Market Outlook | September 23, 2013

“Considering how dangerous everything is, nothing is really very frightening.” Gertrude Stein (1874-1946)

Dangerously comfortable

The story of rising markets is easier to tell when day by day, a roaring bull market picks up momentum. Certainly, any novice, or expert, for that matter, can identify a positive market and proclaim its previous undeniable success while boldly claiming higher conviction. Similarly, policymakers like the Central Bank prefer to proclaim their instrumental role in championing rising asset prices. Collectively, it seems participants are programmed to simply think that higher market levels produce an intangible but psychologically powerful list of reasons for risk-taking. Perhaps, those cashing out from the current run feel the tangible impact of stimulus-led results. Meanwhile, others deploying new capital with renewed greed might lose sight of where we've come since the crisis. Now in the fall of 2013, it shouldn't take much to get collective angst or pure genuine confusion about the sustained status quo driven market. Plenty of items are candidates for next ‘big catalyst,’ but usually, the build-up tends to be overdone, mistimed and blown out of proportion. However, entering a fragile period, one should be aware of controllable market-moving elements.

Policymaking pressures

Fearing the worst is not a rewarding investment thesis thus far, as skepticism is not scarce and US markets have shown resilience. Yet, somehow this time around the stakes appear higher, considering the unknowns. First, the Fed is not the almighty fortuneteller or mighty fighter for ‘the people’ who participate in the real economy. This is not as obvious as it may be. Confused and overly pressured by stakeholders of all kinds, experts following the Central Bank will remind us that the Fed is running out of tools. Last week's delay to do anything with taper guidance not only illustrates the disheartening motto of ‘kicking the can down the road,’ but it also shows admission of having exhausted relevant options. Perhaps, some would say, the Fed is not going to admit its weak points or lack of ability to navigate the economy to a promising landscape. It’s politics as usual for a non-political entity that's been labeled a ‘hedge fund’ by a key investor. Not only is the Fed’s role being questioned, but the Fed’s new chairman is a daily guessing game that only raises the stakes to historic levels.

Adding to this mix is the discussion of the US budget in a contentious political climate. Memories of 2011 remind us that market participants are not big fans of debt ceiling debates. Yet, the sensitive Fed discussions can be dangerously mixed in with budget talks to create some inflection point. The current set-up of all-time highs in stock market indexes and soft economic growth creates a divergence that in turn creates uneasy sentiment and irrational behaviors.

Rotation game

During the first half of 2013, the demise of emerging markets eventually turned into a late-summer bargain-hunting project for those betting on recovery. Now the appetite to re-enter risky emerging markets is picking up, as China’s manufacturing is re-stabilizing and emerging market currencies are stabilizing from recent volatility. Short-lived or not, rotation to emerging markets is quite noticeable: “[EPFR] said it found that $1.65 billion had flowed to emerging equity funds in the week to September 18.” (Reuters, September 20, 2013. Clearly, the taper decision and relative appearance versus developed markets will impact the timing and direction of pending moves.

The common Eurozone post-crisis dilemma shifted to renewed interest for value-driven managers in desperate need of optimistic purchases. The highly anticipated German elections are behind us, which takes away one uncertain factor. In fact, Angela Merkel’s victory preserves the status quo, but whether that’s beneficial or not is a debate. As the risk-reward is unclear, it only invites courageous speculators to express views of the near future in a complex region.

Meanwhile, US housing as a key driver of consumer mood painted a positive picture at one end, while stock price appreciation produced a sense of wealth creation. The hype of QE has merits when tracking known indexes and housing data, but fails to provide a nuanced explanation for the fundamental improvements. In a game of perception, reality is understated and the bluffing game takes center stage. Thus, each economic data from now until the next ‘taper’ discussion is bound to be micro-analyzed. Amazingly, as these market-moving dynamics play out, the ‘safe’ thing to do is perceived as taking on more risk in already risky assets that are not cheap. As history reminds us, truth discovery is either a lengthy process or a shock; thus, staying nimble is the autumn theme for financial markets.

Article quotes:

“China’s one-child policy, which since 1979 has limited most Chinese couples to a single child, is notorious for having accelerated the rate of China’s aging. It’s also created a glut of young men who can’t find Chinese wives; by 2020, bachelor ranks will swell to between 30 million and 35 million—equal to the population of Canada. But lovelorn suitors aren’t the only fallout from China’s draconian population controls, says Zhang Xiaobo, a Peking University economist. ‘I just returned to Beijing [from Washington, DC], and housing prices are three times that of DC,’ Zhang said. ‘If you look at all the indicators there’s a housing bubble. But despite the very low economic returns, people [keep buying].’ The reason? Intensified marriage market competition, says Zhang. ‘The reason is that people have to buy a house in order to get married,’ he says, explaining that the mothers of most brides will accept only grooms who can provide a home for their daughter. This, says Zhang, is what has made home prices so unaffordable (a small Beijing two-bedroom is about $330,614—what an average Beijinger earns in 32 years). And, ironically, the one-child policy will eventually reverse this trend, knocking the floor out of the market. China’s gender imbalance contributed 30 percent to 48 percent of the rise in real home prices in 35 major cities from 2003 to 2009, according to research Zhang and two colleagues conducted. Home values rose more sharply in cities with many more young men than young women.” (The Atlantic, September 13, 2013)

“The new European structure seems to be missing something. The current paralysis of the financial markets is due to transactions conducted over the past year by the European Central Bank (ECB), notably the Outright Monetary Transactions (OMT) programme by which treasury bonds are acquired in secondary, sovereign bond markets to boost countries under pressure. Two hedge funds, however, Brevan Howard in London and Bridgewater in the United States, believe that the German elections will become a turning point in the crisis – for the worse. For Brevan Howard, a Merkel victory may slow down the reform process in the Eurozone. This is an understandable fear given the snail's pace at which reforms were carried out in the past two years. The blame lies with the Bundesrat or Federal Council, which must approve each of Germany's administrative expenses, including each contribution to the bailout funds for member states, to the European Financial Stability Facility and to the European Stability Mechanism (ESM). Many issues remain unresolved. The first is the banking union. Or better yet, a system that would put EU banks under the supervision of the ECB. The aim is to avoid jolts linked to opaque positions, partially protected by national financial authorities. As indispensable as it is slow to implement, a banking union must overcome two hurdles: the reluctance of German banks to submit to the control of the ECB and Berlin's multiple doubts regarding the European deposit insurance fund. These are precisely the two points that could soon become major differences between Germany and the other members of the Eurozone.” (Fabrizio Goria, Press Europ, August, 28, 2013).

Levels: (Prices as of close September 20, 2013)

S&P 500 Index [1709.91] – After making all-time highs of 1729.86, there is a wave of optimism reflected in the charts. However, staying above 1700 created a few doubts earlier this summer. Buyers might be vulnerable for short-term pullbacks within this multi-year run.

Crude (Spot) [$110.53] – Climbing above the $108-110 range has proven to be difficult over the last 50 days. This marks a resistance level and showcases a slowdown in momentum as the three-month range-bound trade resumes.

Gold [$1328.00] – Following a sharp first-half decline, a bottoming process might surface around $1279-1300. Gold is showcasing some revival in an oversold asset that’s underperformed for more than a year. Upside potential is mysterious, but upcoming weeks will provide vital clues.

DXY – US Dollar Index [81.36] – A three-month decline in the dollar index has awakened the multi-decade common theme of the weak dollar. Suspense builds as to whether the DXY will go below its annual lows of 78.91 from February 2013.

US 10 Year Treasury Yields [2.88%] – The next noticeable yield move is either a break above 2.90% or breaking below 2.70% (around the 50-day moving average). For now, this narrow band suggests investors are waiting for clarity on rate-moving factors.



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 | September 16, 2013

“Art is making something out of nothing and selling it.” Frank Zappa (1940-1993)

Fed’s selling points

The central bank gears up to make its selling points as investors wait for the artful messaging. As highly expected by consensus, the Fed is looking to scale back its stimulus efforts of purchasing bonds (treasuries and mortgage-backed securities), which provided cheap money and fueled assets. The timing for this is supported by an “encouraging” economic environment and indicators that a stimulus is less required ahead. Sure: That’s more or less the driver of this much-anticipated taper that’s been long awaited since the revival of this bull market. On the bright side, no one will argue this is a powerful recovery for stockholders and those tracking corporate earnings.

Amazingly, the issue not to be dismissed in this shuffle is the lack of meaningful impact of QE into this real economy that’s created mainly part-time jobs and is expected to grow around 2% GDP. A step back from the jargon and day-to-day psychology begs the question: Is the central bank effective in providing an economic boost, beyond appreciating stock and real estate markets? Complex explanations and crafty language aside, the Federal Reserve should acknowledge that the economy is not as rosy as desired. Importantly, some wonder if the Fed is admitting that the stimulus effort has run its course. Otherwise, the self-promotion of success in reviving the US market might result in a mixed response.

