Market Outlook | June 17, 2013

“What has puzzled us before seems less mysterious, and the crooked paths look straighter as we approach the end.” Jean Paul Richter (1763-1825)

The plot thickens

In the past month, a few events have unfolded, heightening hints of a potential sell-off. It started with sharp sell-offs in emerging markets, along with currency volatility and certainly the ongoing debate about the status of Quantitative Easing (QE). In addition, US participants in the past month witnessed a run-up in interest rates and minor pullbacks in broader markets. In what has been a smooth-sailing ride (year-to-date: S&P 500 up 14.1% and NASDAQ 100 above 10%), now this begs a few questions about asset prices. Are we poised for a slowdown triggering a prolonged selling period? Is the status quo at risk of changing its tune? These are natural and key questions to ask among the financial circles.

Before building the pending downside thesis, one should realize a few reasons that favor further upside moves in US markets. Here are key influential points to consider:

1. Limited participation. This thus-far unloved rally does not feel like a broad participation to set up a bubble-like collapse in the US. A few pundit comparisons to the 2008 or 2000 bubbles are not quite relevant yet. Perhaps, the lack of enthusiasm thus far may require more cheerleading to even reach a more dangerous level.

2. Lack of alternative markets. When considering European woes and the recent emerging market sell-off, US equities end up benefiting from capital rotation. Plus, given the low interest rate environment, there are limited options in sound bond investments, which again bodes well for equities

3. Power of intervention. Stabilizing the market remains a priority for central bankers as conductors of the financial market orchestra – stimulus efforts can prolong the rally and attempt to postpone potential demise or loss of confidence.

Big-picture assessment

Surely, the reason for upside moves is now being understood. However, there is a potential setup of a lose-lose situation facing the Federal Reserve, which risks the hopes of those falling deeply in love with this market. In the summer of 2011, the panic served as a buy signal. However, in summer 2013, having market confidence is not such a rare trait or outlook.

First, if QE as we know it ceases, there is a natural investor withdrawal or shift from the status quo that can cause justified and unjustified concerns. Participants have been trained not to doubt the status quo, and when that's taken away, then fear easily brews.

Secondly, if QE continues for long, then the mystery of QE’s end date would trigger additional skepticism and worry beyond the Fed’s messaging control. Not to mention, if the economy is considered okay, then more will ask: Why more stimulus? The last thing central banks desire is to admit that ongoing stimulus efforts were a failure. So one should brace for government intervention and confusing messaging. So far, it's quite clear that US homeowners and stock owners benefited in price appreciation. Thus, the Fed can flex some muscles to re-emphasize the old saying: "Don't fight the Fed.” Yet, the economy is mysterious to grasp, when sorting through revisions and debatable sample sizes and other tricks in calculation that confuse rather than refute potential doubts.

Unlocking confusion:

It’s fair to say that the trend for recent months is known. The upcoming trend is less clear, which can cause some near-term disturbance. Perhaps, some market overreaction should not be surprising and is the healthy approach. Corporate earnings ahead will dictate some responses related to investor confidence. If emerging markets are slowing, then odds are multi-national corporations will feel the pinch, too. So earnings may set the tone in the US. Each trading day can confirm the clues of jittery macro reactions. For now, cleverly observing is wiser than boldly relying on old trends or speculating on new, unproven movements.

Article quotes:

“After three years, Greece’s experience is telling. As a new IMF report acknowledges, structural reforms there have failed to produce the intended effects, partly because they ran up against political and implementation difficulties, and partly because their potential to increase growth in the short run was overstated. Nor have Spain’s labor-market reforms worked as expected. None of this should come as a surprise. Structural reform increases productivity in practice through two complementary channels. First, low-productivity sectors shed labor. Second, high-productivity sectors expand and hire more labor. Both processes are needed if the reforms are to increase economy-wide productivity. But, when aggregate demand is depressed – as it is in Europe’s periphery – the second mechanism operates weakly, if at all. It is easy to see why: making it easier to fire labor or start new businesses has little effect on hiring when firms already have excess capacity and have difficulty finding consumers. So all we get is the first effect, and thus an increase in unemployment. There is little new in the European Commission’s approach, and few reasons to be optimistic that its “new” strategy will work better than the old one. Structural reform – however desirable it may be for the longer term – simply is not a remedy for these countries’ short-term growth conundrum.” (Project Syndicate, June 17, 2013)

“Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity. India’s central bank sold dollars the past two days to stem the rupee’s slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate today. Brazil said yesterday it would unwind some of the capital controls it began putting in place in 2010 – when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week. Foreign selling of Thai, Indonesian and Philippine stocks has reached record levels as the threat of reduced Fed monetary stimulus spurs the biggest equity declines since 2011. Overseas investors unloaded a net $2.7 billion from the three stock markets so far this month, the biggest eight-day outflow since Bloomberg began compiling the data in March 1999. Three years after emerging-market policy makers from Brazil to South Korea warned about destabilization from record Fed stimulus, they are now coping with the prospect of the spigot being tightened. Fed actions have pumped more than $2.5 trillion into the financial system since 2008.” (Bloomberg, June 13, 2013).

Levels: (Prices as of close June 14, 2013)

S&P 500 Index [1626.73] – After peaking on May 22, the index appears to stabilize around 1620. Buyers with conviction are offered an entry point, while sellers debate the magnitude and potential of this downtrend.

Crude (Spot) [$97.85] – Very early signs of a breakout above $96. There is technically some significance in that move, yet some wonder if this is a short-lived run.

Gold [$1385.00] – A nine-month decline leading to a more than 20% depreciation reemphasizes the cycle pause. Although there has been chatter of buying the last few quarters, gold prices have not rejuvenated.

DXY – US Dollar Index [81.66] – Since late May, the dollar has declined in value, giving up some of the gains that began in February 2013.

US 10 Year Treasury Yields [2.12%] – After an explosive run since May 3, yields have risen at a faster pace. Sustainability remains questionable and suspenseful.


Dear Readers:

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

Market Outlook | June 10, 2013

“Good teaching is one-forth preparation and three-fourths theater.” (Gail Godwin 1937-Present)

Dichotomy

A few triggers of potential unrest in global markets are loudly visible despite a positive weekly finish for the S&P 500 Index and the not-so-catastrophic labor numbers for May. Underneath the surface, mild turbulence is brewing while financial minds ponder the faith of interest rates and speculate on quantitative easing exit plans.
Meanwhile, other nations resume efforts to replicate the art of asset price stimulus via easing (of course). With home values and stock markets above or around pre-bubble levels, for some Americans, the perception of feeling wealthy or normal seems rather legitimate, as opposed to digesting the not-so-pleasant to mixed economic realities that persist. This ironic maze brings forth a disconnect often used and misused in political arenas and general discussions. For the so-called professionals, it is crucial to navigate thoroughly to survive any pending fallout. For market observers making distinctions between the dominant status quo and trend shifts, it is a burning question with higher stakes.

The quiet turbulence

The message from emerging stock markets acknowledges the weakness of the real and slowing global economy. For example, since March 7, 2013, the Brazilian Index (EWZ) is down nearly 15%. Similarly, Mexico (EWW) saw its stocks fall by more than 15% after peaking on April 11, 2013. Last week, the Turkish stock market (TUR) fell nearly 10%. Perhaps, these key markets followed the footsteps of the Japanese stock market decline from two weeks ago. Related or not, sell-offs have been materializing across various markets. These movements are worth highlighting as the US equity markets have maintained composure thus far by avoiding sharp sell-offs.

Interestingly, the emerging market decline has coincided with commodity price deceleration. The simple logic goes: If global demand softens, then commodity prices need to correct as well. This mirrors the same cyclical perspective. So far this year, one can say it is only natural to have moderation in both given the over decade run.

Practical dilemma

There might be a disconnect between weak economic growth and inflated assets that lives on. Clearly, that's the message. Maintaining high asset values while applying low interest rate policy is hardly new anywhere these days. In a world that's still somewhat desperate for growth and yield, there are not many alternatives to stocks. It’s a tough case to claim this is of a bubble of 2008 nature, as the participation rate by investors is not quite at the same pace.

“U.S. equity trading volume has dropped 7 percent in the first five months of the year, positioning it as the fourth year in a row of decline. For the five months through May, U.S. equity average daily volume was 6.34 billion shares, down 7 percent from the same period in 2012, according to data from Credit Suisse's Trading Strategy Group. Trading in exchange-traded funds dropped 9 percent, while trading in stocks fell 7 percent. (Traders Magazine, June 7, 2013).

If the number and level of participants in equity markets remain at low levels, then calling bubbles is not quite accurate. That’s the challenge and danger for those betting on further gloom or a repeat of recent history. At some point, the hints of market slowdown cannot be just ignored easily or dismissed collectively. The labor and GDP lack of growth is one factor, while earnings require further clarity that needs unlocking. The status quo has been quite powerful in lifting asset prices, but expectations are rising and patience is wearing thin as the market truth is being confronted.

