“An intense anticipation itself transforms possibility into reality; our desires being often but precursors of the things which we are capable of performing.” (Samuel Smile 1812-1904)
Anticipation
In a decorative manner, most weekend headlines pointed out the best quarter for the S&P 500 index in over a decade. Surely, the liquid and robust equity markets reconfirmed a definitive trend of strength – a feel-good story for participants and optimistic storytellers. Interestingly, the shares of top-performing companies in the first quarter did not showcase similar traits last year. “The 50 S&P 500 stocks that were down the most in 2011 were up an average of 23.8% in the first quarter, which is by far the best of any decile.” (Bespoke March 30, 2012.). This begs the question of whether the multi-month trend is part of a suppressed buy appetite that’s catching up to not-so-bad realities. Or else, this can be characterized as a short-lived recovery from depressed ranges. Momentum followers cannot easily deny improvements in economic factors, especially labor, although, when opened to interpretations, Nonetheless, in the current conditions, owning shares of US companies has its advantages, even as a short-term chatter of corrections looms around us.
Repeat Attempt
In looking ahead, the stock market’s ability to replicate winning ideas will be both scrutinized, while the gains can result in a more hyped tone. Surely, lofty expectations are being set while curiosities re-emerge in pondering if these winnings extend toward the year’s end. Much of the strength in US equities appears solid from historical patterns, and in some metrics it echoes a ‘90s-like bull market after a nearly 13% rise in the S&P 500 Index. Yet, it is not quite viewed in the same manner by all. Skeptical mindsets may not accept this fact of positive momentum (in stocks and labor numbers) despite the declining Euro-zone realities. At this point, European concerns are too persistent to vanish, as Spain’s economy stands to reignite familiar shock waves in the near-term.
Enigma
Meanwhile, as usual in recent years, the global attention finds a way to wait in suspense on the Chinese growth rate. In terms of sentiment, investors have realized the slowdown, whether in GDP or attitudes by policymakers, to prevent overheating. So far this year, the Chinese broad index (FXI) has underperformed when compared to other emerging markets. For bargain hunters, Chinese stocks may remain appealing, especially if improvements in manufacturing numbers. However, the decade-old (conventional) investor mindset has to wonder on the potential rewards of owning state-run companies offering attractive returns. Some bank analysts are slowly raising estimates in Chinese growth, which is contrarian for now and requires a follow-through. Yet, the sustainability of near-term recovery has implications on sentiment related to commodities and other nations tied to the Chinese economy. However, betting on a slowing China is not a new event, so perhaps upside surprise should not be easily dismissed.
Impactful
A sense of stability is forming in establishing a low-rate environment, which resulted in lower volatility and increased relative comfort. Policymakers for now have successfully calmed participants’ nerves, at least for a little while. The low rate continues to expand into key developed countries as this trend is led by the US and characterized by some as “currency wars”. Predicting changes to for further easing plans may leave managers scrambling and speculating on the dollar and interest rate policies. Both a mega driver of macro themes impacting the perception of commodity and currency pricing while distinguishing the interests between emerging and developed markets. When considering these points, another reason for more capital inflow into US Equities especially if the alternatives globally continue is be overly limiting.
Quotes:
"Here’s another facet of a Chinese slowdown: its role as an importer. The longstanding notion of China as the world’s exporter is beginning to look a bit dated, argues Tao Wang, UBS’ China economist. Recent data shows imports have risen while exports have fallen, and Tao says China’s import power should not be underestimated: ‘For one thing, China’s imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011. Also, as the numerous stories in financial newspapers can testify, China has become an increasingly important market for investment goods and certain high end consumer goods.’ 0.6 percentage points of Germany’s 3 per cent GDP growth for 2011 — or, about a fifth — was courtesy of its exports to China. Well, it probably helped Germany to reduce reliance on exporting to its fellow eurozone members. There’s a certain irony here in that Germany is simultaneously importing less from some eurozone peripherals, to a degree that could be harming their prospects of recovery. Meanwhile, Chinese imports also contributed to 0.1 percentage points of the US’ 1.7 per cent GDP growth in 2011. Not much of a small number, but not insignificant either — almost 6 per cent of US GDP growth. So, no wonder US companies are becoming increasingly worried about a Chinese slowdown. (Financial Times, March 26, 2012)
“To see the future of oil, consider the present of natural gas. Until recently, many thought the West was running out of gas — most of the easily accessible natural gas finds were being depleted, making the West reliant on ever more distant, ever more difficult reserves to exploit. The U.S., the world’s biggest natural gas importer, began to build ports to receive liquefied natural gas from distant continents in the expectation that it couldn’t import enough from Canada and Mexico. Then everything flipped. New technologies emerged to extract gas from shale and other rock formations. Because these so-called unconventional technologies — fracking is the best known among them — proved cheaper than obtaining gas from the harder-to-find “conventional” sources, and because shale gas is plentiful, the unconventional became the norm. Thanks to fracking, the U.S. has suddenly become the world’s largest producer of natural gas, creating a massive glut that has more than halved the price of natural gas. Those liquefied natural gas ports that the U.S. was building to import gas will now be used to export gas.” (Lawrence Solomon, Financial Post, March 30, 2012)
Levels:
S&P 500 Index [1408.47] – After reaching annual intra-day highs of 1419.15, the index closed at the higher end of a multi-month range. Currently trading 11% above the 200-day moving average.
Crude [$103.02] – Despite notable acceleration this year, crude has struggled to surpass the $107 range on numerous occasions. Further evidence is needed to justify the recent moves.
Gold [$1662.50] – Sideways pattern continues, as buyers have not shown enough demand to propel the commodity into new highs. Mostly, trading back and forth between $1600-1700.
DXY – US Dollar Index [79.00] – Barley moving, which comes as no surprise in recent months.
US 10 Year Treasury Yields [2.20%] – Pausing from recent acceleration. Surpassing the 2.40% range remains a challenge.
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, April 02, 2012
Monday, March 26, 2012
Market Outlook | March 26, 2012
“Our imagination is the only limit to what we can hope to have in the future” -Charles F. Kettering (1883-1931)
Seasonal Reevaluation
Like seasonal changes, there is suspense and excitement circling around markets. Since the fall, broad indexes have proved to be less turbulent and led to steadily rising equity markets. Now this comforting trend faces a period of further questioning and potential readjustment, despite the strong bullish statement in the past six months. For buyers, the weeks ahead offer a chance to examine or to take profits or hold off on further buying. Meanwhile, sideline observers eager to enter have reawakened to the lack of liquid alternatives and are facing the new realities. Of course, the skeptical crowd did not quite vanish completely, as each minor down day is most likely to reignite previously known tiresome worries. The end of the first quarter presents a reshuffling period for fund managers to pinpoint on assessing “value” while trying to get clarity on the meaning of risk.
Isolating key themes
Before reacting or responding to pending headline results, a breather is ¬needed. As a start, distinguishing the critical big-picture themes of the US’s relative strength versus anticipating near-term price decline is vital for participants.
First, long-term themes mostly revolve around the edge of America’s financial and legal system, which is ahead of Emerging nations and few steps ahead of Europe. Secondly, in a period where low interest rates are well established, other global policymakers are following the US strategy in attempting to “race to the bottom” in lowering rates. In turn, this has reaffirmed the strength of stocks, especially when compared to other fixed-income investments. Plus, this forces traditional fixed-income investors to reassess and look into higher yielding instruments (explore taking risks). Thirdly, overly feared macro events, such as a European crisis and China slowdown, may not end up eroding US growth as hugely as anticipated. This becomes a stronger point if economic stabilization and restoration of innovation-based sectors continues to take hold. All three points above should not be forgotten if the S&P 500 index declines 5 or 10% in the near term.
