Under a DPA a company can admit wrongdoing, pay a fine and bring in independent monitors. In exchange, prosecutors agree to suspend criminal charges, allowing the company to remain on lucrative government tender lists. In theory, UK regulators and prosecutors could become more powerful than Wall Street expects. In addition to the far-reaching 2010 Bribery Act, the UK laws prohibiting insider dealing are also broader than those in the US, as Mr Einhorn discovered to his peril” (Financial Times, February 5, 2012)
Levels:
S&P 500 Index [1344.90] – Uptrend intact. Breaking out of 1350 and reaching last May highs of 1370 is the next challenge for optimist participants.
Crude [$97.84] – The commodity has yet to establish a well-defined trend above $100. However, any pullback is hardly a dent in the 12 year upside run.
Gold [$1734.00] – Moving at a slower pace in past 5 months. Buyer’s momentum for a re-acceleration is not too convincing. Nonetheless, buyers confirmed interest at $1600.
DXY – US Dollar Index [78.90] – The strong run since September has taken a minor break in the last two weeks. Interestingly, the dollar index is in-line with its 5 day moving average (78.58).
US 10 Year Treasury Yields [1.92%] – No major change in the several weeks. Attempting to stay above its new intra-day lows of 1.79% achieved on January 31, 2012.
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.
An awakening
Recent market moves have awakened investors from the dull and fearful mindsets. A minor rejuvenation in confidence is leading to second thoughts from those who were deeply awaiting a market collapse. Europe remains essential to the global economy, as the anticipated worst case scenarios serve as a negotiation tactic than a proven fact. Similarly, the much talked about “hard-landing” in China feels like a popular and convenient opinion that lingers from the overly fear biased estimates. At the same time, it appears too early to declare a unanimous bull market across key economies.
Not good enough?
The stock market is smoothly pointing to a positive multi-month trend. Headline makers were offered plenty of cheerful and noteworthy statistics this weekend. For example, the Nasdaq closed at an 11 year high and the Dow Jones index reached its best levels since May 2008. In addition, the S&P 500 index has gained over 25% rally since October 4, 2011 lows which reinforces further strength. Interestingly, the S&P downgrade of US debt, in last August is far forgotten while the historic opinion failed to cripple a recovery. Simply, the resilience of the financial system reaffirms the relative edge of America’s economy.
Even a good market performance has its shares of doubters. Improvement in labor numbers has yet to deter naysayers, who are overly focused on the politics of an election year. As expected, those invested in political circles present a conflicted and mostly self-serving view. Obviously, identifying the usual political oriented or social banter is not enough to formulate an investment plan. Now, the stubborn gloom and doom crowd may struggle to deny the increasing drivers of a positive momentum. On the other hand, over- hyping the recent moves has its dangers of overstating the collective confidence. However, most can agree that a follow through, in this recent rally has the cheerful and the gloomy observer equally waiting in a suspenseful manner.
Near-term Digestion
A breather from the upside moves is approaching in days and weeks ahead. Amazingly enough, fear, which was trading at a significant premium is now heavily discounted. Clearly, volatility is remains in a downtrend serving as a barometer of calming nerves. The current market set up may lead to some traders to take some profits or at least hedge their winnings. Nonetheless, the overall bias favors an upside move that has weary sideline observers eagerly watching for next attractive entry points.
Looming in the background, are the day to day results from European resolution efforts. Meanwhile, a better than expected outcome can extended this rally into the late spring months. The surprise element is quite alive as long as majority of money managers continue to view the unresolved Europe ending up in a collapse. In the near-term, a back and forth debate between buyers and sellers can lead to neutral trading patterns. However, the bigger picture favors a recovery and unfairly dismissing that message over the long-term can prove to be costly.
Article Quotes:
“China’s voracious appetite for energy to feed its continued economic development will become increasingly important as the state continues its transition into an industrial powerhouse. In 2009, China just barely overtook the United States as the largest consumer of energy in the world; by 2025, its energy consumption is projected to eclipse the United States by nearly 50 percent. In order to secure access to the energy resources it needs to fuel its economy, Beijing is developing a broad range of energy sources, including investments in solar technology and hydroelectric development. Yet conventional fossil fuels, China is betting, are likely to remain dominant. As a result, Beijing is developing a robust portfolio of fossil fuel resources from a variety of locations, including the Middle East, Central Asia and the South China Sea, in an effort to reduce its vulnerability from any one source. Middle East oil must transit through the Strait of Malacca, which, as Beijing is acutely aware, poses a strategic vulnerability should any state choose to compromise the sea lines of communications by blocking the strait.” (The Diplomat, February 4, 2012)
“The UK is starting to adopt some of the most aggressive US tactics, such as dawn raids on financial institutions and plea bargains, and it recently enacted a ban on bribery that is even tougher than the US foreign corrupt practices act. The eye-watering fines that companies pay in the US may also become a reality in the UK under new proposals from the solicitor general, Edward Garnier. Mr Garnier would like to introduce deferred prosecution agreements (DPAs) akin to those across the Atlantic. The US Department of Justice netted $2.3bn from 32 deferred prosecution agreements in 2010, according to statistics gathered by Gibson Dunn, the law firm. Under a DPA a company can admit wrongdoing, pay a fine and bring in independent monitors. In exchange, prosecutors agree to suspend criminal charges, allowing the company to remain on lucrative government tender lists. In theory, UK regulators and prosecutors could become more powerful than Wall Street expects. In addition to the far-reaching 2010 Bribery Act, the UK laws prohibiting insider dealing are also broader than those in the US, as Mr Einhorn discovered to his peril” (Financial Times, February 5, 2012)
Levels:
S&P 500 Index [1344.90] – Uptrend intact. Breaking out of 1350 and reaching last May highs of 1370 is the next challenge for optimist participants.
Crude [$97.84] – The commodity has yet to establish a well-defined trend above $100. However, any pullback is hardly a dent in the 12 year upside run.
Gold [$1734.00] – Moving at a slower pace in past 5 months. Buyer’s momentum for a re-acceleration is not too convincing. Nonetheless, buyers confirmed interest at $1600.
DXY – US Dollar Index [78.90] – The strong run since September has taken a minor break in the last two weeks. Interestingly, the dollar index is in-line with its 5 day moving average (78.58).
US 10 Year Treasury Yields [1.92%] – No major change in the several weeks. Attempting to stay above its new intra-day lows of 1.79% achieved on January 31, 2012.
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, January 30, 2012
Market Outlook | January 30, 2012
“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.
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 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.
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