Article quotes:

“Data released on Sunday showed China's annual consumer inflation slowed in May while bank lending fell below expectations, more evidence that the world's second-largest economy could slow further in the second quarter. Fuel demand in China, the world's second-largest user and a key driver for global oil markets, grew at the slowest pace in four years last year as the economy expanded less rapidly. China consumed roughly 9.48 million barrels per day of oil in May, according to Reuters calculations based on preliminary government data. Reuters tallies implied oil demand by adding crude throughput and net imports of refined products, but excludes changes in inventories which China rarely discloses. That compared to 9.38 million bpd in May last year and April's 9.6 million bpd. The lackluster consumption was mostly due to weak refinery throughput, which gained 2.4 percent over a weak year-earlier base to 9.2 million bpd, data from the National Statistical Bureau showed on Sunday, the lowest daily rate since September 2012.” (Reuters, June 9, 2013)

“The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway. That number was even worse than it looked since new orders plunged 3.5 points while inventories rose. The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December. Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline. Consumer expenditures for April declined 0.2% and disposable income 0.1%. Compared to a year-earlier, real consumer spending is up a paltry 2.1% and real disposable income only 1%. Even then, consumers were able to maintain this inadequate rate of spending only by reducing their savings rate to 2.5%. Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle. Real GDP has increased only 1.8% over the last four reported quarters, within a range that has been in force since the first quarter of 2010. The current quarter is shaping up as no better. Manufacturing production has declined for the last two months and three of the last four.” (Comstock Partners, Inc June 6, 2013).

Levels: (Prices as of close June 7, 2013)

S&P 500 Index [1643.38] – After temporarily pausing, the index bounced back from 1600. In upcoming days, bullish participants await revisiting all-time highs (1687 on May 22). The four-year bull market is facing an inflection point, and sustaining this run will be severely questioned.

Crude (Spot) [$96.03] – Once again, climbing back to $96, a familiar resistance range. Staying above it has been a challenge, as the $100 point has seemed elusive in recent months.

Gold [$1400.00] – Since October 5, 2012 the commodity has dropped by 24%. Clearly, this confirms the downtrend. The discounted price might attract new buyers seeking a liftoff, but the cycle is hard to dismiss.

DXY – US Dollar Index [81.66] – A sharp two-week sell-off in dollars wiped out last month’s gains. It’s too early to determine the nature of the recent sell-off, but the strengthening trend is mildly pausing.

US 10 Year Treasury Yields [2.17%] – Since May 1 lows of 1.61%, yields are raising and holding steady. Reaching and breaking above 2.50% will prompt a new wave of confirmation of a stable rising yield theme. For now, between the skepticism and lack of evidence, speculators line up.








Dear Readers:


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

Market Outlook | June 3, 2013

“Every calamity is a spur and valuable hint.” Ralph Waldo Emerson (1803-1882)

Concerns building

The status quo of higher markets, lower interest rates and stable economic growth is not as sustainable as in previous years. There are several unfolding events that point to a potential for increased uncertainty and analysts, journalists and participants alike misunderstand plenty of uncertainties. A few big-picture themes to consider:

1. The end date for quantitative easing is being debated as interest rates show signs of rising (increased bond market nervousness).

2. Drivers of sharp selling in the Japanese stock market are being understood as the sell-off spreads to other emerging market indices.

3. The lack of compelling and sustainable fundamental strength in corporate earnings suggests limited upside potential.

4. May ended with a stretched stock market that needs a breather from an explosive recent month and a well-defined four-year bull market.

5. Weak economic data in key nations (led by China) signal lack of expansion and growth. This is further supported by the decline in commodity prices, which respond to the softening global demand.

All this adds up to suggest that a pending calamity is in the not-so-distant future, as the collective run-up has long ignored the brewing issues. Of course, the right move in the past few years has favored risk-taking, and pessimists were wrong in their views and missed out. Now in a new setting, the environment is quite different than March 2009, when the S&P 500 bottomed after the crumbling of the bubble top. Back then, it was an opportune time to purchase; these days, it’s not ideal to double down on risk.

Deceiving calmness

The comfort of the status quo leads to calmness, which is common before bigger sell-offs, as witnessed in August 2007 – right before the major sell-off. Certainly, the magnitude of any pending sell-off should not be automatically compared to the 2008 crisis. Perhaps, the magnitude is not the same here, but the concept of ebb and flow is important. Not long ago, the all-time highs in the S&P 500 index we cheered as other global indexes rejoiced in the collective bull market. Yet, even the most bullish and rational speculator would admit some sell-off or price readjustment is necessary. At least, the disconnect between the real economy and elevated stock market is harder and harder to justify. Thus, as the summer months approach, there is plenty to ponder, as central banks will have to find a coherent explanation of pending developments while investor near-term overreactions seem inevitable in either direction. When viewing turbulence (Volatility Index), it has been quiet since summer 2011, and keeping that calmness may not be as successful as the last two years.

Bracing and accepting

With all the uncertainties, it is fair to say participants – investors and analysts alike – are facing shaky confidence and limited conviction. If market uncertainty is brewing while lack of conviction is playing out, then ongoing rosy forecasts for risk-taking omit the recent clues that suggest corrections in asset values. The S&P trading at all-time highs versus weakening real economic data is a highly noticeable reality that illustrates this disconnect. Full questions await on earnings and sustainability.
“Of the 106 companies that have issued EPS guidance for the second quarter, 86 have issued projections below the mean EPS estimate and 20 have issued projections above the mean EPS estimate. Thus, 81% (86 out of 106) of the companies that have issued EPS guidance to date for Q2 2013 have issued negative guidance. This percentage is well above the five-year average of 62%.” (Factset, May 31, 2013).

It is one thing to beat already lowered analyst expectations; it is another to showcase natural growth. Overwhelming evidence is building, from technical chart pattern spotting to simple economic trend following. There is the usual denial or attempts to keep the uptrend going. Even commodities such as gold are in a decline, rather than serving as a reliable shelter during risk aversion. The safe asset is not quite safe, either, as there is a lack of escape in the short term. Thus, accepting the inevitable correction is healthier than fighting it. Keeping an open and observant mind appears to be the trick for the week ahead, as tension accumulates.

Article quotes:

“The list of major emerging-markets countries either currently cutting rates or very likely to do so in the near term consists of just five: Hungary, Poland, Turkey, Korea, and India. The first two of these are suffering the consequences of the extended euro area recession. On top of that effect, the National Bank of Hungary is carrying out a “structural” easing associated with a regime change at the central bank, with doves now holding a majority on the board. Turkey is also feeling the euro area chill, though to a lesser extent. Its easing additionally reflects the upgrading of the role played by real exchange rate management in determining the overall policy stance. Gradual currency appreciation (in real, trade-weighted terms) is triggering compensatory interest rate reductions. In Korea’s case, global cyclical weakness is combining with the yen’s depreciation — a negative competitiveness shock to Korea — to bolster the case for additional cuts, on top of the 50 basis points in easing during 2012. Finally, India has been cutting gradually since last year but has brought the policy rate down a modest 75 basis points during that period. The statement following the most recent move suggested that the cycle is drawing to a close or perhaps has already done so.” (Institutional Investor, May 15, 2013).

“I believe this to be a crucial point of distinction and I think that many Western central bankers – including some of our own Bank of England members – have misled themselves, as well as others, about measuring the effectiveness of so-called quantitative easing (QE). Some policymakers, especially in the early days, tried to judge the success of QE by the impact it had on whether long-term bond yields were lower than they would otherwise have been. It always struck me that this was hardly a high hurdle, nor an appropriate one. In fact, it could be a potentially troublesome criterion once markets believe the economy is starting to do better – as some might now think about Japan – because eventually, if economies return to normal, it would seem quite sensible that bond yields might return to normal. Most economists would argue normal 10-year bond yields should equate closely to the trend growth rate, plus the inflation performance or underlying inflation expectation, plus some kind of risk premia.” (The Telegraph, May 31, 2013)



Levels: (Prices as of close May 31, 2013)

S&P 500 Index [1630.74] – The last seven trading days have started a near-term correction after reaching record highs. The magnitude of the sell-off is being questioned.

Crude (Spot) [$91.97] – Once again holding in not far from $92, but failed to hold above $96 – confirming the weakness in global demand.

Gold [$1413.50] – After a multi-month sell-off, a bottoming process appears to form around $1400. Yet, the intermediate-term trend remains fragile and confirms a prevailing weakness.

DXY – US Dollar Index [83.37] – A few points removed from its multi-year high. The dollar strength story remains alive.

US 10 Year Treasury Yields [2.12%] – Within the month of May, treasury yields went from annual lows (1.60% - May 1) to reaching yearly highs (2.23% - May 29). This was an impressive reversal, raising all types of questions on faith of interest rate policies and movements.


***
Dear Readers:

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

Market Outlook | May 28, 2013

‘It is a bad plan that admits of no modification.’ Publilius Syrus (~100 BC)

Untangling unknowns

There is a commonly touted disconnect between stock markets, economic growth and general socio-political sentiment. At least, when considering all factors, this is puzzling for those attempting to plug in a formula and dissect this matter. It’s discouraging to those seeking a definitive answer. It is also unclear for those predicting a foreseeable future. We see the same old challenge for those managing risk and chasing returns. And this mostly stems beyond politics and government polices. The unconvincing economic growth combined with an explosive stock market is mysterious for experts and outsiders alike. Thus, in that not-so-clear picture, many will attempt to decipher the pending fallouts.

Occasional Clues

The decline in the Japanese stock market sent an early hint of pause in the form of consecutive down days. Granted, the Japanese Index made a strong run already this year, and set up for the inevitable correction, the moves were rather sharp. Interestingly, this negative action is taking place after a collective cheering of a revival in the Japanese economy (‘abenomics’), and flourishing inflow of capital into Japanese funds. Perhaps, the old lesson of going with the popular thought has its dangers. The following was outlined on May 23:
“The latest inflows in the week ending May 22 marked the 27th straight week of cash gains into funds that hold Japanese stocks. The latest demand was for exchange-traded funds, which attracted $1.52 billion, while mutual funds that hold Japanese stocks saw slight outflows of $14.8 million.” (Reuters).