Thinking ahead
At the same time, the post-2008 era created hesitancy over stock market stability and opened some desire for alternatives. That trend may encourage investors to dabble int0 niche areas. However, the liquidity of US markets remains intact, despite a mini-glitch last week that was specific to one company. Surely, cumulating glitches can have bigger implications, but for now the question is around the reversal of recent low-volume trends and the continuation of lower volatility. A sensitive period indeed. The stakes are raised with high-profile IPOs awaiting launches, the federal reserve planning to clarify the macro plans and the unveiling of recent corporate earnings results. All combine to add nerves to what has been for the most part a seamless recent uptrend. Yet, a new season and new quarter are known to test all kinds of convictions.
Article Quotes:
“First, China’s economy is overly dependent on fixed-asset investment and exports. Consumption represents only about 35 per cent of GDP, a figure well below those of developing countries such as India. The perpetuation of a production-intensive economic model owes much to inefficient capital allocation. This condition is buttressed by an illiberal and politicised financial system, as well as distorted input costs including subsidised energy and land prices. Second, one of the more troubling consequences of China’s capital-intensive growth model is that companies (and the government) have captured much of the enormous wealth generated in the last three decades at the expense of Chinese households. This dynamic is not only exacerbating an already yawning gap between the government and business elite on the one hand and the average Chinese citizen on the other; it is also repressing consumption…. Third, China’s vast regional disparities in living standards and average incomes are often likened to the contrast between different centuries. Policy makers in Beijing face the unique problem of having to deal with issues typical of both 21st-century middle-income countries and 20th-century developing countries.” (East Asia Forum, March 24, 2012)
“Accredited investors willing to invest in start-ups are simply too few to provide enough capital for young companies. My analysis of data from representative surveys of Americans reveals that venture capitalists and accredited business angels make equity investments in only about 15,000 businesses per year. But roughly 150,000 small companies receive informal investments every year. Thus, the vast majority of informal investment comes from unaccredited investors who cannot be solicited online but who learn about the investment opportunities through other means. Equity crowd funding will just improve the efficiency of this process. As anyone with a Facebook or Linked In account knows, allowing people to use online tools just facilitates interactions that people are undertaking anyway. The House bill minimizes the risks that investors face from equity crowd funding by limiting the amount of money they can lose. The bill limits investment to the lesser of $10,000 or 10 percent of the investor’s income. In what might only be described as a Washington miracle, Congress has a chance to pass bipartisan legislation to help entrepreneurs in a presidential election year.” (The American, March 22, 2012)
Levels:
S&P 500 Index [1397.11] – Near-term signs of pausing around 1400. Ablity to stay above 1350 will stir interest concerning the sustainability.
Crude [$106.87] – Recent momentum briefly stalling below $110. The multi-month upside move is creating a perception of price spikes.
Gold [$1658.00] – Struggling to break above $1750 while not dipping below $1610. An extended stalling process reflects a lack of catalysts for an upside move while lacking serious sellers. The faith of the commodity remains unsettled for weeks ahead.
DXY – US Dollar Index [79.34] – Hardly moving in recent weeks while remaining near all-time lows, suggesting the deprecating dollar has not changed significantly.
US 10 Year Treasury Yields [2.23%] – Although there has been much chatter of rising rates in recent days, the 2.40% range has served as a tough ceiling to overcome. Too early to declare a trend shift, as yields remain low.
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.
Seasonal Reevaluation
Like seasonal changes, there is suspense and excitement circling around markets. Since the fall, broad indexes have proved to be less turbulent and led to steadily rising equity markets. Now this comforting trend faces a period of further questioning and potential readjustment, despite the strong bullish statement in the past six months. For buyers, the weeks ahead offer a chance to examine or to take profits or hold off on further buying. Meanwhile, sideline observers eager to enter have reawakened to the lack of liquid alternatives and are facing the new realities. Of course, the skeptical crowd did not quite vanish completely, as each minor down day is most likely to reignite previously known tiresome worries. The end of the first quarter presents a reshuffling period for fund managers to pinpoint on assessing “value” while trying to get clarity on the meaning of risk.
Isolating key themes
Before reacting or responding to pending headline results, a breather is ¬needed. As a start, distinguishing the critical big-picture themes of the US’s relative strength versus anticipating near-term price decline is vital for participants.
First, long-term themes mostly revolve around the edge of America’s financial and legal system, which is ahead of Emerging nations and few steps ahead of Europe. Secondly, in a period where low interest rates are well established, other global policymakers are following the US strategy in attempting to “race to the bottom” in lowering rates. In turn, this has reaffirmed the strength of stocks, especially when compared to other fixed-income investments. Plus, this forces traditional fixed-income investors to reassess and look into higher yielding instruments (explore taking risks). Thirdly, overly feared macro events, such as a European crisis and China slowdown, may not end up eroding US growth as hugely as anticipated. This becomes a stronger point if economic stabilization and restoration of innovation-based sectors continues to take hold. All three points above should not be forgotten if the S&P 500 index declines 5 or 10% in the near term.
Thinking ahead
At the same time, the post-2008 era created hesitancy over stock market stability and opened some desire for alternatives. That trend may encourage investors to dabble int0 niche areas. However, the liquidity of US markets remains intact, despite a mini-glitch last week that was specific to one company. Surely, cumulating glitches can have bigger implications, but for now the question is around the reversal of recent low-volume trends and the continuation of lower volatility. A sensitive period indeed. The stakes are raised with high-profile IPOs awaiting launches, the federal reserve planning to clarify the macro plans and the unveiling of recent corporate earnings results. All combine to add nerves to what has been for the most part a seamless recent uptrend. Yet, a new season and new quarter are known to test all kinds of convictions.
Article Quotes:
“First, China’s economy is overly dependent on fixed-asset investment and exports. Consumption represents only about 35 per cent of GDP, a figure well below those of developing countries such as India. The perpetuation of a production-intensive economic model owes much to inefficient capital allocation. This condition is buttressed by an illiberal and politicised financial system, as well as distorted input costs including subsidised energy and land prices. Second, one of the more troubling consequences of China’s capital-intensive growth model is that companies (and the government) have captured much of the enormous wealth generated in the last three decades at the expense of Chinese households. This dynamic is not only exacerbating an already yawning gap between the government and business elite on the one hand and the average Chinese citizen on the other; it is also repressing consumption…. Third, China’s vast regional disparities in living standards and average incomes are often likened to the contrast between different centuries. Policy makers in Beijing face the unique problem of having to deal with issues typical of both 21st-century middle-income countries and 20th-century developing countries.” (East Asia Forum, March 24, 2012)
“Accredited investors willing to invest in start-ups are simply too few to provide enough capital for young companies. My analysis of data from representative surveys of Americans reveals that venture capitalists and accredited business angels make equity investments in only about 15,000 businesses per year. But roughly 150,000 small companies receive informal investments every year. Thus, the vast majority of informal investment comes from unaccredited investors who cannot be solicited online but who learn about the investment opportunities through other means. Equity crowd funding will just improve the efficiency of this process. As anyone with a Facebook or Linked In account knows, allowing people to use online tools just facilitates interactions that people are undertaking anyway. The House bill minimizes the risks that investors face from equity crowd funding by limiting the amount of money they can lose. The bill limits investment to the lesser of $10,000 or 10 percent of the investor’s income. In what might only be described as a Washington miracle, Congress has a chance to pass bipartisan legislation to help entrepreneurs in a presidential election year.” (The American, March 22, 2012)
Levels:
S&P 500 Index [1397.11] – Near-term signs of pausing around 1400. Ablity to stay above 1350 will stir interest concerning the sustainability.
