Market Outlook | July 2, 2012

“More important than the quest for certainty is the quest for clarity.” François Gautier (1959-present)

Perspective simplified

If one observer stated: Interest rates are extremely low, volatility remains low and oil prices are way off from previous highs, then it would have been sufficient to expect higher US stock prices. At least, that has been the thought process in the minds of active investors, especially in recent years. In any random year or cycle, this setup generates broadly accepted expectations of good returns.
To take a step back, last weekend, crude closed below $80, volatility index below 20 and US 10 year yield below 2%. So perhaps we should not be overly surprised that the S&P 500 Index gained 2.03% for the week and remains up 8.31% for 2012. All noise aside, the combination of these key barometers paints an actual positive year for stockholders. This is rewarding for those who favored some risk over safety in a period of increased fear mongering.

Search for clarity

Psychology, of course, finds a way to distort one’s view in looking back at last quarter. Thus, consider if the question was asked in the last few weeks: Why are US stocks not much higher? Perhaps, even the not-so avid-observer would loudly proclaim European worries are one key factor. Similarly, a global observer would add China is slowing and confidence in that market is dwindling faster. Of course, both points have some merits based on recent data that contribute to shaky sentiments.

Any interpretation of a Eurozone rally might attract doubters more quickly than believers. What have become tiresome acts of injections and “pain relief” actions from policymakers still leave some skeptics. That's the expected feel, especially over the weekend after a stunning up day to close the month. An ongoing lack of faith in “leaders” is a common jargon these days but doesn’t get much weight in long-term market performance. Converting non-believers to take risks has proven to be a daunting task thus far. Generally, to change minds requires drastic moves. At this junction, the bearish train is still relatively crowded. For example, the following indicator from last week offered this view:

“According to the American Association of Individual Investors (AAII), bullish sentiment dropped from 32.89% to 28.7% for a drop of 4.19 percentage points.” (Bespoke Investment, June 28, 2012)

Market participants have yelled and screamed about their dislike for potential returns due to global concerns. However, if Europe is not as bad as expected while China's true economic sustainability is a mystery (not overly grim), then things are not as bad as was thought. Then the element of an upside surprise lives on again for the second half of this year. Importantly, underestimating the prospects of a coordinated boost from policymakers in US, UK ECB and China is dangerous to ignore, even if these efforts produce short-lived results.

In the case of China, the FTSE China Index (FXI) peaked nearly five years ago and has remained sluggish. Therefore, the prospect of weakness is hardly a new element to Chinese stocks. Plus, the eight-month weakness of Chinese manufacturing showcases that bad news and worst-case scenarios are deeply factored in. However, the mystery of the outcome will drive further suspense and plenty of speculations.

Slow Revival

The lack of alternatives for liquid assets leads to piling on into known instruments. This increases the odds of collective asset price appreciation for global stocks. Of course, reward is not always a result of impressive fundamentals or an increase in innovative sectors. Uncertainly over pending regulatory climate creates some hesitancy in the near-term. Perhaps, the financial service dilemma is adjusting to new changes, new participants and inevitable new policies that are needed for several years.

For now, the message from the first half echoes a fragile revival in the post-2008 era. This transition phase divides the outlook between frustrated and forward-thinking investors. It’s these inflection points that shape valuable investments and timely entry points. Thus, ignoring the noise of fear has been fruitful this first half, despite few turbulent periods.

Article Quotes:

“Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no ‘peak-oil’ in sight. The full deployment of the world’s oil potential depends only on price, technology, and political factors. More than 80 percent of the additional production under development globally appears to be profitable with a price of oil higher than $70 per barrel. The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation, although the U.S. boom is difficult to be replicated given the unique features of the U.S. oil (and gas) arena. Whatever the timing, emulation over the next decades might bear surprising results, given the fact that most shale/tight oil resources in the world are still unknown and untapped. China appears to be the first country to follow the U.S. example.” (Belfer Center for Science and International Affairs, Harvard University, June 2012)

“The black letter law that is taught in law schools is inevitably the codification of past views on finance and financial practices that may no longer be up to date at the time it is taught or practiced by recent law graduates. The high level of technical sophistication needed to master these areas of law tends to obscure the dis-connect between law on the books, the theories that may have informed this law, and the actual operation of the financial system. Lawyers do, however, play a critical role in the world of finance. They help structure new instruments, advise market participants on the legality of their actions and devise strategies for them to minimize the costs of regulatory restrictions. Lawyers also serve as expert witnesses to Congress and work in committees or at regulatory agencies that are charged with developing new legislation or regulations. This requires that lawyers know something about how markets operate in the real world. The most critical factors in these alternative theories are Imperfect Knowledge and the Liquidity Constraint, and the interaction between the two. They help explain why markets tend to destabilize even under assumptions of actor rationality and ready access to relevant information. These theories therefore hold important clues for rethinking not only the governance of finance but the organization of the financial system itself.” (Selected Works, Katharina Pistor, June 2012)

Levels:

S&P 500 Index [1362.16] – Signs of recovery from spring sell-offs and a strong bottoming statement made on June 4th at 126.74. Skeptics linger, but positive stability continues to emerge.

Crude [$79.76] – The one-day sharp rise slightly makes up for the recent decline from $105 to $77. The follow-through is awaited as the next main target is at $90.

Gold [$1598.50] – Several weeks of non-eventful but stabilizing movement closer to $1600.

DXY – US Dollar Index [82.25] – The multi-month strength in the dollar remains in place. Nearly a year since the index bottomed at 73.42.

US 10 Year Treasury Yields [1.64%] – Interestingly, the last trading days showcase a narrowing range between 1.55% and 1.65%. Trendless in some ways, but clearly the low end of the range is not a short-lived incident for now.

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

Market Outlook | June 25, 2012

“Simplicity is the ultimate sophistication.” Leonardo da Vinci (1452-1519)

Familiar actions

Major assets have appeared fairly synchronized in the past few months, highlighted by sharp commodity declines. As usual, higher and reliable returns with low turbulence are hard to find. Instead, we’re in a discovery period where lofty expectations have not been fully met. Through this familiar puzzle, another round of stimulus efforts was announced last week to a less-than-enthusiastic audience. The Federal Reserve’s statements reiterated the need for milder stimulus while projecting an uncertain tone for pending recoveries. Of course, for economists tuned in to the central bank’s nuances, a lot of the substance is not earth shattering. Unfortunately, bold actions or empathic messaging by central bank officials ahead of elections is not too common. Yet, the fund manager remains challenged in a world of limited liquid assets and scarce investable instruments, given low interest rates.

Uncommonly Common

An inverse relationship between oil and stocks is discussed too often, at least in the past, but is yet to materialize in that manner in recent months. Crude prices coming down sharply have not guaranteed a rising stock market. Amazingly, around the increasing Iran turbulence in mid-spring, some observers were buying into explosive runs in crude prices. This has not been the case thus far, but the year is only halfway finished. Surely, sensational stories rarely end up driving the fundamentals over time. Perhaps, this is a valuable lesson to remember as it resurfaces in various trends where the newsworthy item is confused with prevailing drivers.

Behavior in crude markets in many ways reflects the global economy weakness – a not-so-pleasant barometer but a realistic awakening. Crude prices mirror the downturn of emerging markets. That's clearly visible in emerging market indexes (EEM), which paints a more powerful picture. Since March 2012, the emerging market index has declined by nearly 16%. In that same period, crude prices declined by 28%, where weakness in China served as a key catalyst to many of the subsequent sell-offs. Of course, the Eurozone background further fuels the threat of a slowdown and at some point this trend is overdone. If crude serves as a sentiment indicator, then confidence for commodity-related areas presents an inflection point.

Naturally, the next question relates to gold prices’ ability to live up to hype of protecting against so-called fear. Gold’s price appreciation did not signal the death of “paper assets” but surely left its mark since the early 2000s. The strong and growing belief in gold prices extends from central banks to hedge fund managers to the individual investor. However, the popularity of gold increases with every perceived troublesome piece of Eurozone news or slowing growth in emerging markets. It’s important to note that this spring, when unpleasant general news resurfaced, gold trading patterns did not make a big splash as a safe haven. Instead, prices retreated modestly. Now those disliking the Federal Reserves statements greatly await a resurgence in gold prices. This thesis is suspenseful but never easy as it looks at first glance.

Risk Misunderstood

A simplistic observation may point to glaringly shaky confidence across assets globally. Interestingly, moments such as these occur one or two times a year – in which buying unfavorable assets may lead to a rewarding result due to misunderstanding of bad news. A cliché perhaps to hear, “buy when everyone sells,” but how often is this applied? It’s a question for researchers to decipher, but in recent memory, risk-taking at periods of low confidence has proven fruitful. With so much institutional capital chasing reliable (liquid) returns, the opportunity to bet big in lesser-known areas has its virtues. Buying selectively in a period of loathing usually provides an opportunity, but the window tends to close faster than desired.