Short-lived or not, other markets wait to see if a similar sell-off pattern is to follow. In the case of Japan drivers of recent sell-offs, they are being discovered and slowly being understood. Some attribute the Japanese sell-off to a weak Chinese PMI (Purchasing Managers Index) data. Money managers cannot deny that the warning sign are here from a fundamental point of view. In fact, there is a strong correlation between weakness in commodity prices and the Chinese stock market. It is worth noting that since May 6, 2011, the CRB (Commodity Index) fell 23% and the fund measuring the Chinese index (FXI) decreased by 20% during the same timeframe.

Basically, the message is quite clear how the commodity and stock market project a similar message of economic weakness. Of course, naturally, the question to ask is: If China is slowing down along with commodities, then why are markets not declining? This is a question to ponder in these summer months ahead.

Fragility

Pressures for downside movement in asset values have been building for a while, considering the lack of impressive global growth and restless responses to familiar ‘easing’ tactics. In fact, lowering interest rates is such a common theme from Japan to Eurozone to other emerging markets. Similarly, the theme of lower growth is also a common theme, which has potential socio-political consequences. Here is one example: “‘The government is showing a much bigger tolerance for slower growth because they understand that China’s potential growth rate is slowing and that concerns about the environment are rising,’ said Bank of America’s Lu. ‘One of the reasons we cut our growth forecast is because protests over environmental issues are leading to the cancellation or delay of a lot of investment projects.’’’ (Bloomberg, May 26, 2013)

With the S&P 500 index up 15% so far this year, a long-awaited breather logically is being discussed and awaited. Volatility is deceivingly calm when viewing the Volatility Index (VIX). Sometimes, calm occurs before potential shocks. There is no question the bullish run is in place, but a fragile stage is silently brewing, at least in the near-term.

Article Quotes:

“Private equity investors are eyeing Africa more intently than ever, with big global firms such as Carlyle Group and KKR & Co. boosting their presence on the continent alongside smaller regional players like Helios Investment Partners and Development Partners International. Deal flow remains far below the peak hit in 2007, though, and well behind the ambitions of most major players. Investors complain of too many buyers chasing too few opportunities, leading to excessive valuations. … The political and economic environment has improved dramatically in many parts of the continent over the past decade. The International Monetary Fund forecasts that 28 of 45 sub-Saharan African countries will post economic growth rates of 5 percent or more this year. There is plenty of money pursuing deals, but only modest amounts are being committed. Helios, an Africa-focused firm founded by former TPG Capital executives, closed its second fund – at $900 million, almost three times the size of its first fund – in June 2011. The firm, which aims to return three times its invested capital, hoped the newer fund would allow it to make larger investments.” (Institutional Investors, May 22, 2013)

“The following editorial appeared in El Pais (Madrid) earlier this month: The consolidation of a fascist party in Greece. The success of Beppe Grillo and Silvio Berlusconi in Italy. The 6.2 million unemployed in Spain, its highest since the year after Franco's death, and the 26.5 million in the EU. The collapse of the French hope for François Hollande. The rise of anti-European parties in Greece, France, Finland, UK, Germany. The dismantling of the welfare state and the return of starvation wages in Southern Europe. … The risk to Europe today is what Fisher said about America under Hoover: ‘If our rulers should still insist of “leaving recovery to nature” and should still refuse to inflate in any way, should vainly try to balance the budget and discharge more government employees, to raise taxes, to float, or try to float, more loans, they will soon have ceased to be our rulers. For we would have insolvency of our national government itself, and probably some form of political revolution.’” (Project Syndicate, May 26, 2013)


Levels: (Prices as of close May 24, 2013)

S&P 500 Index [1649.60] – Slight pullbacks after reaching record highs. Consolidation at this stage seems fitting, with 1600 and 1592 being noteworthy levels. The run since mid-November 2012 showcases the increase demand for equities.

Crude (Spot) [$94.15] – A range forming between $92-96 for several months. No convincing signs of directional movement.

Gold [$1380.5] – The commodity has not changed much since last week. It stands 16% removed from its 200-day moving average, which showcases the magnitude of the recent sell-off, loss of momentum and may convey the message of being cheap for some.

DXY – US Dollar Index [82.12] – Maintaining a four-month strength. However, the near two-year strength is not significant enough to cause major disruptions.

US 10 Year Treasury Yields [2.00%] – Climbed back to 2% after stalling in the first quarter. Questionable sustainability here, given previous patterns.



Dear Readers:

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

Market Outlook | May 20, 2013

“Nature cares nothing for logic, our human logic: she has her own, which we do not recognize and do not acknowledge until we are crushed under its wheel.” (Ivan Turgenev 1818-1883).

Digesting surprises

We are reaching a junction where fighting the status quo is wearing down those who did not accept the power of the Federal Reserve. The power of surprises plagues the consensus mindset and costs investors if they miss out. The surprises, of course, are in how the stock markets reached all-time highs, inflation is not a big threat and commodities are weakening despite an overall economic cooling period. Clearly, the Federal Reserve has engineered the stock market recovery and demonstrated its dominance and influence. Love it or hate it, those are the facts that confront those who placed their bets in the liquid markets. The commentary of Fed-bashing and gloomy opinions is mere noise now, as the bullish months passed by through all built-up concerns.

Similarly, gold bugs who kept proclaiming the “inevitable” gold price upside movement in a religious-like manner are learning that markets are not overly simplistic or logical. At the same time, this is a reminder that all trends must come to a pause even before a trend comes to a sudden shift. Two points made headlines this weekend:
“[1] Money managers, including hedge funds, pulled $1.4 billion from the U.S. gold futures market for the week ended May 14 by trimming their net long positions in the metal, according to Reuters calculations of data released by the Commodity Futures Trading Commission (CFTC) … [2] On [last] Friday, gold fell for a seventh straight session, its longest losing streak in four years, as the dollar rose to the highest since 2008.” (Reuters, May 17, 2013)

For those proclaiming the weak dollar path, it has been nearly deadly to claim a declining dollar in the last two years. Equally, the rise in inflation theory was proven wrong thus far and a spike in rates is hardly visible, as reaching 2% on the US 10 year Treasuries remained more of a struggle than a norm early this year. Unfortunately, grasping previous trends fails to create enough comfort for those looking ahead. Amazingly, it forces one to think of all surprise possibilities for months ahead and that the wisdom learned since the March 2009 recovery has reverted to a new normalcy.

Barometer

Is the stock market a barometer of confidence (wealth or wellbeing)? Or is the stock market a projection of earnings outlook? Or do these broad indexes provide clues to an economic recovery? Obviously, finding one answer that fits all these questions is plenty to ask. Thus, curiosity looms now with elevated markets, while pundits talk and managers wrestle with discovering the truth (for those who seek it, of course). Yet, in a competitive world judged by portfolio performance, the challenge of month-to-month money management is a brutally daunting task, especially if the status quo is misunderstood. In hindsight, the reward has been for the one that simply went bullish for the past three years or so and resisted piling into a “safe asset.” Obviously, the “truth” is nearly discovered by participants who fully noticed that after a crisis, it is more than convenient to sell/preach protection against the next crisis. But piling into safe assets to avoid unforeseen panic is not fruitful in practice. So weariness of fear-mongering stories is healthier. Now we collectively grasp the hint and message from the fluid market, which keeps welcoming risk and rejecting fear.

Many discuss the market “science,” logical arguments are thrown around constantly and salesmanship dominates forecasting as much as critical thinking. Yet, using science to prove points (future prediction) is one issue, but the art within markets is what differentiates and rewards those vested. Frankly, global economies are slowing; data after data have proven this point, not only in the Eurozone and US, but in emerging markets, as well. Nonetheless, the Eurozone troubles have not reached the overly dismal levels as expected. Thus, the better-than-expectations feel supersedes actual weak numbers. And that’s the lesson that keeps repeating itself on a global basis. Thus, the science alone is not enough without the art to complement it for taking a calculated risk.

Matching the art with logic

The sustainability of this market is bound to be questioned from chart observers and fundamental analysts. The glamour of calling tops will be enticing many in upcoming weeks with either the bad news brewing quietly or being less neglected than in prior months. Yet, the reason “bad news” was neglected is due to a lack of alternatives offered in markets and the acceptance of a low interest rate policy to resume in the foreseeable future. The puzzling issue remains whether the crowd will pile into stocks at a faster pace than the last four years. Perhaps, mildly using the term bubble might be more than justified beyond fear mongering. For now, a healthy pullback is not so newsworthy, especially in a period of overly tame volatility and restless crowd ahead of the summer months. Surely the stage appears set for some pause in this rally. Continuation of this upside run might even be more of a surprise than a global slowdown.
Article Quotes:

“The United States and China really are opponents – and they really do need each other to prosper. Accepting all this requires changing some of our assumptions about friends and enemies, allies and competitors. It means acknowledging that opposed forces and ideas do not always merge into a grand synthesis and that their struggle also need not issue in an epic battle to the finish. It would be uplifting to conclude that peace is logical, that rational people on all sides will avert conflict by acting sensibly. But such a conclusion simply betrays the facts – and possibilities – of this tense relationship. Instead I offer a more modest claim: Geostrategic conflict is inevitable, but mutual economic interdependence can help manage that conflict and keep it from spiraling out of control. We cannot project a winner in the Cool War. If violence can be avoided, human well-being improved, and human rights expanded, perhaps everybody could emerge as a winner. If, however, confrontation leads to violence, we will all lose.” (Foreign Policy, May 16, 2013).

