“Vision is the art of seeing what is invisible to others.” (Jonathan Swift 1667-1745)
Re-confirming strength
The existing bull market continues its run while the US economy appears to reaffirm its slow recovery. Central banks’ implementation of stimulus plans may have accumulated enough doubters, but the success of raising inflation expectations is still questionable, so the tone has led to assets seeing a collective boost. Housing improvement has been long underestimated and its contribution to the GDP can create surprises in the quarters ahead. Confirmation of construction and manufacturing growth will be watched attentively to see if there is an actual broad-based recovery. At this point, as in prior decades, the US manufacturing sector is sluggish, but even minor improvement can contribute to further evidence of new cycle recovery.
The desired pace of the current recovery is debated in many ways, but the clues of a housing healing should not be easily ignored. A recent status update on homeowners’ condition provided some early clues:
“According to the scorecard homeowner equity has risen to its highest level since the third quarter of 2008 and 1.3 million borrowers have been lifted above water, largely due to rising home prices. Equity jumped $406 billion or 5.9 percent to $7,275 billion in the second quarter of 2012.” (Mortgage News Daily, October 5, 2012)
Not too foggy:
These days, convincing the gloom-and-doom crowd with endless data of improving or cheery messages is not an overnight task. The same way, turning risk-averse observers into optimistic risk-takers ends up taking significant time. Yet, markets move faster than economic factors and select entry points are offered in a narrow period. The increasing confusion in data digestion, political messaging and residues of the 2008 crisis have puzzled many minds. Simply, casual and seasoned observers have been challenged by and at times missed this relentless “silent bull market.” Glancing at the scoreboard today (year to date: S&P 500 +16.2%, Nasdaq 100 +23.5%, German DAX Equities +25.4% and US Bank Index +30.5%) shows healthy return numbers by any equity-based historic standards. Perhaps, this reality is aggregating the trailing fund managers who failed to bet enough on US stocks.
Obviously, if the message of economic strength is not fully transmitted to wider audiences, then confidence restoration remains a lengthy process. Anticipation of Washington’s policy and elections outcomes further confuse many to stay stagnant:
“Almost 79 percent of respondents cited uncertainties related to the political environment as their number-one challenge.” (National Association of Manufactures, September 13, 2012).
Adjusting vision:
Similarly, the lack of stock market participation is hard to dismiss. Highly intensified and politically charged opinions on the economy are less relevant for markets. This year revealed the slowness of emerging markets, improvements in US labor and redefinition and restoration of a fragile global financial system. Interestingly, hedge funds are buying debt of risky European nations. According to Bloomberg, last month witnessed the $104 billion purchase of Spanish bonds by foreign investors (October 7, 2012). Perhaps, this shows risk-taking by few in anticipation of improving Eurozone solutions. This is a though reality to envision given what’s transpired in the last five years. Whether this is right or wrong is one issue, but acting on courage is what keeps the spirit of financial markets alive. Frankly, betting on upside surprises is out of favor and partially neglected.
As the mild race to own stocks piles up, then the grim question asked will be whether a strong economic recovery ends up slowing the stock market’s upside potential. Although economic strength is not fully evident, the trend is slightly positive. Yet the laundry list of worries has grown if not stayed the same from the start of the year. That includes: further discovery on Eurozone crisis, magnitude of China slowdown and escalating regional tensions leading to potential spike in commodities. The so-called “inventory” for worrisome matters continues to appear excessive more than was imaginable. For example, when it comes to buying downside insurance, last month presented heightened fear of all sorts:
“In September, average daily volume (ADV) in VIX futures reached a new all-time high of 126,345 contracts, which surpassed the previous record ADV of 102,587 contracts during June 2012.” (HedgeWeek, October 2, 2012).
Thus far, high trading activity in volatility-related products has not translated to increased volatility. Rather, the opposite result has been seen, in which volatility is not quite as high as expected.
That said, to claim a blind-sided collapse that may loom around the corner is not a shock (yet again). Rampant attempts to avoid or minimize misunderstood risk remain a theme, but riskless instruments are unattainable – reinforcing the importance of emphasizing relative attractiveness. For now, a slowing US economic recovery attempting to catch up with the explosive stock market only demonstrates a new cycle formation and a new definition of “normal.” The search for a “new normal” remains unknown to all.
Article Quotes:
“June or July is usually the peak month for both total and full time employment. This year the numbers broke last July’s level in April. The economy was a couple months ahead of schedule in affirming the uptrend in jobs. That uptrend is still firmly entrenched, even in the full time jobs including the September decline. The gains have clearly accelerated in 2012 versus 2011. The idea that the economy slowed in 2012 is hogwash. With QE3, the Fed is adding more fuel to a fire that was already beginning to burn hot. … The withholding tax data shown below also suggested that something in the labor picture is still undergoing consistent gains, regardless of what the SA [seasonally adjusted] data says. Increasing withholding tax collections of 2% in real terms are growing at double the rate of population growth. … Economic pundits must face the fact that the 10 million fake jobs spawned by the bubble are not coming back. The 7.8% unemployment rate is probably ‘normal.’ The bubble unemployment rate of 5.5% was abnormal.” (The Wall Street Examiner, October 5, 2012)
“Chinese leaders have plenty of cash, so they can easily funnel resources into new industries. They are already directing funding toward strategic emerging industries such as green technology products and next-generation information technology equipment and software. Where they run into trouble, however, is in actually getting those new industries off the ground. That requires turning off the spigots of government support flowing toward the older and more inefficient industries and state-owned enterprises, a tough task when local government officials are fighting hard to keep them alive. In green energy, for example, Chinese leaders have directed substantial resources toward wind and solar. That has paid off in clean energy manufacturing: Chinese companies are using cost innovations to manufacture cheaper versions of wind and solar technologies developed abroad, and they are exporting those products all over the world. What Chinese leaders really want, however, is to develop their own technologies and sell more of them at home, and that is not going so well. Chinese leaders are doling out funds for clean energy R&D, but they distribute them through government channels, and government officials direct the money toward old friends instead of new prospects. Resources go to the well-connected instead of to the entrepreneurial. Many private enterprises cannot get financing, and private enterprises are more likely to generate the new ideas China needs.” (Center for American Progress, October 2012).
Levels:
S&P 500 Index [1460.93] – Closed last week a few points away from September 14 highs of 1474.51. The current strong recovery began in early June as the odds for near-term correction increase.
Crude [$89.88] – Interestingly, after making annual highs along with stocks in mid-September, the momentum for oil has slowed sharply. A notable move below $90 is worth watching and deciphering between a trend and a temporary pause.
Gold [$1784.00] – Continues to trade near annual highs. Surpassing $1800 remains a suspenseful event for some buyers and a mere test of strength for most observers.
DXY – US Dollar Index [79.32] – In line with its four-year and two-points below its ten-year moving averages. Both demonstrate the lack of noteworthy movements and the relative stability of a strong currency.
US 10 Year Treasury Yields [1.74%] – It was September 30, 1981 when rates peaked, and ever since, the downside has persisted over three decades. Now, attempting to dig out off all-time lows set in July at 1.37%. Over a 10-week period, stability is forming between 1.60%-1.80%.
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
Sunday, October 07, 2012
Sunday, September 30, 2012
Market Outlook | October 1, 2012
“The truest way to be deceived is to think oneself more knowing than others.” François de La Rochefoucauld ((1613-1680)
Seasonal deliberation
The four-year-cycle run in the stock markets mirrors the election season, which stirs up opinions and various thoughts. Interestingly, the fall season, including the month of October, is often feared, as pundits anticipate theatrical events. Certainly, sharp slowdowns have been displayed, most notably during the 2008 credit crisis and 1987 crash – not to mention most historians’ favorite: the 1929 crash resulting in the October panic ahead of the Depression. All sound quite familiar and rehashed in these cautious days and make for a thrilling documentary-like dialogue, but may not tell the full or exact story.
This financial market thus far has encountered various opinions, including some threats of gigantic regulations, or pending global collapse and lack of trust leading to a revisit of recent crises. Certainly, there is plenty that’s unsolved, but knowing where to focus one’s fear is the art that’s rewarding in this faster-paced market. Surely, noise and headline makers are eager for dull or theatrical events. Meanwhile, capital allocators have been punished for lagging broad indexes and simply cannot afford to live by popular or generic ideas. As the schedule has it, this week’s election-related events, along with early releases on labor conditions, combine to spark some talking points. In addition, further central bank and economic growth matters are awaited. Through all various data points, the impact to long-term implications will still remain a mystery to most.
Shaky feelings
This year has been more about accepting the slowing global growth and a collective recognition of various demographic and globalization challenges. At this point, one has to wonder how much ‘bad news’ remains in the tank for a market that has quietly risen while silencing various critics. According to the AAII investor sentiment data, the bearish reading is at a nine-month highs. Thus, it’s fair to assume that bubble-like levels regarding corporate growth are not overly concerning. It’s intriguing that the lack of enthusiasm continues despite the impressive year-to-date stock market returns. Simply, there is no shortage of doubters. Interestingly, other perceived “safe assets” persist in showcasing euphoric investor demand, such as Long US treasury and high-yield bonds.
For now, the appealing trade for broader audiences is to expect commodities to go higher. That's quite evident in speculators of crude that have increased their bets. Similarly, bank analysts have increased gold price estimates and the collective upbeat expert view lives on. Certainly, going against these forces is not easy and not natural to dismiss. Nonetheless, the risk of owning commodities has increased relative to other years, while the upside potential is unclear.
The Macro Reminders
The overly exhausted but never-ending Eurozone discussion may provide some jolt for volatility traders and some ammunition for those heavily entrenched in glooms-day scenarios. The fifth year of the Euro Crisis has rotated its focus between various countries, as Spain seeks a rescue plan. As the Spanish banks hold a $76.3 billion deficit (according to Bloomberg), the uncertainty cannot dissipate overnight as new discoveries unfold. Yet, the shock element is hardly news for a forward-looking market. Distinguishing social and political noise from market behavior remains the ultimate challenge in assessing Eurozone matters.
Finally, in the near-term, the impact of Middle East tension on oil prices and ongoing weaker Chinese growth (low PMI September data) will stimulate various minds to make strategic macro moves. Importantly, the link between oil demand and emerging market growth/slowdown is a puzzle that’s due for unlocking. Similarly, emerging markets are expected to reignite themselves out of the current slump, as demand for growth is desperately needed. Since 2010, the Emerging Market Fund (EEM) has underperformed compared to the S&P 500 index. This reinforces that the US banks, currency and financial system maintain their relative edge despite increased global uncertainty.
Article Quotes:
“The demand side is also dark and threatening for overpriced oil, very threatening. World oil demand, this year, may achieve a scary feat for the oil bulls: two straight years of near perfect stagnation of global demand. The EU27 countries are now in their sixth straight year of oil demand shrinkage, recession aiding, but they are now far from the only countries where oil demand shrinks – and shrinks. …. China's long-term growth rate of oil imports, which hit an average of more than 9 percent a year for 1999-2009 has been slashed in half. Indian oil demand growth, these days, is close to 3.5 percent per year, not the previous 5.5 percent average…. The US is now a large, ever growing net exporter of refined oil products. Domestic refiners are taking crude from wherever available and turning it into diesel, gasoline and other oil products for growing demand from Latin America, Asia, Africa and even Europe, where Europe's outdated, high cost, oversupplied and mismatched refinery output – relative to European refined product demand – creates a growing market for US exports.” (The Market Oracle, Andrew McKillop September 30, 2012)
“Jens Weidmann, president of the Bundesbank, last week said a banking union was a disguised transfer mechanism. On this point, he is right. A banking union would recapitalise Spanish banks at the expense of northern European taxpayers. This is the whole point of having it. It would be dishonest to deny that. A banking union, properly constructed, thus constitutes a fiscal union. This is not something you do before Christmas, or through a directive. I wrote earlier that a banking union is an even bigger deal than a eurozone bond. You can construct a eurozone bond with lots of safeguards. There are even proposals on the table that would turn a eurozone bond into an instrument to deliver austerity – a so-called debt redemption bond. I would rather have a banking union and no eurobonds, than the other way round. I would rather have nothing than a debt redemption bond. Judging from the political debate, Germany is not ready for a fiscal transfer mechanism of any kind. In particular, Germany is not ready for a banking union. Ms. Merkel never made a political case for a banking union in Germany. All she did was play down the implications. I would counsel readers against falling into the trap of thinking that next year’s German elections will miraculously clear all the hurdles. All the various probable outcomes favour a continuation of the present policy.” (Financial Times, Wolfgang Münchau Septmber 30, 2012)
Levels:
S&P 500 Index [1440.67] – Slightly retracing from intra-day highs of 1474.51. Increasing expectation for declines closer to 1400-1350. However, positive momentum remains intact. Since the lows of October 7, 2011, the index has risen by 34%.
Crude [$92.19] –Recent sharp declines are puzzling those expecting price appreciation due to some regional unrest. Interestingly, there is a record number of speculators who continue to bet on higher prices showcasing the already built-up expectations. At the same time, the slight decline below the 50- and 200-day moving averages are compelling to chartists who may make the case for further weakness. Holding above $90 will remain key for sensitive observers in days ahead.