Figuring out if demand for safety is trading at a premium is severely challenging. Based on the volatility index, turbulence is contained, at least in US stocks. And that’s not so clear, especially when the Volatility Index (VIX) is closer to annual lows rather than highs. In a period of confusion, risk-taking is not such a bad idea if executed in a timely manner with conviction. Importantly, when well-known pundits/fund managers begin to dislike stocks, that may be positive for smaller investors willing to take a chance in neglected themes.

Article Quotes:

“It used to be that homeownership signaled and led to economic growth. But that relationship was tied to the industrial era, when building and buying more homes primed the pump of America’s great assembly-lines, increasing demand for cars, appliances, televisions, and all manner of consumer durables. Those days are gone. The United States is a now knowledge and service economy; less than ten percent of Americans work in some form of manufacturing and just 6.5 percent are engaged in actually producing things. The stuff Americans buy is largely made offshore. Instead of leading to economic development, higher rates of homeownership today are associated with lower levels of it. Homeownership is either not correlated or negatively correlated with the big drivers of economic development. Writing recently in the Wall Street Journal, Dan Gross notes the shift in this country toward a ‘rentership society.’ But this is not to say that the U.S. is destined to become a ‘nation of renters.’ The issue is one of balance. The rate of homeownership in America hit an all-time high of near 70 percent right before the crisis and has since dropped back to roughly 65 percent today.” (The Atlantic, June 20, 2012)


“As part of its diplomatic pressure on Tokyo, Beijing appeared to halt exports of so-called rare earth metals – a resource vital to many of Japan’s high-tech industries – prompting alarm among some of the many other countries that rely on China for the actually not-so-rare metals. At the time, China claimed that it hadn’t directed exports to be halted, suggesting that it was a spontaneous decision by all its exporters. Few were convinced, and the Chinese move was followed by a round of deals among other nations and much media speculation about a possible Chinese stranglehold on other nations’ economies and even national security. To be fair to China, there had already been warnings over the environmental toll that illegal mining of rare earth metals was taking, and the government warned that it was tightening up on such activity, adding that it was this crackdown, and not exploitation of its virtual monopoly, that was driving its cuts in export quotas. … But will an announcement by China this week change things up again? In a policy paper, Chinese officials warned a decline in its rare earth reserves in some mining areas was ‘accelerating.’ ‘The Chinese government exercises strict control over the total volume of rare earth smelting and separation, and will not approve any new rare earth smelting and separation projects except for those state-sanctioned projects of merger and reorganization and for distribution optimum. Existing rare earth smelting and separation projects are prohibited from expanding their scale of production.’” (The Diplomat, June 20, 2012)

Levels:

S&P 500 Index [1335.02] – Buyers showed plenty of interest around 1300, but near-term pressure is building to stay above 1350.

Crude [$79.76] – A four-month sharp decline continues. Dramatic drop, considering March 1, 2012 highs of $110. Attempting to bottom closer to the $80 range.

Gold [$1565.50] – Recent weeks demonstrate a back-and-forth movement between 1550 and 1600.

DXY – US Dollar Index [82.25] – The dollar-strengthening theme continues since last May. Closely approaching annual highs in the near-term.

US 10 Year Treasury Yields [1.67%] – Last few trading session suggestions point to a tight range between 1.56% and 1.68%. Filtering with annual and all-time low levels, yet some signs of stabilization.

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

Market Outlook | June 18, 2012

“Apprehension, uncertainty, waiting, expectation, fear of surprise, do a patient more harm than any exertion.” (Florence Nightingale 1820-1910)

Newer Focus

With a lack of many growth stories, attention has shifted to election outcome, stimulus efforts, and collaborative problem solving. All three factors serve as stimulants or depressants for anxious participants depending on the day—a new environment for fund managers used to chasing momentum in flourishing companies. These days, those remaining in financial services are engulfed in deciphering legal and political risks, which in turn influence the day-to-day movements. In some ways, investors appear fed up with the increasing list of unknowns and the complexity of justifying loses. Investors continue to grapple with the ongoing reminder of fearsome headlines. The acknowledgement of “global recession” is a reoccurring discovery for some, but let’s remember markets get over things quicker than imagined.

Clearly, there is no escape from sluggish economic realties and increased monitoring of government related decisions. At the same time, cheerleading election results in Greece certainly cause a fast reaction to uplift deflated moods. Similarly, easing expectations by central banks is alive and well:

“More than $1.5 trillion was added to the value of global equity markets in the past two weeks on speculation the Federal Reserve will join central banks in bolstering growth at its policy meeting this week” (Bloomberg, June 17, 2012).

Ongoing intrigue of stimulus efforts might create some suspense; however, the election outcome is too much of a wildcard for many money managers to take on bigger bets.

Trend Search

For the intermediate-term, there are few reasons to brush off these panic-like collapse theories. After all, the S&P 500 Index is bottoming here, offering a chance to speculate or even invest. The June 4th lows in broad US indexes and a peak in volatility slowly set the stage for a pending recovery. In fact, talks of further easing, combined with better than projected events, usually lead to surprising outcomes. A confused audience may mistake bad projections with worsening conditions and deteriorating asset prices. Surely as challenging as it maybe, avoiding thesis based on known apathy can be fruitful at this junction.

If four years ago felt so stunning with bail outs and near collapses, it would take plenty to convince one that things will turn out better four years from now. But with a world focused on shorter-term events, it’s even harder to convince participants of the advantages of long-term investment. Perhaps, capital allocators struggle to imagine significant money flowing to less liquid assets or aggressive risk taking. Mood swings are harder to quantify, and mind reading is not a certified profession either. Thus, this speculative climate overemphasizes the risks while underestimating rewards. The week ahead can test this train of thought.

Safety Overdone

Perhaps, the "safe asset" obsessions may take a breather in the second half of this year. At least, we can surmise a minor bubble that’s forming with the ongoing rush to safer instruments. Plus, owning US treasuries is getting too crowded when larger capital continues to allocate to familiar assets. Similarly, Gold is mildly awakening from annual lows and attempting to reenergize its fan base. There is a strong belief that Gold solves many risk management issues. That biased view is easily sold as fact, and that should concern owners. As confidence restoration shifts to traditional markets, there might be unexpected consequences for overpaying for more liquid and lower yielding assets. As unpopular as this scenario might be, it is worth planning for a surprise or two.

Article Quotes:

“Either we take stronger steps to ensure the integrity of the banking system on our own, or outsiders will press for more regulation and oversight. Or we have free markets that function effectively, or Congress, lawyers, and the Occupy Wall Street movement will keep the pressure on—and rightly so. On the whole, most US banks have taken intelligent steps since the financial crisis. They’ve doubled their capital, shed (mostly) poor assets, and increased liquidity. Yet you don’t hear much about this because such quiet progress has been overshadowed by a host of relatively minor misdeeds that reinforce the perception the playing field is tilted in favour of banks. Heads, they win. Tails, US taxpayers bail them out. And with each negative headline, the banking industry loses more control of the narrative. If those outside the financial sector take over the process of cleaning up Wall Street, it will be more unpleasant and indiscriminate. As banking becomes ever more complex, outsiders have correspondingly less insight into the internal functions of major global banks and are likely to use blunt and potentially less-effective tools to try to control these huge companies.” (Mike Mayo, Financial Times, June 18, 2012).


"Examples of investor demand for safe, liquid assets are not hard to identify. One source has been foreign official investors, mostly emerging market countries, which invested about $1.6 trillion in the United States in the four years preceding the crisis, largely in U.S. Treasury and agency securities. Much of this activity arose from the investment of foreign exchange reserves by countries running large current account surpluses. Some of these reserves were undoubtedly built up as a precautionary measure in light of the financial problems in emerging markets during the late 1990s, while others are attendant to policies of managed exchange rates. This official sector demand for safe assets was largely if not entirely focused on U.S. government securities, rather than cash equivalents. But this source of demand absorbed roughly 80 percent of the increase in U.S. Treasury and agency securities over the four-year period, potentially crowding out other investors and thereby increasing their demand for cash equivalents that appeared to be of comparable safety and liquidity." (Governor Daniel K. Tarullo, Federal Reserve, June 12, 2012)

Levels:

S&P 500 Index [1342.84] – Early signs of bottoming between 1280 and 1320. Better gauge of buyers’ enthusiasm awaits in weeks ahead.

Crude [$84.10] – Digging from annual lows of $81 reached last week. The sharp fall since March 1st will take a while to recover. In the near-term, attempts to reach $90 are bound to stir some attention.

Gold [$1627.25] – Buyers’ interest confirmed at $1550 and $1600. Observers await to see if sustainable buying will resume back to $1750.

DXY – US Dollar Index [81.62] – Dollar strength is retreating since June 1, 2012. Yet, the strength since May 2011 remains in place.

US 10 Year Treasury Yields [1.57%] – Stuck near all-time lows as demand for treasuries remains high. April 2010 marked a noteworthy peak at 4%, and since last summer, below 2.50% defined the range.