“Low inflation has reassured investors that central banks can keep their feet on the monetary accelerator – and enabled share prices to increase faster than profits. But have prices risen too far? The valuation of stock markets can be gauged in two ways: relative and absolute. In relative terms, the convention is to compare the valuation of equities with that of government bonds or cash, and calculate the risk premium (the higher return investors demand for putting money into the more volatile stock market). A new paper by Fernando Duarte and Carlo Rosa, two researchers at the New York Fed, analyses 29 separate models used to calculate the expected premium over the past 50 years. A weighted average of those models suggests that the current premium is around 5.4 percentage points, about as high as it was after the bear market of the mid-1970s and close to the recent share-price bottom in early 2009. That makes equities look like a bargain. In contrast, the cyclically adjusted price-earnings ratio of the American stock market, which averages profits over ten years, is currently 23.2, as calculated by Robert Shiller of Yale University. That valuation is well above the historical average, suggesting lower, not higher, equity returns from here. Is it possible to square the absolute with the relative measures? Equities may perform much better than government bonds, but only because those bonds will provide dreadful returns.” (The Economist, May 18, 2013)

Levels: (Prices as of close May 18, 2013)

S&P 500 Index [1667.47] – Continuation of a higher market into record territory. The index is 5.4% above its 50-day moving average, which only begs the question of a pending breather.

Crude (Spot) [$96.02] – Once again attempting to top $96. With crude inventories at five-year highs, further pressure is building on prices to continue higher at the current range.

Gold [$1381.00] – After the short-lived rally, gold has confirmed its weakness, as the commodity stands one point above its April 17 lows. The debate between collapsing and bottoming will live on, but it’s hard to deny the multi-month downtrend that is persisting.

DXY – US Dollar Index [82.12] – Dollar strength is picking up the pace. The index is up nearly 7% since February 1 and has jumped 16% since May 2011 lows. This showcases a shift in the macro dynamics, in which the dollar is digging out of the three-decade downtrend.

US 10 Year Treasury Yields [1.95%] – Roaring back to the 2% mark after failing to demonstrate the rising rate theme. Annual highs of 2.08% set in March set the near-term benchmark. Yet, holding above 1.90% has not been an easy task recently and will be watched in the upcoming week.


Dear Readers:

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

Market Outlook | May 6, 2013

“Deliberate with caution, but act with decision; and yield with graciousness, or oppose with firmness.” Charles Caleb Colton (1780-1832)

Subdued milestone

When stock markets hit all-time highs, one would expect a cheerful environment all around. A collective celebration is expected rather than the subdued skepticism that’s plagued this silent bull market. Not so silent perhaps when considering that this time around, it is not quite 2007 in terms of the real economy feel. In terms of risk appetite, there are some similarities to pre-crisis days, in which participants were chasing risk and the index was roaring higher, while volatility remained steadily calm.

Strangely enough, on broad indexes, the S&P 500 Index is 2% higher than its 2007 highs (1576). However, through this recent wave of bullishness, it remains hard to convince most that the real economy is much better and robust growth is in full gear. Perspective is needed, as usual. From the doomsday standpoint, the reported labor and growth numbers are not as bad as March 2009. Yet, there is a growing divide in perception and driving forces for confidence. Even the concept of measuring investor sentiment or opposing the Federal Reserve policies is either biased or inaccurate and open for heated debate. At the same time, it’s simply difficult or at least not fully accurate to use the stock market as a sole indicator for individual and national well-being. The current trend restates the relative strength of the US financial system relative to other nations. Of course, all is relative – today’s world is more fragile, but relative strength counts. This is showcased in the current market behavior, where US assets are beneficiaries of uncertain Europe and slowing Asia.

Late this weekend, Chinese manufacturing and servicing (PMI) data came in below consensus and the weakest in two years. This reinforces the real economic slowdown even in regions that were winners last decade. Escaping to commodities and emerging markets alone is not quite the answer for all this decade. Interestingly, the EEM (Emerging Market stock markets) is not quite at its all-time highs, which were achieved in December 2007. It’s not impossible for emerging market stocks to follow the US, as global indices march on with a tune that’s familiar. However, the disconnect between economic realities and stock market behavior has this uneasy feel that requires more of a closer study than a definitive conclusion.

Cycles repeating

The mechanics of price appreciation are driven by a lack of yielding alternatives in this global market. The task of desperately boosting confidence in recent years has left the Federal Reserve implementing further easing. Collectively, we’ve reached a point where the talk of quantitative easing is too numbing, not so strange and certainly uniform. The same rate cuts in Europe and Japan reflect the coordinated efforts led by the US. Plenty have commented on the puzzling process of the “bubble” re-creation, yet talks of a bubble are not enough to slow down this market. It has been painful for money managers who relied on fundamentals (or emotionally based advice) only and bet on declines and demises of equity markets. Not quite. Perhaps, the bubble or peak talk appears premature for now, but to bring up concerns is hardly rare these days.

Hazy moving parts

The status quo of lower interest rates and higher asset prices is always up for debate, but the trend is in place. Yet commodities remain at a tricky junction. Crude has made a sharp upside run, while gold has had a trading bounce. Crude prices have gained despite the slowing global demand. Thus, a mystery resurfaces between the supply-demand argument and actual crude price appreciation.

Meanwhile, grasping the fundamentals of gold is not quite clear these days. In fact, the sudden drop in gold prices last month is still being digested:

“The biggest reason for the move in gold was investor liquidations of gold-backed exchange-traded products, said Jerome Gaudry, the London-based head of commodity structuring at Natixis SA. Gold holdings in ETPs plunged 174 metric tons last month, the biggest drop ever, as prices entered a bear market and wiped $17.9 billion from the value of the funds, data compiled by Bloomberg show.” (Bloomberg, May 3, 2013).

Gold: Safe asset or not; physical versus synthetic; or a hedge to paper assets – the confusion remains in place. It’s fair to call it a speculative trading vehicle. There is nothing wrong with boldness, as only the bold will continue to take a risk in a quasi-currency and full commodity that’s still fuzzy, even to experts.

Article Quotes:

“So why does onshoring make so much sense in banking? With both China and India growing year on year, the cost savings are less appealing. Wage growth in these regions means that the difference in salaries, compared to local talent, has become increasingly marginal. Banks are also more focused on the cost reduction opportunities offered by an increase in digital channel usage and a decline in branch activity. Regional branch closures are expected to grow again this year. There is also an acceptance that delivering quality technology now, more than ever, relies on face-to-face interaction. Having a team full of people co-located and empowered means not only an improvement in product quality, but a significant increase in time-to-market. Whereas offshoring was once considered a competitive advantage, it is now considered the opposite. More and more banks are looking to bring jobs back home, and even analysts and investors are starting to ask questions. The key to the transition is to do it smartly. No more inflated business cases. No more forced changes. By onshoring too rapidly you run the risk of making the same mistake most banks did with offshoring. Have clear objectives so you can easily decide what roles or departments are going to grow locally.” (American Banker, April 24, 2013)

“The Bureau of Labor Statistics recently produced a breakdown of job growth during North Dakota's oil rush, and it's pretty remarkable. In counties where oil rigs have sprouted up to drill from the Bakken Shale Formation – a few of which are actually in Montana – employment grew by 35.9 percent from 2007 to 2011, from about 78,000 jobs to more than 105,000. But much as in Texas's shale country, the impact on local job growth has actually been dwarfed by the impact on local income. Total wages more than doubled from $2.6 billion to $5.4 billion. Average pay jumped by more than half, from $33,040 to $50,553. Blue-collar men suddenly finding high-paying work in the fields is a big part of the story. But jobs and paychecks have surged across industries. Some of the fastest growth has been in professional and technical services, a category dominated by college educated workers. Earnings have grown the most in real estate, which, with rents rivaling Manhattan in the boom town of Williston, isn't that much of a surprise. But they've also jumped in working class sectors like transport (think trucking), construction, and even food services.” (The Atlantic, May 2, 2013)

Levels: (Prices as of close May 3, 2013)

S&P 500 Index [1614.42] – All-time highs, as the index is nearly 4% above its 50-day moving average. Most technical indicators suggest some minor pullbacks within the context of an established bullish trend.

Crude (Spot) [$95.61] – After failing to stay above $96 on two occasions, prices of crude attempt to make another upside run.

Gold [$1469.25] – From October 4, 2012 until April 17, 2013, Gold fell 23%. Since the mid-April lows, a recovery appears visible, but only showcasing its early legs.

DXY – US Dollar Index [82.12] – Mostly unchanged week over week. The dollar maintains its slight relative edge, despite the slowing pace.

US 10 Year Treasury Yields [1.73%] – The significant drop in yields, from 2.08% to 1.61%, was a noteworthy three-month move. Now, at around 1.70%, the possibility of a trend reversal may be set up, although there’s a lack of strong evidence to declare that trend.







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

Market Outlook | April 29, 2013

“To repeat what others have said, requires education; to challenge it, requires brains.” (Mary Pettibone Poole)

The back-and-forth uproar

A short-term driven rally in gold and commodities awoke the previously deflated gold bugs, while enticing action by the bargain-hunting investors, who seized the trading opportunity. Similarly, sellers of commodities dried up and took some profit after a multi-month decline. Gold closed the week up 3.31%, which has the investment community asking: Now what? Again, for calm and prudent observers, evidence continues to suggest that gold and silver are more of a trading vehicle than an investment. The sudden 10% drop in gold two weeks ago went beyond fundamentals; thus, we shouldn't act puzzled by the gold recovery in the past week.Central bank buying does not translate to increased price, either.