Gold [$1776.00] – Growing suspense on gold’s ability to break above $1800 on the way to record highs will be tested yet again. Recent four-month upward movements have re-ignited confidence for analysts to increase targets while downplaying concerns of “bubbles”. Either way, hardly a fundamental play that’s heavily tilted toward momentum and increased speculation.
DXY – US Dollar Index [79.32] – Amazingly, the 12-month average stands at 79.91 and the four-year average stood at 79.25, which reminds us of the lack of any major changes.
US 10 Year Treasury Yields [1.63%] – In the last two months, struggling to hurdle past 1.80%, while showing resilience around 1.60%. Until there is a movement below or above this trend, the message remains that yields are very close to historic lows.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, September 24, 2012
Market Outlook | September 24, 2012
"Silence is a source of great strength." Lao Tzu, (600 B.C. – 531 B.C.)
A silent bull market
The much-anticipated announcement of further easing came and went mostly as expected. With this Quantitative Easing (QE3) announcement, the theme of synchronized uplift in all assets reminds us of 2007, or pre-crisis mode. It is fair to say that this summer, key markets were not quite caught up in the grim conditions of market hopelessness as experienced in late 2008. Neither did the Federal Reserve’s recent action feel like a desperate shock to get out of "intensive care" like the dull late winter of 2009. Yet, through all this repair and these confidence restoration attempts, it simply feels like a silent but powerful bull market. Amazingly enough, even the German stock market (DAX) is already up 26% in 2012. Not many openly glorify the recent market success. Perhaps, many are hesitant to fully relinquish the fearful mindset that’s commonly driven by too many unknowns. That said, de-leveraging is not so pleasant and restoring employment in the current landscape is not easy, but in many ways the market has explored and examined doomsday scenarios.
Growth in private sector jobs has been increasing slowly, corporate earnings are closer to all-time high levels and housing appears to be digging out of a deep ditch. All three fundamental points have backed this strong equity market that is looking ahead or at least for signs that indicate the stopping of the ongoing bleeding. For example, “A lack of inventory in the low-price segment of the market meant the average price of a home was up just because there were fewer low-priced homes in the mix. Adjusting for price, existing home sales were up a more impressive 16%, which is more in line with the growth we are seeing in new home sales.” (Morningstar, Robert Johnson, September 22, 2012). The expectation for continuously improving numbers is slowly building, which only enhances further sensitive responses.
Underestimated
Surely, when the thought of the S&P 500 index revisiting 2007 highs while Nasdaq hovers near its 12-year highs occurs, then it naturally stirs a knee-jerk reaction of a market that’s accelerating too quickly. It is understandable, but not necessarily wise, to take “overbought” statements at face value. Investment managers and participants are set to quarrel between the “gut feel” of day-to-day observation versus a mechanical but familiar set of circumstances that supports higher stock indexes
Through this upside move, there are instances of reality check that lead to a blurry vision when dissecting the testy social and foreign policy environment ahead of election season. Excessive diversion into these not-so-pretty but contentious social dynamics may have led some professionals to lose focus on trends and macro catalysts. Plus, the lack of clarity in regulatory policies and banks’ new revenue models enhance the list of uncertain items. Nonetheless, that’s not enough to depress a dynamic and evolving financial market.
First, it has become too common for politicians or pundits to bash the Federal Reserve’s actions these days. Secondly, there has been a growing fear movement that has led investors to purchase downside protection (insurance) in portfolio holdings. This is exhibited in various ways, as this summary showcases: “The CBOE saw more than 600,000 VIX contracts traded on Friday [September 14, 2012] for open interest of 7.66m, of which more than two-thirds represented calls, indicating that investors are positioning for volatility to increase in the near term.” (IFR Asia, September 23, 2012). Thirdly, the lack of retail investor participation is noteworthy and not needed to produce a solid year-to-date return. Interestingly, the majority of hedge fund managers did not participate or show strong convictions in the rally. At the end of August, when the S&P 500 index returned nearly 12%, hedge funds only produced 3.8% (Hennessey Group LLC). This is not overly alarming for longtime mutual fund observers who’re accustomed to underperformance by overhyped or larger managers. Similarly, few money managers may increase overall risk tolerance to chasing returns by accumulating winning stocks. That response potentially fuels further market upside movement (fairly or unfairly), especially if the real economy improves at least psychologically. Sure, pending pullbacks resurface here, but the positive momentum is hard to debate or ignore.
Suspenseful questions
Now that the anticipation of further central bank easing is nearly off the table, then what’s the next upside catalyst? It’s a question that’s being asked and an answer that will not be clear in the near-term. Are expectations going to escalate too high? And if the stimulus fails to produce growth, then what are the options and consequences?
These are all valid questions that will play out. Certainty, the Federal Reserve plan is now quite evident to decrease the suspense. The results of US elections and pending results from Eurzone solutions clearly will set the stage. Not to be missed in all headline-sensitive items is the potential resurgence of emerging markets, which contribute significantly to sales of larger multi-national firms. If the interconnected market operates in a coordinated recovery, then a collective strength may re-emerge. Any movement of collective strength can spark a much louder bull market as the odds for this are still underestimated.
Article Quotes:
“Americans have profited from China’s meteoric rise: China holds $1.15 trillion of the roughly $16 trillion total in federal debt, enabling deficit-popping tax cuts and government expenditures on social programs and the military. Nearly 160,000 Chinese students attended American universities last year, a 398 percent increase over the past 15 years, according to the Institute of International Education. Chinese firms invested more than $4.5 billion directly into the United States in each of the previous two years, through either mergers or opening new factories, according to the Rhodium Group. More than 1 million Chinese tourists came to the United States last year – each spending an average of about $6,500. The Commerce Department estimates 3.25 million Chinese will visit in 2016.” (The Fiscal Times, September 21, 2012)
“Much that could have gone wrong in the euro zone suddenly seems to be going right. Germany’s constitutional court in Karlsruhe has given the go-ahead for a new rescue fund. A banking union is taking shape. The ever-awkward Dutch have swung back to pro-EU mainstream parties in this week’s election. This builds on a recent pledge from the European Central Bank (ECB) to act to stop the break-up of the currency. Even angry talk of expelling the Greeks from the euro has died down. But don’t rejoice quite yet. The fine print of the Karlsruhe judgment may yet cause problems. Even Dutch centrists are wary of handing over cash and sovereignty. Nobody yet knows how to defuse the ticking bomb of Greece. The ECB’s commitment is untested. And nobody yet knows whether and when Spain will accept the offer of ECB help. Then there is the danger of complacency: debtor states might slow down reforms; creditors may lose the will to repair the euro’s fatal flaws.” (The Economist, September 15, 2012)
Levels:
S&P 500 Index [1465.77] – Trading at annual and multi-year highs while 7% above its 200-day moving average. Recent break above 1420 showcases some buyers’ appetite despite pending pullbacks.
Crude [$92.89] – Sharp near-term decline triggered after reaching the $100 level on September 14, 2012. Set to hold steady around $92 as participants decipher the reasons for recent declines.
Gold [$1784.50] – On one end, a break above $1750 demonstrates ongoing strength that aims to reach all-time highs of $1895 set last September. However, staying above $1750 for a considerable time has been challenging. In November 2011 gold peaked at $1795 and on March 2, 2012 the commodity stalled at $1781.
DXY – US Dollar Index [79.32] – Since late July, the dollar strength run has taken its familiar course of depreciation. In recent weeks, the dollar has been attempting to stabilize, but appears to trade around its multi-year average.
US 10 Year Treasury Yields [1.75%] – The last two months are establishing a new tight range between 1.60% and 1.80% as more clues are awaited for a noteworthy move.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, September 10, 2012
Market Outlook | September 10, 2012
“Society is always taken by surprise at any new example of common sense.” Ralph Waldo Emerson
Common sayings
The three common prevailing themes these days circle around re-accelerating gold prices, overvalued stock market and weakening Euro. As to how these themes materialize remains an art form that will play itself out. Deciphering the chances of all three themes having an unexpected or inverse result is even more appealing then the currently presented conventional thinking.
The thought process of high gold prices, lower stock market and weakening Euro stems from daily reminders of economic slowdown and ongoing efforts of easing by central banks. This collective growth concern has plagued large (especially China) and smaller nations in recent months. Thus, the inescapable nature of interconnected markets creates a gloomier outlook for those shaped by current events. These fragile growth related issues may reinstate further thoughts that all three themes will play out in a "logical" manner. At least, experience teach us the power of self-fulfilling prophecies should not be underestimated. However, accepting a gloomy outlook because it is a good or logical story is not prudent for a participant looking to capture trends.
A Multi-purpose idea
From a participants point of view, having clarity of the “instrument” is a good start. As in, is gold a commodity or a currency or both? Is it a speculative instrument or a long term investment? Perhaps all of the above is the sentiment that is being felt and those forces are unpredictable in their waves. Yet, staying weary of these so called "obvious" statements usually ends up rewarding the skeptical observer. These days gold is popular not only as an investment tool but a political tool as a commodity that has rustic appeal and historical appeal. Plus, gold is a hedge for gloomy outlook or system breakdowns that are pending. Perhaps, there is a comfort in holding in a perceived safe instrument.
Gold aficionados are sensing a bottoming process form over the summer. That encouragement is fueled by an 11% rise in gold prices since mid-July. A much anticipated gold rally lurked in the background and reawakening the gold bugs. Yet, the goal of diversification away from major currencies is not to be confused with gold price appreciation. In other words, fear of dollar and Euro depreciation might be compelling to look for some gold exposure. Sure, that’ s a portfolio management decision to hold some the same way central banks manage their balance sheet. Sometimes confusing a hedge with an investment does not have a pleasant outcome. In the near-term, the higher gold prices go the higher the conviction of those awaiting this commonly accepted expectation.
Sustainability doubted
Observers are noticing the rise in stock markets and ongoing strength of corporate earnings and asking the question: is this sustainable?
It is a logical question that begs for increased clarity, but the uptrend is too difficult to dismiss or ignore. Of course, some pundits remind us that The S&P 500 index keeps making its stride towards the 2007 highs led by technology but wide participation is visible – even banks are recovering. The well followed stock indices are up 14% for 2012 and if one was too busy reading the “slow down” headlines then these gains would’ve been harder to visualize. For a focused trader, all the noise of market concern has been the loudest distraction, but fundamentals have been solid.
Bank analysts (ie. Bank of America and RBC) are beginning to send out cautious forecasts for equity markets between now and year-end. This is hardly surprising and somewhat predictable for veteran observers. As volatility remains low these conditions invite the contrarian crowd to bet against all global markets. That bet has been mistaken several times this year in which some envisioned increase turbulence leading to stock demise. The set up for a stock market correction may be plausible but evidence is not quite as visible as desired by most naysayers. Thus, the positive momentum remains in place.
Undesirable challenge
Much of the discussions and cautious investor sentiment centers around a fragile European stability. Importantly, there is an ongoing assumption that Europe can not solve its problems and the Euro currency is bound to collapse. Yet, the preservation of the Euro appears to be a priority despite a mountain of complex challenges. For risk takers, the erosion of the Euro value has not materialized as expected. Obviously, the political mess for resolution and increasing unemployment is discomforting in the Eurozone. The emotional responses to these events is visible as Greece enters the fifth year of recession. Now, the contemplation of Greece leaving the Euro is on the table but impact on currency might be another story. As an editorial reminded us this weekend: “If Greece, the weakest link, is forced out of the monetary union, that would actually strengthen the currency. The result would be so chaotic for Greece that the other debtor countries, observing the wreckage, would do whatever it took to avoid the same fate, cutting their deficits even more quickly and accelerating other reforms.” (Washington Post, September 7, 2012). Thus, the fate of the Euro may not be as clear as some point out and, as usual, the timing is tricky for observers and costly for participants.
Stimulation continued
Intense anticipation of further easing by the Federal Reserve is understandable but the unintended consequences stir up additional suspense and colorful opinions. The unfolding events trigger this question: Does QE3 provide further economic spark or does it showcases further economic desperation?
Guessing how participants react from a psychological point of view is more noteworthy for speculators than QE3’s impact. The US jobs number translated to an overall weak result but sparked a curiosity in the pending easing announcement. The impact of all stimulus efforts seems mysterious to most and too early to tell its success. Importantly, tracking inflation expectation remains a vital barometer that will shape investors mindset. Closely watched indeed. Rising inflation most likely is set to reinforce that the recovery is taking place and potentially not fully recognized by the marketplace given the infestation of “gloomy” outlooks. If that’s the case then inflation expectation remains the rewarding surprise for those betting on increasing stock prices. Perhaps, then one would have a better idea on Gold, stocks and currencies.
Article Quotes:
“The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry…..Currently, the German economy is doing relatively well and the political situation is also relatively stable; the crisis is only a distant noise coming from abroad. Only something shocking would shake Germany out of its preconceived ideas and force it to face the consequences of its current policies. That is what a movement offering a workable alternative to German domination could accomplish. In short, the current situation is like a nightmare that can be escaped only by waking up Germany and making it aware of the misconceptions that are currently guiding its policies. We can hope Germany, when put to the choice, will choose to exercise benevolent leadership rather than to suffer the losses connected with leaving the euro” (George Soros, The New York Review of Books, September 7, 2012).