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

Market Outlook | June 11, 2012

“Courage is not simply one of the virtues, but the form of every virtue at the testing point.” (C.S. Lewis, 1898-1963)

Struggle Recognized

Participants acknowledge and accept the slowing growth environment as showcased by recent data. Now, with that reality established, occasional panic-like responses are less of a shock these days than previously imagined. At the same time, casual investors have run out of patience in dealing with risk taking, while most fund managers reexamine the stability of financial systems in a fragile period.
Required adjustments in policy making stirs fearful responses for Chinese or Brazilian leaders, despite being touted as the alternative option to the U.S. and Europe. Equally, developed markets leaders quarrel with stimulus and economic revival deliberation on a daily basis. Of course, different challenges face matured versus maturing economies. Yet both face heavy scrutiny in navigating in the uncharted territory of a highly connected but slowing global system. In a cycle where unknowns have escalated dramatically, being a risk taker takes on a different meaning, and risk itself takes a while to grasp.

Intertwined Puzzle

Discovering the true nature of the Eurozone conditions is tricky and frankly ugly, when considering the political maneuverings. Equally, gauging the rapidly changing investor perceptions creates some suspense. Being optimistic on postponement of bad news is not a solid investment plan, but it is somewhat a common practice. Specifically a bail out rally, as showcased with Spain over the weekend, may turn out to be short lived, but that surely does not discourage the crowd from cheering.

Meanwhile, betting against the world's key assets is questionable, despite the constant urges from overly cautious crowds. Yet, in most cases, courage is known to pay more in markets than a long bet on sustainable demise. Even in a period where there is a "1930's" like depression, it is often quoted not necessarily safe to bet against traditional assets. For over three years, we've learned that moods are hard to decipher; faith in political leaders is at somewhat desperate lows; and growth industries aren't glaringly obvious.

Fearing Good News

In regards to envisioning a surprise element of a rally, it is healthy to feel fear in a period where there is surrounding overemphasis on the current list of worries. Still, it’s not quite accurate to proclaim that panic is at the highest level, with the Volatility Index closer to 20 than 40. Yet, an upbeat outlook and pragmatic case for further strength is in play. A lack of desired returns, along with the slowing of emerging markets, are points that are inescapable for fund managers. Buying land, infrastructure projects, and/or other real assets continue to gain momentum for now, while the overcrowded “safe asset” mania raises questions and doubts of a new bubble.

Finding bargains in the weeks ahead (value stocks or in select commodities) can stimulate buyers who are playing catch on their portfolios’ annual returns. In the last two summers, the post panics rallies ended up spoiling us into forgetting the previous concerns and tensions. Interestingly, a similar set up is building here. Chart observers and odds makers like the chances of a recovery, and headlines might paint a pleasant picture. Thus, anticipating several series of good news ahead of the election is not worth underestimating.

Article Quotes:

"Capitalism did not end, because of two major adaptations. First, the organizing and political clout of workers grew and allowed them to fight back through progressive legislation. The Progressive Era and the New Deal in the U.S., and labor governments in Europe, broke up the trusts, reined in the runaway wealth of the elite with progressive income and estate taxes, and empowered workers to bargain to gain a larger share of the benefits of their productivity increases. In the short run, the wealth and power of the elites was diminished (which is why they fought these changes tooth and nail and predicted the end of America, democracy, and everything else would result). But in the long run, these changes put the masses back on the side of sustaining capitalism, and kept it going…. Sadly, Marx was right about one aspect of capitalism—it is prone to periodic crises. Even rational actors tend to over-borrow if they are unduly optimistic about asset values and risk; the adjustment of labor forces to new technology is not a smooth and frictionless process; and the political institutions that provide the vital legal and contractual framework for capitalism to function can sometimes get clogged by political clashes and deadlock, or turn out to be wrongly designed to cope with the kind and scale of economic problems that emerge from growth." (The Atlantic, June 7, 2012)


“In the past, money manager Blau had no qualms about buying bonds issued by banks. But since the Lehman Brothers bankruptcy and the Greek disaster, no investor is willing to lend banks money without demanding substantial collateral in return. Instead, Blau is increasingly making the kinds of investments that banks used to make, in real estate, for example. When Deutsche Bank sold its freshly renovated twin towers in Frankfurt to its fund subsidiary DWS last year, the financing came from Allianz.There is little Blau isn't willing to explore in his search for investment returns, from infrastructure projects to wind farms. The latest craze is, of all things, parking meters. Two years ago, Allianz and a group of partners invested €1 billion in a company that operates parking meters in Chicago. And while banks shy away from funding Germany's cash-strapped local authorities, insurance companies are increasingly interested in municipal bonds. German life insurer R+V Lebensversicherung recently bought €20 million in bonds from the western German city of Wiesbaden.” (Spiegel Online International, June 5, 2012)



Levels:

S&P 500 Index [1325.66] – Strong case for an early bottoming process at 1288-1300. The near three month correction can entice further buying.

Crude [$84.10] – Following a sharp drop since March 1st, Crude still remains around 13% removed from 200-day moving average. Staying above $84 will set the tone and provide clues as to buyers’ appetite.

Gold [$1576.50] – Much anticipated inflection point between $1550-1600, in which buyer demand is long awaited. A failed recover here can stir less confidence for Gold for the rest of 2012.

DXY – US Dollar Index [82.51] – Closer to a higher trend of multi-month range. Ability to keep at these ranges is not clear.

US 10 Year Treasury Yields [1.63%] – Barely holding above all-time lows of 1.43%, while attempting to dig out of the 1.60%-1.80% range.



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

Market Outlook | June 4, 2012

“There is no wisdom in useless and hopeless sorrow.” (Samuel Johnson, 1709-1784)

Collective breakdown

Through the weekend, the echoes of fear are felt vibrantly for the majority of social and economic observers. It appears too easy to yell about the unpleasant job numbers, especially when they are below expectations. This feeds into the risk-aversion theme which has taken even a new twist, leading to all-time low yields in US treasuries. Similarly, gold aficionados slowly reawaken, at least for a week or two. Considering the current landscape, it is convenient for an impulsive pundit to point fingers at the system or at political leaders. These are contentious times indeed, but the ups and downs are becoming ever so familiar in this shaky era. Worn-down optimists are facing heightened tests for grit in various financial assets.

Interconnected feel

Fund managers who found comfort in emerging markets are now faced with realities of slowing growth. The Purchasing Manger’s Index (PMI) of larger economies confirmed further weakness. Even before the US job numbers were announced on Friday, the global markets were digesting China’s struggles in the service sector. That was enough confirmation to reignite concerns broadly, and below-consensus estimates did not paint an attractive picture.

Last May, the CRB (commodity) Index peaked and has since declined by more than 27%. This offers an early clue to how crude, copper and other soft commodities have stalled in their price appreciation. Perhaps, we should not be surprised at stalling emerging market growth. Naturally, commodities have been strongly linked with emerging market growth, a tone set last decade. Recent emerging market declines confirm for a relative edge of US markets, and that thought is sour now but bound to change with pending political and macro events.

Managing the unknowns

What's known is not pleasing at an early glance and what's unknown is disturbing for most within these panic levels. Summer months stir other fireworks where pleasant surprises seem too far to find. Considering that it’s an election year, and the lack of good news in several weeks, it’s not a bad idea to seek purchasing quality assets. The S&P 500 index ended last week only up 1.7% in 2012. Impressive first-quarter gains are nearly erased, and buyers will get a second chance to evaluate opportunity versus safety. Odds-makers might quickly point out the hopeful setup, and the appeal of contrarian viewpoints seems very timely. After all, fund managers are not paid to dodge risk or to dump assets into “safe assets.” These lessons have played out for the last two years, where the lows for the US equity markets took place in the summer. To repeat near-term history for the third consecutive time might be plenty to ask. Yet, one has to wonder whether there is further room for panic after the escalating turbulence in the last two months.

Article quotes:

“The European authorities had little understanding of what was happening. They were prepared to deal with fiscal problems but only Greece qualified as a fiscal crisis; the rest of Europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis. The authorities did not even understand the nature of the problem, let alone see a solution. So they tried to buy time. Usually that works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been. That is the political bubble I was talking about.” (George Soros speech in Italy, June 2, 2012).


“For instance, Calpers, the largest US public pension plan, this year cut its assumed rate of return from 7.75 per cent to 7.5 per cent. The fund’s actuary had recommended a cut to 7.25 per cent. Official estimates for US public pension shortfalls range from $500bn to $1tn. Critics have suggested the true number is closer to $2.5tn. Regulations for US corporate plans, and for European and Canadian plans, calculate liabilities based on the prevailing level of bond yields. In 1990, 10-year Treasury bonds paid more than 8 per cent, but have since fallen to below 2 per cent. As interest rates fall, the size of a pension plan’s ultimate liability rises. But rather than lower expectations which might raise contribution requirements, public pension funds have increased allocations to risky assets: from 53 per cent of total assets in 1992, to almost 75 per cent now.” (Financial Times, May 28, 2012)

Levels:

S&P 500 Index [1278.04] – Slightly below the 200-day moving average, as staying above 1250 serves as a near-term test.

Crude [$83.23] – Sharp drop in prices reflecting the slowdown in commodities. Since March 1st, crude has dropped nearly 25%.