“Central banks are the biggest losers, with about $560 billion of value erased since gold reached a record $1,921.15 an ounce in September 2011. The metal was already in the eighth year of its longest bull market since the end of World War I when reserves started expanding again in 2008. They were also buying in 1980 when bullion peaked at the equivalent of $2,400 in today’s money, and selling in 1999 as prices slumped to a 20-year low.” (Bloomberg, April 25, 2013)

The econ puzzle

There is a disconnect between markets and the economy, which is worth noting. First, labor numbers for March and the first-quarter GDP confirmed that the consensus analyst estimate is much higher than reality. Yet, the markets (bonds and stocks) are more concerned about Quantitative Easing (QE) implications. Secondly, QE has proven not to be quite the “mega” job creator, nor the driver of a GDP boost. Of course, slowing government spending (defense spending -11.5%) fails to boost the real economy. Plus, business investments fell last quarter, contributing to a softer GDP. Both reveal that a robust economy cannot only rely on consumer spending. Although the level of growth is debatable, the trend is not clear enough to make a judgment. After all, there is upside left in this US recovery, and therefore, not showing negative growth is a reason to remain upbeat.

By now, those benefiting from QE are asset holders of equities or some homebuyers given the ability to borrow cheaply. How does QE help the real economy with confidence restoration? This is a legitimate question that’s continuously asked. The answer thus far is not appeasing. Interestingly, the labor numbers for last month come out at the end of this week and will confirm if labor (economic) weakness is slowing.

The convergence of the real economy and stock markets comes into to play when the Fed begins to message its outlook and interest rate plan. Of course, in those discussions to raise or lower rates, the justification lies in economic conditions. However, some can argue the typical period of disconnect between markets and the economy is more of an art than substance. The dent in the US 10 year treasuries from 2.00% to 1.66%, merely showcases that there are expectations of further easing, as the economy has recently disappointed. Similarly, growth expectations are not as cheerful as before.

Not quite simple

One undertone these days is to dislike the stock market and seek shelter in gold. This is a sentiment that’s heard often in conversations, writings and even some thought-out investment plans. Perhaps, being desperate for yield makes investing not quite easy, as some choose to blame the Federal Reserve's policies. For a few years, piling into the stock market was the easy next move or preferred choice for asset managers. Yet, the shift into stocks is at times proclaimed as an "artificial" run. The stock market still functions by rewarding good companies and punishing poorly managed ones. Lose or win money, one needs to grasp too many moving parts and risks in this pure game of speculation. Tons of conspiracy-driven thoughts float out there as part of the noise. Having a defeatist response to the speculative environment is not quite logical and is misleading. In other words, the fundamental dynamic has not vanished, even if folks keep thinking markets “shoot to the moon”; due to Fed policy, some stocks still get punished.

When the S&P 500 index is near all-time highs, and earning uncertainty resurfaces, then it is normal to have jittery thoughts. Somehow, volatility is still calm, and Fed/government policies remain intact. Eurozone growth does not exist, but its demise was not as bad as expected. The status quo has barely changed as the next turbulence is desperately awaited.

Article Quotes:

“There are no calls for celebration, no desire to relax in the corridors of Brussels but some officials believe the euro zone has turned a corner, sharpening the focus on longer-term reforms and structures. Despite a messy bailout of Cyprus, markets are calm, Ireland's rescue program is on track and Greece and Portugal, while still in recession, hope for a slow recovery next year. Slovenia's banks are a concern, but one that policymakers are confident they can deal with. And although Malta's banking system is vast compared with its economy, it is not structured in the same way as in Cyprus. The same goes for Luxembourg. … Borrowing costs in Ireland, where yields on the government's 10-year bonds shot above 8 percent before the country was bailed out in November 2011, are now down to 3.8 percent. Benchmark yields in Italy and Spain are also far below their peaks, indicating a much lower level of perceived risk by investors, despite the continued political uncertainty in Italy and the possibility that Spain may need further support. Another sign of confidence is that banks in southern Europe rely less on the ECB for funding, according to central bank data. That trend continued after the Cyprus bailout, signaling that they are finding it easier to raise funding normally.” (Reuters April 26, 2013).

“Military expenditures reflect states' threat perceptions, and reveal how they are planning for both immediate and long-term contingencies. In times of external threat, military priorities take precedence over domestic ones, like social and economic services; in times of relative peace, countries devote a greater share of their economy to domestic priorities. The best way to measure military expenditures is as a percentage of total GDP, because this reflects how much a country could potentially spend. In 1988, as the Cold War was winding down, the six major Southeast Asian states spent an average of almost 3.5 percent of GDP on military expenditures. (All data comes from the Stockholm International Peace Research Institute, the most dependable source for worldwide military data, which began publishing its global military figures in 1988.) By 2012, that number had dropped to less than 2 percent of GDP. Vietnam, despite current tensions with China over maritime issues, has reduced its military expenditures most dramatically, to 2.4 percent in 2012, down from 7.1 percent of GDP in 1988. Back then, an impoverished China was actively involved with insurgencies in Burma and Thailand; and U.S.-Soviet competition threatened the stability of the entire region. Singapore, Indonesia, and Malaysia had only recently settled border disputes, while Vietnam was still recovering from wars it fought against the United States and China. Now, only North Korea and Taiwan fear for their survival -- almost every other state is more stable and prosperous than it has ever been. (Taiwan's military spending dropped from 5.3 of GDP in 1988 to 2.3 percent in 2012; there are no good statistics on North Korean military spending.)” (Foreign Policy, April 25, 2013).

Levels: (Prices as of close April 26, 2013)

S&P 500 Index [1582.24] – Pausing between 1540-1580, opening up the debate between bulls and bears.

Crude (Spot) [$93.0] – Staying above $96 has proved difficult, showing a lack of buy demand. After a 12% drop from April 1 to April 18, crude is stabilizing near the 50-day moving average. It remains in a fragile state.

Gold [$1393.75] – Despite the near-term recovery, gold is removed from its 50-day moving average of $1642.66. To put it in perspective, the decline from October 2012 to this April’s lows was nearly 23%. Only early signs of recouping the severe loss.

DXY – US Dollar Index [82.71] – Up nearly 16% since the lows of May 2011. There are signs of stability for a currency that’s been depreciating for more than three decades.

US 10 Year Treasury Yields [1.66%] – Since March 2013, interest rates have fallen at a fast pace. The fall below 1.70% marks a new concern of further decline in yields, given talks of further easing.



Dear Readers:

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

Market Outlook | April 22, 2013

“All truths are easy to understand once they are discovered; the point is to discover them.” (Galileo Galilei, 1564-1642)

Beyond collapse

Taking a step back, one should realize that commodities as a whole are in a declining mode. Hints provided since autumn suggest a slowing commodity market. It’s no secret that analysts at big, known banks were downgrading gold price expectations earlier this year. Other pundits warned about gold as well, despite the unpopularity of “gold bashing,” which for some appeared to be a “sacrilegious” act. Many wondered about gold: Is it a commodity or currency or even insurance? That depends. However, it’s safe to say gold is a speculative instrument with a known, tangible feel successful at capturing the attention of currency and commodity traders.

Connecting dots

There’s no mystery as to the waning confidence by chart observers. It’s not a secret that the $1800 mark in gold prices served as a difficult barrier to surpass on three occasions in less than two years. Not to mention the 12-year bull cycle, which was reaching escalated levels. Yet, the scramble to figure out why gold fell sharply is treated with mystery and at times misleading assessment. It’s hardly a shock that gold is not the "safe haven" some made it out to be. Interestingly, even last spring, some pointed out the dangers of labeling gold as a safe haven.
“Right now [May 2012] it’s not a safe haven ‘for the things you want protection from,’ Liam said. The safe-haven money is going into U.S. Treasuries and German bonds. That’s creating another problem for gold because it’s driving up the dollar. Seeing as gold’s priced in dollars, it’s making the metal more expensive.” (Wall Street Journal, May 30, 2012).
All these points are not to claim that what is written is always obvious, but rather to point out the dangers of not appreciating clues. The humbling part of trading is the lessons learned that are not so novel but seem amazing afterwards. Sure, sharp declines are at times followed up by sharp increases, yet this volatility does not justify or erase the shifting cycles. The dynamics of gold prices do not create stability or comfort for long-term holders, even if prices hovered above $1400 in the short-term. At least if one is interested in buying, then a good grasp of the supply of gold is a mystery worth unlocking. Given the mainstream debate on commodities and gold, the following relatively simple point is worth remembering: “The U.S. Geological Survey believes another 114 million pounds of it [gold] have yet to be discovered.” (USA Today, April 7, 2013).

Discovery process

Increasing signs of slowing economic growth are visible from deeply wounded Europe to slowly cooling but maturing emerging markets, as well. Thus, the scramble for clarity is underway. In the US, there is a balancing act between the labor market stability and the additional need for stimulus. If strength is witnessed, then further easing may not be needed. This is the mantra for now. To start, figuring out the natural strength of the labor and housing market is an enigma by itself. The slowing labor participation number and weak non-farm payroll presents a shaky perspective unless the trend shows signs of liveliness. Labor results next month should determine the direction of this very slow job recovery. Similarly, the central bank leaders continue to debate on the next stimulus efforts, which adds on to the speculative market elements. This unknown aspect lingers with suspense, but there is no need to panic as long as the volatility index is calm and broad indexes are not too far from all-time highs. The status quo is slightly comforting, but an inflection point is brewing, triggered by opinions related to “stimulus.” For now, more discovery is needed.

Article Quotes:

“Why are corporations on such a tear? The first clue is that a significant share of these profits have always come from two sectors, as Jordan Weissmann has reported: Manufacturing and Finance. Together, they account for more than 50 percent of domestic corporate profits. But they employ just 13 percent of the workforce. Manufacturing and finance are both global industries, and global industries have advantages on both sides of the profit equation. First, they have access to demand in countries that are growing quickly, especially in Asia and Latin America. Second, they have access to workers in countries with cheaper wages. Meanwhile, the fastest-growing jobs in the U.S. over the last few decades have been in industries insulated from globalization, precisely because so many jobs in worldwide industries like manufacturing have escaped overseas. Between 1990 and 2008, virtually all (97.7 percent) of the net new jobs came from what economists call the "nontradable" sector, which is a funky way of saying the work must be done locally (e.g.: government, education, health care). Even in the recovery, health care, food service, and other local and low-paying industries have led the jobs recovery.” (The Atlantic, April 5, 2013).