Crude [$106.87] – Recent momentum briefly stalling below $110. The multi-month upside move is creating a perception of price spikes.
Gold [$1658.00] – Struggling to break above $1750 while not dipping below $1610. An extended stalling process reflects a lack of catalysts for an upside move while lacking serious sellers. The faith of the commodity remains unsettled for weeks ahead.
DXY – US Dollar Index [79.34] – Hardly moving in recent weeks while remaining near all-time lows, suggesting the deprecating dollar has not changed significantly.
US 10 Year Treasury Yields [2.23%] – Although there has been much chatter of rising rates in recent days, the 2.40% range has served as a tough ceiling to overcome. Too early to declare a trend shift, as yields remain low.
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, March 19, 2012
Market Outlook | March 19, 2012
"History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them" B. R. Ambedkar (1891-1956)
Resilience
Dismissing the political banter and shortsighted stalemates, the US stock market is restoring its bull form. It takes time to alter the fear-driven mindsets, as the real economy is adjusting to a recovery that’s hard to gauge through an eyeball test. The magnitude of labor and manufacturing improvement might be hard to feel, but even analysis that accounts for political biases would confirm that the economy is better than before. “In the three months to the end of February employers added 734,000 jobs, which is the best result since April 2006 if you exclude from past figures workers hired temporarily for the federal census” (The Economist, March 17, 2012). Political egos and opinions aside, confidence restoration is quite visible.
Meanwhile, applying the word resilience to describe recent stock market strength is appropriate, especially when considering the fragile state of the financial service sector three years ago. There is some lingering stigma associated with financial firms, especially when it comes to public relations. However, that has not stopped the bank stocks from restoring value to shareholders and playing a significant role in a collective US market strength. At a quick glance, the perception-driven S&P 500 index continues to generate profits for long-term and patient buyers. These appreciations, mostly sparked by low interest rates, create an environment that’s friendly for equity owners.
Not fully sold
Generally, when buyers become too eager and cheerful, it is common for critics to build skeptical arguments stating that the run-up was "too fast, too quick" or “unsustainable,” or a warm-up to an "eventual demise." Whether these are part of clever excuses or (politically driven) fear tactics, the debate lives on. However, there is a wearisome market thesis that has dominated headlines and common chatter for months. Emotion-filled opinions have missed the rally while waiting for heavy sell-offs. Money managers know too well, you get paid for today’s market (if the price is right) and not for pondering on the great unknown of tomorrow.
Interestingly, trading volume is relatively low as exchange dynamics fail to match up with the surging broad index prices. In fact, last Monday (March 12), US markets displayed the lowest volume for the year. “Trading volume has been declining since October as customers of U.S. stock mutual funds withdrew more than $68 billion through January even as the S&P 500’s valuation has recovered by 14 percent.” (Bloomberg, March 12, 2012). Although technical patterns argue a lack of conviction, the low volume might suggest more participation ahead. In other words, lack of alternative investment options should drive rotation into stock markets for months ahead.
Vibrant
Are early autumn buyers satisfied with accumulated gains or ready to cash in during the upcoming weeks? For now, given the lack of undiscovered reasons (or risks) to sell, there is a case for riding this trend. Some ask, are there enough buyers for significant selling? At this point, not enough, since the process of forming a bubble takes time and needs widespread participation. Plus, investor appetite for doomsday scenarios and skeptical views has not vanished completely. Therefore, more discussions of a 2008-like crisis appear to be feared by many, which ironically ends up benefiting buyers. In other words, the lack of a major surprise element of expecting downward moves actually lessens the odds for a dramatic sell-off. We’re in a period of overemphasis of risk management, pondering of further financial regulations and fear of US market leadership. Perhaps, these three might be overblown. Apparently, the real fear should be channeled to missing growth opportunities that resurface here and there. Simply, failure to adjust to new market conditions is painful in most cycles.
Article Quotes:
“The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA). Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods – things like food, clothing and toys – purchased in the U.S. are made in China; 76.2% are made in America. For durable goods – things like cars and furniture – 12% are made in China; 66.6% are made in America. Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. imported $399 billion worth of goods from China last year, which is 2.7% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.” (The Motley Fool, February 12, 2012)
“People in the West want to believe that China's economy will go on growing fast because the fragile recovery in Western economies depends on it. Twenty years of 10 percent-plus annual growth have made China the engine of the world economy, even though most Chinese remain poor. But the engine is fuelled by cheap credit, and most of that cheap money, as usual, has gone into real estate. Take the city of Wuhan, southwest of Shanghai and about 500 km in from the coast. It is only China's ninth-largest city, but in addition to a skyscraper half again as high as the Empire State Building it is currently building a subway system that will cost $45 billion, two new airports, a whole new financial district, and hundreds of thousands of new housing units. It is paying for all this with cheap loans from state-run banks. Last year Wuhan municipality spent $22 billion on infrastructure and housing projects although its tax revenues were only one-fifth of that amount. The bank loans were made to special investment corporations and do not appear on the city's books. The only collateral the banks have is city-owned land, and that is not a reliable asset in current circumstances.” (Japan Times, March 15, 2012)
Levels:
S&P 500 Index [1404.17] – Achieving new multi-year highs, as the positive momentum continues to build. Staying above 1400 is a near-term challenge, but strength confirmed.
Crude [$107.06] – Several months of a positive trend continues, although a break above $110 can trigger the next-wave move.
Gold [$1658.00] – Neutral pattern established between $1610-$1750. Several catalysts needed to determine if buyers’ demand reignites at current levels. In the last 6 months, enthusiasm has waned.
DXY – US Dollar Index [79.78] – Mostly unchanged week over week, but significantly up since the summer lows around 72.
US 10 Year Treasury Yields [2.02%] – A significant spike last week from the usual “2%” range. Surpassing the 2.41% range is the next noteworthy point for trend followers.
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.
Resilience
Dismissing the political banter and shortsighted stalemates, the US stock market is restoring its bull form. It takes time to alter the fear-driven mindsets, as the real economy is adjusting to a recovery that’s hard to gauge through an eyeball test. The magnitude of labor and manufacturing improvement might be hard to feel, but even analysis that accounts for political biases would confirm that the economy is better than before. “In the three months to the end of February employers added 734,000 jobs, which is the best result since April 2006 if you exclude from past figures workers hired temporarily for the federal census” (The Economist, March 17, 2012). Political egos and opinions aside, confidence restoration is quite visible.
Meanwhile, applying the word resilience to describe recent stock market strength is appropriate, especially when considering the fragile state of the financial service sector three years ago. There is some lingering stigma associated with financial firms, especially when it comes to public relations. However, that has not stopped the bank stocks from restoring value to shareholders and playing a significant role in a collective US market strength. At a quick glance, the perception-driven S&P 500 index continues to generate profits for long-term and patient buyers. These appreciations, mostly sparked by low interest rates, create an environment that’s friendly for equity owners.
