Market Outlook | June 2, 2014

Market Outlook | June 2, 2014

“It is no use trying to sum people up. One must follow hints, not exactly what is said, nor yet entirely what is done.” John Greenleaf Whittier (1807-1892)

Continuation

Just when optimism appears to have reached a new plateau, amazingly, the broad indexes find a way to redefine the meaning of record highs. Other historic highs last week restated the strength of this bullish run and reemphasized the power of the central bank’s script, regardless of real economy-based worries. For speculators and investors alike, the search for massive macro-driven hints and catalysts remains a desperate priority. For some naysayers, capitulation seems to be a desired path as volatility keeps drifting lower. Others attempt to maintain a healthy skepticism despite the unshakeable status quo form.

A “safer” risk taking

Interestingly, within the euphoric response, the shift toward safer assets is still visible. It’s not easy to picture a rush to safety in a period where risk is deemed safer with low volatility, as plenty are chasing attractive returns, given what has transpired in the last few years of this bullish run. Yet, there is evidence of rotation into more reliable, liquid and Fed-supported assets.

First, the flow into US Treasuries illustrates the search for safety in terms of a liquid, reliable investment that yields around 2.50%. On an absolute level, 2.48% does not seems too enticing, but when other developed markets such as Japan (0.57%), France (1.77%) and Germany (1.36%) offer lesser yields, then the US 10-year bonds seem attractive after all. The relative game at the end of the day is what drives market behaviors. Overwhelmingly, investors expect the status quo to continue, as the consensus expects the ECB to continue this trend of lower rates.

Secondly, the success in share prices of larger companies’ shares versus small cap demonstrates a shift toward safer, recognizable firms. Cost cutting and share buybacks surely play a role in rising share prices as much as organic growth in business. Meanwhile, small cap companies’ shares have struggled this year; at times of turbulence, this has been revealed. In fact, the Russell 2000 Index is not making new record highs, but is instead 6% removed from annual highs reached on March 4, 2014.

Finally, the same point about quality can be stated about high-end real estate from London to New York. Equally, the same concept in larger and safer investments is applicable to hedge funds:

“Many investors who were burned by the volatile markets of the financial crisis have turned to big hedge funds for the more stable returns and safety of size – scale, solid infrastructure and operational security. Credit Suisse's 2014 hedge fund investor survey showed only a third of respondents would invest in a fund under $50 million, while just over half could invest in one between $50 million and $100 million and three-quarters could do so in one over $100 million.” (Reuters, June 1 2014).

Bottom line: This bullish market is not quite a fair barometer of collective participation in the real economy. Instead, even though at a glance, risk taking seems appealing and robust, for the most part this so-called recovery benefits select areas of the investment segments in which quality is still in favor. A collective recovery is still mysterious.

Limited ideas

Shifts into more liquid, reliable assets may suggest either a shortage of investable assets or lack of confidence in alternatives such as gold and emerging markets. Fed’s policy of low rates limits ones option and there is a disregard for absolute struggle of economic and fundamental recovery. If 2009 is the benchmark, then the economy and markets have come a long way toward stabilizing. Yet, the weak GDP numbers in Europe and the US are constantly ignored. Markets are hardly panicking about these less-than-stellar numbers as the consensus expects a better-growth second half.

Meanwhile, those who perceived gold to be a safe asset learned in 2013 that it is a speculative instrument that is a non-yielding asset. In an environment where yield is so scarce and in high demand, gold prices are losing their luster after a massive outflow. Not to mention, the debate between gold being a commodity or currency has been mostly settled, as gold was not immune from the commodity cool down. Plus, a speculative asset is typically viewed as risky, but in gold’s case, a multi-year run has corrected, and is now pausing and attempting to stabilize to a new era. The slowdown in emerging markets also played a role on the demand side.