“Academics at the Oxford-Man Institute of Quantitative Finance tracked the monthly submissions of 12,128 funds to industry databases between 2007 and 2011, and found that just under half the managers subsequently modified their data. Some tweaks are tiny but many are material: around 30% of managers revised past figures by 0.5% or more, roughly equivalent to a month’s returns. Some revisions may be down to cock-up but a closer look hints at conspiracy. Counter-intuitively, most fixes aim to make performance look worse than originally stated. That is probably because two-thirds of funds charge performance fees only if they are at or above their highest valuations. Eager to bring forward the time when they can charge fees again, such managers have an incentive to belittle past returns. Indeed they are the most avid revisers, knocking an average 0.62% off the numbers. In contrast, funds with no need to beat past high-water marks typically inflated their first submissions by 0.4%, making them look more successful to prospective backers. The suspicion is that managers are either making phoney corrections, or pushing through legitimate corrections only when it helps.” (The Economist, April 6, 2013)


Levels: (Prices as of close April 19, 2013)

S&P 500 Index [1555.52] – Staying slightly above the 200-day moving average. 1540 appears to attract buyers in recent weeks.

Crude (Spot) [$88.01] – Nearly a 12% drop since April 1, showcasing part of the commodity slowdown. Several times this year, breaking above $96 and $98 proved to be difficult as sellers exerted further pressure.

Gold [$1393.75] – Following a severe sell-off confirms the downtrend is in full force after a 12-year bull market run. Clearly deeply oversold, yet it would be too ambitious to imagine a recovery back to $1800 without further re-examination of the current trends.

DXY – US Dollar Index [82.71] – The dollar strength remains a theme thus far in 2013. Stability has been forming in the last few weeks and staying above 80 signals renewed stability.

US 10 Year Treasury Yields [1.70%] – Since March 8, 2013, yields have failed to sustain the early year run-up. The next notable lows are near 1.60%, a level last witnessed toward the end of 2012 on three occasions. The odds of yields holding above 1.60% seem slightly favorable, despite the powerful drop in recent weeks.



Dear Readers:

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

Market Outlook | April 8, 2013

“Everything has been said before, but since nobody listens we have to keep going back and beginning all over again.” (Andre Gide, 1869-1951)

Hunt for a catalyst

Generally, over the last few weeks, there has been a search for negative news to drive markets lower. First it was the Cyprus dilemma, then it shifted to US employment numbers. Other catalysts (or a combination of the first two) await in these spring months. The resilient market is not “giving in” easily to day-to-day worrisome news – which is tiresome for the simple minded, challenging for the thoughtful planner and artful for the removed observer.
Digesting labor data

For a while, the doubts have lingered around this rising market, which caused many to await some breather or price correction. March’s labor numbers sent a unanimous sign of disappointment on Friday, since the employment result was significantly below analysts’ expectations. Of course, matching collective expectations is one issue, and judging absolute numbers (i.e., non-farm payroll) is another matter. Yet, it’s fair to say that job growth, which is a sample measure for the real economy, did not send a sign of noteworthy strength but rather a one-month reality check for all participants. Frankly, there is one trend that is not a fluke or a one-time event. That is the workforce participation rate, which fell to 63.3% – the lowest in 24 years. Although this is much discussed, the roots of this are vital in order to grasp the US trends. Here is one well-balanced explanation of the current status:

“There are three big explanations for why so few Americans are in the labor force: 1) The country is aging. 2) Men have been leaving the labor force consistently for 60 years. 3) More people are in school.” (Motley Fool, April 5, 2013).

The impact of the labor numbers, as usual, is an attempt to decipher the pace of recovery, the perception of economic strength, the potential influence required by the Federal Reserve and speculations on how one clue can impact future financial market behavior. As economists regroup to understand the nuance of the labor status, the markets are eager to express a view on interest rates and equity risk. For now, the economy is not quite collapsing, the job recovery is not close to overheating and the demographic trends of baby boomers are highly influential.

Commodities – trading vs. investing:

Since May 6, 2011, the multi-year run-up in commodities (CRB Index) has begun to weaken. A 22% drop in commodities in nearly two years hints at a new era, when buying and holding commodities for the long term makes less sense than last decade. In fact, gold investors are restless and impatient about the lack of movement and unconvincing status as a safe haven. Similarly, crude has not held its strength, especially when inventories are estimated to reach the high ranges. Copper has dropped for three consecutive weeks, emphasizing the lack of demand versus the available supply. The same applies for corn, where oversupply is contributing to lower prices. “The U.S.D.A. said in its quarterly grains report that corn stocks totaled 5.4 billion bushels as of the beginning of March, and that farmers intend to plant the most corn in nearly 80 years. Corn closed at $7.33 a bushel March 27, the day before the report came out.” (Associated Press, April 4, 2013).

Thus, the investment community is contemplating how to implement the risk of commodities into greater portfolios. This paradigm is shifting as the commodities optimism slowly fades. Also, the speculative nature of gold and crude is too much noise to manage on a day-to-day basis – especially when the returns are not steady and are below prior years’ expectations. Similarly, emerging markets (EEM) also peaked on May 6, 2011 and are down 16% since then. Surely, there was a strong connection between expanding emerging markets and increasing demand for commodities. Now the inverse may hold true in the emerging market-commodity relationship, in which both remain fragile despite this explosive US bull market that is near all-time highs.

Observing

The deep search for catalysts and new ideas persists as anxiety continues to build. Are markets extended? Is the labor recovery slumping? Is Europe overdue for collapse now? Are commodities worth abandoning? And what about other fiscal crises and governance risk? All these questions are circulating in the minds of many. To be fair, all these questions are nothing new. Thus, a self-fulfilling panic-like move may resurface, but building a logical argument in a not-so-rational market is challenging for all. That being said, patience and closer observation in the weeks ahead may be as rewarding as acting and reacting.

Article Quotes:

“The truth is that the responsibility for the euro-crisis is shared. For every reckless debt or there was a reckless creditor… The northern countries were all too ready to provide loans to southerners so as to be able to accumulate export surpluses. The northern countries’ banks involved in these lending operations managed to shift the loan losses to their respective governments. None was subjected to the bail-ins that will now be imposed on the debtor countries. The recognition that responsibilities for this crisis are shared would go a long way to making it acceptable for the costs of the adjustment to be shared among taxpayers in the north and south of the eurozone. The failure to recognize shared responsibility has led to the imposition of a bail-in template that increases the risk of banking crises and economic depression in the eurozone. When a banking crisis erupts, authorities have to weigh up two risks. One is the moral hazard risk that will emerge in the future when the banks are bailed out. The other is the immediate risk of an implosion of the banking system when bail-ins are implemented.” (CEPS, April 4, 2013).

“In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. ‘Abenomics’ has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity. But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment.” (EconoMonitor, April 1, 2013).

Levels: (Prices as of close April 5, 2013)

S&P 500 Index [1553.28] – A four-year bull market run that’s back to 2007 levels now wrestles to keep up the momentum. After a nearly 6% run since February 26, 2013, a near-term pullback would hardly be surprising.

Crude (Spot) [$92.70] – After a very explosive run last month, crude affirmed its base is closer to $92 than $98. Buyers’ momentum continues to fade at $96, which has been witnessed on several occasions.

Gold [$1546.50] – Since December 17, 2012, gold is down nearly 9%. The adored commodity has re-established a new downtrend.

DXY – US Dollar Index [83.21] – Showcasing stability in the past few weeks. No major changes as the intermediate-term trend signals dollar strength.

US 10 Year Treasury Yields [1.84%] –After climbing above 2%, the yield has backtracked closer to 2012 year-end levels. The back-and-forth swings create a fuzzy trend. In the near-term, staying above 1.60% will determine the nature of activity and sentiment.




Dear Readers:


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

Market Outlook | April 1, 2013

“Success depends upon previous preparation, and without such preparation there is sure to be failure.” Confucius (551-479 BC)

Seasonal change

With a seasonal change and a new quarter upon us, perhaps old notes are worth dusting off. One thought to ponder revolves around the relationship between currencies and stock market performance. Since nearly half of S&P 500 companies’ earnings are produced overseas, the strengthening dollar in last six months may appear to impact corporate balance sheets. The impact of currency movements for mutli-national companies should be discovered broadly in this earning season. This is a thought-provoking point hidden behind the ongoing optimism for stock ownership and value. The currency-earnings relationship has been hinted at by some in the past few years but has not been at the center stage of discussions.

Also, from a sentiment point of view, rising earnings expectations in an upward trending market do raise the stakes for the next quarter, as well. Of course, neither sentiment argument is new and both have been previously discussed in summer 2012, but the bullish strength has proven again and again to remain powerful and resilient. Amazingly, in this low-volatility and steady period, it remains equally discomforting for buyers and sellers.