Not fully sold
Generally, when buyers become too eager and cheerful, it is common for critics to build skeptical arguments stating that the run-up was "too fast, too quick" or “unsustainable,” or a warm-up to an "eventual demise." Whether these are part of clever excuses or (politically driven) fear tactics, the debate lives on. However, there is a wearisome market thesis that has dominated headlines and common chatter for months. Emotion-filled opinions have missed the rally while waiting for heavy sell-offs. Money managers know too well, you get paid for today’s market (if the price is right) and not for pondering on the great unknown of tomorrow.
Interestingly, trading volume is relatively low as exchange dynamics fail to match up with the surging broad index prices. In fact, last Monday (March 12), US markets displayed the lowest volume for the year. “Trading volume has been declining since October as customers of U.S. stock mutual funds withdrew more than $68 billion through January even as the S&P 500’s valuation has recovered by 14 percent.” (Bloomberg, March 12, 2012). Although technical patterns argue a lack of conviction, the low volume might suggest more participation ahead. In other words, lack of alternative investment options should drive rotation into stock markets for months ahead.
Vibrant
Are early autumn buyers satisfied with accumulated gains or ready to cash in during the upcoming weeks? For now, given the lack of undiscovered reasons (or risks) to sell, there is a case for riding this trend. Some ask, are there enough buyers for significant selling? At this point, not enough, since the process of forming a bubble takes time and needs widespread participation. Plus, investor appetite for doomsday scenarios and skeptical views has not vanished completely. Therefore, more discussions of a 2008-like crisis appear to be feared by many, which ironically ends up benefiting buyers. In other words, the lack of a major surprise element of expecting downward moves actually lessens the odds for a dramatic sell-off. We’re in a period of overemphasis of risk management, pondering of further financial regulations and fear of US market leadership. Perhaps, these three might be overblown. Apparently, the real fear should be channeled to missing growth opportunities that resurface here and there. Simply, failure to adjust to new market conditions is painful in most cycles.
Article Quotes:
“The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA). Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods – things like food, clothing and toys – purchased in the U.S. are made in China; 76.2% are made in America. For durable goods – things like cars and furniture – 12% are made in China; 66.6% are made in America. Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. imported $399 billion worth of goods from China last year, which is 2.7% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.” (The Motley Fool, February 12, 2012)
“People in the West want to believe that China's economy will go on growing fast because the fragile recovery in Western economies depends on it. Twenty years of 10 percent-plus annual growth have made China the engine of the world economy, even though most Chinese remain poor. But the engine is fuelled by cheap credit, and most of that cheap money, as usual, has gone into real estate. Take the city of Wuhan, southwest of Shanghai and about 500 km in from the coast. It is only China's ninth-largest city, but in addition to a skyscraper half again as high as the Empire State Building it is currently building a subway system that will cost $45 billion, two new airports, a whole new financial district, and hundreds of thousands of new housing units. It is paying for all this with cheap loans from state-run banks. Last year Wuhan municipality spent $22 billion on infrastructure and housing projects although its tax revenues were only one-fifth of that amount. The bank loans were made to special investment corporations and do not appear on the city's books. The only collateral the banks have is city-owned land, and that is not a reliable asset in current circumstances.” (Japan Times, March 15, 2012)
Levels:
S&P 500 Index [1404.17] – Achieving new multi-year highs, as the positive momentum continues to build. Staying above 1400 is a near-term challenge, but strength confirmed.
Crude [$107.06] – Several months of a positive trend continues, although a break above $110 can trigger the next-wave move.
Gold [$1658.00] – Neutral pattern established between $1610-$1750. Several catalysts needed to determine if buyers’ demand reignites at current levels. In the last 6 months, enthusiasm has waned.
DXY – US Dollar Index [79.78] – Mostly unchanged week over week, but significantly up since the summer lows around 72.
US 10 Year Treasury Yields [2.02%] – A significant spike last week from the usual “2%” range. Surpassing the 2.41% range is the next noteworthy point for trend followers.
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, March 12, 2012
Market Outlook | March 12, 2012
“Doubt is not a pleasant condition but certainty is an absurd one.” Voltaire (1694-1778)
Hard to deny:
The multi-month uptrend in stock prices and improvement in labor numbers continues yet again . As gloom and doomers ease off from the ugly script, current economic numbers are in line with expectations. The mindset is slowly changing to the point where upside estimates are not viewed as a dramatic revelation but as moderate growth. Yet these rosy pictures are not enough to cleanse numerous doubts resurfacing from investment committees and spectators. In other words, some financial circles view further good news as already ‘priced into’ market pricing. Meanwhile, as political observers remind us, the race to election season has its influences on shaping perception. It’s only natural to expect that, but politics aside, the strength is quite visible despite lukewarm participation and low exchange volume.
This weekend, few headlines reminded us of the 3-year-old anniversary of this bull market in the US stock market. After all, March 2009 seemed bleak, following bailouts and escalating fears at alarming rates. Surely, near-term memories are tricky and often biased to selective memories. The main question remains: How much confidence restoration is left ahead? A question that strategists are wrestling with while weighing the justifications for adding or decreasing risk. Anticipating pullbacks has been a common form of thinking for several months, and that has yet to come to fruition. Interestingly, markets are not too friendly for common thinking, and a daring approach has its rewards. Despite the fear of stock prices rising too quickly , there is another perspective:
“Nine quarters of earnings growth have outpaced the index’s advance, leaving valuations 14 percent below the five-decade average of 16.4. The price-earnings ratio hasn’t been this low while the index was at a 52-week high in 23 years” (Bloomberg, March 5, 2012)
Next set of worries:
There is a consensus and established theme resurfacing. It circles around restructuring in Europe, recovering in America and potential overheating in emerging markets. Clearly, these are interlinked economies, but at different stages of a cycle. In fact, factors impacting these trends are at the core of decision makers’ minds. In the near-term, the sustainable growth in emerging markets is a wildcard and sparks thought-provoking debates. Plenty of pundits have waited for a while for a slowing grow rate in China and Brazil. These realizations beg for further confirmation and require investors to adjust expectations from last decade’s capital allocation. As usual, worry of rude awakening lingers in the psyche of risk managers. As we’ve learned in recent years, when cycle shifts take place, it takes time after early shocks to readjust. Thus, deciphering the real GDP in China and assessing the sustainability might provide the essential clue to this decade’s trends. Last week, China set its GDP target at 7.5% (in real term) for 2012, showcasing a scaled-down expectation not seen in several years.
More to go:
However, confidence in developed markets’ growth is not overwhelmingly comforting, either. Perhaps, from all developed markets, America’s strength has not vanished and is poised to stand out. Fund managers seeking moderate returns with attractive liquidity can cling on to the well-known and established US financial system. As hard as it may be for outside observers, the relative strength of large US companies’ growth is appealing and not fully appreciated.