“The National Development and Reform Commission last week approved 25 urban rail and 13 highway construction projects, and a number of water schemes. The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent…. Urbanisation remains a long-term play. About 70 per cent of China’s 100-odd cities with a population of 5m or more do not have a metro, HSBC notes. But in today’s tougher funding environment, big spending announcements will not translate into guaranteed growth.” (Financial Times, September 9, 2012)
Levels:
S&P 500 Index [1437.92] – Broke above the spring highs of 1420 and now making new yearly highs. Positive momentum continues despite chatter of a peak that’s overly anticipated.
Crude [$96.42] – Last 15 days trading action suggest a narrow range between $95-97. Near-term momentum waning despite the explosive run from $80 to $96 in recent months. Appears that participants are waiting for a catalyst to dictate the next noteworthy move.
Gold [$1728.00] – For few months the commodity traded in a narrow range between $1550 and $1650. Now the recent lift above $1700, creates a momentum and increasing expectation to elevate above or to $1800.
DXY – US Dollar Index [82.59] – Noticeable downtrend since late July in which the index has fallen by nearly 5%. Some of the decline may be linked to anticipation of further easing.
US 10 Year Treasury Yields [1.68%] – Stuck in the familiar range below 2%. Increasing odds in days ahead where yields stay around the 1.60% to 1.80% zone.
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
Common sayings
The three common prevailing themes these days circle around re-accelerating gold prices, overvalued stock market and weakening Euro. As to how these themes materialize remains an art form that will play itself out. Deciphering the chances of all three themes having an unexpected or inverse result is even more appealing then the currently presented conventional thinking.
The thought process of high gold prices, lower stock market and weakening Euro stems from daily reminders of economic slowdown and ongoing efforts of easing by central banks. This collective growth concern has plagued large (especially China) and smaller nations in recent months. Thus, the inescapable nature of interconnected markets creates a gloomier outlook for those shaped by current events. These fragile growth related issues may reinstate further thoughts that all three themes will play out in a "logical" manner. At least, experience teach us the power of self-fulfilling prophecies should not be underestimated. However, accepting a gloomy outlook because it is a good or logical story is not prudent for a participant looking to capture trends.
A Multi-purpose idea
From a participants point of view, having clarity of the “instrument” is a good start. As in, is gold a commodity or a currency or both? Is it a speculative instrument or a long term investment? Perhaps all of the above is the sentiment that is being felt and those forces are unpredictable in their waves. Yet, staying weary of these so called "obvious" statements usually ends up rewarding the skeptical observer. These days gold is popular not only as an investment tool but a political tool as a commodity that has rustic appeal and historical appeal. Plus, gold is a hedge for gloomy outlook or system breakdowns that are pending. Perhaps, there is a comfort in holding in a perceived safe instrument.
Gold aficionados are sensing a bottoming process form over the summer. That encouragement is fueled by an 11% rise in gold prices since mid-July. A much anticipated gold rally lurked in the background and reawakening the gold bugs. Yet, the goal of diversification away from major currencies is not to be confused with gold price appreciation. In other words, fear of dollar and Euro depreciation might be compelling to look for some gold exposure. Sure, that’ s a portfolio management decision to hold some the same way central banks manage their balance sheet. Sometimes confusing a hedge with an investment does not have a pleasant outcome. In the near-term, the higher gold prices go the higher the conviction of those awaiting this commonly accepted expectation.
Sustainability doubted
Observers are noticing the rise in stock markets and ongoing strength of corporate earnings and asking the question: is this sustainable?
It is a logical question that begs for increased clarity, but the uptrend is too difficult to dismiss or ignore. Of course, some pundits remind us that The S&P 500 index keeps making its stride towards the 2007 highs led by technology but wide participation is visible – even banks are recovering. The well followed stock indices are up 14% for 2012 and if one was too busy reading the “slow down” headlines then these gains would’ve been harder to visualize. For a focused trader, all the noise of market concern has been the loudest distraction, but fundamentals have been solid.
Bank analysts (ie. Bank of America and RBC) are beginning to send out cautious forecasts for equity markets between now and year-end. This is hardly surprising and somewhat predictable for veteran observers. As volatility remains low these conditions invite the contrarian crowd to bet against all global markets. That bet has been mistaken several times this year in which some envisioned increase turbulence leading to stock demise. The set up for a stock market correction may be plausible but evidence is not quite as visible as desired by most naysayers. Thus, the positive momentum remains in place.
Undesirable challenge
Much of the discussions and cautious investor sentiment centers around a fragile European stability. Importantly, there is an ongoing assumption that Europe can not solve its problems and the Euro currency is bound to collapse. Yet, the preservation of the Euro appears to be a priority despite a mountain of complex challenges. For risk takers, the erosion of the Euro value has not materialized as expected. Obviously, the political mess for resolution and increasing unemployment is discomforting in the Eurozone. The emotional responses to these events is visible as Greece enters the fifth year of recession. Now, the contemplation of Greece leaving the Euro is on the table but impact on currency might be another story. As an editorial reminded us this weekend: “If Greece, the weakest link, is forced out of the monetary union, that would actually strengthen the currency. The result would be so chaotic for Greece that the other debtor countries, observing the wreckage, would do whatever it took to avoid the same fate, cutting their deficits even more quickly and accelerating other reforms.” (Washington Post, September 7, 2012). Thus, the fate of the Euro may not be as clear as some point out and, as usual, the timing is tricky for observers and costly for participants.
Stimulation continued
Intense anticipation of further easing by the Federal Reserve is understandable but the unintended consequences stir up additional suspense and colorful opinions. The unfolding events trigger this question: Does QE3 provide further economic spark or does it showcases further economic desperation?
Guessing how participants react from a psychological point of view is more noteworthy for speculators than QE3’s impact. The US jobs number translated to an overall weak result but sparked a curiosity in the pending easing announcement. The impact of all stimulus efforts seems mysterious to most and too early to tell its success. Importantly, tracking inflation expectation remains a vital barometer that will shape investors mindset. Closely watched indeed. Rising inflation most likely is set to reinforce that the recovery is taking place and potentially not fully recognized by the marketplace given the infestation of “gloomy” outlooks. If that’s the case then inflation expectation remains the rewarding surprise for those betting on increasing stock prices. Perhaps, then one would have a better idea on Gold, stocks and currencies.
Article Quotes:
“The campaign to change German attitudes will therefore have to take a very different form from the intergovernmental negotiations that are currently deciding policy. European civil society, the business community, and the general public need to mobilize and become engaged. At present, the public in many eurozone countries is distressed, confused, and angry…..Currently, the German economy is doing relatively well and the political situation is also relatively stable; the crisis is only a distant noise coming from abroad. Only something shocking would shake Germany out of its preconceived ideas and force it to face the consequences of its current policies. That is what a movement offering a workable alternative to German domination could accomplish. In short, the current situation is like a nightmare that can be escaped only by waking up Germany and making it aware of the misconceptions that are currently guiding its policies. We can hope Germany, when put to the choice, will choose to exercise benevolent leadership rather than to suffer the losses connected with leaving the euro” (George Soros, The New York Review of Books, September 7, 2012).
“The National Development and Reform Commission last week approved 25 urban rail and 13 highway construction projects, and a number of water schemes. The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent…. Urbanisation remains a long-term play. About 70 per cent of China’s 100-odd cities with a population of 5m or more do not have a metro, HSBC notes. But in today’s tougher funding environment, big spending announcements will not translate into guaranteed growth.” (Financial Times, September 9, 2012)
Levels:
S&P 500 Index [1437.92] – Broke above the spring highs of 1420 and now making new yearly highs. Positive momentum continues despite chatter of a peak that’s overly anticipated.
Crude [$96.42] – Last 15 days trading action suggest a narrow range between $95-97. Near-term momentum waning despite the explosive run from $80 to $96 in recent months. Appears that participants are waiting for a catalyst to dictate the next noteworthy move.
Gold [$1728.00] – For few months the commodity traded in a narrow range between $1550 and $1650. Now the recent lift above $1700, creates a momentum and increasing expectation to elevate above or to $1800.
DXY – US Dollar Index [82.59] – Noticeable downtrend since late July in which the index has fallen by nearly 5%. Some of the decline may be linked to anticipation of further easing.
US 10 Year Treasury Yields [1.68%] – Stuck in the familiar range below 2%. Increasing odds in days ahead where yields stay around the 1.60% to 1.80% zone.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 27, 2012
Market Outlook | August 27, 2012
“Quarrels would not last long if the fault were only on one side.” (François de la Rochefoucauld 1613-1680)
Disagreements:
A series of divided views remains visible in the actions of the Federal Reserve, congress, Euro-zone leaders and investors alike – a theme that continues to resurface among those credited with setting market tones. Surely, the contentious and passionate differences today have led to the following:
1) Increased difficulty in deciphering the “believable” data about the economy and stock market, given increasingly biased views.
2) Ongoing public and private disagreement among policy makers in a rebuilding era creates unneeded uncertainty, if not further confusion.
3) Confidence restoration is not easily achieved when adding more layers of difficulties in heated debates.
4) Unconvincing messages of longer-term sustainability and undesired results of increased risk aversion.
In a puzzling manner, the desire for collective success (of the global economy) seems less noticeable than imagined. Specifically in the case of the Federal Reserve, the debate over the need for stimulus has played out for a while in FOMC meetings. Thus far, the plan to ease has prevailed, but its results are under scrutiny, as usual. A new wave of uncertainty looms over the leadership of the central bank, driven by election chatter and speculative banter on the next quantitative easing. The question of further easing is debatable itself, which only confirms a genuinely confusing state of affairs rather than providing any answers.
Perspective mystified
It’s hard to tell if market success is feared more than fear itself. So far this year, investment success, when measured by continuing equity market appreciation, appears more acceptable than not. However, it has failed to drive away all legitimate and illegitimate fear mongering by pundits. Perhaps that’s business as usual, but it stands out in an unusual time.
For example, the view of the market today varies depending on whom you ask during a random stroll. The year-to-date numbers show 12% return for the S&P 500 index and 22% appreciation for the Nasdaq. For an outsider removed from the day-to-day noise, these numbers may reflect normal times. Even weak economic numbers did not fully destroy the market’s spirit, but revealed the disconnect between the real economy and stock prices – frustrating for the too-logical-minded participant and tricky for those with a gambler’s mindset. Nonetheless, the end result increases the challenge for prudent managers in charge of selecting profitable ideas.
Gold’s glory?
Euphoric supporters of gold appear to be reawakened, as sentiment is overwhelmingly positive. The following discovery was summarized on Bloomberg:
“Twenty-nine of 35 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further three were neutral, making the proportion of bulls the highest since Nov. 11. Investors bought 51.7 metric tons valued at $2.78 billion through gold-backed exchange-traded products this month, the most since November, overtaking France as the world’s fourth-largest hoard when compared with national reserves.” (Bloomberg August 23, 2012)
In digesting the fact above, one should not have a knee-jerk reaction on the bullish or contrarian side. Instead, understanding the landscape may tell the story better. Chart observers will point out increasing odds for price appreciation given a bottoming process that’s unfolded around $1550 (per ounce) for several months. At the same time, macro observers with a gloomier outlook for “everything else” are known to confidentially cling to a relatively mainstream view of buying gold ahead of further chaos. Sure, that point has its merits when considering uncertainty and inflation. Interestingly, the lack of chaotic market events and calming volatility levels this year may easily convince plenty to think that the worst is ahead in the second half. Yet, it is glaringly dangerous or at least intriguing that the consensus is overly optimistic in embracing gold as the investment solution.
Article Quotes:
“In 1962, one newspaper pushed that ‘it's about time you stopped worrying about layoffs and start thinking about security and the future.’ In 1983, another wrote about a rise in consumer confidence: ‘The nuclear threat still looms. Reports come in every week of further destruction of forests by acid rain. Unemployment is at a record high. But people seem to be tired of worrying.’ Then again in 1992: ‘People are saying, “I'm tired of this recession,” and they are spending again,’ wrote the Dallas Morning News.
It turns out there's more to this than anecdotes. There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones – a sort of natural aversion to unpleasant thoughts. In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.” (Morgan Housel, August 24, 2012 The Motley Fool)
“Despite cheaper labor abroad, currency manipulation, intellectual property theft, and subsidies to foreign competitors, these American manufacturers are winning. Many of them are small or medium-sized businesses that are family owned. Some are large corporations led by executives who still believe that America is the best place to set up a factory. … These manufacturers help explain why, against all odds, our nation held the global lead over China in manufacturing output until 2009. What's extraordinary is that our aggregate output remains competitive with China's, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China's or India's and significantly larger than Japan's or Germany's. Strong productivity has enabled the United States to increase its manufacturing output over the past 30 years to a greater extent than any other developed nation, more than doubling in size. American manufacturers often have an advantage over their competitors in more authoritarian or bureaucratic nations because participatory governance is preferable to top-down governance, even in the business world.” (Ro Khanna, Reuters, August 21, 2012)
Levels:
S&P 500 Index [1411.13] – After reaching annual highs of 1426 on August 21, there is a growing anticipation for a correction toward 1350. Despite these changing sentiments, in the near term, the uptrend remains in place.
Crude [$96.15] – Staying above $100 has been challenging in the last two years. In the springs of 2011 and 2012, the commodity peaked, then normalized to a sideways pattern.
Gold [$1618.50] – Odds for a bottoming process here appear high. The consensus is overwhelmingly positive here; however, a run above $1895 seems mysterious for now.