Gold [$1606.00] – The last few trading days showcased a bottoming process around $1550. A rejuvenated spike back to $1600 can confirm how gold is perceived as a safe asset

DXY – US Dollar Index [82.89] – At annual highs continuing the strength established in October 2011. If this is a sustainable movement, the next noteworthy level is around 86-88, last reached in summer 2010.

US 10 Year Treasury Yields [1.45%] – All-time lows. Last noteworthy lows stood at 1.65% in September 2011. Before that,1.95% in 1941 marked the multi-generational bottom from a historical point of view.


Dear Readers:

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

Market Outlook | May 28, 2012

“Pride makes us artificial and humility makes us real.” Thomas Merton (1915-1968)

Ongoing Outcries

The last four months showcased the decline in prices of assets stretching from gold to oil to global equities. Price corrections usually invite frenzied responses by most and hidden pragmatic messages for others. Certainly, it does not take much to ponder the lack of financial stability. Cautiously, one has to weigh the influence of irrational sellers, which tends to influence the consensus thought at a rapid pace.

For now, known economic barometers reiterate the scarcity of “growth” from China to the Americas while enhancing the expected doubt as the summer months loom. Yet, the European debacle is not going away soon and remains a noisemaking daily matter. Meanwhile, the outcry for stimulus, increased demand for regulation and uproar for solutions is uttered by experts and expressed by the public alike. It’s a theme that’s influencing the leaders of emerging and developing markets. These chatters for near-term solutions are centered on policymaking debates rather than concrete confidence restoration. Perhaps, in a mind-numbing trading environment, one would think fund managers would take a humble view in admitting the unknown consequences of this current era.

Trust restoration

The growing mood of distrust toward stocks has persisted for several months - way before Facebook’s initial public offering. This is a key distinction that’s omitted by the mainstream headline makers. This dampening stock trading volume has for a while forced financial firms to adjust their business models and expectations. At least, the so-called retail or casual investor, not too eager to jump-in, is the overall takeaway, on a relative basis. Regardless of directional moves of broad stock indexes, participation has waned and this trend is questionable. Perhaps, a loss in popularity for an asset class does not necessarily translate to a loss of US relative attractiveness. Neither does distrust of banks confirm a full-blown collapse, at least in the US system. These discoveries can take a while to restore confidence to desired levels for nostalgic observers.

Confronting risks

The volatility index (VIX) is around 20 – much lower than the frantic ranges witnessed in spring 2010 and fall 2011. Perhaps, the “spooked” stock market crowd has graciously bowed out of risk taking, leaving larger firms to wager between each other. Interestingly, recent patterns in Treasury yields and US Dollar suggest increased risk aversion, especially with Eurozone fears serving as the primary catalysts. We see a differing message between the volatility index (for stocks) versus macro-driven indicators. In upcoming weeks, this divergence can provide further clarity and a uniform outlook. Yet through all this fuzziness, bargain hunters are desperately searching for mispriced ideas. Generally, a collective confusion can turn into fruitful entry points, as history tends to illustrate again and again.

Article Quotes:

“To analyze how military experience translates into corporate leadership, the researchers looked up the names of CEOs that ran America’s top companies from 1980 to 2006 and matched them to their listings in various editions of “Who’s Who,” which explicitly requests military background in its annual biographical list of prominent Americans. The percentage of CEOs during this period with military experience – about 30 percent overall – may be surprising to those raised in the post-Vietnam era, who imagine a tiny fraction of 18-year-olds joining the armed forces. But military drafts meant that a stint in the military was quite common for men coming of age during World War II and the Korean and Vietnam Wars. Back in the 1980s, when many war veterans were about the right age to be running companies, nearly 60 percent of CEOs had military experience. Nowadays, with veterans of these wars entering their golden years, only 8 percent of CEOs have served. So whatever characterizes military leadership, it’s increasingly rare in the corner office. (Slate, May 25, 2012).


There are many things I wish America did better, but one thing that is often underappreciated about the place is its remarkable economic and institutional flexibility. When Michigan's economy implodes, that's bad – but people find it remarkably easy to pack up and move to sunnier climes. When Congress can scarcely keep the money for highway repair flowing, the city of Chicago pioneers new public-private sources of infrastructure finance. America's federal government is often a wreck. Luckily, America's success isn't driven almost entirely by the choices and actions of the federal government. … Meanwhile, American innovation is proving as impressive as ever. The golden age of the Space Race may be long gone, but private firms in America are putting ships into orbit. Apple is the envy of the world, and rightly so. Google is doing pioneering work on autonomous vehicles, which could revolutionise transport. IBM's Watson, and things like it, could change medicine and many other fields besides. (The Economist, May 25, 2012)




Levels:

S&P 500 Index [1317.82] – Attempting to bottom around the 1300-1320 range, following the recent sell-offs.

Crude [$90.86] – Back to a familiar range around $90. Down $20 from March 2012 highs as part of a multi-month sell-off process.

Gold [$1569.50] – Remains in an established downtrend and slightly above December 2011 lows around $1531.

DXY – US Dollar Index [82.40] – Since May 1, 2012, the dollar is up nearly 5%. To put it in perspective, the strengthening dollar is far off from last decade’s highs of 121.02. Thus, there is a long way to climb up, and recent changes need plenty of follow through.

US 10 Year Treasury Yields [1.73%] – Flirting with the low end of the recent range. Very close to September 2011 lows of 1.67%, which marked the recovery for risky assets.

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

Market Outlook | May 21, 2012

“We all live in suspense from day to day; in other words, you are the hero of your own story.” Mary McCarthy (1912-1989)

Continued Apathy

One way or another, tolerance for risky assets is slightly less vibrant today than last May. Recent patterns continue to reignite a frenzy mode, which is visible in several pockets of the market. For example, emerging market (EEM) and small cap (Russell 2000) indexes are lower than last year’s levels by 26% and 10% respectively. It merely reemphasizes what seems a never-ending demand for risk aversion, as confidence restoration is a much longer process than envisioned by optimistic observers. Perhaps, this is not much of a surprise when considering that the New York Stock Exchange volume dwindled to extreme lows in February this year. Meanwhile, the same holds true for the declining trading activity in April 2012. We’re in an era of lower participation rates in stock market speculation despite the overhyped initial public offering witnessed last week. Basically, the overall message is that retail investor participation is slowly diminishing.

A lukewarm appetite for risk taking is much talked about and loudly heard when viewing the strength of the US dollar patterns year over year. Similarly, increasing demand for safety is visible when observing the US Treasury yields closing at 1.73% – very low indeed. Surely, this marks another year in this ongoing period of the “desperate for yield” theme that plagues investors of all kinds. This contributes to risk-aversion behavior for now, despite the strong first-quarter stock performance and gradually improving economy. However, market jitters find a way to express less enthusiasm when several unknowns dampen the commitment levels of experts, veterans and of course capital allocators.

Commodities evaluated

Ongoing thoughts of speculating in oil stocks have lost their luster, as (OSX) reminds us, given its 23% decline extending from February to May 2012. Similarly, crude, which was around $100 a year ago, is now trading closer to $90, as the commodity trading community weighs the balance. For gold-related investments, a hopeful crowd awaits a recovery, but speculators have a lowered buying appetite. According to data (ending May 8, 2012) collected by the Commodity Futures Trading Commission (CFTC), the number of speculators betting on rising gold prices fell to its lowest level since December 2008. Some may argue an inevitable gold recovery is slowly underway, but sideways to down behavior provides us with noteworthy hints. In upcoming weeks, the broad demand for commodities will be revisited, especially with limited options within popular financial vehicles.

Uncertainty accustomed

If the word “uncertainty” felt overused last year, it may turn out to be a commonly used phrase this year, too. Sure, at times, bad news (or current reality) is exhausted until it resurfaces again into actionable thoughts of selling. Now, global indexes wrestle to preserve annual gains as each downside move frightens most people into following patterns seen in summer 2011. Plus, furious elections pending in Europe and the US easily stir up emotional near-term patterns.

The search for a stable Europe, a reliable financial system and sustainable natural growth has not been achievable at political influencers’ desired pace. Perceptions may change here and there, but convincing participants to heavily bet positively is a daunting task, or at least not as easy as was seen last decade. Surely, uncertainty is beyond directional guesses, but subject to shifting moods and changes in some perceptions. For now, the jump in volatility displays further edginess. After all, frustrations arise in financial circles over adjustments from opaque systems to current realities. As wagering on election results creates a summer buzz, the impact of taxes and regulatory measures can provide further guidance for clarity. Perhaps, a collaborative stimulus by central banks may serve as a mild wild card to this inflection point. Yet, the crowd has seen and heard that story before.