Accumulated curiosity

Beyond the markets flirting with all-time highs, a reflection of low rates is driving US stocks and real estate much higher – not to mention the lack of investment alternatives and the classic "fear of missing out” that revive and propel bull markets. A few questions await: Is headline chatter of all-time highs in US markets very symbolic, as advertised? Or is the soaring stock market mainly a result of low rate/higher asset dynamic? Soon to be discovered …
Now, between an inevitable and long-awaited mild correction and anxious European market lingers as the suspense continues to build. A verdict on the recent European financial system implications is too mysterious, yet many assumed it might serve as the catalyst. However, Eurozone crisis prevention methods or delay may persist. Thus far, there has been no sweeping overreaction regarding Cyprus drama, as the last two weeks hinted. Surely, it sparked a noticeable concern, especially in other vulnerable European markets (i.e. Italy and Spain). Near-term and pending consequence are mostly misunderstood. Many noteworthy Eurozone actions are expected following German elections in September. A barrage of worrisome news can hit randomly, when and if markets need an excuse to sell off. Then, one can adjust accordingly. For now, a tangible reason to panic in this five-year European crisis management has not been found. Eagerly, we collectively and patiently observe.

Humbling results

The last two years, showcase a short-term cycle in which commonly assumed trends did not play out as touted (at least, a surprise to most). What seems obvious today was not too clear back then. These humbling reminders are worthwhile for forecasters.

- Buying gold in September 2011 for accelerated run

Heading into this weekend, the following article demonstrated that:

“Gold fell on Thursday and closed the first three months of 2013 with a quarterly decline of nearly 5 percent as fears about Europe waned, Wall Street surged and strong U.S. economic data cut demand for a safe haven.” (Reuters, March 28, 2013)

- Betting against US stock market after S&P downgrade of US credit

Interestingly, since the downgrade on Friday, August 2, 2011, the S&P 500 index rose 25%. Worrying about the fiscal cliff and other Congress-related issues did not impact the market.

- Assuming continued weakness in US dollar depreciation

Since May 2011, the dollar theme has mildly strengthened. And these days, the euro weakness is picking up pace versus the dollar. Shaky European conditions may even drive further demand for US dollars.

All three macro trends can reverse suddenly, which is not a surprise. Limited ideas in the marketplace are too challenging for passive investors. Yet, the lessons learned from these assumptions are to prepare for trend-shifts, and keeping an open mind is vital.

Constraining realities

Willing fully or not, risk managers had to rotate to equities to participate in the momentum. Also, the rush for safe assets quieted down, although the supply of safe assets is limited, as well. Over the years, buying insurance (hedges for volatility) and deciphering safe assets has consumed most professional time. There are gray areas in terms of earnings sustainability, level of participation and shift in the Fed’s language toward an end game for easing. The week ahead, with Chinese PMI, US labor numbers and digestion of first-quarter returns, should produce some responses to question the known status quo.


Article Quotes:

“Last year marked the most severe and extensive drought in at least 25 years, according to the U.S. Department of Agriculture. It was also the hottest year on record for the United States. Nearly 80 percent of farmland experienced drought in 2012, with more than 2,000 counties designated disaster areas. By September 2012, 50 percent of the crops being harvested were in poor or very poor condition. Last year's damaged harvest is expected to raise food prices by as much as 4 percent in 2013, particularly products like beef, which suffered from a lack of available cattle feed and viable foraging options. Overall, the 2012 drought cost an estimated $150 billion in damage, as well as an estimated 0.5 to 1 percent drop in the U.S. gross domestic product. One industry looking closely, albeit cautiously, at the early-season drought maps is the insurance business. Farmers have filed for a record $14.2 billion in crop insurance so far to cover losses from last year, with the federal government and private companies splitting the bill.” (Inside Climate News, March 28, 2013)

“Oil production in the Lone Star State has more than doubled in only three years, from 1.10 million bpd in January 2010 to 2.26 million bpd in January 2013, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over just the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. Just a little more than three years ago, Texas was producing less than 20% of America’s domestic oil. The recent gusher of unconventional oil being produced in the Eagle Ford Shale area of Texas, thanks to breakthrough drilling technologies, has pushed the Lone Star State’s share of domestic crude oil above 30% in each of the last ten months, and up to 32.2% in January. Further, Texas oil output in January at an average of 2.26 million bpd was 25.7% greater than the US oil imports that month from all of the Persian Gulf countries (Saudi Arabia, Iraq, Kuwait and Qatar) combined at 1.79 million bpd. In fact, Texas oil output has exceeded Persian Gulf imports in each of the last five months starting in September, and that has never happened before in the history of the monthly EIA data for Persian Gulf imports back to January 1993.” (American Enterprise Institute March 28, 2013)




Levels: (Prices as of close March 31, 2013)

S&P 500 Index [1556.89] – Revisiting the highs of 2007, erasing the post-crisis losses. A jump of 135% since the extreme lows of March 6, 2009 (666.79).

Crude (Spot) [$97.23] – An explosive run in March, leading to a jump from $89 to $97. Interestingly, we’re revisiting a resistance point around $98. Chart observers are eager to see a break above those levels.

Gold [$1613.75] – Neutral/bottoming pattern remains in place. Trading below its 50- and 200-day moving averages, as buyer fatigue appears to resurface.

DXY – US Dollar Index [83.21] – Steady strength, especially in the last two months. The next upside hurdle is above 84, where the dollar peaked in July 2012.

US 10 Year Treasury Yields [1.84%] – Short-term decline in yields continues after peaking above 2%. Most await a break below 1.80% to confirm this trend. For now, 1.80-2% appears to be the normal range.




Dear Readers:

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

Market Outlook |March 25, 2013

“The secret of all victory lies in the organization of the non-obvious.” (Marcus Aurelius, AD 121-180)

Thinking beyond

The most appealing and puzzling part of markets is that “nothing is quite obvious.” Having conviction is worthwhile when investing in an idea that’s working and bigger rewards await. The escalating Cyprus fear did not materialize to a collapsing market last week, nor it did lead to unimaginable spikes in gold prices. In fact, gold was up less than 1% last week, to many gold bugs’ surprise. Perhaps, markets have matured when it comes to digesting crisis-like news in recent years.

Also, participants have partially matured, as sudden overreactions are not at the dramatic levels last seen in summer 2011. In fact, volatility is still clinging to calmness, the S&P 500 index is nearing all-time highs and the Federal Reserve policies haven’t signaled changes. Nonetheless, the crowd is edgy while welcoming a new season. The news reporting is aggressive and curiosity is heightened to decipher the Eurozone, risk perception and the rest of the market-moving matters. Turbulence can re-emerge anytime, but is settles down quickly.

Before grappling with Cyprus’ even more puzzling deal and Eurozone matters, a breather is needed to reflect. Prior to making big (risky) moves for upcoming months, one is faced with understanding the nuances, hints and misunderstandings that continue to plague this market. There is plenty of discipline required to resist hype, fear-mongering and “obvious” statements. That’s the global message that keeps on teaching, especially in a period that’s desperately awaiting turning points. The Cyprus deal can spark reactions, but it will take time for participants to weigh the big-picture impacts. (To be continued) …

Clues: Two springs ago

The commodity downtrend became evident in early May 2011 – a point that might serve as an important turning point when reflecting back. The CRB Index (a collection of various commodities, which includes crude) peaked on May 6, 2011. In fact, crude fell below the $100 mark then, sparking some early bearish reactions. Interestingly, the US Dollar bottomed at the same time, putting in the lows as the strength continues today. An inflection point indeed! Back then, the dollar-crude inverse relationship was being dissected along with the end of quantitative easing II and the improving US economy. In several areas, the origins of today’s macro issues come from that colorful period.


Here is a headline from Friday May 6, 2011:

“U.S. crude oil futures [ended] with the biggest weekly loss in dollar terms since oil trading began on the New York Mercantile Exchange in 1983, as a stronger dollar prompted investors to continue trimming oil bets. The extended sell-off in an extremely volatile day snuffed out gains made after early data showed U.S. companies created jobs at the fastest pace in five years last month.” (Reuters).

Since May 2011, the Dollar Index is up nearly 14%, and the commodity index (CRB) is down 20%. The same message is echoed in the last six months, as further confirmation is needed to put an exclamation point to this trend. The broad indexes have spoken based on prior trend-shifting patterns. At the same time, unemployment that stood then at 9% is closer to 7.7%, which mirrors the improving confidence and undeniable improvement (even for those who doubt the data’s accuracy). So we should not be overly surprised with the optimism that’s swept risk managers and investors of all kinds. Sure, to say markets are overheating has some legitimacy to some extent, but we are not overheating, especially if collectively there is an agreement for further growth.

Internalizing

Speculating on pending European decisions or Congress votes is a very daunting task that can be closer to reckless gambling than sound planning. Sure, there is room for traders and short-term risk managers to participate in those heart-pounding events. Yet, the big picture themes/trends are worth understanding when it comes to currency, interest rates and equities. Otherwise, mapping out a plan is less likely. Despite the edginess that’s growing, there should not be an urgent need to make directional or big calls at this stage. The art of digesting prior clues provides better clarity, as exhibited by the dollar-crude relationship.

Article Quotes:

“China's crude oil imports from Iran rebounded last month from a 10-month low hit in January, official data showed, in line with an International Energy Agency (IEA) report that said new U.S. sanctions appeared to have had little impact on shipments. The rebound also came after an official from China's biggest refiner, Sinopec Corp, said his refinery will process more Iranian crude this year than last. China, Iran's top crude oil customer, bought nearly 2.0 million tonnes of Iranian crude in February, equivalent to about 521,330 barrels per day (bpd), up 68 percent from 309,906 bpd in January, according to data from the General Administration of Customs. February crude imports from Iran rose 81 percent from 288,576 bpd a year earlier. … China – along with other main buyers of Iranian crude, including India, Japan and South Korea – has been under pressure since last year to reduce imports in the face of U.S. and European sanctions. The West has imposed sanctions targeting Iran's vital oil sector as it suspects Tehran wants to develop nuclear weapons, an allegation Iran denies.” (Reuters, March 21, 2013).