Past and present

Meanwhile, the fifth year anniversary of the Lehman Brothers collapse had a few in a reflective mode this weekend. There is general agreement that the post-crisis management has been successful in providing financial system stability. Thus, we all wait for the explanation this week in what is always a market-moving event – even if baked into forecasters’ estimates. Reactions are hard to predict and this vibrant bull market (year to date: S&P 500 up 18.4% and Nasdaq up 23.3%) continues to test its upside potential. Surely, the stock market is seeking other good news catalysts for the months ahead. Odds suggest that the end-of-stimulus period may lead to the disruption of current trends, and that’s more than reasonable at this junction. Not to mention, ongoing budget discussions in Congress and the guessing game of the next Fed chairman create additional market buzz. Perhaps, these uncertainties are candidates for an eruption in volatility. In some ways, the corporate earnings environment hasn’t fully peaked yet, but concerns are legitimate as ever.

Speculators’ dilemma

An explosive stock market supported by increased capital inflow creates confidence, inviting people to pile on. The decimation of commodities, primarily weakness in metals, reinforces that stocks are a better alternative. Similarly, a sell-off in bonds reiterates the ‘great rotation’ theme that’s been thrown around and realized in practice. “U.S. bond funds saw $30.3 billion in redemptions this month through Aug. 19 – the third-highest on record, according to a report this week from TrimTabs Investment Research.” (Bloomberg, August 23, 2013). As US equities continue to gain traction, the asset is unofficially becoming a safe haven. Yet, as we saw with gold and treasuries, safe havens are not quite “safe” from nasty turnarounds. As the autumn months approach, it’s natural to think about severe declines in the past, as well as irrational behaviors that persist beyond collective expectations. Claiming stocks are safe is overly ambitious and potentially too confident. Perhaps, that’s the mental game that challenges investors, given the lack of alternatives and complacency that follows well-acclaimed rallies.

Article quotes:

“The top 1% of earners also took in a whopping 95% of whatever gains were made in the recovery from the recession, and the top decile took in 50.4% of 2012 income. (Note: The analysis didn't take into account health benefits, unemployment, or Social Security for the rest of the population, but we can probably assume those wouldn't greatly upset the gap between richest and poorest in this country.) [Emanuel Saez, University of California, Berkeley economist] gives us the detailed stats: From 2009 to 2012, average real income per family grew modestly by 6.0% (Table 1). Most of the gains happened in the last year when average incomes grew by 4.6% from 2011 to 2012. However, the gains were very uneven. Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover.” (Fast Company, September 12, 2013)


“The inability of credit rating agencies to anticipate sovereign-debt crises and the tendency to overreact once financial difficulties have piled up are well-known phenomena. Ferri et al. (1999) show that the downgrades by Moody’s and S&P exacerbated the Asian crisis in 1997. Examining the Great Depression, Gaillard (2011) and Flandreau et al. (2011) find that major credit rating agencies did not lower sovereign credit ratings until 1931. The ratings assigned by Fitch, Moody’s, and S&P to Eurozone members since 1999 illustrate these chronic shortcomings. For example, no Eurozone country was downgraded by Moody’s during the 1999-2008 period and none was upgraded by this agency between 2009 and mid-2013! More worrying still is that Greece, which was forced to restructure its debt in February 2012, has been the highest-rated defaulting country since sovereign rating rebounded in the mid-1980s. The Hellenic Republic was rated in the single-A category until June 2010 and in the investment-grade category until January 2011 by at least one credit rating agency. Since 2009, credit ratings have persistently lagged behind credit default swaps. Although hardly surprising – given that markets can instantaneously incorporate new economic and financial information – these findings are valuable for policymakers. In particular, they support the view that the credit ratings assigned to Eurozone countries have been more flattering than expected and that credit default swaps may simply be too volatile to be used for regulatory purposes.” (VOX, Norbert Gaillard, September 9, 2013)

Levels: (Prices as of close September 13, 2013)

S&P 500 Index [1687.99] – On two previous occasions this year (May and July), the index struggled to hold above 1680. This time around, the question remains whether surpassing 1680 and holding above 1700 is a sustainable move.

Crude (Spot) [$110.53] – For several weeks, crude has traded between $105-$110. Its momentum seems to be weakening after an explosive run from April to August 2013. Over the past three years, reaching above $110 has proven to be highly challenging for bulls.

Gold [$1328.00] – The $1400 range is proving to be a key resistance level. The recent recovery is pausing, showcasing the ongoing downside established about a year ago.

DXY – US Dollar Index [81.36] – In the last seven trading days, the dollar has reversed its trend. It remains in a neutral zone for intermediate-term trend seekers.

US 10 Year Treasury Yields [2.88%] – In November 2012 and May 2013, investors settled on 1.61% as the low point for long-term rates. On the other hand, in 2009, 2010 and 2011, the high point stood somewhere between 3.50% and 4%.


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 | September 9, 2013

“Good judgment comes from experience, and often experience comes from bad judgment.” Rita Mae Brown (1944-Present)

Anxiety building

When the phrase ‘Septaper,’ the anticipation of a stimulus taper in September, begins to circulate in the financial circles, then one notices the obsession that’s reaching a new frenzy level. All guesses aside, this long-anticipated twist in the stimulus efforts has been on the minds of many, but for now, the timing remains only a popular guess. Interestingly, these days there is not much suspense in evaluating the success of quantitative easing. The stimulus efforts have not overly impressed many in creating plenty of full-time jobs to propel a robust economy. Escaping the post-2008 crisis and climbing back to some stability showcases some belief in central banker guidance.

Nonetheless, the expectations of QE as an organic growth-generating tool are questionable and surely awaken the skeptics. Plus, recent economic reports, including last month’s labor numbers, do not suggest an overheating economy, but are rather categorized as somewhat fragile and barely stable conditions. Thus, how can the Fed taper if the economy is not strong enough? In fact, another question might be better: If QE has not been successful in fueling a recovery in the real economy, then why should the end of QE cause suspense?

The timing of the taper is not the only concern. Amazingly, the reaction of a mostly expected event draws the suspense. This QE debate, combined with the next Fed chairman discussion and pending Syria, offers plenty of distractions from a known fundamental weakness. Nonetheless, one should not forget the inflection point that’s facing financial services that have stabilized mildly. Growth is scarce globally and government/political mismanagement is a potential risk. Both combinations are legitimate enough to cause concern, but it’s unclear if these concerns could spark a 2008-like panic.

Realization

Clearly now, there is the realization or long-awaited acknowledgement of the disconnect between the real economy and stock and home price appreciation. The acknowledgement of QE’s limitations is not only in participants’ minds, but also felt by the central bank conductors. The S&P 500 index is up nearly 16% in 2013, which showcases a bull market that’s still clinging and alive. Yet, the forecast for further positive corporate earnings is doubtful today versus last year. A wave of uncertainty looms, especially following this multi-year run. It’s not surprising that there is ongoing rotation into European stocks for now in anticipation of an over-valued US stock market. There is a potential shift that’s taking hold as investors seek bargains while looking ahead:

“Despite the risks, the fact European stocks remain cheap is encouraging more US funds to put money into the market, say strategists and investment managers. HSBC’s cyclically adjusted price earnings multiples are running at 11.4 times compared with an historical average of 14.8 times.” (Financial Times, September 8, 2013).

Comprehending fear

As we head toward the final stretch of this year, investors so far witnessed a collapse of commodities, sell-offs in emerging markets, increased volatility in developing countries’ currencies and, recently, a developing trend of bonds declining. Strangely, around the spring, US equities appeared like the temporary “safe haven,” as risk-taking was encouraged and key index performances enticed more global inflow. Now, if the status quo shifts too quickly, then a notable shift can take place. Whether emerging markets or commodities are the answer remains to be seen. The themes that suffered the most in 2013 might at first glance present the best risk-reward potential versus the established US equities. This answer is not determined. Yet, this synchronized global marketplace does not offer an insulated investment product. Therefore, expecting the unexpected should not be that strange during a fear-driven cycle.

Article quotes:

“Austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation. This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a ‘competitive devaluation’; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%). The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit). Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of ‘tapering’ quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.” (Daniel Gros, Project Syndicate, September 6, 2013)

“Chinese refiners will buy 28 percent less West African crude this month than a year earlier, the least in data starting in August 2011, according to loading plans and a Bloomberg News survey of eight traders. Shares of Frontline, which operates 32 very large crude carriers, will drop 38 percent in 12 months, the average of 14 analyst estimates compiled by Bloomberg shows. Those of Euronav SA, with 13 supertankers in its fleet, will retreat 24 percent, the forecasts show. Tanker owners are enduring a fifth year of declining rates as fleet growth outpaces demand. China’s preference for cheaper Middle East oil over West African supplies shortens voyages by 42 percent, effectively increasing the capacity of the fleet, says ICAP Shipping International Ltd., a shipbroker in London. That’s adding to changes in trade flows as the U.S., the only country that buys more oil than China, meets the highest proportion of its energy needs since 1986. ‘Falling shipments point to potentially one more bad month of earnings, which tanker owners could really do without,’ Simon Newman, the London-based head of tanker research at ICAP Shipping, said by telephone on Aug. 28. ‘To avoid an even weaker market, owners will need significant support from shipments out of other areas.’” (Bloomberg, September 3, 2013)

Levels: (Prices as of close September 6, 2013)

S&P 500 Index [1655.17] – Eclipsing the 50-day moving average and revisiting annual highs of 1709.67 remains a challenge. The last few trading days have produced a tight range between 1630-1665.