Another puzzle to limited ideas is seen in increased issuance of African bonds as a new frontier market.Certainly, the yield search into Africa makes sense, considering Southern European yields have also come down notably, as noted recently by the Greek bond issuance. Subprime memories persist when thinking about the lack of investment options to meet a ferocious appetite for risk taking. Surely, the low volatility levels remind many of 2007, yet it is only human nature to find new segments of exciting opportunities. However, repeating similar mistakes of risk taking should not surprise us, especially when there is desperation to make good returns in a world where bigger capital is focused on familiar, limited options.
Article Quotes:

“After spending the past decade and more than $200 billion acquiring mines and oilfields from Australia to Argentina, China’s attention is turning to food. The world’s most populous nation is confronting a harsh reality: For every additional bushel of wheat or pound of beef the world produces, China will need almost half of that to keep its citizens fed. And in a recognition that it can’t produce enough crops and meat domestically, mainland Chinese and Hong Kong-listed firms spent $12.3 billion abroad on takeovers and investments in food, drink or agriculture last year, the most in at least a decade, data compiled by Bloomberg show. Those purchases included the largest Chinese takeover of a U.S. company when Shuanghui International Holdings Ltd. bought Smithfield Foods Inc. for $7 billion including debt. They are likely to be followed by overseas forays into beef, sheep meat and grain assets, according to the National Australia Bank Ltd.” (Bloomberg, May 30, 2014)

“First quarter Spanish GDP was tweaked lower in its latest revision. But even this modest rate of growth was only eked out thanks to still substantial government deficit spending and falling inflation. Which suggests Spain’s economy will struggle to hit escape velocity. Indeed, there are worrying signs the first quarter represented a high point – however underwhelming in the first place – for the euro zone more generally. Recent data point to a further softening. And a need for a European Central Bank policy response. Spain’s economy expanded 0.5% on the year in the first quarter, revised down from a previously reported 0.6% rise. But Edward Hugh, a Spain-based economist and respected blogger, pointed out that there’s even less growth here than meets the eye. For one thing, in money terms, the economy is stagnating. Much of what apparent growth there is comes thanks to inflation adjustment, Mr. Hugh noted. That’s because Spain was effectively in deflation during the first quarter, and a negative GDP deflator (the component in GDP data that creates the inflation adjusted figure generally referred to when talking about economic growth) is thus boosting – subtracting a negative creates a positive – reported growth.” (Wall Street Journal, May 29, 2014)

Levels: (Prices as of close May 30, 2014)

S&P 500 Index [1923.57] – Eclipsing prior record highs and setting a strong monthly finish. Since April 11 lows, the index has gained more than 6%.

Crude (Spot) [$102.71] – Over the last few months, a back-and-forth movement between the $98-102 range. No clear signs of an established new trend, and the supply-demand dynamics remain mysterious rather than clear for participants.

Gold [$1255.00] – The oversold rally from December lows ($1195.25) to March highs ($1385) proved to be short lived, as $1400 was elusive and $1200 became a quite familiar place. A multi-week low with no signs of bottoming at this junction.

DXY – US Dollar Index [80.36] – Since May 8, 2014, slight hints of a rising dollar, but mostly a sign of a stabilizing dollar.

US 10 Year Treasury Yields [2.47%] – Annual highs of 3.05% in the second day of this year actually triggered a downside move, as the annual lows of 2.40% were set last week.



Dear Readers:

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

Market Outlook | May 27, 2014

“The difference between life and the movies is that a script has to make sense, and life doesn't.” (Joseph L. Mankiewicz 1909-1993)

Experts humbled

Hedge fund managers, for the most part, might be amazed or, to put it accurately, humbled by what has transpired in the market. The unshakable trend of a record high stock market index with severely low interest rates and a nearly non-existent volatility lives on – not to mention last year’s correction in commodities and emerging markets, which have failed to regain momentum. Sure, nothing major has formed into a new trend-shifting catalyst when viewing year-over-year thus far.