“The Chinese government has expressively endorsed developing African states through the creation of economic, trade and cooperation zones (ETCZs) in Africa, similar to China’s own use of Special Economic Zones (SEZs) domestically. However, Chinese investors and companies work together with African leaders to develop specially tailored zones without a lot of Chinese government involvement in how the zones are designed or operated. While some of the Chinese companies are technically state-owned, the companies still enjoy a high degree of autonomy. Eight official government endorsed zones have been built thus far (although some have not begun operating yet). Private Chinese enterprises also operate their own. Since these zones are still new, it is hard to determine whether or not they are mutually beneficial to China and Africa, and a lot of the negative speculation on Chinese investment in Africa stems from this uncertainty. Although some of these zones are joint ventures, Chinese companies have also come under criticism for owning 100 percent of the shares in some of the ETCZs. This ignores the fact that prior experience has shown that many times the African stakeholders often inhibit the success of these kinds of projects due to rampant corruption and mismanagement. Thus, Chinese companies exercising ownership of the STCZs can actually be to the benefit of the ordinary Africans involved.” (The Diplomat, March 25, 2013)





Levels: (Prices as of close March 22, 2013)

S&P 500 Index [1556.89] – Nearly unchanged from last week after peaking on March 15, 2013 at 1563.62.

Crude (Spot) [$93.71] – Appears stuck in the near-term between $92-94. Crude is in a slow but noticeable downtrend. The price peaked at $114.83 (May 6, 2011) and momentum stalled at $110.55 last March.

Gold [$1613.75] – In the last year and a half, buyers have bought below $1600 and sold closer to $1750. This is a very visible pattern that’s becoming convincing and continues to encourage buyers to purchase.

DXY – US Dollar Index [82.69] – Since February 1, the dollar index is up 5.38%, showcasing a noticeable short-term response. Sustainability of this trend is still in question, despite the multi-month comeback of the “King Dollar.”

US 10 Year Treasury Yields [1.92%] – A fragile level is being tested. The 2% hurdle proves to be difficult yet again. The 50-day moving average is at 1.94%, which summarizes the recent behavior.



Dear Readers:

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

Market Outlook | March 18, 2013

“True genius resides in the capacity for evaluation of uncertain, hazardous, and conflicting information.” (Winston Churchill, 1874-1965)

Optimism confirmed

The relative edge of the US financial system is showcased not only by the vigor of the post-crisis recovery, but also by the never-ending weakness of the European financial system and the ongoing catching up that is required by emerging market economies. Of course, this is not to say the economic or financial strength of today will stay the same in the next 10-15 years. Importantly, in dealing with the present and the known, this theme of America’s comparative edge in this interlinked world is surely playing out in many ways. Also, the potency of the robust US financial system is not to be confused with satisfying or glorious economic (labor, wages etc.) strength for all. Certainly not. Corporate earnings (around all-time highs) should not be confused with labor and housing market performance. Yet, in an overly critical and at times sensational environment of instant opinion sharing and news making, one should try to maintain a clearer picture. Today, the gap between perception and reality is very narrow when evaluating the relative attractiveness of the US financial system. This stretches beyond cliché, as the markets have spoken loudly to back up this quantifiable reality.

To start with the obvious, the US markets have made headlines as the legendary Dow Jones index’s all-time high achievement is often cited for those who still care to listen. Meanwhile, the S&P 500 index flirting within inches of all-time highs is in the mind of practitioners, traders and investors of all kinds. That record, set in October 2007, serves as more of a symbolic rather than tangible reason. Doubters and doomers are less hesitant to fight on the inevitable rally. Of course, confusing the stock market strength with the overall economic status is dangerous, as stated too often. Now in the fourth year of a bull market, participants should welcome reasonable skepticism, and fear is deeply discounted these days, in which a mild reversal would be less surprising to most.

Similarly, the neglected US dollar is back from beaten-up levels, mainly by outperforming other currencies in the last six month. US 10-Year Treasury Yields have fought back to 2% and mild hints of a Federal Reserve change of plans on quantitative easing suggests the US economy has recovered from intensive care. Yet, there is a mystery to the real economic growth and there is fragility to the current confidence buildup. Nonetheless, in this dichotomy, US assets have benefited the most.
Re-awakening

Within the celebratory climate for risk takers in the US, this weekend’s attention quickly shifted toward revisiting the Eurozone crisis via headlines from Cyprus. Initial discussion of a one-time levy on depositors (6.75% or 9. 99%), as in a penalty on all savers for the nation and the Eurozone, sent shockwaves through the financial community. The terms are being negotiated, but the message sends all kind of damaging signals. Perhaps, the real worst-case scenario is for a complete banking collapse, but the thought of a levy alone is not easily palatable Now this deliberation has begun and is likely to result in a suspenseful decision.

This weekend, chatter offered a big-picture reminder that the European crisis repair never evaporated, despite the recent perceived stability in Europe. And “too big to fail” is a concept that’s alive and kicking globally, and playing out in different forms and schemes. In that sense, crisis-like themes are back, despite attempts to ignore the systemic blunders. Bailout (or bail-in) and the consequences of fallouts are not as uncommon as pre-2008. Fairness to stakeholders is another heated debate and is at times lost in the shuffle. The ultimate fear instantly points to a run on banks; therefore, putting out fires is the preferred short-term solution. For now, the final result is unknown, but the speculation is in full gear. Clearly, these dim realizations leave a bad taste that opens up potential rational and irrational fears in market behavior. Eventually, if and when cooler heads prevail, markets will recognize that Cyprus accounts for 0.2% of the Eurozone’s GDP.

Piecing the puzzles

We’re seeing overheating markets on one end, while investor confidence in US equities keeps growing. This may smells like trouble when one is too comfortable, at least for a moderate price correction. Then there is the sensitive and edgy crowd ready to react. The reignited Eurozone crisis can stir chatter and increase demand for “safer assets.” Gold bugs are eager for price appreciation; the flight to safety should benefit US liquid assets, as seen in various past episodes. After all, volatility is at a multi-year low. Plus, one can easily find suppressed negative headlines that are poised to brew. At that point, a slight catalyst can embark into a spring sell-off. Plus, the S&P 500 Index has gained more than 16% since mid-November 2012, in a mostly uninterrupted manner. Chart observers have called for a breather of sorts in broad markets, as winning streaks eventually end. Yet, the words “bubble” or “gloom-doom” are not so easily applicable and fail to fully describe the current dynamics. Thus, dealing with and embracing the conflicting market signals is the practical way to manage risk.






Article Quotes:

“Indian refiners, which are waiting for an order from the oil ministry on whether to stop buying Iranian cargoes, are discussing annual term contracts with Saudi Arabia, Iraq and Kuwait for the year starting April 1, the people said this week, asking not to be identified because the information is confidential. While the volume hasn’t been set, the Indian companies have been told there is enough supply to cover the loss of Iranian crude, the people said. The assurances reduce the risk of disruptions to oil supplies for Asia’s third-largest economy as it seeks to cut fuel subsidies and narrow its budget deficit. They are also evidence of how global penalties against Iran because of its nuclear program are squeezing the nation’s revenues. At current prices, Iran stands to lose about $11.5 billion in sales annually if India stops buying its oil. … Iranian oil shipments advanced 13 percent last month to 1.28 million barrels a day even as the U.S. implemented sanctions that complicate sales from the Persian Gulf country, according to the International Energy Agency. Iranian crude production rose by 70,000 barrels a day to 2.72 million barrels a day in February, with the increased output going to China and India, the Paris-based adviser to 28 oil-consuming nations said in a report today.” (Bloomberg, March 13, 2013)


“With inflation looking like more of a threat to China than unemployment at the moment, China may have no other choice than to revalue CNY upwards vs. USD. China's consumer prices registered a 10-month high in February of 3.2% year-on-year, but more seriously in terms of popular discontent potential, food prices rose 6%. That's partly down to China's New Year festivities. But flows of speculative capital driven by foreign central bank QE programs could see China's inflation levels pushing higher. The magnet for that hot money is partly because CNY has risen in value pulled up by its USD peg. According to the People's Bank of China there was 684 billion CNY ($109 billion) worth of foreign currency exchanged in January, a record for a single month. Large inflows of hot money can spur imbalances in China's economy as it feeds the already significant shadow banking system and speculative activity in real estate and commodities, making them more expensive for industry and households. China could simply try and clamp down on those capital inflows and that's still a possibility. But it has porous capital controls and the authorities want China to become an international finance center and for the CNY to one day become a reserve currency. Enforcing stricter capital controls would be a retrogressive step in terms of achieving those objectives. The downside of allowing CNY to appreciate, especially against USD, is that it will make many of China's exporters uncompetitive and that will create unemployment in the coastal cities. Also, rebalancing toward a consumer driven economy and more value added activity still has a long way to go.” (Futuresmag.com, March 13, 2013)


Levels: (Prices as of close March 15, 2013)

S&P 500 Index [1560.7] – A few points away from the all-time highs of 1576.09 (intra-day highs). Positive momentum lives on in the ongoing bullish run, but mild pullbacks seem more likely in weeks ahead.

Crude (Spot) [$93.45] – Early signs of re-acceleration are developing as the commodity attempts to reach back to the $98 range. Currently, trading is in a neutral area.

Gold [$1586.00] – Buyers have shown recent interest closer to $1550 levels, while sellers’ appetite begins to wane at $1750. Gold is due for a short-term recovery closer to $1650.

DXY – US Dollar Index [82.69] – Holding steady above 80, which showcases further legitimacy to the 15% appreciation since May 6, 2011.

US 10 Year Treasury Yields [1.98%] – Staying above 2% remains a common challenge and again that leap will be tested.








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