Article Quotes:

“And one more point of note for the ‘What, me worry?’ crowd: Just because bond markets in countries perceived as safe, such as the U.S., are blasé about the debt load, it would be a mistake to ignore the lessons of history. ‘Those waiting for financial markets to send the warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time,’ the authors wrote in their paper. Now for some of the details, starting with a definition. The economists define a ‘debt overhang’ as a five-year period when gross public debt exceeds 90 percent of gross domestic product. According to this metric, Italy, Greece and Japan are charter members of the club, with their most recent episodes beginning in 1988, 1993 and 1995, respectively. The U.S. isn’t in the debt doghouse just yet, given that it first breached the 90 percent threshold after the 2008 financial crisis. But it’s on the waiting list, along with Belgium, Iceland, Ireland and Portugal.” (Bloomberg, May 16, 2012)

“The financial world is more accident prone than ever – thanks in large part to the Internet, the mother of all interconnections. Not only has the Internet supercharged financial innovation and created high rates of growth, but it lies at the heart of many financial normal accidents in the 21st century. In the case of Iceland, the country was welcomed into the European Economic Area, which enabled Icelandic banks to operate throughout the continent as long as they had deposit insurance. At the time, Iceland had a gross domestic product of less than $20 billion. Yet its banks mushroomed in size. By 2008 they had over $100 billion in assets as investors raced to capitalize on high interest rates and the rising value of the Icelandic kronur. Iceland's online banks sucked in $6 billion in deposits from consumers in Britain and the Netherlands in a few years. But when investors lost confidence in the Icelandic economy, it triggered a normal accident. Money that had flowed in over electronic networks, fled at Internet speeds – an electronic run on the banks. There was no way the Icelandic Deposit Compensation Fund could meet its commitments to depositors. Iceland had created banks that were too big to fail in a country that was too small to save them. The kronur went into free fall, and lost half its value.” (The Atlantic, May 18, 2012)

Levels:

S&P 500 Index [1295.22] – From its intra-day peak on April 2, 2012, the index has dropped by 15%. The 200-day average is a few points away at 1278.22, which will be a discussion point to determine if a relief rally is pending.

Crude [$91.43] – For over three months, the sharp declines in crude confirm sustained weakness. First glimpse of bottoming awaited around $90.

Gold [$1589] – A very early sign of a recovery this week from slumping levels. Buyers’ interest showcased below 1550, similar to late December 2011. However, an inevitable bounce needs to prove a sustainable trend.

DXY – US Dollar Index [81.29] – A strengthening statement since May 1. In fact, the dollar index is approaching its multi-month highs achieved in January 2012. Since May 2011, the index is up nearly 12%.

US 10 Year Treasury Yields [1.72%] – A few points above September 2011 lows of 1.67%. Stuck between a bottoming process and an established downtrend. Attentively watched at these very fragile levels, as the risk-aversion participants finds shelter.



Dear Readers:

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

Market Outlook | May 14, 2012

“Agitation is the marshalling of the conscience of a nation to mold its laws.” Robert Peel (1788-1850)

Replaying

Reminiscent of last year, old worries are mounting and new grim facts untangle while fresh sets of discoveries enhance the existing suspense. Fragile attempts at European stability resurface while US business leaders scramble to instill trust as politicians and regulars attempt to deliver a plan for the impatient crowd. From Spain’s nationalization of banks to powerful election results in Europe, collective emotions are flaring. All in all, tension is back again and for market followers the script is becoming too familiar.

Amazingly, numbers find a way to fasinate observers – at least on a simple year-to-year comparision. Strange as it may be, on May 2, 2011, the S&P 500 Index peaked at 1370. Today it’s holding at a delicate range around 1350, leaving buyers and sellers to haggle for the next move. Of course, history does not always repeat itself in the same exact form – at lease we’d like to think so. Similarly, one can glance at the volaitlity index which peaked around 20 last May. Today, the expected fear barrmoter stands around 19.89 as of the end of last Friday. Not quite extreme fear levels, but quite reflective of a sensitive crowd that’s anxiously dealing with known problems but unknown consequences heading into the summer months.

Loss confronted

Against this big-picture backdrop, perhaps last week was not an ideal time to announce the loss of $2 billion dollars, especially for a “risk management expert.” Certainly, these days, there is no mercy for banks admitting fault when the overall climate is increasingly edgy. Unforgiving crowds continue to emerge as a theme that’s visible in voters and investors alike. Basically, the vote of confidence in the existing system is not producing a thrilling response. However, for executives of public companies, it may not be a bad time to dump all bad news in a jittery environment. Piling onto the pot of bad news is one strategy as less pleasant news becomes somewhat of the norm. Thus, discovering a bank loss or lack of control quickly takes us back down memory lane to an unshakeable new financial world. Basically, the effects of 2008 are with us – hard to shake – and regulatory measures are even more justifiable now.

Dissecting Mottos

In a basic form, the sales pitches of popular investment slogans are being questioned or being digested. Those fed up with paper assets and those clinging onto unfavorable views of the Federal Reserve's plan concluded that owning gold might be one safer answer. Of course, one glaring advertisement for gold lies in its past performance. Simply, it’s visible in its 12-year chart, demonstrating an eye-catching upward slide. Re-runs of that advertisement can get a crowd excited. Yet gold this year is up only 1%, reflecting a sluggish near-term performance and testing the will of commodity supporters. Again, just because central banks are buying to diversify their currency position is no guarantee for gold to skyrocket above $2500. Nor should waning stock and global growth issues spur an audience to turn to other alternative options.

Growth search

For a while, advisors remind us of the historical performance of the last decade, in which emerging markets vastly outperformed established markets. Clearly, for a while this so-called structural shift became fashionable and real in some respects. Mainly, this mindset created momentum in emerging markets, and drove plenty of folks to “chase the money” by owning possessions in China and other nations. Now this thought is not rosy, as recent headline outcomes continue to reconfirm the slowdown:

“China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. ….India's industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment. Output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before.” (Associated Press, May 11, 2012)

Meanwhile, the classic textbook investment suggests that US Treasuries remain a barometer for risk-free rates. So far it has been the symbol of risk aversion, but on a basic level the returns are unappealing. Now yields are less than 2%, around all-time lows, as showcased for weeks, especially in a period where shelter is hard to find. Plenty of managers would rather give up higher returns for the comfort of perceived safety. This song and dance at some point has to end or take a new shape. The thought of safety may turn into a liability for those planning ahead. Perhaps, that’s the message from recent patterns in gold, emerging markets and US Treasuries. Soon we will have a better confirmation

Through all this, the lack of investment options may require investors to engage in further risk taking to meet desirable hurdles. For now, the near-term emphasis is highly focused on a barrage of worries. Yet, selective buying in US stocks and less discovered emerging markets may prove fruitful a year or so from now.

Article Quotes:

“US-based public pension funds constitute one of the most prominent institutional investor segments investing in real estate. The aggregate assets under management held by US public pensions that are active in real estate is over USD 3 trillion, with the average real estate allocation amounting to 6.3% of total assets, below the 8% average target allocation of this group of investors. Fifty-seven percent of public pension funds based in the US that invest in real estate have assets under management of below USD 1 billion; a further 28% have assets of between USD 1 billion and USD 9.99 billion. Eleven percent have total assets of USD 10-49.99 billion. Five percent have total assets of USD 50 billion or more. Seventy-three percent of US public pension funds that invest in real estate have a real estate allocation of less than USD 250 million.” (Preqin, May 2, 2012)

“In the face of the overwhelming demographic facts, Greece and Wisconsin will have to shed their antiquated notions of work and retirement. … Even if you believe in the economic promise of austerity, there are simply no cost-cutting measures to buoy an economy with one-third of the people retired and a sub-replacement birth rate. If we can begin to integrate our aging population into economic life, the payoff would be two-fold. First, it would stop the bleeding brought about by bygone retirement schemes and entitlements. Second, it would add GDP to the economy by growing the skilled workforce. Sure, the workplace of today is far different than it was 20 and even 10 years ago – but this can’t be an excuse to marginalize the aging. Instead, the older population is Greece’s and the world’s greatest hope for economic growth and recovery; and this group has decades of experience and expertise to offer. Throughout Europe, the story is much the same. Only Turkey, France, and Ireland have birth rates over 2.0, and the average old-age dependency ratio in Europe is 25 to 100; it will climb to 47 to 100 by 2050. “ (The Fiscal Times, May 11, 2012)

Levels:

S&P 500 Index [1353.69] – Attempting to hold 1350, as the index is below its 50-day moving average.

Crude [$96.13] – Barely holding on above $96, as the decline continues. The recent sharp fall is stimulated by higher inventory than expected; plus, slowing global demand triggers an inevitable downside action.

Gold [$1583] – A drop below the $1600 is eye grabbing in one view. Interestingly, the recent lows stood at $1531 on December 29, 2011. Now, enthusiasm is waning but buyers seeking a bargain might dabble. Yet this downtrend is hard to ignore.

DXY – US Dollar Index [79.19] – Since May 6, 2011, the index has managed to rise by 10%. Although not glaringly noticeable, a strengthening dollar is quietly and slowly brewing. Index is up 10 days in a row, making a noteworthy macro statement.

US 10 Year Treasury Yields [1.83%] – All-time lows are not too far at 1.67% and the downtrend pressures looms larger.

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

Market Outlook | May 7, 2012

“We should not expect all the present to be as good as the best of the past.” (Lewis Korns, Thoughts 1892)

Interlinked brake

Leading up to this spring, several discussions resurfaced on global slowdown themes, which appear to coincide with peaking or consolidating commodities prices. Although this link is not always directly correlated, there are a few issues to ponder in connecting the dots between major macro indicators. At least, early signs of slowing commodity prices are igniting thought-provoking questions.