For how many months and weeks can this rate-stock-volatility pattern repeat itself? Is there natural risk to all this? Is the Fed a conductor of this market script? Is the lack of global options for liquid and established assets? The value of fund managers is being questioned by those who think this speculative exercise is a lay-up when using hindsight, as some guidance is known to increase danger, of course. Whether bravado, danger or somewhere in between, moods are improving and the Q1 flow shows more capital flowing into hedge funds. Nonetheless, performance is where it counts and that has been a challenge for most managers:

“‘A lot of people were hoping this year would turn out to be a stockpickers’ market, but that has turned out to be anything but the case so far,’ says Troy Gayeski, partner and senior portfolio manager at SkyBridge, a $10.3bn investor in hedge funds based in New York. With the average hedge fund suffering the worst start to the year since the financial crisis, making just 1.2 per cent, according to the industry data provider Preqin, only a few managers, many concentrated in trading in concentrated company-specific events, have prospered.” (Financial Times, May 20, 2014)

Record highs in the S&P 500 index are nothing new, despite the colorful headlines they provide. Select areas like Tech and Biotech are reexamining the upside potential, and plenty of fundamental concerns persist in some sectors. Flight to quality is one trend that’s been seen before, with rotation to dollars and Treasuries. If this demand for quality and safe assets continues, then the argument for reduced risk-taking can be made. For now, a rise in volatility or massive risk reduction is not quite visible. It would have to be an event that finds a way to organically form despite experts’ attempt to speculate.

Continuously puzzling

Suspense is one thing and luck is another, but the drop in US 10 year Treasury Yields and surging stock markets have given a whole new meaning to status quo. The gloom-and-doom theatrics were off, the inevitable correction seems deferred and proclaiming further upside may be feared as much as betting against this market, it seems. After all, investment opinions are plentiful, but investable liquid assets offer limited options. For now, the market verdict suggests: Despite lukewarm economic growth, US stocks are favored and other developed markets are gearing up to follow a similar direction. Not quite the murmurs of “rich” valuation, pending a rise in volatility or risk of rising rates, which various money managers proclaimed across various public venues. Trepidation is natural when indexes are at uncharted territories of record highs, and follow-through to rising expectations is usually harder and harder to match. Thus, one cannot be overly amazed at the cautionary tale that’s rehashed on daily basis. Measuring the level of hubris in the market is one thing, but guessing the potential top is a daunting exercise.

Managing expectations

US midterm elections, pending Russian/Ukraine tension, election results in Europe, BRIC-related growth conditions and further earnings and economic status reports will be deeply analyzed in the summer months ahead. Yet, attention is better suited for grasping the interest rate policies of central banks, the conductors of risk-reward expectations and market tone. At this stage, the combination of more faithful bulls and discouraged short-sellers leads to a dynamic that has helped the S&P 500 index reach the 1900 range. The faithful participants will continue to test their luck. Surely, a multi-year bull market is viewed as more than luck, by any logical measures. However, how much of this luck is Fed/Central Bank driven? This is a collective question with suspense.

Grasping drivers of risk is desperately required for money managers seeking bigger rewards. Several false signals of tops in US markets have misled plenty, but there is some value to pursue in emerging markets. Emerging markets seem less risky than other markets following last year’s major price correction and immense capital outflow. Surely, a follow-through is awaited. Therefore, the market soon will determine if betting on developing markets is riskier than dabbling with long-term emerging markets. Interestingly, emerging markets (EEM) have jumped by 16% since February 3, 2014. Perhaps, a noticeable capital rotation into EM out of developed markets will provide the clearer picture of pending risk-reward perception. Maybe then the Fed-driven market will require adjustments, and with alterations, turbulence is known to follow for a bit.