Article Quotes:
“Take Brazil. Were managers rewarded with a quintupling of its stock market over the last decade because they cleverly spotted structural reforms? Or were they simply lucky to invest in Brazil during a period of falling global interest rates and the mother of all commodity booms? They will never know. What can be said, however, is that the amazing set of circumstances that helped many emerging markets to prosper may be nearing the end. Brazil’s gross domestic product grew just 2.7 per cent last year, its second-worst performance in almost a decade. Only by pumping the economy in the fourth quarter (aided by a 275 basis point cut in benchmark interest rates by the central bank since July) did the newish government avoid presiding over a technical recession. All of which is taking the fizz out of stocks. The local Bovespa index is flat over 12 months and, after leaping about like float dancers during carnival, many of Brazil’s biggest stocks, such as Vale, PDG Realty and Itau Unibanco, are roughly where they were four years ago. Petrobras shares are the same price now as at the end of 2005.” (Financial Times, March 9, 2012)
“Congress seems comfortable with this reduced role. We don't realize that by authorizing entitlement programs – perpetual mandatory spending – and hiding some of our biggest expenditures in unaccountable tax loopholes, we have diminished our constitutional duty to appropriate funds (Art. I, Sec. 9). In fact, we hide our biggest problems by keeping them off-budget, exempting ourselves from normal accounting rules. Congress has legalized its own budget blindness. Very few legislators have ever had to eat their own cooking, to run a business governed by the cumulative weight of the laws and regulations they supported. The most famous example is George McGovern who, after years as a liberal U.S. Senator from South Dakota and an unsuccessful presidential campaign, retired to run an inn in Connecticut. He wrote an article for The Wall Street Journal decrying all the useless regulations that burdened his business. This, of course, delighted his conservative critics but did nothing to lighten the regulatory burden.” (The Atlantic, March 8, 2012 -Jim Cooper is a Congressman in the U.S. House of Representatives)
Levels:
S&P 500 Index [1370.87] – Nearly unchanged from last week’s close. March 2, 2012 highs of 1378 remain intra-day highs. Buyers’ conviction tested above 1300, given the strong multi-month run.
Crude [$107.40] – New trading range forming above $105.00. More than a five-month trend of price appreciation. Observers await a revisit to last May’s highs around $114.83 to confirm the strength.
Gold [$1687.50] – Several evidences of waning buy demand around $1750. From previous patterns, some suggestions of buyers around $1600. A clearer picture to this setup requires some time.
DXY – US Dollar Index [80.04] – Hovering around an all-too-familiar point. The 50- and 5-day moving averages are around 79.00 showcasing the lack of major movements.
US 10 Year Treasury Yields [2.02%] – In the last 100 days, an established range between 1.80% and little above 2%. Confirmation of lack of movement in either direction while being stuck around all-time lows.
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.
Hard to deny:
The multi-month uptrend in stock prices and improvement in labor numbers continues yet again . As gloom and doomers ease off from the ugly script, current economic numbers are in line with expectations. The mindset is slowly changing to the point where upside estimates are not viewed as a dramatic revelation but as moderate growth. Yet these rosy pictures are not enough to cleanse numerous doubts resurfacing from investment committees and spectators. In other words, some financial circles view further good news as already ‘priced into’ market pricing. Meanwhile, as political observers remind us, the race to election season has its influences on shaping perception. It’s only natural to expect that, but politics aside, the strength is quite visible despite lukewarm participation and low exchange volume.
This weekend, few headlines reminded us of the 3-year-old anniversary of this bull market in the US stock market. After all, March 2009 seemed bleak, following bailouts and escalating fears at alarming rates. Surely, near-term memories are tricky and often biased to selective memories. The main question remains: How much confidence restoration is left ahead? A question that strategists are wrestling with while weighing the justifications for adding or decreasing risk. Anticipating pullbacks has been a common form of thinking for several months, and that has yet to come to fruition. Interestingly, markets are not too friendly for common thinking, and a daring approach has its rewards. Despite the fear of stock prices rising too quickly , there is another perspective:
“Nine quarters of earnings growth have outpaced the index’s advance, leaving valuations 14 percent below the five-decade average of 16.4. The price-earnings ratio hasn’t been this low while the index was at a 52-week high in 23 years” (Bloomberg, March 5, 2012)
Next set of worries:
There is a consensus and established theme resurfacing. It circles around restructuring in Europe, recovering in America and potential overheating in emerging markets. Clearly, these are interlinked economies, but at different stages of a cycle. In fact, factors impacting these trends are at the core of decision makers’ minds. In the near-term, the sustainable growth in emerging markets is a wildcard and sparks thought-provoking debates. Plenty of pundits have waited for a while for a slowing grow rate in China and Brazil. These realizations beg for further confirmation and require investors to adjust expectations from last decade’s capital allocation. As usual, worry of rude awakening lingers in the psyche of risk managers. As we’ve learned in recent years, when cycle shifts take place, it takes time after early shocks to readjust. Thus, deciphering the real GDP in China and assessing the sustainability might provide the essential clue to this decade’s trends. Last week, China set its GDP target at 7.5% (in real term) for 2012, showcasing a scaled-down expectation not seen in several years.
More to go:
However, confidence in developed markets’ growth is not overwhelmingly comforting, either. Perhaps, from all developed markets, America’s strength has not vanished and is poised to stand out. Fund managers seeking moderate returns with attractive liquidity can cling on to the well-known and established US financial system. As hard as it may be for outside observers, the relative strength of large US companies’ growth is appealing and not fully appreciated.
Article Quotes:
“Take Brazil. Were managers rewarded with a quintupling of its stock market over the last decade because they cleverly spotted structural reforms? Or were they simply lucky to invest in Brazil during a period of falling global interest rates and the mother of all commodity booms? They will never know. What can be said, however, is that the amazing set of circumstances that helped many emerging markets to prosper may be nearing the end. Brazil’s gross domestic product grew just 2.7 per cent last year, its second-worst performance in almost a decade. Only by pumping the economy in the fourth quarter (aided by a 275 basis point cut in benchmark interest rates by the central bank since July) did the newish government avoid presiding over a technical recession. All of which is taking the fizz out of stocks. The local Bovespa index is flat over 12 months and, after leaping about like float dancers during carnival, many of Brazil’s biggest stocks, such as Vale, PDG Realty and Itau Unibanco, are roughly where they were four years ago. Petrobras shares are the same price now as at the end of 2005.” (Financial Times, March 9, 2012)
“Congress seems comfortable with this reduced role. We don't realize that by authorizing entitlement programs – perpetual mandatory spending – and hiding some of our biggest expenditures in unaccountable tax loopholes, we have diminished our constitutional duty to appropriate funds (Art. I, Sec. 9). In fact, we hide our biggest problems by keeping them off-budget, exempting ourselves from normal accounting rules. Congress has legalized its own budget blindness. Very few legislators have ever had to eat their own cooking, to run a business governed by the cumulative weight of the laws and regulations they supported. The most famous example is George McGovern who, after years as a liberal U.S. Senator from South Dakota and an unsuccessful presidential campaign, retired to run an inn in Connecticut. He wrote an article for The Wall Street Journal decrying all the useless regulations that burdened his business. This, of course, delighted his conservative critics but did nothing to lighten the regulatory burden.” (The Atlantic, March 8, 2012 -Jim Cooper is a Congressman in the U.S. House of Representatives)
Levels:
S&P 500 Index [1370.87] – Nearly unchanged from last week’s close. March 2, 2012 highs of 1378 remain intra-day highs. Buyers’ conviction tested above 1300, given the strong multi-month run.
Crude [$107.40] – New trading range forming above $105.00. More than a five-month trend of price appreciation. Observers await a revisit to last May’s highs around $114.83 to confirm the strength.
Gold [$1687.50] – Several evidences of waning buy demand around $1750. From previous patterns, some suggestions of buyers around $1600. A clearer picture to this setup requires some time.