The overall available oil supply mildly shocked participants making a noteworthy move last week. Crude prices broke below $100, signaling a sharp weekly decline of 6%. The rise in US crude inventories showcased a trend that has continued for over six weeks. Recent price patterns did not quite live up to the chatter of Middle East disruption, which was causing worry about escalating crude prices. Refuting common groupthink thus far, this trend alerts us to lessen the emphasis on political chatter but refocus on more fundamental matters.

Vitally deadlocked

To grasp most of the mechanics in the commodity pricing requires linking a few puzzles. One key sensitive topic relates to recent awareness of emerging markets’ sluggish outlook. Again, as the facts and evidence reveal themselves, the decade-old commodity momentum is facing similar scrutiny as other risky assets. Recent crisis-mode behaviors have showcased synchronized downside movements in recent years. Amazingly, short-term memory will play psychological games for capital allocators.

The connection between gold prices and the US Dollar presents a noteworthy impact to market dynamics. Both heavily cited barometers have been stuck in a trading range lately, enhancing curiosity and discouraging trend followers. Gold has not found compelling reasons to spark an appreciation for several weeks. Meanwhile, the same applies for the US Dollar, which remains suppressed into customary low ranges in the last three months. These indicators are usually known (at least in conversations) to move in the opposite direction. However, the commodity and the currency are equally deadlocked in a period flooded with less certain events. This poses a hint in itself, of a pending inflection point.

Other observers will point out how a destabilized environment causes a rush into safer assets. In that scenario, the Dollar proved to be in higher demand in 2008 than gold. Similarly, the faith of quantitative easing will dictate whether further policies “eroding” the US Dollar’s value continue to benefit gold prices. If further easing is off the table, then gold may not sustain its leadership, despite its appeal as a reserve currency to central banks.

Benefiting by default

Considering the troublesome emerging markets, along with impactful election results in Europe, the US market seems poised to benefit from a lack of stability. Yet, the US monthly labor numbers were not as cheerful as a result of increasing growth expectations. Similarly, keeping up with previous solid quarterly earnings outcomes is not easy to deliver. “The percentage of companies beating earnings estimates has been just 53% over the last three days [last week], dropping the overall beat rate for all of earnings season down to 61%.” (Bespoke Investments Group, May 4, 2012). Perhaps a warning that ongoing solid surprises are not sustainable for a charged-up crowd Fatigue of a good stock market run is normal and it wears down the enthusiasm for a short period. It takes time to restore a collective resurgence. All that said, preparing to add exposure to US stocks is a valuable exercise, especially given the lack of better alternatives from all sides.

Article Quotes:

“Stock trading now accounts for 16 percent fewer customer trades at TD Ameritrade than it did in 2009. ‘We’ve had instances where it looked like things were clearing up,’ said Mr. Quirk. The company’s clients in some recent months tiptoed back into stocks, he said, ‘but then they rather surprisingly just quit.’ Among the broader population, the most common investment in stocks has been through mutual funds. The most conspicuous sign that these investors have grown disenchanted with American stocks has been the flow of money out of domestic stock mutual funds, which were drained of more than $400 billion since the start of 2008, compared with an inflow of $52 billion in the four years before that, according to the Investment Company Institute. The outflow has continued into 2012. The shift is partly attributable to the growing number of seniors moving from stocks to bonds, which is typical in retirement. But surveys by the institute have shown that investors young and old have grown less willing to invest in domestic stocks, even with interest rates on bonds at record lows in recent years.” (New York Times, May 6, 2012)

“The Lewis Point refers to the gradual disappearance of an unlimited rural labor supply that happens when a country develops. This, along with the commensurate rise in labor wages, is certainly happening in China, and as this World Bank blog post notes, could cause a decrease in FDI as China becomes a less attractive manufacturing destination. The characteristics of the workforce are also changing – more and more Chinese are going to college, creating a workforce more suited to skilled tasks than factory work. The middle income trap, as explained by this excellent New York Times article, is when a country’s growth starts slowing once per capita income has reached between $5,000 and $15,000. Once a country has reached a certain economic level, it becomes harder to grow further, in a situation analogous to the law of diminishing returns. Additionally, China is reaching the end of its demographic dividend, the disproportionate number of working age people that allowed it to leapfrog growth.” (The Diplomat, May 3, 2012)

Levels:

S&P 500 Index [1369.10] – Staying above 1350 is a near-term challenge; yet, a retest around 1360 is too familiar.

Crude [$98.49] – Sharp collapse below the $100 level. Appears like a knee-jerk reaction at first. However, this offers confirmation of slowing momentum in recent weeks.

Gold [$1643.75] – Barley changed from last week. Although a neutral territory is glaringly established, an anxious move awaits.

DXY – US Dollar Index [79.19] – Like gold prices, in the last 50 days or so, the index has not moved much. Importantly, the dollar has not made or retested new lows.

US 10 Year Treasury Yields [1.87%] – Short-lived run above 2% proved not to be sustainable. Yet, hovering at 2% is nothing unique or surprising.

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

Market Outlook | April 30, 2012

“Most of our assumptions have outlived their uselessness.” (Marshall McLuhan 1911-1980)

Reinforcement

Cruel months accumulate for doubters of global stock markets and indexes. Rants and raves of varying economic views did not slowdown the shares of larger companies. Many scramble with the realization of dreadful assumptions in thinking that economic realities coincide with market performance, at least thus fur.

Certainly, the message from concerned groups has some validity in real economic matters. After all, the temperature of the real and new economies are harder to measure when digesting numerous data points with conflicting takeaways. Slowing growth rates of are hard to dismiss even for the narrowest-minded optimist. Anticipation of a mild pause or fear-driven thoughts circulate again this season, but the merits of those beliefs are less appealing for market movers and influencers alike. Behind all the jargon and mass-media banter, the US stock market signals a noteworthy confidence that's perhaps understated by outside or sideline observers.

Simply using stock market indexes to paint the full picture would be incomplete, while omitting cyclical nuances is equally dangerous. Surely, the ongoing philosophical debate of government involvement and the role of capitalism is the global issue at hand that’s messy and lengthy but the core of most arguments. Since the post-crisis bailout decision, this issue is unresolved, ferociously debated, and a deadlock of all kinds resurfaces. Confidence restoration is too tricky for non-S&P 500 companies, and job creation is not quite as efficient as commonly demanded by popularity seekers. Thus, in developing an opinion or a solution, one is forced to carefully distinguish thoughts of nostalgic economic revival versus the limited tools available in the current landscape.

These heavyweight matters are partially directed and reserved for central banks. The Federal Reserve suggested improving labor and business developments. For tuned in central bank followers, these were common and expected words that at times ended up being a non-event.

Barely touched

So now we ask, what's changed? Barely as much as noisemakers would like one to believe. Deliberation of well-established low interest rates is hardly up for debate. US 10 year treasury yields continue to extend a six-week decline below 2%. A reminder that familiar and liquid instruments are perceived as valuable.

At the same time, volatility has gradually decreased for several months, commodities are around where they've been and the US Dollar is around its historic lows. Political debates increase but collective resolutions remain uncertain. Meanwhile, the economy is adopting, adjusting and merely becoming a non-glamorous puzzle.
In taking a few deep breathes, we quickly realize a whole lot of nothing is made of patterns in liquid markets. Similarly, bombardments of the Eurozone scare are more like the same old known crisis and previously showcased episodes of self-pity by some and unshakable denial by others. Through a few screams and shouts of election implication and policy-making theatrics, we see the same story but slightly different actors in this European saga.

Coping

Frankly, from a trend follower’s perspective, it’s hard to justify altering the current status of attractive US markets. Each day feels like an inflection point where the interconnected markets set the tone, from Spanish news to the Chinese housing slowdown. Thus, synchronized and collective sentiments are quickly developed while potentially ruining fundamental-based ideas. Therefore, clarity on timeframe is a risk management trait that’s been emphasized in recent years. Expectations based on big theories are harder to apply than selectively picking a handful of growth stories for market participation.