Article Quotes:


“That interest-rate cuts [by the ECB] are on their way is now regarded as a done deal. The main lending rate will be lowered from 0.25%, probably to 0.15% or 0.1%. Much more strikingly the deposit rate paid to banks on overnight deposits, currently zero, will be lowered by a similar amount, to either minus 0.1% or minus 0.15%, in effect charging banks for funds they leave with the central bank. The ECB would thus become the first big central bank to move into negative territory, though a recent precedent has been set by the Danish central bank, which charged negative rates between July 2012 and April 2014 in order to stave off market pressures pushing up the krone, which is tied to the euro. What has been less clear is what, if anything, the ECB might do beyond this. Some easing of liquidity has been expected, for example by ceasing to sterilise its remaining holdings of government bonds bought between May 2010 and February 2012 through its ‘Securities Markets Programme,’ a euphemism for trying to arrest panic in bond markets under siege. But what has now emerged from Mr. Draghi’s speech is that the package is very likely to include measures designed to boost credit to firms in southern Europe. Mr. Draghi distinguished between two causes for low inflation, one general and one local. The general was the downward pressure on inflation across the euro area from the appreciation of the euro. Interest rate cuts should help to counter the broad disinflationary pressure arising from an overstrong currency. Money-market rates should move down to levels that discourage inflows of foreign funds.” (Economist, May 26, 2014)

“The director of an allied intelligence service once described the theft of sensitive business negotiation is as a ‘normal business practice’ in China. The Chinese government uses it to give Chinese companies an immediate advantage. China agreed to protect intellectual property when it joined the World Trade Organization (WTO) and has never really done so. The United States has in effect been asking them to play by the rules of both global trade and espionage, and the Chinese have ignored these requests. There are rules in espionage, implicit and unstated, but understood. One rule is to not overdo it; Snowden’s leaks showed that U.S. ignored this rule to its cost. Now China has been called out as well. The most likely Chinese reaction will be denial, a recitation of Snowden leaks, and threats to take action against U.S. companies. China will be tempted to retaliate. They could punish U.S. companies in China (another violation of WTO rules, not that this would bother them), they could indicate U.S. officials based on the Snowden leaks, but tit-for-tat indictments risk leading back to China’s own corruption problems. Fears of Chinese currency manipulation are wildly overstated – the Chinese economy is in bad financial shape (given the huge local debts) and can’t risk destabilizing the global economy – it would be the first victim. It would be in neither country’s interest to start a trade war. The United States could manage retaliation by letting the Chinese government know that it would take appropriate countermeasures in response. The United States is less vulnerable to Chinese pressure (even if individual U.S. companies are vulnerable). This is a case where the public good may outweigh the good of individual companies.” (Center of Strategic & International Studies, May 19, 2014).





Levels: (Prices as of close May 23, 2014)

S&P 500 Index [1900.53] – For the second time this month, 1900 was reached. Previously, the inter-day highs of 1902.17 (on May 13) marked the all-time highs. The 15-day moving average of 1883.67 sums up most of the recent trading activity around 1880. Record highs may be reached, but these ranges are too familiar early this year.

Crude (Spot) [$104.35] – April 16 highs of $104.99 are on the radar for many oil observers, and now, a few cents away from that point, the question of a further catalyst awaits.

Gold [$1298.00] – In the last several weeks, the range between 1280 and 1300 is developing as an uneventful pattern. A catalyst is deeply needed, and there are no hints from a chartist point of view.

DXY – US Dollar Index [80.04] – In the last four months, the dollar appears to have established a bottoming phase again. 79.50 seems to be the base and a stronger dollar is being closely tracked in the near-term

US 10 Year Treasury Yields [2.53%] – No major week-over-week change. This begs the question of how low yields can continue at this stage. 2.20% is the next key level, and anything below 2% can spark some uneasy responses.



Dear Readers:

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

Market Outlook | May 19, 2014

“The desire for safety stands against every great and noble enterprise.” Publius Tacitus (56 – ca. 117)

Seasonal reflection

What has changed since the end of last summer? This is a question to bring up ahead of this summer’s months, when a trend shift is pondered while the status quo continues to flex its muscles by marching on. Humbling for money managers of all sorts, real economy worries have proven unproductive when speculating on stock market indexes. Yet there is unease in moving forward – a sense of puzzling patterns or a tune that's not quite in sync.