Crude (Spot) [$110.53] – Like in May 2011 and March 2012, crude oil is back up over $105. The last two years remind us of crude’s inability to hold above $110 for a sustainable period. For the third consecutive year, the question is asked again if crude can explode significantly above $110. Perhaps the unsettled Middle East is the wildcard, but the chart pattern suggests heavy resistance ahead.

Gold [$1385.00] – The last time gold made a run from $1200 to the $1400 range goes back to August-November 2010. The difference being that this time around, the recent move represented a recovery bounce following a severe drop from a cycle peak. Surpassing $1400 might be as hard as exploding to $1600. Unsettling markets may serve as a catalyst, but the natural bullish flow remains in flux.

DXY – US Dollar Index [81.36] – Since September 2012, DXY has not fallen below $79 but has not surpassed $84.75. Frankly, this is a tight range, suggesting that despite the recent currency volatility, the overall swings are not overly dramatic based on this index.

US 10 Year Treasury Yields [2.93%] – The jump from 1.61% (May 1, 2013) to nearly 3.00% today remains the key macro indicator thus far. Staying above 3% is mysterious for now, as participants wonder if the next range is around 3.00%-3.50%. Last time yields stayed in this range was in first half of 2011 before debt ceiling volatility.


Dear Readers:

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

Market Outlook | September 3, 2013

“What convinces is conviction.” Lyndon B. Johnson (1908-1973)

Shakiness felt

One notices that skepticism never quite left the financial circles, even during the rising US stock market and some success in the confidence restoration projects both in the US and Europe. In fact, more time is spent on known concerns than unknown consequences, which explains the inevitable suspense. The one known worrisome issue is the lack of economic growth that stretches from China to the US to European nations. Collectively, the intellectual discussions of interest rate policy or currency management are left for prolonged dialogue. However, the weakening economic climate is visible even for the most casual observer, thus denting the confidence that’s been built since 2008. The painted picture of optimism, led by central banks, now needs validation and a further confidence boost, but that easing argument is losing its luster and anxiousness is building from different angles.

Emerging markets continue to witness sharp sell-0ffs, eroding confidence and causing unpleasant responses to risk-taking. Surely, this uncertainty in so-called emerging markets is not at the early stages, but the accumulating outcomes are difficult to ignore and clearly outlined in headlines.

“Investors worldwide pulled $2 billion out of emerging market debt funds in the latest week, the 14th straight week of outflows and the biggest withdrawals since June, a Bank of America Merrill Lynch Global Research report said on Friday.” (Reuters, August 30, 2013).
As a start, global economic growth is not visible (perhaps a global theme); thus, naturally, it creates all types of questions and knee-jerk responses. Notably, emerging market currencies have witnessed increased volatility, particularly in India, Brazil, Indonesia and Turkey. Entering a new season, the following is generally expected:

“The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. Thus, even modest portfolio shifts can still lead to big price swings, perhaps even more so when traders are off on their August vacations.” (Kenneth Rogoff, Project Syndicate September 2, 2013)

Thinking ahead

If skepticism is widespread and if the concerns are well known, then why not be a contrarian? Perhaps, seeking value in a disliked story is what should motivate risk-takers moving ahead. Already, a wave of fund managers has looked into Europe for bargains. There are signs of life in the Eurozone, although minor improvements:

“The recovery in the Eurozone manufacturing sector entered its second month during August. At 51.4, up from a flash reading of 51.3, the seasonally adjusted Markit Eurozone Manufacturing PMI rose for the fourth successive month to reach its highest level since June 2011.“ ((Markit, September 2, 2013)

Similarly, in due time, emerging market recovery may not be a far-fetched idea either. The list of uncertainties is building, which stretches from “taper” speculation to the pending debt ceiling debate and results of the upcoming German elections. More often than not, these pending events are the basis for a lack of conviction for buyers. As a quick reminder, EEM (Emerging Market Index) is 32% below its all-time highs reached in October 2007. It’s hard to claim that emerging markets are deeply overvalued for the growing crowd that’s afraid of further meltdown.

Managing suspense

Recent economics numbers and earnings result in the US have not created enough comfort for those judging on an absolute basis. Certainly on a relative basis, the US markets have shown strength versus other markets since the last crisis. Interestingly, until recent months, the inflow to US equity was picking up a tremendous pace. However, the ETF and equity fund outflow has picked up to multi-year highs in recent weeks. “U.S. ETFs saw $16.1 billion in redemptions through Thursday [August 29], representing the biggest outflow in one month since $17.1 billion exited in January 2010. The largest ETF was the main driver, as the SPDR S&P 500.” (MarketWatch, August 30, 2013).

The cautious approach is in full effect as gold has rallied from annual lows. This matches the declining investor sentiment as well, given the desperate search for good news. Capital is seeking shelter while fund managers are forced to put capital to work. To be overly bearish is not an overly unique view these days, as most known fears are already factored in. Being a daring bull might be less fashionable today than before. This is a deadlocked market that’s not overly cheap or overly euphoric, which puts one in no man’s land. For now, not overreacting is an asset when approaching an unsettling period ahead.

Article quotes:

“Canadian interest rates usually follow the interest rates of the U.S.…). So if U.S. interest rates continue to rise, it is very likely that Canadian housing prices will drop and defaults will go up. But two thirds of Canadian mortgages are insured by the Canadian Mortgage and Housing Corp. (CMHC), the Canadian version of Fannie Mae. CMHC is owned and guaranteed by the government. Thus the government will be on the hook, not Canadian banks. Canadians have therefore skipped a step: If (or, should we say, when) their housing crisis happens, there won't be any argument in the media about "too big to fail"; the government will take care of it. Jim Chanos of Kynikos Associates (who is not short Canadian banks), made an interesting point after Brian's talk. He is more worried about problems in Canada from incomes declining once the China-induced commodities supercycle ends — after all, Canada has benefited tremendously from it. To Jim's point, Canada reminds me of Australia, another beneficiary of the Chinese commodities party: Low-skilled people who used to work at McDonald's restaurants in Sydney or Canberra began moving to the west coast and getting jobs driving trucks at iron ore mines, instantly making more than $100,000 a year.” (Institutional Investor, August 8, 2013)

“Even with Wall Street’s help, Mexico is struggling to lure investors to its local-currency bonds as speculation the Federal Reserve will curb stimulus sparks an exodus from emerging markets. Mexico’s sale of 25 billion pesos ($1.9 billion) of five-year notes last week attracted the weakest demand since the government started using a group of banks in 2010 to help handle sales of new benchmark bonds. The bid-to-cover ratio, a measure of investor demand, was 1.02 times for the offering, which included participation by firms including Grupo Financiero BBVA Bancomer SA, Deutsche Bank AG and Barclays Plc (BARC), according to two people with direct knowledge of the transaction who asked not to be identified because they aren’t authorized to speak publicly. Investors have yanked $44 billion from emerging-market bond and stock funds since the end of May, according to data provider EPFR Global, on concern the Fed will reduce its $85 billion of monthly bond purchases as soon as this month. Yields on Mexican notes jumped 0.1 percentage point last week, five times the average in emerging markets, data compiled by Bank of America Corp. show.” (Bloomberg, September 2, 2013)

Levels: (Prices as of close August 30, 2013)

S&P 500 Index [1632.97] – Back to familiar levels from late spring/early summer after peaking on August 2nd (1709.67). In the near-term, a buyer’s appetite around 1640 can showcase the willingness for risk-taking.

Crude (Spot) [$106.42] – For more than two months, the commodity has traded closer to the $104 range, which is in line with the 50-day moving average. The long-term picture reminds us that crude is up more than 30% since November 2012. Perhaps, investors await a natural pause from the explosive run until the next catalyst.

Gold [$1407.75] – Clawing back to and around $1400. The inevitable bounce has taken place but the doubt lingers on the enthusiasm back to $1700. The perception of gold as a volatility hedge is also unclear in this run versus prior years. The 200-day moving average of $1468.71 is the next key target.

DXY – US Dollar Index [82.08] – Between summer 2012 and today, the index has traded within a tight range. Yet the swings have been too common recently, suggesting increased volatility in currency markets.

US 10 Year Treasury Yields [2.78%] – Attempting to surpass the 3% mark. The jump from 1.61% to 2.93% in a few months is noteworthy but questionably sustainable, given debatable signals of an improving economy.