DXY – US Dollar Index [80.04] – Hovering around an all-too-familiar point. The 50- and 5-day moving averages are around 79.00 showcasing the lack of major movements.
US 10 Year Treasury Yields [2.02%] – In the last 100 days, an established range between 1.80% and little above 2%. Confirmation of lack of movement in either direction while being stuck around all-time lows.
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, March 05, 2012
Market Outlook | March 5, 2012
“The Excellency of every art is its intensity, capable of making all disagreeable evaporate.” (John Keats, 1795-1821)
Strength:
Momentum continues to favor a recovery in traditional markets. Enticing further buyers at this junction presents few challenges, given the extended chart patterns and loud screams from naysayers emphasizing caution. Yet, those looking to deploy capital investments lack many alternatives for investment exposure. For some capital allocators, importance is placed on having liquidity. Plus, the mindset of decision-makers is plagued with safety, even after a 27% move in the S&P 500 index since October 2011. Interestingly, there is a wishful crowd out there seeking higher growth, like returns, while not willing to risk much — simply not a practical expectation by many. Ongoing adjustments in desired returns will be required. This tuning of expected returns should drive more capital into known indexes and provide a further boost to the existing run.
Similarly, observers waited for strong pullbacks as a buy point, but that’s not been the case. Anticipating day-to-day, news-sensitive items omits the relative strength of the US markets. Dwelling on future unintended consequences may result in failing to spot the vital trading points. Motivated investors lurk to chase yields and remain willing to expand exposure beyond US equities and Treasuries. After all, the shaken confidence of the last few years does not impede the natural hunt for higher returns, not to mention the pent-up demand. Perhaps, intense eagerness is what drove markets higher at a faster pace so far this year. Big down days have not been visible thus far, which reiterates strength rather than irrational buying. Intense success is not to be feared but carefully cherished, and that’s the message from broad markets showing resilience.
Scarcity:
Today’s lack of options in the known and trusted investable asset signals the need to expand into illiquid assets, especially for larger fund managers. For example, direct asset purchasing is appealing due to a shortage of soft commodities. On that note, farmland investments are an attractive theme, given increasing food demand and positive set-up favoring agricultural-based commodities. A trend applicable in developed and frontier markets that presents a risk and reward is not to be overlooked by traditional asset managers. “In Illinois, specifically, high quality farm land also has surged in value, rising by about 27 percent in the last two years, from $7,500 an acre in January 2010 to $9,500 an acre in January 2012” (Kane County Chronicle, February 29, 2012).
Meanwhile, Chinese investment in African farmland is noteworthy and plays a key role in the flow of money. It reflects the demographics trends of China demanding more food while restating the perceived shortage of food as witnessed in the last decade. In the big picture, the European and credit markets’ recovery take some time. However, yield-seekers are left to explore tangible assets that fit longer-term trends. Importantly, these transactions do not end up benefiting from strength in overall liquid markets.
Rate Driven
Amidst the scramble for investment ideas, the low interest rate policies provide a definitive picture compared to other macro factors. Policies leading to lower rates are debated from all angles, but surly set the tone for analysts mapping out a three-to five-year plan. Partially, this is exhibited in calming volatility, as the central banks have clearly stated and remarked that low rates are here stay. Surely, assessing political and legal risk is too noisy to grasp now, with election uncertainty. However, those putting capital to work recognize the limitations in the reward of going against the Federal Reserve’s objections. Perhaps, a collective appreciation in hard and soft assets is a trend to follow. Surely dwelling on risk aversion may interest observers, but that approach is subsiding until the next pause. Interestingly, even if a downtrend begins to persist, then the safety net of further Fed easing is perceived to add confidence, as well. For now, stimulus efforts are working and interest rate directions are less mysterious.
Article Quotes:
“It is not so much that the Chinese eat more when they move to the cities. It is rather the composition of their diets which changes. They simply consume more animal proteins. Between 1994 and 2009, the Chinese effectively doubled their meat consumption from about 35 kilograms per annum to approximately 70 kilograms. … The United States, New Zealand and Australia are the heaviest meat eaters in the world with an average annual per capita consumption of about 110 kilograms. As the poor get wealthier, they will want more protein – mainly chicken, pork and beef. Converting a grain rich diet to a more protein rich diet will increase overall demand for grain significantly as livestock is inefficient in terms of converting grain to energy. It takes 2-3 kilograms of grain to produce 1 kilogram of chicken, about 4 kilograms of grain to produce 1 kilogram of pork and as much as 7-8 kilograms of grain to produce 1 kilogram of beef. Hence, if the average daily calorie consumption grows by 30% between now and 2030 as projected, demand for grain will grow by a multiple of that.” (Credit Writedowns, March 2, 2012)
“One thing is abundantly clear, however. The German economy has powered far ahead of France’s, and the gap is widening every year. Germany has maintained its industrial base and competitive edge, both technologically and in terms of cost, while France lacks a large sector of medium-size industrial enterprises and depends much more on services. The French share of global exports has steadily fallen, while the German share has steadily risen. French salaries have increased in real terms while German salaries have fallen, making French workers more expensive and thus less productive and competitive. French social protections for the unemployed are also much more lavish, especially after the Germans pushed through the so-called Hartz reforms, which largely limited unemployment benefits to 12 months. In France, the duration is 23 months for those under 50 and three years for those over 50, many of whom never work again. (New York Times, March 3, 2012)
Levels:
S&P 500 Index [1369.63] – Closed near the high end of the post-2008 recovery run. Uptrend momentum appears poised for retracements.
Crude [$106.70] – Current price levels above $105 mirror action of last spring. Strength restored and confirmed in recent months.
Gold [$1707.00] – Once again, buyers demand is questionable or neutral at around $1750. Sideways price action remains in place.
DXY – US Dollar Index [79.40] – Attempting to moderately re-accelerate. In a common trading range and in line with the 15-week moving average. Simply confirming the lack of major movement and remains in the low end of a multi-year trend.
US 10 Year Treasury Yields [1.97%] – In a very narrow range between 1.90% and 2.05%. Reinforces the point of low yields without major volatility.
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.
Strength:
Momentum continues to favor a recovery in traditional markets. Enticing further buyers at this junction presents few challenges, given the extended chart patterns and loud screams from naysayers emphasizing caution. Yet, those looking to deploy capital investments lack many alternatives for investment exposure. For some capital allocators, importance is placed on having liquidity. Plus, the mindset of decision-makers is plagued with safety, even after a 27% move in the S&P 500 index since October 2011. Interestingly, there is a wishful crowd out there seeking higher growth, like returns, while not willing to risk much — simply not a practical expectation by many. Ongoing adjustments in desired returns will be required. This tuning of expected returns should drive more capital into known indexes and provide a further boost to the existing run.
Similarly, observers waited for strong pullbacks as a buy point, but that’s not been the case. Anticipating day-to-day, news-sensitive items omits the relative strength of the US markets. Dwelling on future unintended consequences may result in failing to spot the vital trading points. Motivated investors lurk to chase yields and remain willing to expand exposure beyond US equities and Treasuries. After all, the shaken confidence of the last few years does not impede the natural hunt for higher returns, not to mention the pent-up demand. Perhaps, intense eagerness is what drove markets higher at a faster pace so far this year. Big down days have not been visible thus far, which reiterates strength rather than irrational buying. Intense success is not to be feared but carefully cherished, and that’s the message from broad markets showing resilience.