Perhaps, identifying what has not changed in nearly nine months is easier: a high stock market, low volatility and positive investor sentiment. A hint of a crack in the bullish run occasionally teased gloomy observers, but skeptics are left to admit that timing a "collapse" is brutally difficult, with false signals being a tricky factor.

Low interest rates and high stock markets combined with a not-so-impressive economy are in place and confirm the general trend felt in September 2013. The fact is accepted, as this message has been very clear. The crowd trusted in the Fed, so the guidance for the defining script is awaited. The art of the words used by the Fed might be what the audience wants, rather than an absolute answer. So many gray areas persist: economic vibrancy, rate hike speculation, housing recovery, long-term labor market, the impact of demographics, etc. Yet, the public markets seem to indicate mixed and conflicted signals, which may explain the paradoxical holding pattern.

Grasping paradox

The search for markets’ ultimate truth is somewhere between the high demand for “safety,” growing demand for risky assets and ongoing standstill in price behaviors of key macro indicators. In other words, safety seekers continue to rotate to liquid and dollar-denominated areas. Risky asset inflows benefit from low interest rates, which are credited with enticing investors to take additional risk in search of higher return targets. Plus, the inherent low volatility creates a sense of comfort, with the perception that turmoil is not lurking. Meanwhile, the S&P 500 index, although near record highs, has not hinted at a convincing directional move. Therefore, 2014 thus far can be characterized by a standstill market action, but suspenseful discussion points offer subtle hints.

The flight to quality is seen in the rotation into liquid, dollar-denominated assets ranging from US equities to Treasuries and high-quality real estate in key cities. Clearly, the much-discussed topic of lower US 10 year yields might explain why there is distrust in economic recoveries from the US to Europe to emerging markets. Perhaps, this lack of confidence will be confirmed in a vivid and broad manner in upcoming months.

Meanwhile, the results of Ukraine and Russian sanctions have shown some behavioral changes as Russians dump the ruble.

“Russians ditched the ruble in March at the fastest pace in more than four years, official data showed, as the currency was hit by fallout from the worst standoff with the West since the Cold War over Ukraine. Central Bank data showed late last week that the total demand for foreign currency, chiefly the dollar and the euro, reached $14.9 billion in March, the highest since January 2009, the aftermath of the global financial crisis.” (Reuters, May 12, 2014)

This is another clear sign that the rush to safe assets continues in BRIC and other emerging markets. Clearly, last year, risky assets such as emerging markets witnessed massive outflow and have underperformed the US indexes. Surely, from Brazil to Turkey to Russia, social and political unrest has been felt, which gives another reason for investors to favor the US and select developed markets. This also ties into the “safety first” mentality that has persisted since the ‘08 crisis.

Dealing with what’s dealt

The endless search for hints on interest rates or vital catalysts from the Federal Reserve consumes the time of pundits. As the stakes increase at this junction, plenty of “Fed speak” speculation will get worthy or less worthy attention. However, it begs for actionable ideas and timing, which is the daunting task of active managers. It’s hard to dismiss the fact that low rates encourage taking on risk, but do not necessarily improve fundamentals or economic indicators.
It’s fair to say that growth and small-cap segments of the markets have realized that sustaining recent success is a challenge. This has led to further sell-offs throughout the year, as small caps underperformed compared to the larger US companies. Amazingly, this pullback is not stopping investors from buying on recent weakness:

“Investors poured $6.3 billion into U.S. equity ETFs in the past week, and surprisingly, about a third of that new money landed into the largest small-cap ETF in the market, the $24 billion iShares Russell 2000 ETF.” (ETF.com, May 16, 2014).

What does this say? Plenty of investors continue to believe this market rally or are potentially desperate to chase returns. The multi-year bullish run is not easily dismissed/ignored, even if known hedge fund managers proclaim that there is a top forming. Skepticism at times looks like it has lost its voice among market participants. The bullish ride is continuing, but reaching record highs is not as easy as it used to be. As stated above, some are seeking shelter in less risky assets.