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 | August 26, 2013

“Actions are always more complex and nuanced than they seem. We have to be willing to wrestle with paradox in pursuing understanding.” (Harold Evans, 1928-present)

Twisted puzzle

Not many can claim to understand the cataclysmic US market dynamic that’s torn between an unloved bull market that's heating up (even over-heating) and the growth in the real economy, which is hardly convincing. Sure, cherry-picking some data or comparing today versus the worst point of the crisis would easily point out that stability has been restored in financial services. Yet, the markets have for a long while accepted this stability, as risk-taking has been promoted and rewarded for those who participated. Certainly the guidance and leadership of the Federal Reserve is divided between those who revere the restoration for near financial collapse and others that continuously question the bubble creation driven by low interest rates. Perhaps, judgment will be left to historians in future years than active participants in today’s market.

Influential money managers are forced to sift through and make a choice in doubling down on risk-taking versus reducing exposure in anticipation of a chaotic pattern. Now, the Fed’s puzzle of deciding whether to slow stimulus efforts under the assumption of a growing economy is also the investor’s dilemma. Finding a middle ground is no easy task, considering it has been a smooth-sailing bull market. Certainly, a change in tone serves as a catalyst for unexpected responses.

Moving parts

The current stability is fragile when looking at global markets, which have expressed powerful responses. 2013 so far has showcased the struggles of emerging markets. From Turkey to China to Brazil, the performances of these nations’ stock markets have not been as pretty as last decade – not to mention currency volatility, which has expanded into countries like India. Frankly, drumming up growth in these nations is challenging, and keeping up previous growth rates is overly ambitious. At this point, the concern of emerging markets is hardly news. The flow data demonstrates the current status:

“Of the $155.6 billion investors poured into developed-market equity exchange-traded products in the first seven months this year, North American funds received $102.4 billion or 65.8 percent, according to BlackRock Investment Institute. Japan attracted a record $28 billion, while Europe-focused funds got $4.3 billion. In contrast, $7.6 billion flowed out of emerging-market funds.” (Bloomberg, August 20, 2013).

In the last four years, the US’s relative edge versus other markets stood out, especially based on stock market performance. Now, it is questionable whether the US markets may need to correct and adjust their pricing despite the increasing capital inflow. Surely, new money is chasing returns in the US. The psychology of missing out is playing a vital behavior role. It is quite clear that liquidity is drying up in developing markets and the relative argument for US markets hasn’t quite run its course.

Questions to ponder:

• Is this unloved US bull market now accumulating more momentum, given increased capital inflow into stocks? Are stock prices are set to overshoot to the upside (further irrational behavior)?

• Is this Fed-led bullish market set up for an inevitable correction, given the escalating uncertainty of earnings, policymaking and macro dynamics?

• Are emerging markets valuations cheap enough versus the US market, potentially presenting a better risk-reward for forward-thinking participants?

Increasing awareness

Adjusting expectations is the big challenge ahead with all the speculation surrounding the stimulus efforts. The interconnected nature of this global market plays a vital role in a period when central banks are examining a change of plan, i.e. taper. Key models were built under the assumption of a low US dollar and low interest rates. As these dynamics shift, adjustments will need to be made and a new normal will need to be established. In a year with heavy emerging market correction along with commodity price adjustment, one has to wonder if this process will be painless. Even the definition of “risk-less” assets needs to be redefined. Otherwise, the best alternative might be the current status quo, which we have experienced in the last few years. Geopolitical tensions and exchange glitches and failure only add on to an already edgy climate. Perhaps, the edginess has been felt profoundly despite the deceiving sense of calm when viewing US broad indexes. As the autumn approaches, nagging but accumulating issues can materialize more quickly than imagined. Thus, preparing for the unknown is not so strange in the weeks ahead.

Article quotes:

“Indonesia has lost 13.6 per cent of its central bank reserves from the end of April until the end of July, Turkey spent 12.7 per cent and Ukraine burnt through almost 10 per cent. India, another country that has seen its currency pummelled in recent months, has shed almost 5.5 per cent of its reserves. Central bank reserves are held to act as a safety buffer against turmoil, and are on average still far larger than during past emerging market crises. But the pace of the drops [has] spooked some investors and analysts. Many central banks are likely to have suffered further reserve depletion in August, as the turbulence caused by the US Federal Reserve’s plans to end its monetary stimulus has resumed, and compounded concerns over slowing economic growth in emerging markets. Palaniappan Chidambaram, India’s finance minister, said on Thursday that India’s reserves were currently $277bn, compared with $280bn at the end of July, according to Morgan Stanley’s figures. … The US bank’s economists pointed out that excluding China and the oil-rich Gulf states, the current account balance of emerging markets as a whole has deteriorated from a 2.3 per cent surplus in 2006 to a 0.8 per cent deficit this year – the biggest shortfall since 1998, the last time the developing world was gripped by crisis.” (Financial Times, August 22, 2013)

“The actual numbers (not seasonally adjusted) behind the seasonally adjusted headline number showed that the drop in sales last month was larger than typical for July, so to that extent, the big miss in the headline number wasn’t all that misleading. The average monthly decline for July over the previous 10 years is 6%. Last year the drop was just 2.9%. This year, July saw a drop of 18.6%. It was the biggest July drop of the past 11 years. Buyers apparently stopped buying after mortgage rates surged. … Regardless of whether the current trend is still rising or not, it’s important to keep this in perspective. In the context of historical norms, this is not a recovery. Sales remain extremely depressed relative to the normal levels of the past couple of decades. Housing may no longer be a drag on US economic growth, but its contribution to overall economic activity relative to its past share is minuscule.” (Wall Street Examiner, August 23, 2013)

Levels: (Prices as of close August 23, 2013)

S&P 500 Index [1663.50] – After failing to hold above 1700, early signs of a pause. Early signs of stabilization around 1650, which will be tested in a few days.

Crude (Spot) [$106.42] – In the last two months, crude is trading in a very narrow range between $104-108. Potential macro events can spark short-term moves, yet it’s key to remember that crude bottomed in late June ($92.67).

Gold [$1375.50] – After the hard sell-0ff earlier this year, there is a 15% bounce from the lows. $1400 appears to be the next goal. Perhaps, there’s an inevitable bounce that’s building some momentum. Yet, revisiting $1895.00 (the all-time high) seems a long distance away at this point.

DXY – US Dollar Index [81.36] – Lots of swings in recent months, suggesting mild volatility. However, the recent range is in familiar territory. It’s premature to declare a new trend.

US 10 Year Treasury Yields [2.81%] – Since May 1, 2013 lows, yields have moved up noticeably. Yet, many wonder if yields will hit 3% and hold that level for a sustainable time. The last time 10 year yields stayed above 3% for a while was in first quarter of 2011.


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 | August 19, 2013

“Judge a tree from its fruit, not from its leaves.” Euripides (480-406 BC)

Stimulus questioned

The most powerful and most prevailing theme in this ongoing bull market run is how participants continue to credit and adore the powers of the Federal Reserve. As to those "magical” central bank powers, any glance at a financial article or journal will remind one on the strength or dangers of QE. This is a suspenseful topic! Yet, with the economic growth being quite visibly disconnected from tangible stock market appreciation, then one has to wonder about the merits of the current trend. Obviously, we’re nearing a point where the fruits of Quantitative Easing are being heavily questioned. Skepticism and uncertainly continue to build around the pending “taper” – the end of stimulus efforts under the assumption of a recovering economy. Interestingly, it was evident participants were either hedging or speculating on rising volatility:

“About 234,000 futures contracts on the Chicago Board Options Exchange Volatility Index, or the VIX, changed hands yesterday. That’s the most since June 21, as the S&P 500 (SPX) reached a one-month low, according to data compiled by Bloomberg. Trading in the securities has exceeded 24.7 million since January, 5 percent more than the 2012 total and double the level from 2011.” (Bloomberg, August 16, 2013).

Repeating lessons

It’s quite clear that perception management is what drives markets until reality comes. Yet, when there is a sudden acceptance of a painful reality, then inevitably shocks follow, causing a dent. Luckily for most of us, this concept of a “bubble” is not ancient history. In fact, the technology and real estate bubble of last decade fed into the greedy mindset while neglecting the drivers of true natural growth Experts go on and on ad nauseum about the recent bubbles of 2000 and 2008, but surely that has not changed the theatrical orchestration of rising stocks and housing markets in 2013 – at least for now. It is important to remember that in the 2000s, US GDP grew by 1.9%, much lower than the historical average, and this fact at times is overshadowed by the housing crisis. Even the inflated housing boom (consumer spending) failed to create significant economic growth. Perhaps, history is repeating itself despite the complicated and deceptive messages that are thrown around. The Federal Reserve Bank of St Louis reminded us in early 2012:

“What makes the U.S. experience of recent decades unusual is that the share of consumer spending in GDP was relatively high already before it began to increase substantially further during the 1980s, 1990s and 2000s. In dollar terms, PCE's share of GDP in the third quarters of 1977, 1987, 1997 and 2007 were 62.5, 65.9, 66.7 and 69.5 percent, respectively. Thus, consumer spending was a large and increasingly important part of the American economy during the decades preceding the recession and remains so today.” (January 2012).