Scarcity:
Today’s lack of options in the known and trusted investable asset signals the need to expand into illiquid assets, especially for larger fund managers. For example, direct asset purchasing is appealing due to a shortage of soft commodities. On that note, farmland investments are an attractive theme, given increasing food demand and positive set-up favoring agricultural-based commodities. A trend applicable in developed and frontier markets that presents a risk and reward is not to be overlooked by traditional asset managers. “In Illinois, specifically, high quality farm land also has surged in value, rising by about 27 percent in the last two years, from $7,500 an acre in January 2010 to $9,500 an acre in January 2012” (Kane County Chronicle, February 29, 2012).
Meanwhile, Chinese investment in African farmland is noteworthy and plays a key role in the flow of money. It reflects the demographics trends of China demanding more food while restating the perceived shortage of food as witnessed in the last decade. In the big picture, the European and credit markets’ recovery take some time. However, yield-seekers are left to explore tangible assets that fit longer-term trends. Importantly, these transactions do not end up benefiting from strength in overall liquid markets.
Rate Driven
Amidst the scramble for investment ideas, the low interest rate policies provide a definitive picture compared to other macro factors. Policies leading to lower rates are debated from all angles, but surly set the tone for analysts mapping out a three-to five-year plan. Partially, this is exhibited in calming volatility, as the central banks have clearly stated and remarked that low rates are here stay. Surely, assessing political and legal risk is too noisy to grasp now, with election uncertainty. However, those putting capital to work recognize the limitations in the reward of going against the Federal Reserve’s objections. Perhaps, a collective appreciation in hard and soft assets is a trend to follow. Surely dwelling on risk aversion may interest observers, but that approach is subsiding until the next pause. Interestingly, even if a downtrend begins to persist, then the safety net of further Fed easing is perceived to add confidence, as well. For now, stimulus efforts are working and interest rate directions are less mysterious.
Article Quotes:
“It is not so much that the Chinese eat more when they move to the cities. It is rather the composition of their diets which changes. They simply consume more animal proteins. Between 1994 and 2009, the Chinese effectively doubled their meat consumption from about 35 kilograms per annum to approximately 70 kilograms. … The United States, New Zealand and Australia are the heaviest meat eaters in the world with an average annual per capita consumption of about 110 kilograms. As the poor get wealthier, they will want more protein – mainly chicken, pork and beef. Converting a grain rich diet to a more protein rich diet will increase overall demand for grain significantly as livestock is inefficient in terms of converting grain to energy. It takes 2-3 kilograms of grain to produce 1 kilogram of chicken, about 4 kilograms of grain to produce 1 kilogram of pork and as much as 7-8 kilograms of grain to produce 1 kilogram of beef. Hence, if the average daily calorie consumption grows by 30% between now and 2030 as projected, demand for grain will grow by a multiple of that.” (Credit Writedowns, March 2, 2012)
“One thing is abundantly clear, however. The German economy has powered far ahead of France’s, and the gap is widening every year. Germany has maintained its industrial base and competitive edge, both technologically and in terms of cost, while France lacks a large sector of medium-size industrial enterprises and depends much more on services. The French share of global exports has steadily fallen, while the German share has steadily risen. French salaries have increased in real terms while German salaries have fallen, making French workers more expensive and thus less productive and competitive. French social protections for the unemployed are also much more lavish, especially after the Germans pushed through the so-called Hartz reforms, which largely limited unemployment benefits to 12 months. In France, the duration is 23 months for those under 50 and three years for those over 50, many of whom never work again. (New York Times, March 3, 2012)
Levels:
S&P 500 Index [1369.63] – Closed near the high end of the post-2008 recovery run. Uptrend momentum appears poised for retracements.
Crude [$106.70] – Current price levels above $105 mirror action of last spring. Strength restored and confirmed in recent months.
Gold [$1707.00] – Once again, buyers demand is questionable or neutral at around $1750. Sideways price action remains in place.
DXY – US Dollar Index [79.40] – Attempting to moderately re-accelerate. In a common trading range and in line with the 15-week moving average. Simply confirming the lack of major movement and remains in the low end of a multi-year trend.
US 10 Year Treasury Yields [1.97%] – In a very narrow range between 1.90% and 2.05%. Reinforces the point of low yields without major volatility.
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 27, 2012
Market Outlook | February 27, 2012
“Conviction is worthless unless it is converted into conduct.” (Thomas Carlyle 1795-1881)
Positivity Justified
For a while, sellers have pointed to concerns, but the collective markets’ upward movement persists. Since October 2011, stocks have proved to be relatively attractive, despite muted cheerfulness among experts. Simply, the scoreboard is what keeps all participants honest. Plus, overall volatility remains calmer than in previous months. Secondly, an outlook of crisis, collapse and financial disaster resurfaces from idea generators, but is not fully playing out in practice.
Inaccurate Blames
This junction in the business cycle remains mysterious to some seeing improvement in the economic data and suspenseful to others who witness a rising stock market. The ongoing blame-the-Fed game, reliance on politicians or speculating on election outcomes add further theatrics but fail to paint a full picture. Plenty of myth is identifiable in the crowd engulfed with a "collapse" scenario. Similarly, clinging to feel-good bravado of invincibility is too common and tiresome, even beyond the US political arenas. In fact, this theme of deciphering a balanced view sounds too familiar to traders, much as it does for political observers.
Reading "market moving” materials easily creates a mixed message. The challenge of sorting out the data and messages from overly biased, politically driven sources intensifies in an election year. Surely, there are splits in opinions, which deviate from a required balanced view on topics such as sentiment or nature of the recovery or grasp of Americans’ edge in the global economy. Neutral observers such as money managers are paid to filter headlines while betting on high conviction that goes far beyond toxic banter.
Truth Confronted
At this point, plenty of folks have warned of a lack of overall system stability. Yet, no system is perfect, mindsets are mostly fickle and risk is not easy to assess in any market. Importantly, betting against this market for the last six months has been a losing proposition for managers and analysts. Skeptical managers are forced to readjust their global view from one-sided, fear-driven projections. Unfortunately, admitting fault by most “experts” is unfashionable and works against investors’ interests. For example, much of the worry is around sustainable corporate profits; however, the impact on markets presents a different story. “Mr. Ramsey [Leuthold Group] has studied market performance going back to 1938, and has discovered that in the 16 best years for stocks, eight actually coincided with declines in corporate earnings. And profits rose in 13 of the 16 worst years for stocks.” (New York Times, February 25, 2012).
Near-term awareness:
Pullbacks are not to be feared, as chart observers and odds-makers eagerly anticipate a slowdown. Now, the rising Crude pattern is a convenient catalyst for sellers, but observers have seen this before. Investors are witnessing a collective appreciation in asset classes, in equities as well as commodities. Clearly, there is demand for risky assets and equally, there is a lack of alternatives, given low global yields. In terms of the big picture, the shortage of investable ideas is the reoccurring theme, regardless of pending price declines. The challenge has not changed, as usual. It mostly comes down to picking the right assets while taking the risk of timing it close to “right.”