Basically at this point, the good fortune for bulls will reach an inevitable end, but identifying the end game is a costly exercise that requires a bit more luck as much as skill. Accepting this is a healthier approach to risk-reward management.

Article Quotes:

“Europe’s banking crisis is unresolved. Loans to finance fixed investment continue to fall. Remarkably, the European Banking Authority’s latest stress test for the eurozone’s banks does not contemplate the possibility of deflation in its adverse scenario. The implication is clear: The banks’ capital shortfall will be understated, and the amount of new capital they will be required to raise will be inadequate. If the goal is to restore confidence and get the banking system firing on all cylinders, this is not how to go about it. … And everyone knows that Europe’s much vaunted banking union is deeply flawed. It creates a single supervisor, but only for the largest banks. It harmonizes deposit-insurance coverage but does not provide a common deposit-insurance fund. The resolution mechanism for bad banks is incomprehensible and unworkable. The associated resolution fund will possess only €55 billion ($76.6 billion) of its own capital, whereas European bank liabilities are on the order of €1 trillion. Finally, there is that pesky matter of public debt, which is still 90% of eurozone GDP. European officials propose to work this down to their target of 60% over a couple of decades. You read that right. Check back to see how they’ve done in 2034.” (Project Syndicate, May 12, 2014)

“Mexico has long languished in the shadow of Brazil when it comes to economic and financial bragging rights. But for Brazil’s big banks, faced with sluggish growth and intensifying competition at home, Mexico suddenly has a new allure. Grupo BTG Pactual opened its first Mexican office in January with a staff of 20 and began trading local stocks in March. The firm is just one step ahead of its biggest rival, Itaú BBA, the investment banking arm of Itaú Unibanco Holding, Brazil’s biggest lender. That firm expects to gain a Mexican broker-dealer license in July and begin trading by the end of the year, says Alberto Mulas, a former Mexican national housing commissioner who is CEO for Mexico at Itaú BBA. … The Brazilian banks have reason to look abroad. The attractions of their domestic market have grown dull of late. Brazil’s share in Latin America’s merger and acquisition transactions slid to 56 percent by deal value last year from 71 percent in 2008, according to data provider Dealogic, whereas its share of Latin American equity offerings fell to 41 percent from 85 percent over the same period. By contrast, Mexico is proving increasingly lucrative. The country’s share of the Latin American M&A market rose to 17 percent last year from 8 percent in 2008, whereas in equities it jumped to 34 percent from 9 percent.” (Institutional Investor, May 1, 2014)



Levels: (Prices as of close May 16, 2014)

S&P 500 Index [1877.86] – For more than three months, the index has spent most days trading between 1880 and 1840. Interestingly, a move above 1880 did not attract more buyers. And a drop below 1840 did not last long, with selling pressure pausing. It’s fair to say, this is a neutral and established range.

Crude (Spot) [$102.02] – Struggled in the recent past to surpass $104. Meanwhile, $100 appears to be an agreeable point for buyers and sellers temporarily.

Gold [$1299.00] – Signs of bottoming around $1280 and a sluggish climb back to $1300 ranges. Ongoing demand for yielding assets and a lack of fear has not helped stir upside momentum.

DXY – US Dollar Index [80.04] – After dancing with fragile annual lows, some signs of stability to such a familiar level. July 2013 highs of 84.75 serve as the upside barometer if there is a reversal.

US 10 Year Treasury Yields [2.52%] – Interestingly, last May, new lows of 1.61% surprised participants, but that was the annual low and certainly short-lived. During the last nine months, a trading range between 2.60-2.80% became too familiar. A slip below 2.60% has signaled a noteworthy move. For now, this remains the key macro indicator that’ll drive perception.




Dear Readers:

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

Market Outlook | May 12, 2014

“Playing safe is probably the most unsafe thing in the world. You cannot stand still. You must go forward.” (Robert Collier 1885-1950)

Standstill

A waiting game is playing out in key corners of the financial markets. There is a pause-like feeling lingering as participants await a "big" catalyst (or two). Of course, the challenge for experts and novice risk takers is pinpointing the key factors for massive trend-shifting moves. At this junction, betting on massive collapse or ongoing re-acceleration is merely a guessing game rather than a collection of highly compelling arguments.