DXY – US Dollar Index [82.59] – Dollar strength has been slowing since late July. This pause does not trigger a significant move to reach a cycle conclusion.
US 10 Year Treasury Yields [1.68%] – A struggle to climb above 1.80% while not too far removed from the lows of 1.37%. Event-driven movements should make moves in yields rather sensitive.
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
Disagreements:
A series of divided views remains visible in the actions of the Federal Reserve, congress, Euro-zone leaders and investors alike – a theme that continues to resurface among those credited with setting market tones. Surely, the contentious and passionate differences today have led to the following:
1) Increased difficulty in deciphering the “believable” data about the economy and stock market, given increasingly biased views.
2) Ongoing public and private disagreement among policy makers in a rebuilding era creates unneeded uncertainty, if not further confusion.
3) Confidence restoration is not easily achieved when adding more layers of difficulties in heated debates.
4) Unconvincing messages of longer-term sustainability and undesired results of increased risk aversion.
In a puzzling manner, the desire for collective success (of the global economy) seems less noticeable than imagined. Specifically in the case of the Federal Reserve, the debate over the need for stimulus has played out for a while in FOMC meetings. Thus far, the plan to ease has prevailed, but its results are under scrutiny, as usual. A new wave of uncertainty looms over the leadership of the central bank, driven by election chatter and speculative banter on the next quantitative easing. The question of further easing is debatable itself, which only confirms a genuinely confusing state of affairs rather than providing any answers.
Perspective mystified
It’s hard to tell if market success is feared more than fear itself. So far this year, investment success, when measured by continuing equity market appreciation, appears more acceptable than not. However, it has failed to drive away all legitimate and illegitimate fear mongering by pundits. Perhaps that’s business as usual, but it stands out in an unusual time.
For example, the view of the market today varies depending on whom you ask during a random stroll. The year-to-date numbers show 12% return for the S&P 500 index and 22% appreciation for the Nasdaq. For an outsider removed from the day-to-day noise, these numbers may reflect normal times. Even weak economic numbers did not fully destroy the market’s spirit, but revealed the disconnect between the real economy and stock prices – frustrating for the too-logical-minded participant and tricky for those with a gambler’s mindset. Nonetheless, the end result increases the challenge for prudent managers in charge of selecting profitable ideas.
Gold’s glory?
Euphoric supporters of gold appear to be reawakened, as sentiment is overwhelmingly positive. The following discovery was summarized on Bloomberg:
“Twenty-nine of 35 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further three were neutral, making the proportion of bulls the highest since Nov. 11. Investors bought 51.7 metric tons valued at $2.78 billion through gold-backed exchange-traded products this month, the most since November, overtaking France as the world’s fourth-largest hoard when compared with national reserves.” (Bloomberg August 23, 2012)
In digesting the fact above, one should not have a knee-jerk reaction on the bullish or contrarian side. Instead, understanding the landscape may tell the story better. Chart observers will point out increasing odds for price appreciation given a bottoming process that’s unfolded around $1550 (per ounce) for several months. At the same time, macro observers with a gloomier outlook for “everything else” are known to confidentially cling to a relatively mainstream view of buying gold ahead of further chaos. Sure, that point has its merits when considering uncertainty and inflation. Interestingly, the lack of chaotic market events and calming volatility levels this year may easily convince plenty to think that the worst is ahead in the second half. Yet, it is glaringly dangerous or at least intriguing that the consensus is overly optimistic in embracing gold as the investment solution.
Article Quotes:
“In 1962, one newspaper pushed that ‘it's about time you stopped worrying about layoffs and start thinking about security and the future.’ In 1983, another wrote about a rise in consumer confidence: ‘The nuclear threat still looms. Reports come in every week of further destruction of forests by acid rain. Unemployment is at a record high. But people seem to be tired of worrying.’ Then again in 1992: ‘People are saying, “I'm tired of this recession,” and they are spending again,’ wrote the Dallas Morning News.
It turns out there's more to this than anecdotes. There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones – a sort of natural aversion to unpleasant thoughts. In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.” (Morgan Housel, August 24, 2012 The Motley Fool)
“Despite cheaper labor abroad, currency manipulation, intellectual property theft, and subsidies to foreign competitors, these American manufacturers are winning. Many of them are small or medium-sized businesses that are family owned. Some are large corporations led by executives who still believe that America is the best place to set up a factory. … These manufacturers help explain why, against all odds, our nation held the global lead over China in manufacturing output until 2009. What's extraordinary is that our aggregate output remains competitive with China's, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China's or India's and significantly larger than Japan's or Germany's. Strong productivity has enabled the United States to increase its manufacturing output over the past 30 years to a greater extent than any other developed nation, more than doubling in size. American manufacturers often have an advantage over their competitors in more authoritarian or bureaucratic nations because participatory governance is preferable to top-down governance, even in the business world.” (Ro Khanna, Reuters, August 21, 2012)
Levels:
S&P 500 Index [1411.13] – After reaching annual highs of 1426 on August 21, there is a growing anticipation for a correction toward 1350. Despite these changing sentiments, in the near term, the uptrend remains in place.
Crude [$96.15] – Staying above $100 has been challenging in the last two years. In the springs of 2011 and 2012, the commodity peaked, then normalized to a sideways pattern.
Gold [$1618.50] – Odds for a bottoming process here appear high. The consensus is overwhelmingly positive here; however, a run above $1895 seems mysterious for now.
DXY – US Dollar Index [82.59] – Dollar strength has been slowing since late July. This pause does not trigger a significant move to reach a cycle conclusion.
US 10 Year Treasury Yields [1.68%] – A struggle to climb above 1.80% while not too far removed from the lows of 1.37%. Event-driven movements should make moves in yields rather sensitive.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 20, 2012
Market Outlook | August 20, 2012
"By law of periodical repetition, everything which has happened once must happen again and again – and not capriciously, but at regular periods, and each thing in its own period, not another's and each obeying its own law." (Mark Twain, 1835-1910)
Calmness prevails
The trend of dwindling trading volume continues to match a very low volatility period in the late summer months. However, it is not slowing the overall positive market response so far in 2012. Beyond elections, the pending outcome of stimulus and interest rate policies sounds hopeful for some participants and vital for policy makers. Through this un-shuffling of sorts, the US dollar remains the most attractive currency by far, for now. Yet, economic growth is not a simple reading in this new era and is certainly open to interpretation, given opaque methodologies. Despite the salesman efforts by pundits and political advisors in key topics such as economic growth, the “fiscal cliff” and corporate earnings, growth generally fails to present a clear direction with any certainty. So if investors avoid being overly greedy while ignoring most of the fear mongering, then their odds of being lucky increase.
Repetition
The four-year cycle is intriguing to watch for market observers. After the technology bubble of the late 1990s, the S&P 500 index finally began to stand on solid ground in the spring of 2003. Back then, the index bottomed at 788 in March 2003, then began a smooth upside trend up all the way up to 1576 (all-time high) in October 2007. It was an impressive run between 2003-2007, in which the S&P 500 gained 99.78% right ahead of the credit meltdown. Similarly, we’re in another four-year cycle that sparked after the credit crisis of 2008. After the dismal and highly documented collapse, in the spring of 2009 a new revival re-emerged. One can easily notice a similar upside pattern. This time, there has been around a 100% appreciation for the S&P 500 index when measuring between 2003-August 2012. This showcases that cycles find a way to provoke similarities despite a rapidly changing world.
The mirroring pattern in both recent four-year cycles is noteworthy for observers but market facts are clouded by political views given the heavy focus on pending election results. As we approach October, this trend is rather suspenseful and the outcomes remain mysterious, even to the brave making daring directional bets.
Disconnect clarified
The broad market as measured by the share performances of 500 companies, tells a story that may not be fully descriptive of the world that’s visible to all. First, nearly half of the companies in the S&P 500 index earn their revenue from non-US markets. Secondly, the average results are tilted toward larger companies while not describing the story for smaller firms and regular small businesses, especially when it comes to access to cheaper capital. Thirdly, the stock market movement should not be confused with the general economy at all times, as that remains a tricky relationship. This is a lesson that keeps repeating for those willing to sift through noise and read through misleading presentations. Thus, developing a genuine opinion is becoming much harder, and pinpointing themes and ideas requires a demanding workload – not to mention the added risk, which is not quite well received in this risk-averse mainstream world.
Article Quotes:
“Mr. Goodhart used monetary history to test these competing theories. He examined the overthrow of Rome and a period in the tenth century when the Japanese government stopped minting coins. If the origin of money were purely private, these shocks should have had no monetary effects. But after Rome’s collapse, traders resorted to barter; in Japan they started to use rice instead of coins. There is a clear link between fiscal power and money. The evidence suggests that only ‘informal’ monies can spring up purely privately. But informal money can exist on the grandest scale. The dollar’s position as the world’s reserve currency is not mandated by any government, for example. Its pre-eminence outside America rests on it being the best option for international transactions. Once a competitor currency becomes preferable, firms and other governments will move on. The good news for the dollar is that the Chinese yuan is not yet widely accepted and suffers from higher inflation, reducing its usefulness. But a shift in the world’s reserve currency could be swifter than many assume. The dollar’s other competitor, the euro, has deeper problems. Its origins were not private. Nor is it a proper Cartalist money, backed by a nation state. This means it lacks a foundation in the power of either the market or the state.” (The Economist, August 18, 2012)
“So some may find it surprising that in a year when Europe's troubles have thrown the global economy into fits, gold has been a loser's bet. The price per ounce of everyone's favorite rock is down about 7 percent for the year and is off 15 percent from its September peak. According to a report released yesterday by the World Gold Council, total demand for gold fell 7 percent in the second quarter of 2012 compared to the year before. Let this be a reminder that, no matter how long it's been around, gold just isn't that special. It's a commodity that responds to the laws of supply and demand. Unlike commodities such as wheat or oil, which you can at least eat or burn for fuel, gold pretty much lacks any inherent value beyond what the market assigns to it. And in the past decade, much of the new demand that set gold off on a wild tear from around $300-an-ounce at the turn of the century to almost $1,900-an-ounce last year has come from two places: India and China. Combined, they account for 45 percent of the world's demand for gold jewelry and bars.” (The Atlantic, August 17, 2012)
Levels:
S&P 500 Index [1418.16] – Approaching annual highs from April (1422), a continued sign of strength in place. Although odds for a pullback are heavily discussed, the trend showcases a positive upward swing.
Crude [$96.01] – Attempting to climb back to $100. Interestingly, the much-followed 200-day average stands at $96.69; that can get a few chart observers to rethink their views.
Gold [$1618.50] – The ongoing and slow bottoming process continues to drag on. The 50-day moving average tells the story at $1597.00.
DXY – US Dollar Index [82.59] –Although mostly trendless, it is fair to say dollar weakness has not been visible in the last year or recent days. However, the multi-month strength continues to lack meaningful follow-through.
US 10 Year Treasury Yields [1.81%] – After making all-time lows last month, yields are somewhat recovering, but climbing back to 2% remains challenging.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, August 13, 2012
Market Outlook | August 13, 2012
“In times of change learners inherit the earth; while the learned find themselves beautifully equipped to deal with a world that no longer exists.” (Eric Hoffer 1902-1983).
Revisiting cycles
It was four years ago when the crux of the financial crisis ferociously shocked the system and quick decisions had to be made to avoid a crumbling series of events. The residues of bailouts and distrust continue to re-ignite the day-to-day trading patterns. In the historic collapse of 2008, it was hard to visualize where we would be today. In hindsight, there are a few points to consider. For one, markets have stabilized despite low volume. Secondly, performance in major indexes is not as bad as was thought. Thirdly, the relative strength of the US stands out despite well-publicized lists of worries filling up pundits’ time.
On the other hand, the stability of banks is still a fragile discussion point as the Federal Resereve continues to demand “recovery plans” from the largest banks. Although less discussed, disaster aversion remains a common practice and occasional worry. Lessons from the 2008 crisis continue to force the regulators to require contingency plans with the hopes of avoiding controversial “bailouts.” Perhaps, confidence restoration is an ongoing challenge.
Meanwhile, calming banks’ vulnerability was intended to restore the system where lending can drive up economic activity. Mild as it may be, lending activity appears to pick up for now:
“Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy burdened by 8.3 percent unemployment. Fed policy makers including Chairman Ben S. Bernanke weighed the results of the survey at their July 31- Aug. 1 meeting at which they said they “will provide additional accommodation as needed” to support the economy.” (Bloomberg, August 6, 2012)
Reassessing
A year ago, the US downgrade awakened the markets while hardly altering the contentious political landscape. Yet, for those who bailed on equity markets, there was 27% appreciation in the S&P 500 Index. A year later, the strength of broad markets is less talked about, especially in a period of low yields. Instead, attention is consumed with endless discussions of a pending downfall, especially by those incentivized to use markets for a political barometer rather than a pure ‘money-making’ instrument. Thus, one must be meticulous in not mixing real returns with cheap talk when it comes to US markets. At the same time, seeking attractive alternatives is not easy to spot, either.
In looking ahead, the challenge begins. For example, if asked today, “Where is attractive growth?” many would stumble to answer with a high or any level of certainty. The global slowdown has been revealed in emerging markets as well as Europe in recent months. Thus, the ongoing slump is not news anymore, as the search for solutions and specific viable ideas continues.