Article Quotes:
“The improper application of the theory is one of the things that fueled the spectacular growth in over-the-counter derivatives, from $60 trillion in 2000 to more than $600 trillion in 2008. This growth took place while the economists and regulators using bricks and mortar logic were arguing that derivatives distributed risk, when in fact massive amounts of derivatives concentrated risk. The fat tails played a starring role in the bankruptcy of Lehman Brothers and the $182 billion bailout of AIG. Merton's theory was right when certain assumptions held, and wrong when they were applied in an overconnected environment. … Economists, policy makers, and presidential advisors have to get it right. Their influence is so great that when they get it wrong, tragedy often ensues. As Robert Heilbroner explained in his classic book, The Worldly Philosophers, the impact of Adam Smith, Karl Marx, John Maynard Keynes, John Stuart Mill, Thorstein Veblen, and Joseph Schumpeter has been immense” (The Atlantic, February 23, 2012)
“Bond issuance in the U.S. declined in 2011 to $2.13 trillion, down from $2.56 trillion in 2011, according to Dealogic. The volume of syndicated loans rose to $1.87 trillion last year, from $1.13 trillion the year before. The shift has occurred despite the fact that rates on corporate bonds are hovering in the 3.3 percent range, near a record low....The Volcker rule and Basel III will also have unintended consequences. For example, a reduction in the inventory of bonds may spur a shift toward the use of more derivatives. ‘Asset managers already use CDSs to manage credit exposure, and in the future, they may use more CDSs as an alternative to credit,’ McPartland says. While the use of CDSs is not necessarily going to make the markets riskier, the expansion of the CDS market is hardly one of the goals of the Dodd-Frank law. The effect of boosting the CDS market is difficult to predict, especially in the event of a crisis.” (Institutional Investor, February 23, 2012)
Levels:
S&P 500 Index [1365.74] –Quickly approaching May 2011 ranges around 1370. Resumption of the upturn since March 2009.
Crude [$109.77] – A very sharp run in last few weeks. Questionable if the current run can get to $114 before exhausting.
Gold [$1777.50] – Nearing the $1800 mark set up a mixed feeling of strength and doubtful follow-through. For now, trading in a familiar trading range between $1600-1800, as seen in the last seven months.
DXY – US Dollar Index [78.35] – Short-lived dollar rally stalled in January, and that continues to be the near-term trend. Yet, the dollar index is 6% higher than its summer lows.
US 10 Year Treasury Yields [1.97%] – Once again, dropping below “2%,” which serves as an emphasis of low 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.
Positivity Justified
For a while, sellers have pointed to concerns, but the collective markets’ upward movement persists. Since October 2011, stocks have proved to be relatively attractive, despite muted cheerfulness among experts. Simply, the scoreboard is what keeps all participants honest. Plus, overall volatility remains calmer than in previous months. Secondly, an outlook of crisis, collapse and financial disaster resurfaces from idea generators, but is not fully playing out in practice.
Inaccurate Blames
This junction in the business cycle remains mysterious to some seeing improvement in the economic data and suspenseful to others who witness a rising stock market. The ongoing blame-the-Fed game, reliance on politicians or speculating on election outcomes add further theatrics but fail to paint a full picture. Plenty of myth is identifiable in the crowd engulfed with a "collapse" scenario. Similarly, clinging to feel-good bravado of invincibility is too common and tiresome, even beyond the US political arenas. In fact, this theme of deciphering a balanced view sounds too familiar to traders, much as it does for political observers.
Reading "market moving” materials easily creates a mixed message. The challenge of sorting out the data and messages from overly biased, politically driven sources intensifies in an election year. Surely, there are splits in opinions, which deviate from a required balanced view on topics such as sentiment or nature of the recovery or grasp of Americans’ edge in the global economy. Neutral observers such as money managers are paid to filter headlines while betting on high conviction that goes far beyond toxic banter.
Truth Confronted
At this point, plenty of folks have warned of a lack of overall system stability. Yet, no system is perfect, mindsets are mostly fickle and risk is not easy to assess in any market. Importantly, betting against this market for the last six months has been a losing proposition for managers and analysts. Skeptical managers are forced to readjust their global view from one-sided, fear-driven projections. Unfortunately, admitting fault by most “experts” is unfashionable and works against investors’ interests. For example, much of the worry is around sustainable corporate profits; however, the impact on markets presents a different story. “Mr. Ramsey [Leuthold Group] has studied market performance going back to 1938, and has discovered that in the 16 best years for stocks, eight actually coincided with declines in corporate earnings. And profits rose in 13 of the 16 worst years for stocks.” (New York Times, February 25, 2012).
Near-term awareness:
Pullbacks are not to be feared, as chart observers and odds-makers eagerly anticipate a slowdown. Now, the rising Crude pattern is a convenient catalyst for sellers, but observers have seen this before. Investors are witnessing a collective appreciation in asset classes, in equities as well as commodities. Clearly, there is demand for risky assets and equally, there is a lack of alternatives, given low global yields. In terms of the big picture, the shortage of investable ideas is the reoccurring theme, regardless of pending price declines. The challenge has not changed, as usual. It mostly comes down to picking the right assets while taking the risk of timing it close to “right.”
Article Quotes:
“The improper application of the theory is one of the things that fueled the spectacular growth in over-the-counter derivatives, from $60 trillion in 2000 to more than $600 trillion in 2008. This growth took place while the economists and regulators using bricks and mortar logic were arguing that derivatives distributed risk, when in fact massive amounts of derivatives concentrated risk. The fat tails played a starring role in the bankruptcy of Lehman Brothers and the $182 billion bailout of AIG. Merton's theory was right when certain assumptions held, and wrong when they were applied in an overconnected environment. … Economists, policy makers, and presidential advisors have to get it right. Their influence is so great that when they get it wrong, tragedy often ensues. As Robert Heilbroner explained in his classic book, The Worldly Philosophers, the impact of Adam Smith, Karl Marx, John Maynard Keynes, John Stuart Mill, Thorstein Veblen, and Joseph Schumpeter has been immense” (The Atlantic, February 23, 2012)
“Bond issuance in the U.S. declined in 2011 to $2.13 trillion, down from $2.56 trillion in 2011, according to Dealogic. The volume of syndicated loans rose to $1.87 trillion last year, from $1.13 trillion the year before. The shift has occurred despite the fact that rates on corporate bonds are hovering in the 3.3 percent range, near a record low....The Volcker rule and Basel III will also have unintended consequences. For example, a reduction in the inventory of bonds may spur a shift toward the use of more derivatives. ‘Asset managers already use CDSs to manage credit exposure, and in the future, they may use more CDSs as an alternative to credit,’ McPartland says. While the use of CDSs is not necessarily going to make the markets riskier, the expansion of the CDS market is hardly one of the goals of the Dodd-Frank law. The effect of boosting the CDS market is difficult to predict, especially in the event of a crisis.” (Institutional Investor, February 23, 2012)
Levels:
S&P 500 Index [1365.74] –Quickly approaching May 2011 ranges around 1370. Resumption of the upturn since March 2009.
Crude [$109.77] – A very sharp run in last few weeks. Questionable if the current run can get to $114 before exhausting.
Gold [$1777.50] – Nearing the $1800 mark set up a mixed feeling of strength and doubtful follow-through. For now, trading in a familiar trading range between $1600-1800, as seen in the last seven months.
DXY – US Dollar Index [78.35] – Short-lived dollar rally stalled in January, and that continues to be the near-term trend. Yet, the dollar index is 6% higher than its summer lows.
US 10 Year Treasury Yields [1.97%] – Once again, dropping below “2%,” which serves as an emphasis of low yields.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, February 20, 2012
Market Outlook | February 20, 2012
“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.
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 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.
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