As a start, the S&P 500 index has not made a strong directional statement in eight weeks, as current ranges seem stable. Interest rates are not quite buying signs of re-accelerating or a vibrantly improving economy. US 10 year Treasury yields are well below 3%, but not quite below 2.60%. Crude prices are flirting at or around $100, not giving buyers or sellers the much-needed extra conviction or trend to make bigger moves. At this stage, the developing standstill is glaring. Risk-takers anxiously await a move in stocks, interest rates and commodities. Surely, forward thinkers are aware that positioning ahead now for pending moves is where the reward awaits.

Skittish or trendless: both seem applicable in assessing the real economic conditions. Skittish messaging is quite visible in the reaction and messaging from the Fed. On one end, the central bank is concerned about housing, while continuing to praise the "taper" and claiming a robust economy. Mixed signals of all kinds are set to test the patience of various investors. Is there a bubble that’s in late innings, or is this numbness to overstated fear? Potentially, a little of both is occurring.

Calmness – universal theme

These days, low yields are hardly a discussion point and are accepted as the norm. Even Spanish and Portuguese yield are much lower in the post-crisis period.

“Spain’s 10-year yields dropped to an all-time low as a separate report showed unemployment in the country fell last month, signaling governments in the region are overcoming the debt crisis that began in 2008. Portuguese and Irish bonds also gained as Fitch Ratings said there is potential for upgrades in the euro region’s peripheral nations.” (Bloomberg, May 6, 2014)

Basically, there is a sense of recovery and a perception that risk has vanished, at least for now. Investors, even in the most vulnerable European markets, are feeling a revival of sorts. Certainly this is hardly news, but worth noting, especially after the issuance of Greek bonds that stirred demand for yield-hungry investors. Is this desperation for yields or a lack of alternatives? It’s fair to say that “collapsing Europe” or default talk is not as prevailing when tracking investment bets versus the gloom-and-doom literature that pollutes the daily airwaves.

Talking about low levels, the volatility index is far removed from indicating hints of turbulence. Amazingly, the volatility index is not overly puzzled by the crumbling factors of slowing growth in innovation-driven themes (i.e. tech and biotech) and macro unrest potential due to fragile foreign policy as the global economy continues its search for solid footing.

Gearing up

There are hints of slowdown, unrest and wobbly sentiment resurfacing in the late spring season. As much as risk aversion has been out of favor, extracting signs of danger for evaluation is wise while not easily falling into the trap of sensational pessimism.

After all, it comes down to which assets are overvalued and which ones are undervalued. If there is a shortage of undervalued assets, then a correction is bound to occur. Money managers or proclaimed risk assessors have to decipher where a peak is. Is it in growth areas such as small cap or technology-driven areas? Is it a collective overvaluation, or is that less important when the market is more relative than absolute? Do areas in emerging markets (stocks and strength in local currencies) offer timely entry points? Is there plenty of noise on macro matters (tensions affecting commodity pricing) or is the gut-check correction about to occur in the next 3-6 months? Plenty to ponder, but maybe the time to act is during a trendless market when the majority is rather neutral, lacking conviction or waiting for further hints. The counterintuitive steps of reducing risk or finding value in areas less sought after may be rewarding. Perhaps, the standstill is calling the daring bunch in search of bigger rewards. Now is an intriguing time to answer the questions above and hope that the risk-reward concept will continue to work and the consensus chatter is just a distraction or casual entertainment.