Frankly, lifting this economy post-technological boom and increasing competitive global markets has been difficult and purely unanswered. Yet, investors have been rewarded in post-crisis periods, which encourages risk-taking. If the prevailing theme deeply resorts to “relying on Fed messaging,” then this continues to repeat the obvious, well-known theme in which the central bank remains the conductor of markets. The Central Bank Chairman, through messaging alone, can influence how data is interpreted while being a key catalyst for macro events. Love it or hate it, if one is in the business of risk-taking, being a rebel or anti-Fed is not always the answer. In fact, it’s proven to be a dangerous way to manage money. Yet, being blinded by perception alone is neglecting the lack of growth that’s been visible in the US economy – regardless of political leadership, regulation, or policy implementation.

The markets easily can sniff the lack of sustainable corporate earnings versus a stale, lackluster economy on a local or national basis. In fact, the big downside surprise in consumer sentiment last week set off some early warnings for the bulls. Even with broad indexes hitting all-time highs, now the ranges appear to be in no man’s land, while the collective thought is for the trend to continue. The Federal Reserve is attempting to craft a new chapter for the autumn season. A continued rally or not, the US growth rate is not quite lively, and being distracted by other forces that ignore this reality is bound to be more costly than prior years.

Bargain hunting

Emerging markets appear to have corrected enough to attract early bargain hunters. European woes have persisted for a while, and any relief can entice speculative buyers to reexamine. Both markets took a back seat in the last few years as the US stock market outperformed. However, in recent months, strength in European markets may signal a shift. Frankly, that’s too early to tell, as a declaration of the end of the recession has plenty to prove beyond being a favorite view for contrarians. Now, the upside potential for US equities lingers: 1) Do US stocks need to retrace further? 2) Is the pending correction a synchronized global stock market decline or isolated to the US only? Answers to these questions may be found in the upcoming quarters ahead, but for now, the jittery US market feeling extends to other notable markets.

Article quotes:

“As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China. Top luxury clothing stores in this city’s downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city’s business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions. But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted. Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city’s car dealerships have failed. The owner of the city’s largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars’ worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.” (New York Times, August 15, 2013)

“Many economists have been expecting the housing boom to provide a visible lift to the US economy. So far the results have been underwhelming. In spite of strong homebuilder optimism housing starts remain subdued. The momentum we saw in late 2012 has dissipated and last year’s forecasts (for example Goldman and ISI Group) turned out to be too optimistic. … The hope of course is that in addition to the jobs created in construction, the indirect impact of the housing market improvement would provide a much needed boost to the economy. But the so-called ‘housing services’ sector (mostly rent and utilities), which is typically 12-13% of the GDP, grew by about 0.7% over the past 4 quarters. That’s roughly the growth rate of the US population. Clearly the ‘knock-on’ effect of the housing recovery isn’t there just yet – other than more people in the US resulting in more rent and utilities payments. … There is another trend that is probably not helping with conversion of new home activity into the economic growth some were expecting. Multi-family units represent an increasing proportion of total housing starts. It is possible that because these units are more likely to be rentals, the ‘multiplier effect’ of housing just isn’t as strong. Homeowners (living in a single-family unit) will probably spend considerably more in house-related purchases than multi-family unit renters.” (SoberLook.com, August 17, 2013).

Levels: (Prices as of close August 16, 2013)

S&P 500 Index [1655.83] – Closed last week below the 50-day moving day average (1657.40). Since peaking on August 2, the index is down nearly 3%, as early signs of a pause are building in late summer.

Crude (Spot) [$107.46] – Twice this summer, crude prices failed to sustainably stay above $108. Now for the third time, the test is looming as buyers look to revisit the annual highs of $109.32 – set on July 19.

Gold [$1329.10] – The next key level is $1400, followed by $1465 (200-day moving average). It’s a long climb back to $1600, confirming the current downtrend.

DXY – US Dollar Index [81.18] – The strong dollar momentum has slowed down in the last month or so. This has been familiar territory since 2008, in which DXY has spent plenty of time in the 77-84 range.

US 10 Year Treasury Yields [2.82%] – The explosive run since May 2013 continues. Early stability around the 2.60% range and last Friday’s (Aug 16) intra-day highs of 2.86% will mark a new upside target.

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 | August 12, 2013

“How often misused words generate misleading thoughts.” (Herbert Spencer, 1820-1903)

Misleading conviction

With each upside tick, buyers pick up confidence and sellers become even more cautious. Strangely enough, conviction levels of bulls and bears appear much higher when measuring unofficial sentiments. Amazingly, the believers in an ongoing market rally seem as confident as those calling an ultimate top – which creates a confusing and rather suspenseful climate.

First, the bullish reawakening carries a strong momentum now that we’re in the multi-year rally. Persuasive bank analysts’ estimates, warm investor reception for risk and a convenient selling point to riding a wave and proclaim “in the moment” frenzy. Dancing above previous all-time highs brings out ferocious risk appetites and roaring index behaviors. Bullishness is contagious, and perception can influence, mislead and rapidly change. Risk-taking has rewarded the brave and the follower alike; thus, breaking the status-quo mindset requires an extraordinary catalyst. Guessing the turning point is nearly impossible, and ignoring recent gains is not a fair judgment either. But accepting the bullish conditions spearheaded by the Federal Reserve is much closer to the honest conclusion.

Secondly, there is the natural pause of cautious experts that looks beyond the brewing hubris. Of course, the gloom-and-doom mindset is not a healthy or balanced way of analyzing the past or present. However, questioning the merits of earnings growth combined with understanding the drivers of the ongoing rally is another form of skepticism. Not to mention, questioning the legitimacy of key economic drivers is reasonable. Surely, grasping labor and real economy growth is hard to pinpoint with accuracy. Regardless, financial positioning tells more about one’s conviction than artful presentations and self-serving commentaries.
“Rising demand for protection against stock declines has made the iPath S&P 500 VIX ETN the fifth-most active U.S. exchange-traded security. About 37.5 million shares of the ETN traded on average in the past 30 days.” (Bloomberg, August 9, 2013)

This illustrates the common theme over recent years, where protection for downside is highly demanded even in a rising market. At least one can somewhat conclude that any future market decline is not overly shocking. In other words, not all investors are going to be blindsided by pending worries.

Weakness accepted

Observers have established slow economic growth rates globally especially in first half of 2013. Commodities have been slowing along with emerging markets. Yet, the current puzzle is figuring out if both commodities and emerging markets are cheap enough to entice "value" investors. A timing question:

“Morgan Stanley calculates that emerging market equities have underperformed their developed counterparts by 18% over the last six months, one of the worst relative performances in history. As a result, the relative price-to-book ratio of emerging markets is 0.73, the lowest since 2004.” (The Economist, August 1, 2013)

Finding a timely entry point in emerging markets keeps many participants scrambling with lack of answers. The Chinese story and growth potential finds a way to confuse rather than reassure success. Yet it is the same frenzies that may attract barging hunters.

Signs to ponder

The US consumer market, should set the tone of collective mood since the consumer drives the economy. At times the consumer is stretched given limited wage growth, elevated gas prices and a less stellar job numbers. In terms of the fundamentals, retail related earnings this week geared to provide desired clues at to market conditions. Housing has made headline recoveries while student loan concerns looms. Nonetheless, markets which are driven by perception prefer to hear from the central bank before emphasizing visible concerns. However, one does not need the Federal Reserve to confirm the troublesome consumer conditions.

Article quotes:

“Most dangerously of all, the bulls think that China can fix its problems while growing at 7% or 7.5% – which is better than the 8% they used to think is the minimum acceptable, although worse then the 6% they will undoubtedly cite next year as the minimal acceptable growth rate. But these growth rates, the skeptics argue, are impossible. In order that Beijing get its arms around credit growth and reduce the extent of wasted investment, GDP growth rates – the skeptics argue – must drop considerably, although since rebalancing means that household income must grow faster than GDP, it will not be nearly as painful as the bulls think it will be. The issue about how much China’s GDP growth must slow in order to accommodate the necessary adjustment is probably the key difference between the bulls and the skeptics. Contrary to the new argument put forward by the old bulls, the problems of debt, investment and consumption in China are not new and unexpected, they are not just the normal growing pains associated with rapid growth in an otherwise healthy developing economy, they are not simply individual problems caused by irresponsible behavior, and they cannot be addressed except with far more radical changes than the bulls acknowledge.” (Michael Pettis, blog.mpettis.com, August 7, 2013)


“The truth this week came courtesy of the Consumer Financial Protection Bureau and the Wall Street Journal, whose data parsing revealed that about one in five college graduates who borrowed for tuition via the federal direct loans program are not paying the money back. More than half of all new jobs created this year in the US came in the low-wage sectors of retail, travel and restaurants. The consulting firm McKinsey & Company determined that only half of recent college graduates were working in fields that actually required a degree to perform well. The report's author dryly noted:” The cliché of the overeducated waiter or limousine driver seems to have some support.” All this debt followed by low-paying gigs has serious consequences for our young people. The New York Federal Reserve reported earlier this year that they believed that the rapidly growing problem of student debt was causing twenty-somethings to delay home and auto purchases. Others are beginning to suspect it is also impacting the country's fabled entrepreneurial culture. Earlier this year, the CFPB reported that many believe the burden of the student debt is costing the US startup jobs.” (The Guardian, August 8, 2013)



Levels: (Prices as of close August 9, 2013)

S&P 500 Index [1691.42] – Consolidating between 1687-1691 range. This suggests a mild pause as eclipsing 1700 is the next target on near-term investors mind.