Pricing courage:
The wild card may be in figuring out how much downside is already priced-in in this risk-sensitive environment. As usual, information is processed faster than headlines would have one imagine. Of course, it seems a little strange (in terms of odds) for one to predict the anticipated events of further easing, election results and corporate earnings growth. Three vital unknowns linger for the upcoming weeks. Believers in an ongoing rally are less visible and not loudly portraying their convictions. Not surprisingly, plenty take the safer route in deferring to election results for reexamination of risk taking. Amazingly enough at this junction, the continuation of the status quo (rising equity markets) might end up being the courageous move.
Article Quotes:
“There are a number of questions now confronting London's status as a financial center: firstly, it is clear that politicians in continental Europe would like nothing better than destroying the city's pre-eminent position in financial services. Partly this effort is so that European politicians could push through certain anti-market principles such as the financial transactions tax (the so-called Tobin tax being promulgated by the French) and a ban on certain types of financial transactions such as sovereign credit default swaps that they believe are centered in London. There is of course the deep envy that German regulators feel about the sheer irrelevance of Frankfurt as a global financial center, not to mention the deep resentment felt in France that even banks that survive due to government bailouts end up having significant operations, particularly those involving higher-paying jobs out of London. Then there is the whole question of how financial regulators have operated in the UK, essentially being accused by their colleagues elsewhere in the world (Switzerland, the US, Germany, Italy to mention a few) of allowing roguish behavior from bankers peddling fairly dangerous financial instruments …” (Asian Times, August 11, 2012)
“If one has to take a position, it may be reasonable to argue that the Beijing Olympics in 2008 symbolically marked the peaking of Chinese power. Everything began to go downhill afterwards. Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum. To be sure, Beijing's stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010. For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved.” (The Diplomat, August 9, 2012)
Levels:
S&P 500 Index [1405.87] – Revisiting the 1400-1420 range last reached in April. Interestingly, that marked the previous peak, which begs the question of a repeat or a stall.
Crude [$92.87] – Since bottoming on June 28, 2012, the commodity has managed to spark an uptrend. The ability to stay above $95 will determine the near-term buyers’ momentum.
Gold [$1618.50] – For over three months, the narrow trading range has been clearly defined between $1560-$1620. A breakout above $1620 could restore a long-awaited enthusiasm among gold aficionados. Yet, it’s safe to say an inflection point is here.
DXY – US Dollar Index [82.70] – The dollar strength theme has been alive and well for over a year. In recent months, an anticipated pause around 82.
US 10 Year Treasury Yields [1.65%] – Some visible relief since the extreme lows of July 25 (1.37%). Hints of rising rates, but a follow-through is desperately needed to reach above 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
Revisiting cycles
It was four years ago when the crux of the financial crisis ferociously shocked the system and quick decisions had to be made to avoid a crumbling series of events. The residues of bailouts and distrust continue to re-ignite the day-to-day trading patterns. In the historic collapse of 2008, it was hard to visualize where we would be today. In hindsight, there are a few points to consider. For one, markets have stabilized despite low volume. Secondly, performance in major indexes is not as bad as was thought. Thirdly, the relative strength of the US stands out despite well-publicized lists of worries filling up pundits’ time.
On the other hand, the stability of banks is still a fragile discussion point as the Federal Resereve continues to demand “recovery plans” from the largest banks. Although less discussed, disaster aversion remains a common practice and occasional worry. Lessons from the 2008 crisis continue to force the regulators to require contingency plans with the hopes of avoiding controversial “bailouts.” Perhaps, confidence restoration is an ongoing challenge.
Meanwhile, calming banks’ vulnerability was intended to restore the system where lending can drive up economic activity. Mild as it may be, lending activity appears to pick up for now:
“Banks in the U.S. are lending the most since the recession ended in June 2009, supporting an economy burdened by 8.3 percent unemployment. Fed policy makers including Chairman Ben S. Bernanke weighed the results of the survey at their July 31- Aug. 1 meeting at which they said they “will provide additional accommodation as needed” to support the economy.” (Bloomberg, August 6, 2012)
Reassessing
A year ago, the US downgrade awakened the markets while hardly altering the contentious political landscape. Yet, for those who bailed on equity markets, there was 27% appreciation in the S&P 500 Index. A year later, the strength of broad markets is less talked about, especially in a period of low yields. Instead, attention is consumed with endless discussions of a pending downfall, especially by those incentivized to use markets for a political barometer rather than a pure ‘money-making’ instrument. Thus, one must be meticulous in not mixing real returns with cheap talk when it comes to US markets. At the same time, seeking attractive alternatives is not easy to spot, either.
In looking ahead, the challenge begins. For example, if asked today, “Where is attractive growth?” many would stumble to answer with a high or any level of certainty. The global slowdown has been revealed in emerging markets as well as Europe in recent months. Thus, the ongoing slump is not news anymore, as the search for solutions and specific viable ideas continues.
Pricing courage:
The wild card may be in figuring out how much downside is already priced-in in this risk-sensitive environment. As usual, information is processed faster than headlines would have one imagine. Of course, it seems a little strange (in terms of odds) for one to predict the anticipated events of further easing, election results and corporate earnings growth. Three vital unknowns linger for the upcoming weeks. Believers in an ongoing rally are less visible and not loudly portraying their convictions. Not surprisingly, plenty take the safer route in deferring to election results for reexamination of risk taking. Amazingly enough at this junction, the continuation of the status quo (rising equity markets) might end up being the courageous move.
Article Quotes:
“There are a number of questions now confronting London's status as a financial center: firstly, it is clear that politicians in continental Europe would like nothing better than destroying the city's pre-eminent position in financial services. Partly this effort is so that European politicians could push through certain anti-market principles such as the financial transactions tax (the so-called Tobin tax being promulgated by the French) and a ban on certain types of financial transactions such as sovereign credit default swaps that they believe are centered in London. There is of course the deep envy that German regulators feel about the sheer irrelevance of Frankfurt as a global financial center, not to mention the deep resentment felt in France that even banks that survive due to government bailouts end up having significant operations, particularly those involving higher-paying jobs out of London. Then there is the whole question of how financial regulators have operated in the UK, essentially being accused by their colleagues elsewhere in the world (Switzerland, the US, Germany, Italy to mention a few) of allowing roguish behavior from bankers peddling fairly dangerous financial instruments …” (Asian Times, August 11, 2012)
“If one has to take a position, it may be reasonable to argue that the Beijing Olympics in 2008 symbolically marked the peaking of Chinese power. Everything began to go downhill afterwards. Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum. To be sure, Beijing's stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010. For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved.” (The Diplomat, August 9, 2012)
Levels:
S&P 500 Index [1405.87] – Revisiting the 1400-1420 range last reached in April. Interestingly, that marked the previous peak, which begs the question of a repeat or a stall.
Crude [$92.87] – Since bottoming on June 28, 2012, the commodity has managed to spark an uptrend. The ability to stay above $95 will determine the near-term buyers’ momentum.
Gold [$1618.50] – For over three months, the narrow trading range has been clearly defined between $1560-$1620. A breakout above $1620 could restore a long-awaited enthusiasm among gold aficionados. Yet, it’s safe to say an inflection point is here.
DXY – US Dollar Index [82.70] – The dollar strength theme has been alive and well for over a year. In recent months, an anticipated pause around 82.
US 10 Year Treasury Yields [1.65%] – Some visible relief since the extreme lows of July 25 (1.37%). Hints of rising rates, but a follow-through is desperately needed to reach above 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
Monday, August 06, 2012
Market Outlook | August 6, 2012
“Confusion is a word we have invented for an order which is not yet understood.” (Henry Miller, 1891-1980)
Stalled in transition
Broadly speaking, for those looking to bet on the direction of stock indexes, it is not quite a clear-cut entry point. If you sense others are too fearful, then the contrarian view has some appeal, at least at first glance. In other words, why not buy in a fear-obsessed and not-so-cheerful environment? However, dissecting that thought leads one to simple arithmetic, which shows the S&P 500 index trading closer to the highs of 2007 than the lows of late 2008. Basically, we are not even close to a “collapsing” market, at least in terms of pricing. If you're a fundamental observer, then the corporate earnings growth makes one relatively optimistic. Yet, it has been an impressive trend for a while and this impressive run is bound to stall, from odds makers’ perspectives. Plus, value investors cannot claim things are too cheap for comfort, either. A conundrum, indeed.
Based on day-to-day anxiousness, one can easily state that volatility is very high, but the answer to that intuitive thought is simply: No. Actually, the truth is to the contrary: Perceived turbulence has declined significantly for several months in a calming manner, along with a slowing participation rate. This combination showcases the much-discussed growing disinterest in or temporary pause from risk-taking. However, barometers indicate we are far removed from any extreme panic. Not to mention last week’s trading glitch, which does not boost the confidence of the financial system, especially after the “flash crash” which only lets the commoner conclude that this market is too complex and highly vulnerable. Yet, as we’ve learned, like all crises, a solution follows despite debates and opinions.
Re-grouping
Emerging markets have boasted long-term cycle returns dating back to turn of the last decade. During that period, those runs were rewarding for investors and select countries’ GDP growth. Now, both investment themes have slowed, while cooling the excitement and momentum run. In looking ahead, many observers have asked, when is growth resuming in emerging markets? Some may view that turnaround point as sooner than others. Yet, most point out that the long-term prospects are what keep optimists alive in the short-term. For example, “Leading companies in the developed world earn just 17% of total revenues from emerging markets, even though these markets represent 36% of global GDP.” (McKinsey Quarterly, August 2012). Certainly, the long-term trend in emerging countries cannot be neglected, but timing the nature of the re-acceleration is tricky. Plus, identifying nations beyond the BRIC’s is a puzzle worth pursuing. That’s where patience may be rewarding, while a dose of healthy skepticism in future projections is worth a closer look.
Unanswerable – for now
Questions related to job growth, the success of quantitative easing and stabilization of the Eurozone are too big and difficult to answer for anyone. Time after time, these noisy macro issues engulf the minds of large and small investors. Basically, trying to predict the outcome of these issues may lead to more mistakes than accurate stock or commodity picking. Perhaps, investor frustration deals with the extra work needed to adjust to a new cycle with varying dynamics related to speedy information and increased competition. While it’s certainly not for the casual observer, to claim “buy and hold” is dead would be grossly misleading, as well. After all, since July 2010, the S&P 500 index is up nearly 38% despite the back-and-forth unknowns. Thus, focusing on big-picture answers to determine entry points is not unique and definitely not certain, either.
Article Quotes:
“The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the US was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of remaining workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains. The result was that China's rise came largely at Europe's expense. Since 2004 China has gained market share in the export of goods and of manufactured goods, while Europe's share is falling and the US share has held steady. After losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change. … Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 80 percent, due to increasing production of oil and particularly natural gas.” (The Atlantic, August, 3 2012)
“It is not just America’s Treasury that is benefiting from ultra-low borrowing costs. On July 30th Unilever, an Anglo-Dutch consumer-goods group, borrowed $1 billion in the bond markets, in two tranches: 0.45% for three-year money and 0.85% over five years, both record lows for corporate debt. A week earlier IBM had raised ten-year money at a rate of just 1.875%. The Spanish and Italian governments can only dream of funding at such a low cost. Multinational companies have some advantages over governments. Although they can be subject to punitive taxation, they have the potential to move their operations to more welcoming jurisdictions. Their revenues are not dependent on the fortunes of an individual economy. And large companies have been able to strengthen their balance-sheets over the past five years, whereas governments have been forced deep into deficit to prop up their economies.” (The Economist, August 4, 2012)
Levels:
S&P 500 Index [1390.99] – Knocking on the door of 1400 and marching higher from the lows established on June 4, 2012. Trend remains positive despite neutral developing patterns.
Crude [$91.40] – Signs of bottoming visible at $84 as shown in recent weeks, and re-acceleration around $90.
Gold [$1602.00] – Over the last three months, gold has seen plenty of trendless action. For example, the 50-day moving average stands at $1592, illustrating the continued zig-zag and narrow movements around $1600.
DXY – US Dollar Index [82.70] – For over a year, the dollar index has shown signs of strengthening. However, the current strength doesn’t match the peak levels seen in late 2008 (88.46), early 2009 (89.62) and mid 2010 (88.70). Potential pause looming in the near-term.
US 10 Year Treasury Yields [1.54%] – It was last August when yields were closer to 3% before a profound drop. Then, April 2012 marked another defining point, where yields struggled to move above 2%. Now, tiptoeing around all-times lows seems more normal than outrageous.
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.
Stalled in transition
Broadly speaking, for those looking to bet on the direction of stock indexes, it is not quite a clear-cut entry point. If you sense others are too fearful, then the contrarian view has some appeal, at least at first glance. In other words, why not buy in a fear-obsessed and not-so-cheerful environment? However, dissecting that thought leads one to simple arithmetic, which shows the S&P 500 index trading closer to the highs of 2007 than the lows of late 2008. Basically, we are not even close to a “collapsing” market, at least in terms of pricing. If you're a fundamental observer, then the corporate earnings growth makes one relatively optimistic. Yet, it has been an impressive trend for a while and this impressive run is bound to stall, from odds makers’ perspectives. Plus, value investors cannot claim things are too cheap for comfort, either. A conundrum, indeed.