Article Quotes:

“In 1980 China’s median (the age at which half the population is younger, half older) was 22. That is characteristic of a young developing country. It is now 34.5, more like a rich country and not very different from America’s, which is 37. But China is ageing at an unprecedented pace. Because fewer children are being born as larger generations of adults are getting older, its median age will rise to 49 by 2050, nearly nine years more than America at that point. Some cities will be older still. The Shanghai Population and Family Planning Committee says that more than a third of the city’s population will be over 60 by 2020. This trend will have profound financial and social consequences. Most obviously, it means China will have a bulge of pensioners before it has developed the means of looking after them. Unlike the rest of the developed world, China will grow old before it gets rich. Currently, 8.2% of China’s total population is over 65. The equivalent figure in America is 13%. By 2050, China’s share will be 26%, higher than in America.” (The Economist, April 21, 2011)

“With regard to the elephant in the room, which is Apple, my impression is that what appears to be endless exponential growth is actually the overlay of three separate logistic growth curves – one for the iPod, one for the iPhone, and one for the iPad. These are great products. Still, in order to maintain even a constant level of sales, every unit sold in a given year has to be matched by a replacement the next year – year-after-year – or it has to be matched by a new adoption, and adopters of used products don't count. In other words, every dollar that existing users spent on Apple products last year has to be spent again this year, or matched by some new user this year, and again next year, and again the year after that, ad infinitum. Of course, it's reasonable to expect that late-adopters (e.g. those who have to save in order to afford the product) will have lower replacement rates, which will need to be offset by even greater adoption. Yes, there are billions of people in developing countries without an iPhone. Unfortunately, most of these people are also without running water.” (John P. Hussman, Hussman Funds)

Levels:

S&P 500 Index [1403.36] – Re-establishing some strength, as seen in the first quarter. Momentum remains positive given several buyers’ interest at the 1360 range. Surpassing April 2 highs of 1422 is a range that’s attentively watched by technical observers.

Crude [$104.93] – Although directionless this month, oil prices are showcasing some sort of bottoming process between $102-106. Behavior around the 50-day moving average will stir some talking points while further catalysts linger.

Gold [$1641.50] – Nearly eight months of causal uneventful trading patterns for hopeful momentum chasers. Yet the wobbly price movement does not erode the established uptrend. An interesting point for new buyers, and more suspenseful for existing holders of gold.

DXY – US Dollar Index [79.19] – The 50-day average stands at 79.83 and the 200-day closed at 77.95. This illustrates the lack of major movements in months.

US 10 Year Treasury Yields [1.93%] – Another weekly finish below 2% is becoming more customary than a shock. Yet sustainability at these newly familiar rates invites intense questioning and anticipation.

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.

Market Outlook | April 23, 2012

“Our Age of Anxiety is, in great part, the result of trying to do
today's jobs with yesterday's tools.” Marshall McLuhan (1911- 1980)


Spring Revisited


Murmurs of last spring’s Eurozone fright and darker visions mostly scared risk takers and casual observers alike. With short-term memories convenient and relatively fresh, the issue of sovereign debt risk is dreadfully revisited. This is a tiresome issue, but each round presents a different angle in a new season, as Spanish concerns take the front-seat discussion for policy makers and commentators. Several months of improving sentiment that focused on restoration in global markets is now severely in question, yet again.


Confronting and addressing the core economic matters is where most leaders have chosen to shy away from, given the layers of complication. This mostly revolves around preservation of self-interest, which has unveiled its true nature. For scoreboard watchers and price influencers, the resurfacing grim thoughts and
emotional responses do set up a period for charged up near-term contemplations brewing to form mild uncertainty. Along with elections and political positioning, the search for clues lives on, while policies related to interest rates remain ever so intriguing to any stakeholder.


Around the same time last spring, volatility and the S&P 500 index traded very close to today’s levels. Yet, unlike the last two Aprils, the US 10 Year Treasury is trading below 2% instead of where it stood above 3% – an eye-grabbing macro trend that hits at the core of pending suspense. We also see growing discussions on how yields
dropped for the fifth week, which suggests shelter to safer assets. Surely, risk aversion is trigged by European events, as witnessed several times in the post-2008 era. For what it is worth, gold is not at all-time highs; neither are crude prices, at least for now, which again refocuses attention to central banks and policymakers.


Strength Examined

A six- to nine-month look back reminds us of the emphasis on and comfort in positive stock market trends. Some buyers who lucked out in staying resilient continue to cherish actual results that turned out better than the gloomiest of predictions, especially when panic peaked in summer 2011. As usual, the better-than-expected market performance did not fully dispel the usual concerns of labor restoration, known and unknown debt concerns and deliberation on pragmatic economic solutions. Yet, the perception between those having market investment exposure versus those digesting traditional economic data may produce varying outlooks.


The data from the earnings season may confirm or justify recent positive trends, at least in market behaviors. All eyes are fixated on these seasonal discoveries of the health of profitability in larger companies. So far, quarterly reports have demonstrated positive outcomes (against expectations) and further discovery awaits as we enter the crux of earning season. Investors face a conflict between pausing to let the looming turbulence pass versus gaining more comfort in owning shares and potentially increasing exposure in US equity markets. The investment options offered an appealing point, but finding a timely entry point is a daunting task in itself. Conventional yet practical viewpoints point to chasing higher returns,while others are willing to pay up for liquid market exposure. These dynamics are critical for investment managers in shaping portfolios to meet desired annual numbers as we’re nearing the midway point.


Resilience

Considering all points, global markets remain interconnected and for the most part share a collective upside move. Of course, financial behaviors easily become politicized and confusing, especially when short-term turbulence is the dominating theme. Plus, glaring crisis matters inevitably play out in the open markets at certain periods
with some spurts. Gauging the Federal Reserve’s intervention is the artful skill required from those active in markets. Speculative as it may be, betting along the central banks is the path favored by near-term traders despite waning investor sentiment. Meanwhile, value seekers should not feel to panic and sell or eagerly purchase, as
opportunities will present themselves in less flashy companies andindustries.


Article Quotes:


“After eight straight quarter increases, overall tax collections in the fourth quarter of 2011 are above the peak levels in most states.Total revenues were 3.0 percent higher in the fourth quarter of 2011 than in the same quarter of 2007. In the fourth quarter of 2011, 33 states reported higher tax revenue collections than in the same quarter of 2007. However, if we adjust the numbers for inflation, nationwide tax receipts show 3.4 percent decline in the fourth quarter of 2011 compared to the same quarter of 2007. … For most of the period during and after the last recession, local tax collections remained relatively strong. However, the trends are now shifting due in part to the lagged impact of falling housing prices on property tax collections. For the quarter ending in December, the 1.0 percent decline in the four-quarter moving average of local tax collections is weak compared to historical averages. The largest year-over-year growth in local tax collections in recent history was recorded in the third quarter of r of 2005, at 5.8 percent” (Rockfeller Institute ofGovernment – April 2012)


“So while Bo's particular brand of charisma may have been a bridge toofar, this is when China needs dynamic leadership most. As highlighted in a February World Bank study, China may well be facing another key inflection point and will require a new wave of economic reforms, such as commercializing the banking sector and redefining the state's role in the economy, or risk increasing the likelihood of a hard landing. But it will take an empowered and proactive new leadership to implement such an agenda over the strong resistance of powerful vested interests such as sprawling state firms and entrenched local officials. Instead, what Beijing has, and what is on display in the Bo case, is a stovepiped bureaucracy that strains to present a unified face to its people and the world. The problem is that an effective remedy would involve substantial structural changes to a system in which key players, such as the Chinese military, seek to advance their parochial interests by exploiting the gaps that pervade the current Leninist structure and which breed poor policy coordination. Extensive corruption also has filled the vacuum left by the demise of ideology,and the leadership has fostered a top-down decision-making culturethat discourages competing ideas and punishes any public hint of disagreement within the party's seniorranks. (Council of Foreign Relations, April 18, 2012)


Levels:

S&P 500 Index [1378.53] – Multi-month run alive but mildly pausing. Mostly uneventful pattern in the last few days. Verdict awaited in earnings sentiment and continuation of optimism. Trading almost around the 50-day moving average, which catches the attention of technical observers.

Crude [$103.50] – Additional evidence of strong buyers’ influences around the $100 range. Despite lacking upside boost, the uptrend has not broken.

Gold [$1641.50] – A tug-of-war between near-term buyers. Back and forth moves between $1650-1750 do not provide enough clues for projections, but emphasize that fueling the upside momentum is taking a while for gold optimists.

DXY – US Dollar Index [79.19] – Barely moving in recent days; hovering at familiar ranges.

US 10 Year Treasury Yields [1.96%] – Since March 20 peak of 2.39%, the downtrend has driven yields down below 2%.



Dear Readers:

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

Market Outlook | April 16, 2012

“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” Publius Cornelius Tacitus

Awaiting Scrutiny

By all measures, sensitive market reactions were forming leading up to the start of a new quarter. Casually anticipated and eventually stimulating negative responses slowly outweighed the built-up momentum in recent days. A mild break is known to challenge the bulls’ conviction, while doubtful pundits reappear loudly by pointing out numerous fragilities. Of course, it comes to the forefront of discussion for investors, especially after a week where the S&P 500 Index fell 2%.

After an explosive first quarter for stocks, plenty of edginess is being or set to be released with increased curiosity around earnings results. Naturally, this has capital allocators reexamining the definition of risk in a market that’s mostly shaped by low interest rate policies and mostly upbeat sentiments. Recent downtrends are not earth shattering, when viewing the key catalysts such as rotating European concerns or a much talked about Chinese slowdown. Both are glaring issues that easily stir macro reactions and headlines while increasing the guesswork for speculators of all sorts for months ahead. Importantly, what is the impact of slowing China and Europe on US corporate earnings? That’s the question that should be asked and researched further.