Crude (Spot) [$105.78] – Mild consolidation between $103-106 range. Intermediate-term run is biased towards the upside but waning momentum setting up.

Gold [$1329.10] – Sings of bottoming resurfacing after a bounce from $1200. Optimist wondering if $1400 is attainable in the near-term. Nonetheless, the long-term trend appears biased for down to sideways movement.

DXY – US Dollar Index [81.18] – Slight decline in recent weeks leading to a move below the 50 and 200 day moving averages. Yet, the dollar index is trading much higher below its multi-year lows.

US 10 Year Treasury Yields [2.58%] – Back to trading below 2.60%. Unclear if breaking above 2.73% is attainable at this point.

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 | July 15, 2013

“Creativity is the power to connect the seemingly unconnected.” (William Plomer 1903-1973)

Emphatic gains

A seven-day winning streak for the S&P 500 index has reinforced the already known and existing bull market. Flirting with all-time highs demonstrates strength with unknown upside. This current trend reaffirms the rotation out of fixed income and emerging markets while showcasing the pent-up and ongoing demand for stocks. According to EPFR Global, $11.8 billion flowed into equity funds last week. Interestingly, this was the largest inflow into equities since September 2011. The S&P 500 is up nearly 18% for the year. Certainly, this is a landscape that awakens performance chasers, as the fear of missing out remains a powerful motivator. The financial sector is breaking out to new highs and this is a powerful force heading into earnings. Advisors and managers of all kinds are gaining confidence in participating in this wave while risk tolerance continues to expand.

Victory by default

Naturally, when reaching all-time highs, along with euphoric responses there are equal doubts that resurface. One issue relates to earnings sustainability. Secondly, many ask: What’s the upside from this point on? Is this too easy to invest, with low volatility and constant upside moves? Discussions of the end of QE can trigger short-lived concerns, but asset prices have risen to previous record highs as the Fed has successfully pleased homeowners and stockholders. Yet the real selling point for US equities (in addition to QE and strong currency) is the lack of alternatives and the dismal conditions of emerging markets. Surely, both China and Brazil have seen major sell-offs in their respective stock markets. For example, the Brazilian Index is down more than 50% since peaking in November 2010.
As investors continue to exit developing markets, perhaps the daring investors are seeing value at current levels and can dig in. Perhaps, the neglected emerging market theme offers the best risk-reward, but at this point that contrarian trade is not overly popular. However, at this point the ever-so-popular investment in US equities is gaining followers. As noted by observers and foreign investors, the US market stands to continue to benefit from capital inflow as disappointed emerging market investors seek shelter. The safer exposure versus the daring bet is clearly defined by recent behaviors, and investors are left to choose.

Mind games

Comparisons to 2007-‘08 may resurface here and there, but as usual, history repeats in a different form. Also, unlike the 2000 stock market bubble, the retail participation and innovation craze is not quite at the same pace. In an environment where most commodities have declined and interest rates appear to be rising, the macro challenges affecting future stock market behavior are equally mysterious. Even though the bullish momentum can continue beyond what’s imagined, the hints of a stronger dollar and real economic growth are not eagerly convincing. Calming words from Central Banks have been magical in re-fueling the market. But is this substance from the real economy or hype from financial instruments? Balancing the two challenges practical observers. Amazingly, perception forces that are more like artwork than science drive markets. The artful managers with a full grasp of connecting macro dots are in a better position at this tricky junction.

Article quotes:

“In 1966, Mao launched the Cultural Revolution to prevent China from ‘taking the capitalist road,’ yet ironically his efforts ended up having precisely the opposite effect. ‘A common verdict is, “no Cultural Revolution, no economic reform,”’ declare Roderick MacFarquhar and Michael Schoenhals, leading historians of the period, in their 2008 book Mao's Last Revolution. ‘The Cultural Revolution was so great a disaster that it provoked an even more profound cultural revolution, precisely the one that Mao intended to forestall.’ By force-marching Chinese society away from its old ways of doing things, Mao presented Deng with a vast construction site on which the demolition of old structures and strictures had been mostly completed, making it shovel-ready for Deng's bold new policy of reform and opening up. Mao's epic destructiveness, which was supposed to prepare China for his version of utopian socialism, instead paved the way for China's transformation into exactly the kind of capitalist economy that he most reviled during his lifetime, but also a nation that Mao, like every modern Chinese reformer before him, dreamed of fashioning: a strong and prosperous one. The question for Chinese leaders now is what exactly they intend to do with their newfound and hard-fought wealth and power – and the challenge for the United States, is how to best help shape the answer in ways beneficial for both nations' people.” (Foreign Policy, July 12, 2013).

“If unlimited Quantitative Easing was Bernanke’s policy of successfully convincing the market that he is a madman, just like Henry Kissinger’s nuclear policy with Russia during the Nixon administration, then laying out a roadmap to tapering actually pulls away the curtain and reveals the Fed as being sane and rational. While -2% real yields might be accepted under a ‘mad’ Fed regime, a reasonable Fed will certainly not be able to push real yields to such extremes – particularly when a slowly recovering economy makes alternative investments more attractive than locking in negative real rates of return. Given financial markets’ dislike of uncertainty, this change in directive by the Fed also comes at a precarious time for the Committee, as Bernanke’s term as Chairman ends in January and given President Obama’s recent remarks, he will not be returning. While Janet Yellen is favored to be appointed after Bernanke and keep Fed policy largely status quo, the departure of Bernanke will still result in the Committee losing a powerful dovish voter at a time when policy decisions and communications have become increasingly democratized. As a result, we have likely seen the beginning of a regime shift towards higher rate volatility.” (EconoMonitor, July 12, 2013).




Levels: (Prices as of close July 12, 2013)

S&P 500 Index [1680.19] – A few points removed from intra-day highs of May 22 (1687.18). Nearly an 8% explosion since the June 24 lows.

Crude (Spot) [$105.95] –Reaching a key range between $105-110 last seen in spring 2012. A relentless run since December 2012 lows with a noticeable re-acceleration since breaking above $98.

Gold [$1285.00] – Near 8% run since the lows of July 1 ($1192.00). Yet, the longer-term downtrend is intact, as the 50-day moving average stands at $1359.83.

DXY – US Dollar Index [82.98] – Retracing after making multi-year highs on July 9, 2013. Overall, since Spring 2011, the strengthening dollar is a noticeable theme.

US 10 Year Treasury Yields [2.58%] – Taking a short-term breather after an explosive two-month rise. A new trend is stabilizing between 2.40-2.60%.



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 | July 8, 2013

“Knowledge is proud that it knows so much; wisdom is humble that it knows no more.” (William Cowper 1731-1800)

Relative dominance

A few days after the July 4th holiday, there is a message echoing across financial markets. As stated so often on this weekly write up, the relative edge of the US Dollar and US equity is visible, as both are sought after globally. Neither is this cheerfulness driven by the positive headline labor numbers for June, which reinforces the prevailing bullish bias. Certainly this glorification of US markets is not breaking news for active and seasoned observers who’ve seen the silent bull market continue to build up for months. Equally, the Federal Reserve’s assessment of improvement is not an opinion that’s up for debate. The dollar reached a three-year high and rates are moving higher from deeply wounded levels, proclaiming economic strength. Surely, the change in QE is something that’s been too discussed and anticipated for one to act surprised.

So here we are in July, in which the Small Cap index (Russell 2000) is sporting all-time record numbers and the S&P 500 index is not far removed from all-time highs. For US homeowners and stockowners, the value of wealth broadly has not been destroyed over the last four years if one bought and held – thus proving how the post-crisis performance has virtually erased all the crisis-related damages. The debate now is more about future damages, for which no one has a clear-cut answer.