Based on day-to-day anxiousness, one can easily state that volatility is very high, but the answer to that intuitive thought is simply: No. Actually, the truth is to the contrary: Perceived turbulence has declined significantly for several months in a calming manner, along with a slowing participation rate. This combination showcases the much-discussed growing disinterest in or temporary pause from risk-taking. However, barometers indicate we are far removed from any extreme panic. Not to mention last week’s trading glitch, which does not boost the confidence of the financial system, especially after the “flash crash” which only lets the commoner conclude that this market is too complex and highly vulnerable. Yet, as we’ve learned, like all crises, a solution follows despite debates and opinions.
Re-grouping
Emerging markets have boasted long-term cycle returns dating back to turn of the last decade. During that period, those runs were rewarding for investors and select countries’ GDP growth. Now, both investment themes have slowed, while cooling the excitement and momentum run. In looking ahead, many observers have asked, when is growth resuming in emerging markets? Some may view that turnaround point as sooner than others. Yet, most point out that the long-term prospects are what keep optimists alive in the short-term. For example, “Leading companies in the developed world earn just 17% of total revenues from emerging markets, even though these markets represent 36% of global GDP.” (McKinsey Quarterly, August 2012). Certainly, the long-term trend in emerging countries cannot be neglected, but timing the nature of the re-acceleration is tricky. Plus, identifying nations beyond the BRIC’s is a puzzle worth pursuing. That’s where patience may be rewarding, while a dose of healthy skepticism in future projections is worth a closer look.
Unanswerable – for now
Questions related to job growth, the success of quantitative easing and stabilization of the Eurozone are too big and difficult to answer for anyone. Time after time, these noisy macro issues engulf the minds of large and small investors. Basically, trying to predict the outcome of these issues may lead to more mistakes than accurate stock or commodity picking. Perhaps, investor frustration deals with the extra work needed to adjust to a new cycle with varying dynamics related to speedy information and increased competition. While it’s certainly not for the casual observer, to claim “buy and hold” is dead would be grossly misleading, as well. After all, since July 2010, the S&P 500 index is up nearly 38% despite the back-and-forth unknowns. Thus, focusing on big-picture answers to determine entry points is not unique and definitely not certain, either.
Article Quotes:
“The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the US was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of remaining workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains. The result was that China's rise came largely at Europe's expense. Since 2004 China has gained market share in the export of goods and of manufactured goods, while Europe's share is falling and the US share has held steady. After losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change. … Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 80 percent, due to increasing production of oil and particularly natural gas.” (The Atlantic, August, 3 2012)
“It is not just America’s Treasury that is benefiting from ultra-low borrowing costs. On July 30th Unilever, an Anglo-Dutch consumer-goods group, borrowed $1 billion in the bond markets, in two tranches: 0.45% for three-year money and 0.85% over five years, both record lows for corporate debt. A week earlier IBM had raised ten-year money at a rate of just 1.875%. The Spanish and Italian governments can only dream of funding at such a low cost. Multinational companies have some advantages over governments. Although they can be subject to punitive taxation, they have the potential to move their operations to more welcoming jurisdictions. Their revenues are not dependent on the fortunes of an individual economy. And large companies have been able to strengthen their balance-sheets over the past five years, whereas governments have been forced deep into deficit to prop up their economies.” (The Economist, August 4, 2012)
Levels:
S&P 500 Index [1390.99] – Knocking on the door of 1400 and marching higher from the lows established on June 4, 2012. Trend remains positive despite neutral developing patterns.
Crude [$91.40] – Signs of bottoming visible at $84 as shown in recent weeks, and re-acceleration around $90.
Gold [$1602.00] – Over the last three months, gold has seen plenty of trendless action. For example, the 50-day moving average stands at $1592, illustrating the continued zig-zag and narrow movements around $1600.
DXY – US Dollar Index [82.70] – For over a year, the dollar index has shown signs of strengthening. However, the current strength doesn’t match the peak levels seen in late 2008 (88.46), early 2009 (89.62) and mid 2010 (88.70). Potential pause looming in the near-term.
US 10 Year Treasury Yields [1.54%] – It was last August when yields were closer to 3% before a profound drop. Then, April 2012 marked another defining point, where yields struggled to move above 2%. Now, tiptoeing around all-times lows seems more normal than outrageous.
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 30, 2012
Market Outlook | July 30, 2012
“Your neighbor's vision is as true for him as your own vision is true for you.” Miguel de Unamuno (1864-1936)
Neutrality beloved
The notion of "wait and see" remains a common saying in casual investor talk. Summer days pass by with one crowd waiting for elections while others sit back, awaiting clarity on the latest job numbers and sustainability of corporate earnings. It’s fair to say: Observing is preferred over speculating on the revival of the fragile financial system. Most US technical forecasters appear to subscribe to “range-bound” movements. More or a less a dull pattern is anticipated as we continue to witness calmer volatility in stocks. This reflects the limited directional conviction for the next 2-3 years. To no one’s surprise, risk-aversion is deeply rooted and interlocked in the minds of market participants as measured by some sentiment barometers.
However, getting comfortable with too much observation and resorting to narrower views may lead to opportunities missed. Surely, there’s no denying of deflated moods and lack of motivation for risk taking. Yet, nearly an ideal setup exists for a patient investor – even more intriguing for the few overcoming the clogged up and fatigued chatter around fear. In between the ramblings, one may stumble on themes such as cyber security, infrastructure and deeply discounted emerging markets, which present an attractive entry point. Certainly, with notable macro-related announcements this week, one can expect emotionally based reactions, but separating facts from noise is the challenge ahead.
Digesting opinions
Emphasis on the various sovereign challenges will remain part of the daily banter. Most of the catalyst of shorter-term market movements is credited to the heads of central banks or policy influencers.
If Germany promoted herself as Europe's top economy, then the recent downgrade is a mild wakeup call to stir thought-provoking points. Does saving the Euro make Germany more risky? At least leaders know that stability by all means is desperately needed. Perhaps, rating agencies opinion is usually leads to shorted-lived responses. However, the recent "downgrade" of Germany and her banks finds a way to play more into the existing uncertainty mania. Last summer, markets quickly got over the much-hyped (debatable) US downgrade faster than imagined. History does not exactly repeat itself, but the notion of credit agencies setting the tone for the long term remains questionable. On the other hand, the results of rating agent opinions shape investors’ mindset. Perhaps the week ahead will present another clue as the ECB faces pressure to deliver decisions.
Soft commodities clues
Hard commodity supporters are puzzled and disappointed despite the increasing hopes of a trend reversal, which has yet to materialize. For example, gold is nearly unchanged for the year, and the long-awaited recovery struggles to find a noteworthy pace. Similarly, silver and copper remain in a downtrend. Yet, the commodity index (CRB) is showing very minor and early sings of bottoming that began in late June. It’s hardly a definitive or a clear trend, but the driver of this trend circulates around agricultural-related commodities, which remain in high demand. Food prices (mainly wheat and corn) serve as a macro-indicator for the tense global landscape. Beyond complicated currency or interest rate management, food prices can influence behaviors and stimulus options. Perhaps, political or market turbulence can trigger the outcome of soft commodity actions. The contrast in pattern between hard and soft commodities is a prevailing theme worth observing in the months ahead.
Article Quotes:
“After 25 years in business trying to do the right thing for our clients every day, after 25 years of never using leverage and sometimes holding significant cash, we still are forced to explain ourselves because what we do—which sounds so incredibly simple—is seen as so very odd. When so many others lose their heads, speculating rather than investing, riding the market’s momentum regardless of valuation, embracing unconscionable amounts of leverage, betting that what hasn’t happened before won’t ever happen, and trusting computer models that greatly oversimplify the real world, there is constant and enormous pressure to capitulate. Clients, of course, want it both ways, too, in this what-have-you-done-for-me-lately world. They want to make lots of money when everyone else is, and to not lose money when the market goes down. Who is going to tell them that these desires are essentially in conflict, and that those who promise them the former are almost certainly not those who can deliver the latter? The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions. Success in the market leads to excess, as bystanders are lured in by observing their friends and neighbors becoming rich, as naysayers are trounced by zealous participants, and as the effects of leverage reinforce early successes.” (Seth Klarman, October 20, 2007)
“But there are more exotic methods that can push interest rates below zero. Lars Svensson, vice governor of Sweden’s Riksbank and a former Princeton colleague of Ben Bernanke, in 2009 implemented a negative interest rate on bank reserves of 0.25 percent. What that means, in plain English, is that banks had to pay 0.25 percent of the principal they parked at the central bank. Because the banks can’t keep their reserves in cash, they couldn’t just pull them out and avoid the penalty. The result was the strongest recovery in Europe. There are other ways to achieve negative interest rates. Mankiw has jokingly suggested invalidating all physical currency whose serial number ends with a certain digit. If every $1, $5, $10 etc. bill with a serial number ending in 7 were declared invalid, 10 percent of all paper money would be worthless — or, in other words, there’d be a negative interest rate on cash of 10 percent. Willem Buiter, formerly of the London School of Economics and currently of Citigroup, has proposed abolishing paper currency altogether. If all the money is in bank accounts, after all, the Fed can just shave off a certain percentage every so often. This is harder to do with paper money, absent a scheme like Mankiw’s serial number idea.” (Washington Post, July 25, 2012)
Levels:
S&P 500 Index [1385.97] – Choppy trading pattern in last few weeks. Closing above 1380 is encouraging despite the murky sentiment. June 4th lows of 1266 mark a key inflection point for now.
Crude [$90.13] – Attempting to hold above $90. Buyers have shown significant interest when prices traded around $84. Early signs of bottoming, however, increased skepticism around the $98 range.
Gold [$1618.00] – Seen in a range in the past three months between $1560-$1620. Now, an ultimate test for buyers’ conviction is here, during the climb back up to $1700.
DXY – US Dollar Index [82.70] – Climbed and peaked at 84, as last seen in the summer of 2010. Near-term pause is too early to declare a trend shift.
US 10 Year Treasury Yields [1.54%] – Trapped in a narrow range between 1.40-1.60%. while attempting to stabilize around all-time lows.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, July 23, 2012
Market Outlook | July 23, 2012
“A good traveler has no fixed plans, and is not intent on arriving.” Lao Tzu (600 BC-531 BC)
Observers are wondering why the market is not deteriorating at a faster pace. Is it the buzz of potential further easing (i.e. QE3) or the fact that corporate earnings were not as bad as expected that’s keeping stock markets higher? Investors who succeed within the rules usually know to trade what they are given, so patience may not hurt for those willing to adjust. However, risk-aversion persists in many and fatigued observers continue to recognize that it takes a while to dust off.
The rate journey:
Central banks’ master plan of lowering rates with the intention of increasing inflation expectations remains the ultimate hopes for stimulating growth. These efforts remain more suspenseful than usual, especially when growth is on the decline and cash remains on the sidelines. Perhaps, it is natural to worry and ask the following: Is there enough collective patience with the current central bankers’ plan? Certainly, we keep learning this is not an easy sales pitch. Even in some cases, the Federal Reserve is deferring to politicians to take action:
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.” (Chairman Ben S. Bernanke, July 17, 2012).
Rather a bold statement that is not pleasing to hear from the Federal Reserve. Yet again this summer, governance risk is at the forefront for money managers to dissect and ponder. In simple terms, pleading for leaders to make decisions for the health of competitive markets is not quite comforting. In some aspects, this fails to project broader confidence, even for the not-so-savvy financial observer. Basically, this alludes to the fragile state of markets, as stated by various indicators last quarter.
Marketing Risk
Perhaps, the vital capital that is too distant from flowing in the traditional economy is getting much more attention these days:
“A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.” (The Guardian, July 21, 2012)
Clearly, anyone labeled “ultra-rich” may not see the need to risk capital given the chaotic nature of sentiment. Perhaps, taxes present more of a priority than risk for some groups. Interestingly, even the typical retail account is lowering exposure to stock markets based on weaker volume. On a similar note, S&P 500 companies are holding cash while struggling to move it toward growth-based investments as an ongoing trend. On this topic, the Financial Times points out: “It continues to be depressingly obvious that corporates cannot find anything very exciting on which to spend their money.” (John Authers, July 22, 2012).
Thus, by various measures, it is quite visible regardless of wealth amount or decision-making role that the current deadlock is “trust” based. Bailouts and interventions are a global theme, not a geographic occurrence, and unknown tax consequences and unpredictable government mindsets even fuel the level of discomfort for participants. Yet, the reward for risks taken now is shaping up nicely for those willing to bet on unknowns. However, it takes courage and vision to ignore the much-discussed concerns.
Rerouting
In the last decade, financial engineering such as derivative products have been in great favor versus real investments in core economies. Perhaps, innovation that was heavily saturated in financial services can shift to other areas, such as manufacturing or innovation-based sectors. However, a globalized world makes this thought semi-nostalgic, and political constraints make it harder to envision. But it’s a necessity by all accounts to reenergize growth to entice capital activity.
Technology, as a known innovative sector, is showing relative strength despite a cloudy macro outlook. The successful IPOs of Kayak and Palo Alto Networks last week should not go unnoticed. Plus, the Semiconductor index is at the early stages of showing signs of bottoming, along with fundamentals that turned out not as dismal as previously thought (or desired). Surely, picking the right company’s stock is more appropriate in the sector, but requires further digging as entry points remain attractive for months ahead.