Early spring clues

The well-known macro drivers, such as commodities, have not accelerated recently and are attempting to restore some positive momentum. For example, the run-up in crude price, a dominant theme for a decade, is not quite finding a new wave of buyers above $110 a barrel. Surely, there is a supply and demand argument that conveniently floats around to justify further upside moves. Yet, weekly oil inventory is signaling that supply is much higher than experts’ estimates. It’s too early to judge for some, but worth taking notes on whether soft demand in commodities serves as a barometer for a weakening global economy.

Similarly, gold aficionados are not vibrantly pounding the table these days. Sure, general fear has subsided since late fall and investor eagerness for “safe assets” (i.e. gold) eventually cooled off. Interestingly, the looming concerns with paper assets are assumed to benefit gold. Increased turbulence reawakens the commodity supporters – barring a synchronized asset decline in major assets. The explosive run witnessed last spring may be hard to replicate, but the stakes, along with expectations, are high.

Observing time

Profit-taking in risky assets by some managers after the end of the first quarter appears somewhat logical. Unlike fall 2011, it is not quite as easy to bargain hunt for seekers of higher-risk groups, such as banks, homebuilders or smaller technology-based companies. Thus, being an aggressive buyer at current price ranges may not be too enticing for now. Patience is needed for buyers and sellers alike until the new rhythm sets a noticeable tone. Buying should not be feared or dismissed, but the readjustment in the investor’s mindset needs to be understood. Further discovery of earnings feel and sentiment may end up providing a fruitful clue rather than overexerting capital along with the frenzied crowd.

Article Quotes:

“It should not be forgotten that the key institutions in China’s banking system remain more or less government owned. This changes the rules of the game considerably. Standard risk management variables, such as the capital adequacy ratio — which, incidentally, is extremely high among Chinese banks — and the non-performing loan ratio are only of marginal relevance because the integrity of the biggest banks is guaranteed by the government. China’s central government is willing and able to act on that guarantee. The level of outstanding public debt is modest and even when contingent liabilities are taken into account, such as local-government debt, the prospect of China falling victim to a European-style public debt crisis is remote. … Property prices in China may well be inflated; price-to-income ratios, particularly in the major cities, suggest that they are. But for high prices to constitute a bubble, they must be able to burst. In the case of China, it is not clear that they have, nor where a trigger might come from.” (East Asia Forum, April 14, 2012)

“Consider the first conundrum: the current relationship of Treasury yields to equity and dividend yields. In both the third and fourth quarters of 2011, the earnings yield on the Standard & Poor’s 500 Index was more than 2.5 times the composite long-term government bond yield, by far the biggest multiple in the past 50 years. And in the fourth quarter, the dividend yield on the S&P 500 (2.13 percent) was only barely below the composite long-term government bond yield (2.7 percent) — the narrowest gap in decades. These facts are cited as reasons that bonds have been overpriced. Yet the complete historical record shows that the current relationship of earnings yields to Treasury bond yields is hardly unprecedented. The ratio has been far higher in the past and has stayed above current levels for long periods. The comparison of bond yields to dividend yields over the past 130 years paints a similar picture, with today’s bond yields appearing not all that unusual. “ (Institutional Investor, April 12, 2012)

Levels:

S&P 500 Index [1370.26] – Waning buyers’ appetite in the near-term to drive the index above 1400. Visible consolidation between 1360-1400 suggests a cooling period from multi-week strength.

Crude [$102.83] – Late March peak setting the tone for price declines. Revisiting the ever-so-familiar $100 mark, where buyers’ will is facing a strong resilience test.

Gold [$1666.50] – Mounting multi-month evidence of a weakening trend. Last two attempts to surpass $1750 have been too difficult and have drawn some doubts in investors’ minds.

DXY – US Dollar Index [80.04] – After an explosive fourth-quarter 2011 run, the dollar is back to a dull trend of much of the same week after week.

US 10 Year Treasury Yields [1.98%] – An eventful 30 days, where rates round-tripped back to the 2.0% range.

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.

Market Outlook | April 9, 2012

“Always do what you are afraid to do.” Ralph Waldo Emerson (1803-1882)

Present feel

Deciphering how to feel is where the majority of time is spent on market diagnoses. Either indexes tell us how we should feel; or politically driven engines shape what to feel For some, common-sense observations may provider better insights.

Scoreboard glancing reminds us that broad indexes, as measured by stock performance, showcase strength. The S&P 500 is up 11% for the year, while the bank index is up nearly 25%. So far, it is not farfetched for one to declare conditions are improving, at least from several months ago. Reading the jobs number, however, requires a shrewd grasp of mechanics, self-serving goals and unlocking missing details that may not appease the casual sentiment examiner.

Right ahead of the holiday weekend, the jobs number provided a not-so-amazing, but still upwardly trending message. There is plenty to dissect in that sense, along with earnings for the first quarter. This reveals mixed results of sorts, which some may use to jump to early conclusions. Somehow, the fear-mongering crowd has its share of followers, but a slanted view among traders can misleadingly pollute minds to disregard the noticeable strength. Putting mind games aside, a clear and open-minded approach is needed heading into quarterly earnings results and further examination of upwardly trending economic numbers – not to mention improving manufacturing and calmer volatility for several months.

Overcoming chatter

Perhaps the recent low-volatility trends are “too calm” for some participants’ liking, but by a few measures, the sense of comfort echoes levels last seen ahead of the crisis. Of course, it is too common to fear relentless success, especially when pending sell-offs and uncertainties are promoted as a possibility. First, memories of the last two spring seasons suggest that markets do slump heading into summer months. Sure, that’s mostly a thought driven by short-term memory, which has a profound influence and a potential of self-fulfilling prophecy. Secondly, the slowing China story is long awaited, and how that reality sets in is another wildcard. Finally, European concerns are convenient to spark and revisit worrisome issues that linger.

Uplifting Custom

Like quantitative easing and LTRO (Long-Term Refinancing Operation), the markets gained a vote of confidence in the early part of the year. Speculating is one matter, but encouragement of risk taking from policymakers provides another boost of market returns. These stimulus efforts can result in simple but unsustainable habits in which active participants count on the same trends to continue. On the other hand, the low interest rate model appears to be a necessary tactic for survival mode to improve global markets. As for now, speculators fight to find and preserve short-term gains while politicians focus on pending elections. The long-term health is left as a surprise (as pointed out by those opposing the Fed), which draws further intrigue for risk managers. Yet, for the traditional money managers, selectively betting along the US market, more often than not, continues to pay off in the long tracked market history. As simple as it seems for intellectual minds, the reality keeps proving itself despite scars and bruises, which are simply part of the game that all must accept.

Article Quotes:

“When strategists speak of the ‘Malacca Dilemma’, they mean that Beijing's sea lines of communications are highly vulnerable. In times of conflict between the US and China, the supply of crude and iron ore needed to keep the Chinese economy alive and kicking could be relatively easily cut off in the straits that connect the Indian Ocean with the Pacific. As such, a move would force the Chinese leadership rather quickly to the negotiation tables on the enemy's terms – and as it becomes clearer that the western Pacific holds vast untapped reserves of oil and natural gas – Beijing naturally sees control over the areas as a way out of its precarious situation. (According to Chinese estimates, oil and gas reserves in the western Pacific could meet Chinese demand for more than 60 years.) With official defense spending to top US$100 billion in 2012, and the actual amount estimated to be much higher, China's People's Liberation Army (PLA) seems on course towards building the strength needed to ensure all goes smoothly in China's quest for energy security.” (Asia Times, April 6, 2012)

“One of the reasons that a perception of manufacturing’s decline exists is the severe job losses that have been experienced within the sector – particularly given the dramatic impact such shifts can have in small communities all over America. … What factors are driving the changes in Chinese wages? Quite a few different things, as it turns out (all of which we find quite intuitive): ‘Chinese wages have been increasing at a rapid pace in recent years, driven by a variety of factors including shortage of workers in the coastal manufacturing areas, rising education levels among young workers, domestic inflation, and the government’s focus on raising national income levels in its 5-year plan(s).’ All of this should bode well for US manufacturing, since it makes the US more competitive in cost terms.” (Financial Times, April 4, 2011)


Levels:

S&P 500 Index [1398.08] – Ability to stay around 1400 provides some early clues for daily observers. A consolidation to 1350 appears plausible. Even in that case, the positive trend is poised to remain in place.

Crude [$103.31] – In the last five years, the bulk of trading for crude has stood within the $80-$100 range, outside of two extremes seen in 2008 (peak of $147 and low of $32). That said, guidance for next ranges is desperately awaited.

Gold [$1631.00] – At a quick glance, the multi-year run is convincing enough to claim gold is in a powerful run. However, the 7-month slump in price appreciation begs the question of when the next reacceleration will be. Otherwise, fragile trading ranges await around $1600.

DXY – US Dollar Index [79.00] – Early attempts at reacceleration, which will serve as a barometer for risk aversion. Yet, unless there is a dramatic move, the current pattern is all too familiar.

US 10 Year Treasury Yields [2.18%] – Similar to a short-lived spark in fall 2011, another sharp run up is pausing. The bottoming process for yields is taking shape between 1.80-2.20%. Yet several catalysts, along with time, are required to witness a noteworthy rise in yields.


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.