Seeking shelter

The increased demand for exposure to US equities does not suggest astronomical upside movement for years to come, either. Instead, the attractiveness of US stocks is bolstered by poor emerging market performance, the demise of commodity prices (with the exception of crude, of course) and shaky bond market confidence and actions. To grasp this loud statement in support of stocks, one needs to connect all macro dots and discard some of the misleading noise, which at times is very difficult. The BRIC nations have struggled immensely and investors are reacting viciously in their behavior. Here is one example of emerging market outflow:


“Global fund managers have yanked money out of Chinese stocks for sixteen of the last 18 weeks, including a net $834 million during a five-day period ending June 5. That was the largest outflow since January 2008, when the financial crisis was getting underway, according to data provider EPFR.” (Wall Street Journal, July 3, 2013)
The bottom line is that the lack of alternatives ends up driving rotation into the next-best assets. Equities may enjoy the pending inflow; however, earnings starting today will enable us to know if expectations match reality. For now, the known is the US attractiveness; the unknown is the fundamental shift and art of spin that await.


Reasonable unease

Before celebrating the positive momentum, one should ponder the macro occurrences that have been brewing in the last few weeks. 1) Interest rates have risen sharply as US 10 year treasury yields are above 2.50%. 2) Crude, unlike other commodities, refuses to decline below $85-90, finally breaking above $100. It continues to benefit from oil-related headline noise. 3) A strong dollar may not necessarily be beneficial for US companies dependent on overseas revenue. 4) European recovery is hardly visible and hopeful signs are not an easy find. Certainly, this is not quite a reason to declare an all-out collapse, but it is a justified list of worrisome topics that surely will persist even if bad news is completely ignored in the short term.

Higher interest rates and oil price appreciations are poised to be the vital macro indicators of collective interest. Financial circles view a rise in both as impeding economic and stock market growth. It is unclear whether the inverse relationship is theoretical or practical. Soon the answer will be discovered, but the discovery requires either patience or risky speculation, which is not comforting despite the cheerful bias.

Article quotes:

“Currently, more than half of China's industrial water usage is in coal-related sectors, including mining, preparation, power generation, coke production and coal-to-chemical factories, according to China Water Risk, a nonprofit initiative based in Hong Kong. That means that the water demand of the Chinese coal industry surpasses that of all other industries combined. A geographic mismatch worsens the water stress. Statistics from China Water Risk show that 85 percent of China's coal lies in the north, which has 23 percent of the country's water resources. As the majority of the Chinese coal industry is built where coal reserves are, those water-scarce regions are increasingly pressured to give more water. To answer China's rising appetite for power, Chinese policymakers have decided to establish 16 large-scale coal industrial hubs by 2015. If the plan materializes, those hubs are estimated to consume nearly 10 billion cubic meters of water annually, equivalent to more than one-quarter of the water the Yellow River supplies in a normal year, according to a report jointly issued last year by the environmental group Greenpeace and the Chinese Academy of Sciences. Researchers from the two groups say that China is now running into a tough choice: Should it adjust the national coal development plan that is set to fuel the economy, or should it go ahead and build up large-scale coal industrial hubs that could cause a serious water crisis?” (Scientific American, July 1, 2013)


“Unfortunately the euro resembles the flawed interwar version of the gold standard rather than the classical pre-war model. After the gold standard was restored in the 1920s, central banks in surplus states like France (which had rejoined it at an undervalued exchange rate) sterilised the monetary effects of gold inflows so that prices did not rise. That put all the pressure to adjust on countries like Britain, which rejoined the gold standard in 1925 at an overvalued rate. A similarly harsh deflationary process is now under way in peripheral euro-zone countries like Greece. Their adjustment would be much less draconian if the core states were prepared to tolerate considerably higher inflation than the euro-zone average. But Germany fiercely resists this. … When countries joined the gold standard, it bestowed a seal of approval that prompted a big influx of foreign money. That pumped up credit, driving an expansion of domestic banks that often ended in grief. Under the gold standard a strong state could support wobbly banks and investors; in pre-war Russia, for example, the central bank was called the ‘Red Cross of the bourse.’ But a weak state could easily forfeit investors’ confidence, as happened to Argentina in its 1890 debt-and-banking crisis. That same story has been repeated in the brief history of the euro. Money cascaded into peripheral Europe, causing banking booms and housing bubbles. In the bust that followed, the task of recapitalising banks has caused both the Irish and Spanish states to buckle.” (Economist, July 6, 2013)


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

S&P 500 Index [1573.09] – Between May 22, 2013 and June 24, 2013, the index fell 7.5%. Now, a bottoming process is setting up for a potential re-acceleration.

Crude (Spot) [$103.22] – After failing to hold above $98 on several occasions, oil has broken above key resistance. Momentum is building, given headline concerns. It is quite evident that $85 is a floor that was established both in April 2013 and December 2012.

Gold [$1251.75] – Recovering from recent lows of $1192.00. Deeply wounded from a heavy sell-off. Although the downside potential appears limited, the long-term downtrend is still intact.

DXY – US Dollar Index [83.23] – Since the May 2011 lows, the dollar has maintained its strength. It finished the week near the two-year highs. Certainly, the multi-decade trend of a weak dollar is not quite the case now, as the bottoming continues.

US 10 Year Treasury Yields [2.73%] – Explosive move remains in place, with the jump from 1.61% to 2.73% in nearly two months. This is a macro game changer that’s been long awaited. Stabilization is anticipated, but this trend is not fragile




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 | July 1, 2013

Market Outlook | July 1, 2013

“Tension is the great integrity.” (Richard Buckminster Fuller, 1895-1983).

Truth discovery

The last few weeks have realized some tension, shaken a few status-quo thoughts, conjured up tons of speculation and confirmed some lingering weaknesses that were around us. The puzzle between the need for further stimulus versus economic growth that’s plausible is being worked out. At least, policymakers are working on releasing messages and avoiding panics, while so-called financial experts are scrambling to guess, to rebalance and to simply understand what awaits next.

Moving parts

Risk-taking has been encouraged and heavily promoted for several quarters. The well-documented stimulus efforts shifted from being an obvious policy to an evolving mystery – yet have been rewarding for those who bought into the story. Managers who claim to understand this "Fed" mystery will be tested ahead in financial markets. Meanwhile, others blaming the Federal Reserve need to remember that risk-taking is still a choice. And the Federal Reserve is not quite a financial advisor – a much-needed clarification for some caught up in the recent storm.
Surely, the public relations and messaging by Fed officials add further suspense, but the markets have a mind of their own. Calmness is no guarantee and the next phase of earnings, economic and Fed cycles are converging faster than most would like to admit. An inflection point is either brewing or the boiling point is postponed. Perhaps a chaotic series of events is quietly accumulating.

Hints of change or fear of change from the norm are being contemplated by participants. Three items that stand out, given what is known:

1) The US growth (Real GDP) has been moderate since 2009 but has struggled to accelerate further. This stalling does not demonstrate strong recovery.

2) Emerging markets collectively have slowed down, and that weakness is visible. This only follows a dismantled and fragile European condition, which is bound to get volatile in the fall.

3) General contemplation of rotating out of bonds is sparking further possibilities of near-term turbulence. The threat of rising rates is not a theoretical argument this summer, especially after the recent move in 10-year yields. Thus, migration out of fixed income is a debatable topic that will consume a few people in the weeks ahead.

Digesting and acting

This head-scratching setup waits so that even if one is a risk-taker, the options seem limited. Emerging markets are attempting to bottom as further weakness is resurfacing. Heading into this week, the sluggish condition was further verified in China: “The HSBC/Markit Purchasing Managers' Index (PMI) for June retreated to 48.2, the lowest level since September 2012 and down from May's final reading of 49.2. It was in line with a preliminary reading of 48.3 released on June 20.” (Reuters, June 30, 2013).

Emerging markets’ strong link to commodities (metals) is the big macro driver where both have unraveled. Damaged fund managers who blindly fell in love with last decade’s winners are calibrating to some rude awakenings. Are emerging markets a bargain? Are gold and silver worth a second look at cheaper prices? Are equity markets overvalued despite the relative appeal?

These are a few questions that await additional clues ahead. Clearly, growth is not overly convincing and the success of easing is not overly impressive, either, in the real economy. As confusion builds, it is probably safe to bluntly watch these tensions play out before making strong market assumptions and heavy allocations.