Article Quotes
“These events of the past five years have put the aging, close to retirement – or already retired population – in capital preservation modes. After all, who would take care of them in their rainy days – which, with the suddenly longer life expectancy, are expected to have become far more numerous? Better give up consumption now and have something for the invalid years. Youngsters, in contrast, can hope to recoup money when exposing themselves to risk and losses; for people above 60, the chances of recouping after losing are slim. Lower interest rates will not induce older people to take more bets: at best they would buy lotteries occasionally for a few bucks, giving up a few cans of beer. Few are in the position of Federal Reserve chairman Ben Bernanke or other public officials, endowed with generous pensions. In Bernanke's case, he can count upon retirement on generous pensions, and speaking and possibly board fees. Push come to shove, he can even return to lecturing at universities.” (Asian Times, July 21, 2012).
“There are two competing models of successful American cities. One encourages a growing population, fosters a middle-class, family-centered lifestyle, and liberally permits new housing. It used to be the norm nationally, and it still predominates in the South and Southwest. The other favors long-term residents, attracts highly productive, work-driven people, focuses on aesthetic amenities, and makes it difficult to build. It prevails on the West Coast, in the Northeast and in picturesque cities such as Boulder, Colorado and Santa Fe, New Mexico. The first model spurs income convergence, the second spurs economic segregation. Both create cities that people find desirable to live in, but they attract different sorts of residents. This segregation has social and political consequences, as it shapes perceptions – and misperceptions – of one’s fellow citizens and ‘normal’ American life. It also has direct and indirect economic effects. ‘It’s a definite productivity loss,’ Shoag says. ‘If there weren’t restrictions and you could build everywhere, it would be productive for people to move. You do make more as a waiter in LA than you do in Ohio. Preventing people from having that opportunity to move to these high-income places, making it so expensive to live there, is a loss.’ That’s true not only for less-educated workers but for lower earners of all sorts, including the artists and writers who traditionally made places like New York, Los Angeles and Santa Fe cultural centers.” (Bloomberg, July 19, 2012).
Levels
S&P 500 Index [1362.66] – Staying above 1360 has proved to be a near-term struggle on two recent occasions. Yet, buyers don’t appear exhausted (or ready to bail), given some visible buy appetite around 1300. Uptrend intact despite short-term stalls.
Crude [$91.44] – An explosive three-week run where the drivers remain mysterious. For now, curiosity lurks around further price escalation.
Gold [$1595.00] – The zigzag pattern since early May 2012 only leads to frustration for trend-followers on either side of the coin. The plot thickens, with a retest of the 1560 level versus the much-anticipated rally beyond 1620. For now, neutrality remains in force while the bias is building on the upside as gold is labeled (or confused) as the demise instrument.
DXY – US Dollar Index [83.37] – For nearly a year, the dollar has steadily strengthened, painting the picture of high demand for “safety” as well as ongoing decline of other currencies. This stronger dollar theme has not shown any signs of weakness, and remains counterintuitive to the nearly 30-year trend we’ve witnessed.
US 10 Year Treasury Yields [1.45%] – Barely holding above previous historic low of 1.43% reached on June 1, 2012. Now the fragile conditions resurface and are marking a new unchartered territory for participants and leaders alike.
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
Observers are wondering why the market is not deteriorating at a faster pace. Is it the buzz of potential further easing (i.e. QE3) or the fact that corporate earnings were not as bad as expected that’s keeping stock markets higher? Investors who succeed within the rules usually know to trade what they are given, so patience may not hurt for those willing to adjust. However, risk-aversion persists in many and fatigued observers continue to recognize that it takes a while to dust off.
The rate journey:
Central banks’ master plan of lowering rates with the intention of increasing inflation expectations remains the ultimate hopes for stimulating growth. These efforts remain more suspenseful than usual, especially when growth is on the decline and cash remains on the sidelines. Perhaps, it is natural to worry and ask the following: Is there enough collective patience with the current central bankers’ plan? Certainly, we keep learning this is not an easy sales pitch. Even in some cases, the Federal Reserve is deferring to politicians to take action:
“The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery.” (Chairman Ben S. Bernanke, July 17, 2012).
Rather a bold statement that is not pleasing to hear from the Federal Reserve. Yet again this summer, governance risk is at the forefront for money managers to dissect and ponder. In simple terms, pleading for leaders to make decisions for the health of competitive markets is not quite comforting. In some aspects, this fails to project broader confidence, even for the not-so-savvy financial observer. Basically, this alludes to the fragile state of markets, as stated by various indicators last quarter.
Marketing Risk
Perhaps, the vital capital that is too distant from flowing in the traditional economy is getting much more attention these days:
“A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.” (The Guardian, July 21, 2012)
Clearly, anyone labeled “ultra-rich” may not see the need to risk capital given the chaotic nature of sentiment. Perhaps, taxes present more of a priority than risk for some groups. Interestingly, even the typical retail account is lowering exposure to stock markets based on weaker volume. On a similar note, S&P 500 companies are holding cash while struggling to move it toward growth-based investments as an ongoing trend. On this topic, the Financial Times points out: “It continues to be depressingly obvious that corporates cannot find anything very exciting on which to spend their money.” (John Authers, July 22, 2012).
Thus, by various measures, it is quite visible regardless of wealth amount or decision-making role that the current deadlock is “trust” based. Bailouts and interventions are a global theme, not a geographic occurrence, and unknown tax consequences and unpredictable government mindsets even fuel the level of discomfort for participants. Yet, the reward for risks taken now is shaping up nicely for those willing to bet on unknowns. However, it takes courage and vision to ignore the much-discussed concerns.
Rerouting
In the last decade, financial engineering such as derivative products have been in great favor versus real investments in core economies. Perhaps, innovation that was heavily saturated in financial services can shift to other areas, such as manufacturing or innovation-based sectors. However, a globalized world makes this thought semi-nostalgic, and political constraints make it harder to envision. But it’s a necessity by all accounts to reenergize growth to entice capital activity.
Technology, as a known innovative sector, is showing relative strength despite a cloudy macro outlook. The successful IPOs of Kayak and Palo Alto Networks last week should not go unnoticed. Plus, the Semiconductor index is at the early stages of showing signs of bottoming, along with fundamentals that turned out not as dismal as previously thought (or desired). Surely, picking the right company’s stock is more appropriate in the sector, but requires further digging as entry points remain attractive for months ahead.
Article Quotes
“These events of the past five years have put the aging, close to retirement – or already retired population – in capital preservation modes. After all, who would take care of them in their rainy days – which, with the suddenly longer life expectancy, are expected to have become far more numerous? Better give up consumption now and have something for the invalid years. Youngsters, in contrast, can hope to recoup money when exposing themselves to risk and losses; for people above 60, the chances of recouping after losing are slim. Lower interest rates will not induce older people to take more bets: at best they would buy lotteries occasionally for a few bucks, giving up a few cans of beer. Few are in the position of Federal Reserve chairman Ben Bernanke or other public officials, endowed with generous pensions. In Bernanke's case, he can count upon retirement on generous pensions, and speaking and possibly board fees. Push come to shove, he can even return to lecturing at universities.” (Asian Times, July 21, 2012).
“There are two competing models of successful American cities. One encourages a growing population, fosters a middle-class, family-centered lifestyle, and liberally permits new housing. It used to be the norm nationally, and it still predominates in the South and Southwest. The other favors long-term residents, attracts highly productive, work-driven people, focuses on aesthetic amenities, and makes it difficult to build. It prevails on the West Coast, in the Northeast and in picturesque cities such as Boulder, Colorado and Santa Fe, New Mexico. The first model spurs income convergence, the second spurs economic segregation. Both create cities that people find desirable to live in, but they attract different sorts of residents. This segregation has social and political consequences, as it shapes perceptions – and misperceptions – of one’s fellow citizens and ‘normal’ American life. It also has direct and indirect economic effects. ‘It’s a definite productivity loss,’ Shoag says. ‘If there weren’t restrictions and you could build everywhere, it would be productive for people to move. You do make more as a waiter in LA than you do in Ohio. Preventing people from having that opportunity to move to these high-income places, making it so expensive to live there, is a loss.’ That’s true not only for less-educated workers but for lower earners of all sorts, including the artists and writers who traditionally made places like New York, Los Angeles and Santa Fe cultural centers.” (Bloomberg, July 19, 2012).
Levels
S&P 500 Index [1362.66] – Staying above 1360 has proved to be a near-term struggle on two recent occasions. Yet, buyers don’t appear exhausted (or ready to bail), given some visible buy appetite around 1300. Uptrend intact despite short-term stalls.
Crude [$91.44] – An explosive three-week run where the drivers remain mysterious. For now, curiosity lurks around further price escalation.
Gold [$1595.00] – The zigzag pattern since early May 2012 only leads to frustration for trend-followers on either side of the coin. The plot thickens, with a retest of the 1560 level versus the much-anticipated rally beyond 1620. For now, neutrality remains in force while the bias is building on the upside as gold is labeled (or confused) as the demise instrument.
DXY – US Dollar Index [83.37] – For nearly a year, the dollar has steadily strengthened, painting the picture of high demand for “safety” as well as ongoing decline of other currencies. This stronger dollar theme has not shown any signs of weakness, and remains counterintuitive to the nearly 30-year trend we’ve witnessed.
US 10 Year Treasury Yields [1.45%] – Barely holding above previous historic low of 1.43% reached on June 1, 2012. Now the fragile conditions resurface and are marking a new unchartered territory for participants and leaders alike.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed
Monday, July 16, 2012
Market Outlook | July 16, 2012
“It is far better to foresee even without certainty than not to foresee at all.” Henri Poincare (1854-1912)
Never Certain
Like last summer, talk of uncertainty is abundant, but when it comes to making investments, one should ask, when was it ever certain? The answer is usually never. Risk aversion may be overly discussed and in higher demand (for comfort seekers) even with low volatility and near-historic low interest rates for yield seekers.
This low-rate environment is too well established by now and is a global phenomenon. Generally, these efforts are believed to push investors into taking more risks than saving. However, the end goal of quantitative easing (QE) is to raise inflation expectations with the hope of forming some sort of stability. Stimulus efforts of all kinds globally are debatable as to whether they are successful or not. At times, the disconnect between the real economy and “fed speak” certainly can sap the excitement out of an observer.
Dependence
Meanwhile, the Federal Reserve of New York reminded us that without stimulus efforts, the S&P 500 Index would be 50% lower – an attention-grabbing finding indeed. This study illustrates the heavy influence of Federal Reserve policies on market responses. Bravado or not, the stimulus efforts do shape minds and move markets in an environment where most look for guidance from central banks. Certainly, betting against the central bankers has not been a wise or brave move for a fund manager. As for the future, the verdict remains unknown, with increased distrust and questioning of central banks’ leadership (some driven by politics, of course). Importantly, recent chatter mildly hints at increasing odds of further quantitative easing to come, despite ferocious and growing opposition. Yet, the real economy has a key role to play and probably will have final say in shaping further policies.
Growth Dilemma
After a decade of growth in emerging markets (particularly China) and commodities, pundits and risk-takers alike are confused as to the next wave of growth. We keep learning that growth is scarce for now and anticipating growth appears too hopeful in some ways. Thus, we’re in a deadlock, in terms of price movements where risk-averse participants are not convinced of good growth stories.
Clearly, last week the losses announced by a financial company combined with a US city filing for bankruptcy added a dent to an already beaten-up sentiment. Plus, with each event we discover the complexities of financial markets and how so-called experts may not fully grasp the intertwined or opaque practices. However, on the bright side, it’s safe to say present ugly realities are confronted politically and financially more than at the peak of 2007 summer highs. Lessons learned are valuable for those looking beyond the intermediate-term suspense of an election year.
Participation
Casual participants appear fed up with the guessing game, especially when the day-to-day pounding news of uncertainty causes more confusion than conviction. Stock market observers have noticed declining volume as part of a slowing demand:
“Its [New York Stock Exchange] volume has dropped 40% in the past two years. In June 2011, average daily volume was 2.2 billion shares. In June 2010, 3.0 billion. That number came in a volatile period after the Flash Crash of May 6, 2010. But was itself down 6.9% from June 2009, a year earlier.” (Securities Technology Monitor, July 11, 2012).
This decline in stock market volume is not to be confused with increased volatility or decline in value. It primarily showcases the individual investor’s lack of appetite for participation in stocks in the post-crisis era. Now, a lack of popularity can invite opportunities that are less crowded for patient but more diligent investors. Bargain hunting is underway in some sectors, while further discounts are awaited in others. That said, the rest of the earnings season could set the tone for the new expectations to stir some new participants.