Article quotes:

“The situation in Italy is different from Spain in some important respects. Italy’s banks are not sitting on mountains of bad mortgage debt. Italy has a lower gross external debt position, at 124 per cent of GDP. But the problem in Italy is a vicious circle of a credit crunch, a recession, and a public sector with little fiscal room for manoeuvre to fix an undercapitalised banking system. The new government’s focus on a petty scheme to reduce youth unemployment when its real problem is a liquidity crunch is unbelievably misguided. With the rise in global market interest rates, the country is getting closer to an ESM programme, which would then trigger bond purchases by the European Central Bank. But the ECB cannot recapitalise the Italian banks. Nor can the Italian state. Nor can the ESM. According to Mediobanca, an Italian investment bank, the degree to which Italy can tap private wealth as a source of new funds is limited, since wealth taxes are already relatively high. So even Italy’s sustainability in the eurozone is not assured in the absence of a joint-liability banking union. How could it have come to this? It was my reading of the political situation a year ago that a majority in the European Council was quite serious about a proper banking union to be followed by a fiscal union in the future. Germany had yet to be persuaded. Then came the ECB's celebrated backstop last summer. And that killed it. The politicians no longer saw a need for policies that would be a hard sell back home.” (Financial Times, June 30, 2013)

“In late 2011 many were expecting China's property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear. But the correction turned out to be quite shallow and in spite of China's government's multiple attempts to arrest housing price appreciation (and partially succeeding) house prices went on rising. With real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks ("encouraged" by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than ‘arms length’. Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally. Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles.” (Sober Look, June 29, 2013)


Levels: (Prices as of close June 28, 2013)

S&P 500 Index [1606.28] – Attempting to hold to the 1600 range, as the next benchmark stands at the 50-day moving average (1621.72).

Crude (Spot) [$96.56] – Three times this year, crude prices have failed to break above $98-100 range. This showcases either a lack of demand or increased inventory.

Gold [$1232.75] – There was a downtrend that began in September 2011, then another peak and deceleration in September 2012. Since then, gold has corrected by nearly 30%. It’s due for some bounce, but the longer-term outlook has been severely impacted.

DXY – US Dollar Index [83.16] – Signs of increased volatility in May and June. The dollar is attempting to resume its strength, as it closed above its 50-day moving average.

US 10 Year Treasury Yields [2.53%] – Since May 1, an explosive run that began from 1.61%. Now a breather is underway.


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 24, 2013

“Truth, like a torch, the more it's shook it shines.”(William Hamilton 1788-1856)

Shaken

The status quo of central bank stimulus (aka QE) succeeded in inflating asset prices, primarily in stocks and real estate. Yet, the stimulus efforts have not proven to be highly effective in re-energizing the real US economy. This is a disconnect that's been much talked about, but cracks in this foundation began to appear in financial markets. Markets globally got a dose of sharp drops last week, setting up turbulent weeks ahead. The catalysts have been building up, and turning a blind eye was not an option at this point of the four-year cycle. Thus, tough questions and inevitable knee-jerk reactions materialized.

So the questions remain: Did the Fed finally realized the ‘disconnect’ is not solved by further easing? Or did the believers in QE realize that, outside of Fed easing, there are not many reasons to own assets? Reality checks on cycles and newly formed bubbles are now playing out in a frantic way as the multi-month smooth sailing market woke up to sharp selling. Certainly, the credit markets were reheating along with stocks to mirror a pre-crisis feel.
Lose-lose options

The overly decorated and at times over-glorified Federal Reserve faced a lose-lose situation last week, ahead of their public announcement:

1. Observers were skeptical of the age-old concept that more easing would lead to growth. There is increasing doubt in that easing strategy today versus two years ago, and rightfully so. The Fed has recognized that as well.

2. Lack of further QE was going to severely impact risk-takers who loaded up on assets with hopes of prolonged QE. Perhaps, overdependence has its own natural risk and at some point this reality must be confronted, as the disconnect was wearing off.

Simply put, both options are not pleasant, but a step toward facing the truth. As the saying goes, ‘If you live by the knife you die by the knife,’ and risk-takers experienced that last week. It’s safe to say that volatility has awakened, and calming participants is not that easy and quick when shifting gears. The macro drivers suggest more turbulence ahead, especially ahead of earnings – which will reveal more. Ultimately, the Fed chatter is not that soothing, and the inevitable correction is here after an explosive first half.

“The Fed has been at the forefront of central banks seeking to stimulate economic recoveries through creating trillions of dollars to buy bonds and wrestle down global interest rates. Much of the new money has spilled into the developing world as investors have desperately sought better returns in new markets. This helped countries from Honduras to Rwanda gain access to international capital for the first time, and buoyed the bigger developing markets.” (Financial Times, June 23, 2013)

Beyond the Fed

Hints of a slowdown have persisted for months, and the signals had been mounting way before the Federal Reserve meeting. A slowing emerging market economy was no secret, especially with the cooling of BRIC nations led by weakness in Chinese growth. In fact, the GDP story of China is unresolved and causes further concerns. This developing nation slowdown is highlighted in the decline in Brazil and Turkey, where investors are discovering the previous growth is not sustainable. Since January 2, 2013 the emerging market fund (EEM) has declined nearly 20%, painting a not so attractive picture.

Similarly, a 12-year bullish run in gold had to come to a pause. This is not a story of gold only, but within the context of the commodity super-cycle that needed a breather. Importantly, over a decade, the commodity boom mirrors plenty of the emerging market explosions and now both are correcting rapidly. Gold is down nearly 28% since October 2012 highs, emphasizing the hype as a safe haven, which has failed despite aficionados’ resilience.
Another critical hint is in interest rates, which bottomed out in early May. The US 10 Year Treasury was already rising heading into the Federal Reserve announcement. Now with 10-year yields reaching two-year highs, analysts are revisiting their targets and bond traders reshuffle their thoughts. Thus, emerging markets, commodities and fixed income all whispered of changes before roaring and shaking the markets.

Bracing for fallout

Linked into developed and emerging economies is the recent shakeup in currency markets. Overall, a three-decade theme of a weak dollar and low interest rates was bound to reverse as well. Even a slight rise in the US dollar led to a domino effect on other currencies, sparking volatility. Thus, the prevailing status quo was defined, as low rates and rising assets must rewrite their path in terms of currency behaviors as well. Surely, the global markets are interconnected and so are asset classes, which are highly correlated. Thus, a sudden spook led to a sell-off in bonds, commodities and fixed income. This only brings up a common theme of: Where does one invest? It’s well known that there are limited options all around, which will force many to look ahead and, like usual, suspect a quick bounce-back. Yet, turbulence has its own pace to sort out and previous misconceptions need to be flushed out of the system.

Article quotes:

“To put it into context, in the four-year period between late 2008 and late 2012, China’s stock of credit, excluding the financial sector, rose 57% of GDP. The US took seven years between 2002 and 2009 to increase the ratio by the same amount, with the UK debt-to-GDP ratio increasing by 80% in the same seven-year period. The speed of China’s growth is not quite unprecedented, but the precedent is not a happy one. ‘These extreme rises of debt-to-GDP have been a very good predictor of financial crises,’ says Coulton. ‘A lot of financial crises have followed this kind of credit expansion.’ There is no sign of any rise in non-performing loans (NPL) as yet, though many suspect Chinese banks are seriously under-reporting deterioration in asset quality. According to the China Banking Regulatory Commission, the NPL ratio of Chinese commercial banks stood at 0.96% in Q1 2013, a nudge up from 0.95% in the fourth quarter of last year – the sixth straight quarter of rises since the fourth quarter of 2011. If there is a bubble in China, it is not a typical one, with government interventions serving to distort the usual indicators – a fact that makes famed China bear Michael Pettis claim the Chinese banking sector is de facto insolvent without state subsidy of interest rates and political cover for asset quality deterioration.” (Euromoney, June 2013).

“From Turkey to Brazil to Iran the global middle class is awakening politically. The size, focus and scope of protests vary, but this is not unfolding chaos – it is nascent democracy. Citizens are demanding basic political rights, accountable governments and a fairer share of resources. The movements may lose their way. The demonstrations will have a limited long-term impact if they fail to become organized political movements. And the violence and criminality that erupted during some protests in Brazil have prompted a popular backlash. … In Turkey, the protests are not the equivalent of the Arab Spring demonstrations that toppled governments across the Middle East. Nor are they simply a pitched battle between religious conservatives and secular liberals. Instead, they are deeply Turkish – and hugely important. After decades of the Turkish state reigning supreme, young Turks are demanding pluralism and basic individual rights. The Turkish state should be accountable to the people, they argue, instead of the people being accountable to the state. … Brazil presents a different dynamic. The ruling Workers' Party is left-leaning and its economic reforms have helped the poor and middle class. But now a souring economy, corruption scandals and $12 billion in government spending on 2014 World Cup stadiums has sparked one million people to take to the streets.” (The Atlantic, June 23, 2013).

Levels: (Prices as of close June 21, 2013)

S&P 500 Index [1592.43] – Since May 22 intra-day highs, the index has fallen nearly six percent. Pausing and poised for further correction.

Crude (Spot) [$93.69] – Once again, oil failed to hold above $100. This is a theme that has repeated again and again in recent months. The ability to hold above the 200-day moving average ($92.30) will set a key tone.

Gold [$1292.50] – Additional deceleration from a multi-month decline. Down more than 25% since peaking on October 4, 2012. Further confirmation of weakness as a break below $1300 sent sharp daily selling.

DXY – US Dollar Index [82.31] – After an up-and-down May, the dollar is stabilizing and appearing to re-strengthen.

US 10 Year Treasury Yields [2.53%] – An explosive run in the last few weeks, from 1.55% to more than 2.50%.




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.