Article Quotes:
“To get a sense of magnitude, consider this: If Libor was understated by an average of only 0.1 percentage point for a year, the discrepancy on the roughly $300 trillion in interest- rate swaps outstanding at the time would add up to $300 billion. That’s about a fifth of the aggregate capital of the 16 banks whose reports were used to calculate Libor in 2008. Much of that amount would not be actionable, but it also doesn’t account for other types of financial contracts or potential punitive damages. It’s in no one’s interest if the prospect of decades of litigation, and prolonged uncertainty about the ultimate cost, cripples the banking system. It’s certainly the last thing a struggling global economy needs. Bank executives, regulators and prosecutors should be thinking now about how to come clean quickly, compensate the victims and move on. The fund set up by BP Plc to pay claims related to the 2010 Deepwater Horizon oil spill offers one possible template. Banks could pool their resources into a global Libor victims’ compensation fund, appoint an independent administrator and create a transparent formula to calculate damages. Doing so might persuade angry clients to settle rather than pursue litigation that would serve mainly to enrich armies of lawyers.” (The Editors, Bloomberg, July 12, 2012)
"Understanding this dynamic, it follows that QE will have its greatest impact on financial markets when interest rates and risk-premiums have spiked higher. If interest rates are low already, and risky assets are already priced to achieve weak long-term returns (we estimate that the S&P 500 is likely to achieve total returns of less than 4.8% over the coming decade), there is not nearly as much room for QE to produce a speculative run. Leave aside the question of why this is considered an appropriate policy objective in the first place, given the extraordinarily weak sensitivity of GDP growth to market fluctuations. The key point is this – QE is effective in supporting stock prices and driving risk-premiums down, but only once they are already elevated. As a result, when we look around the globe, we find that the impact of QE is rarely much greater than the market decline that preceded it. … In short, the effect of quantitative easing has diminished substantially since 2009, when risk-premiums were elevated and amenable to being pressed significantly lower. At present, risk-premiums are thin, and the S&P 500 has retreated very little from its April 2012 peak. My impression is that QE3 would (will) be unable to pluck the U.S. out of an unfolding global recession, and that even the ability to provoke a speculative advance in risky assets will be dependent on those assets first declining substantially in value." (John Hussman, July 9, 2012)
Levels:
S&P 500 Index [1356.78] – At a healthy range above both the 200- and 50-day moving averages. Showing a revival after a dismal April and May, yet strength remains unconfirmed.
Crude [$87.10] – Trading between $80-$100, which has become a familiar place in the post-2008 era. Trend-following in this volatile commodity remains tricky, especially with unfolding events. It’s fair to say that buyers and sellers lack conviction for now.
Gold [$1595.00] – No major change from the last weeks or months. After a four-month decline, anxious buyers are seeing momentum develop to break through the $1600 range.
DXY – US Dollar Index [83.34] – Flirting with new highs yet again. The strengthening dollar theme is alive and well for over a year – mostly as a function of relative gain as others devalue their currency.
US 10 Year Treasury Yields [1.48%] – Demand for safety via Treasuries is too visible as yields approach all-time lows, as witnessed on June 1st, 2012 (1.43%).
http://markettakers.blogspot.com
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended, or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
Monday, July 09, 2012
Market Outlook | July 9, 2012
“Order is repetition of units. Chaos is multiplicity without rhythm.” (M. C. Escher, 1898-1972)
Heating puzzle
It was a holiday-shortened week that witnessed further coordinated global easing and the ever-so-common interventions. Then, the US jobs results triggered heated political discussion points on levels of growth. Meanwhile, the stock market trading in a narrower range witnessed some mild reactions to the labor conditions. Despite headline excitement, the overall New York Stock exchange volume stood well below the norm, which reveals lackluster participation rates. Yet, the broad US markets are up for the year (S&P 500 Index: 7.7% and Nasdaq 100: 14.7%) but emphasis might be biased around the deflating sentiment.
Plus, lack of comfort in the debatable economic growth measures presents edginess, especially when the revived manufacturing data took a dip. There’s plenty to decipher in the labor conditions, but it’s safe to say that good news remains very scarce. This justifies owning stocks more than selling – at least from a contrarian view. Thus, the search for quiet summer months is harder to find in recent years with the interlinked nature of markets and dissatisfied audiences with varying self-interest. Investors will have to sort out the loud rhetoric versus actual unknown results. That’s where the limited opportunities lie for the brave and patient.
Ambiguity mounting
Through all this, the mystery of quarterly corporate earning results looms around the corner – not to mention the Eurozone turbulences that can erupt periodically or be resolved temporarily. In any case, we’re accustomed to both. Clearly, the low interest theme is a global phenomenon stretching beyond US central banks. China’s recent policies may require additional time to digest from the recent slowdown. It’ll be a tough month ahead for speculators and forecasters of all kinds. Thus, the speculative nature of markets is viewed as less of a skill or luck, and is based more on guessing outcomes. Maybe that entices some, but the whole idea of making money for retirement in markets is questioned severely. Finding shelter in “safe assets” has proven to be unsatisfying, which showcases no shelter for risk avoidance in this recovery cycle.
Then of course, there is the not-so-pleasant "debt ceiling" issue that may resurface as a potential near-term disruption. It all adds up to a less cheery anticipation, while expert knowledge for forecasting is in less demand in this changing landscape of financial services. However, the grim outlooks require as much scrutiny as the hopeful bunch, which will require more patience than desired.
Trust restoration
Rebuilding confidence in the financial system is difficult to manage, especially when recovery itself is not collectively convincing. Large banks have seen their shares of challenges from defective instruments, hedges that have gone wrong and reputational residues from crisis fallout. The recent flurry of regulatory framework being established is colorful, but practical results are unclear, causing minor trepidation. Thus, central bankers, policymakers and larger private companies are facing critical decision points. Fund managers will be forced to think critically rather than guessing in the weeks ahead. Perhaps, that’s a valuable moneymaking skill along with patience to combat this murky setup.
Article Quotes:
“We showed that the manufacturing multiplier – the number of indirect manufacturing jobs generated by one additional manufacturing job – is higher than conventionally believed. This is extremely important for understanding the current job weakness of the U.S. economy. The offshoring of production, and the large trade deficits, may have affected employment more than most economists thought. This also helps us situate manufacturing in today’s tech-driven economy. For the foreseeable future – or at least the next few years – economic growth is going to be led by the broad communications sector. It’s unlikely that manufacturing will ever be as central to the economy as it was before. However, the higher manufacturing multiplier suggests that manufacturing has an important role in running a balanced and sustainable economy, by moving us toward a production economy that creates jobs, that is more stable, and does not rely so heavily on borrowing as our current economy. Of all the benefits, that may be the greatest of all.” (The Progressive Policy Institute, May 2012)
“After thirty years, China is nearing the end of its super-high-growth phase, but that shouldn’t be a shock. It’s much like the twenty-five-year growth spurts by earlier East Asian economies such as South Korea, and it was always bound to slow. But it is resilient. For all the gloom these days, I end up around where The Economist did in April, when it concluded that China’s ‘quirks and unfairnesses’ – financial repression, sops to the state-owned enterprises – will help it withstand a shock. China is still on pace to overtake the United States as the world’s largest economy by 2020. If you want to know if it’s a better investment than other places, consider that U.S. fund managers continue to move in. (They put $2.5 billion into Chinese stocks this year, after pulling out $2.6 billion last year, according to the research firm EPFR Global.) If China was a stock, it would be down now, but, viewed from another angle, that means it is cheap.” (The New Yorker, July 6, 2012)
Levels:
S&P 500 Index [1354.68] –Interestingly, attempts to stay above 1360 failed in late June, and a second attempt in July seems mildly vulnerable. This setup invites short-term technical sell-offs, yet won’t grossly impact the fundamentals of a positive trend.
Crude [$84.45] – A dramatic move from $77 to $88 in matter of a few days sparked a puzzling reaction at the start of this month. Perhaps stabilizing at mid-$80 range as the fundamentals and sentiment remain highly unclear, with some possibilities for further turbulence.
Gold [$1587.00] – Mostly a non-trending theme continues to persist. In the past 10 months, gold has attracted strong buyer attitude around $1540 and waning interest closer to $1750. Long-term believers in the yellow metal anxiously await a lift to sustain a multi-year run.
DXY – US Dollar Index [83.37] – Closed the week very close to annual highs. A strengthening dollar is a theme that’s been building slowly since May 2011.
US 10 Year Treasury Yields [1.54%] – Only a few points removed from all-time lows of 1.43%, while March highs of 2.39% appear further away given the recent pattern. Yet this three-decade downtrend move is surely difficult to turn around over months or quarters.
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
Heating puzzle
It was a holiday-shortened week that witnessed further coordinated global easing and the ever-so-common interventions. Then, the US jobs results triggered heated political discussion points on levels of growth. Meanwhile, the stock market trading in a narrower range witnessed some mild reactions to the labor conditions. Despite headline excitement, the overall New York Stock exchange volume stood well below the norm, which reveals lackluster participation rates. Yet, the broad US markets are up for the year (S&P 500 Index: 7.7% and Nasdaq 100: 14.7%) but emphasis might be biased around the deflating sentiment.
Plus, lack of comfort in the debatable economic growth measures presents edginess, especially when the revived manufacturing data took a dip. There’s plenty to decipher in the labor conditions, but it’s safe to say that good news remains very scarce. This justifies owning stocks more than selling – at least from a contrarian view. Thus, the search for quiet summer months is harder to find in recent years with the interlinked nature of markets and dissatisfied audiences with varying self-interest. Investors will have to sort out the loud rhetoric versus actual unknown results. That’s where the limited opportunities lie for the brave and patient.
Ambiguity mounting
Through all this, the mystery of quarterly corporate earning results looms around the corner – not to mention the Eurozone turbulences that can erupt periodically or be resolved temporarily. In any case, we’re accustomed to both. Clearly, the low interest theme is a global phenomenon stretching beyond US central banks. China’s recent policies may require additional time to digest from the recent slowdown. It’ll be a tough month ahead for speculators and forecasters of all kinds. Thus, the speculative nature of markets is viewed as less of a skill or luck, and is based more on guessing outcomes. Maybe that entices some, but the whole idea of making money for retirement in markets is questioned severely. Finding shelter in “safe assets” has proven to be unsatisfying, which showcases no shelter for risk avoidance in this recovery cycle.
Then of course, there is the not-so-pleasant "debt ceiling" issue that may resurface as a potential near-term disruption. It all adds up to a less cheery anticipation, while expert knowledge for forecasting is in less demand in this changing landscape of financial services. However, the grim outlooks require as much scrutiny as the hopeful bunch, which will require more patience than desired.
Trust restoration
Rebuilding confidence in the financial system is difficult to manage, especially when recovery itself is not collectively convincing. Large banks have seen their shares of challenges from defective instruments, hedges that have gone wrong and reputational residues from crisis fallout. The recent flurry of regulatory framework being established is colorful, but practical results are unclear, causing minor trepidation. Thus, central bankers, policymakers and larger private companies are facing critical decision points. Fund managers will be forced to think critically rather than guessing in the weeks ahead. Perhaps, that’s a valuable moneymaking skill along with patience to combat this murky setup.
Article Quotes:
“We showed that the manufacturing multiplier – the number of indirect manufacturing jobs generated by one additional manufacturing job – is higher than conventionally believed. This is extremely important for understanding the current job weakness of the U.S. economy. The offshoring of production, and the large trade deficits, may have affected employment more than most economists thought. This also helps us situate manufacturing in today’s tech-driven economy. For the foreseeable future – or at least the next few years – economic growth is going to be led by the broad communications sector. It’s unlikely that manufacturing will ever be as central to the economy as it was before. However, the higher manufacturing multiplier suggests that manufacturing has an important role in running a balanced and sustainable economy, by moving us toward a production economy that creates jobs, that is more stable, and does not rely so heavily on borrowing as our current economy. Of all the benefits, that may be the greatest of all.” (The Progressive Policy Institute, May 2012)
“After thirty years, China is nearing the end of its super-high-growth phase, but that shouldn’t be a shock. It’s much like the twenty-five-year growth spurts by earlier East Asian economies such as South Korea, and it was always bound to slow. But it is resilient. For all the gloom these days, I end up around where The Economist did in April, when it concluded that China’s ‘quirks and unfairnesses’ – financial repression, sops to the state-owned enterprises – will help it withstand a shock. China is still on pace to overtake the United States as the world’s largest economy by 2020. If you want to know if it’s a better investment than other places, consider that U.S. fund managers continue to move in. (They put $2.5 billion into Chinese stocks this year, after pulling out $2.6 billion last year, according to the research firm EPFR Global.) If China was a stock, it would be down now, but, viewed from another angle, that means it is cheap.” (The New Yorker, July 6, 2012)
Levels:
S&P 500 Index [1354.68] –Interestingly, attempts to stay above 1360 failed in late June, and a second attempt in July seems mildly vulnerable. This setup invites short-term technical sell-offs, yet won’t grossly impact the fundamentals of a positive trend.
Crude [$84.45] – A dramatic move from $77 to $88 in matter of a few days sparked a puzzling reaction at the start of this month. Perhaps stabilizing at mid-$80 range as the fundamentals and sentiment remain highly unclear, with some possibilities for further turbulence.
Gold [$1587.00] – Mostly a non-trending theme continues to persist. In the past 10 months, gold has attracted strong buyer attitude around $1540 and waning interest closer to $1750. Long-term believers in the yellow metal anxiously await a lift to sustain a multi-year run.
DXY – US Dollar Index [83.37] – Closed the week very close to annual highs. A strengthening dollar is a theme that’s been building slowly since May 2011.
US 10 Year Treasury Yields [1.54%] – Only a few points removed from all-time lows of 1.43%, while March highs of 2.39% appear further away given the recent pattern. Yet this three-decade downtrend move is surely difficult to turn around over months or quarters.
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