Article Quotes:

“A serious flaw was exposed in the European Central Bank’s policy strategy this week, setting up the Euro for a potentially rough few weeks going forward. With ECB President Mario Draghi saying that the Governing Council felt ‘comfortable’ enacting further dovish policies at the June meeting once the new staff economic projections were released, the market’s growing calls for new dovish action has been materially altered into a full-blown expectation of a substantive policy change in four weeks. Market participants gleefully hopped on board the Euro bear train midway through President Draghi’s press conference on Thursday, taking the latest episode of jawboning a bit more seriously now that a veritable checkpoint down the road has been established for action that should undermine the Euro (the selling on Thursday and Friday is evidence of the market pricing in a small rate cut, with the number of basis points priced out of the Euro over the next 12-months moving from -4.3-bps on Wednesday to -11.4-bps on Friday).

Even though President Draghi indicated that the Euro exchange rate was not a policy tool, he did specifically say that it would be necessary to address if it undermined price stability. Incidentally, traders have taken this as a sign that persistently low inflation for the region is being blamed on the single currency (rather than the policies which got us to this point, of course) – and this is now the most daunting corner the ECB has painted itself into to date as it has essentially guaranteed some form of easing. We can’t say that Euro weakness into the June meeting is guaranteed; but, in the sense that market participants needed a reason to offer the Euro lower, they’ve been granted one: the ECB wants a weaker currency, and it has promised a dovish policy response in return. And the market has responded, with the EURUSD dropping from a fresh yearly high of $1.3993 on Thursday to the close of 1.3760 on Friday.” (Daily FOREX, May 10, 2014)

“China is attempting to restructure its economy, reorienting the manufacturing sector toward the production of more technology-intensive goods and expanding the service sector in order to move up the economic ladder from a middle-income country to a high-income country. Premier Li Keqiang stated in his Work Report at the National People’s Congress in March that China needs to rebalance away from investment and trade and toward domestic consumption and service industries. This is in line with the Fisher-Clark theory of structural change and a very common view that as economies modernize, they must shift from a focus on primary industry (agriculture), to secondary industry (manufacturing), to tertiary industry (services). Yet could moving up the value chain be a mistake for China? Contrary to common belief that to move up the economic ladder a nation must transition out of a focus on manufacturing to a stronger emphasis on services, we proffer the cases of the United States and Japan. The U.S. and Japan have service sectors that contribute close to 70 percent of GDP and manufacturing sectors that represent about 20 percent. Manufacturing has moved abroad to places like China and Vietnam, where labor has been far cheaper, while the services sectors in these countries have become increasingly sophisticated and skill-intensive. Both the U.S. and Japan are now mourning the loss of manufacturing jobs overseas, as sources of economic growth have diminished and economic inequality has widened. A major argument in favor of moving up the structural ladder is that increasing economic productivity should be reflected in increased modernization of sectors away from labor-intensive processes and toward more technology-infused or skill-intensive processes. This should be accompanied by a heavy policy emphasis on educating the work force, so that individuals can continue to find employment in a more mentally demanding work environment. Increased productivity will lead to a shifting out of the production possibilities frontier and sustained economic growth.” (The Diplomat, May 5, 2014)



Levels: (Prices as of close May 9, 2014)

S&P 500 Index [1878.48] – In the last two months, moving above the 1880 range has proven to be difficult or short-lived. Some signs of slowing bull market but still lacking further signs of major sell-off.

Crude (Spot) [$99.99] – The 200-day moving average and the 15-day moving average both are $100. Basically, uneventful action last week awaits any signs of movement away from a very familiar and common $100 range.

Gold [$1287.00] – Based on trading actions, a base is forming around 1280, while the upside potential lacks significant momentum. Clearly, the “hot” or “quick” money has vanished from the sector, and a range-bound action will follow in years ahead.

DXY – US Dollar Index [79.90] – Closed at annual lows. Prior lows were achieved in late October 2013, confirming the weak dollar trend.

US 10 Year Treasury Yields [2.62%] – As seen in September 2013 and January 2014, yields failed at 3% or so. In the last nine months, the 2.60% range has been rather familiar to most, but signs of a breakout are not overly convincing.



Dear Readers:

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

Market Outlook | May 5, 2014

“Doubt can only be removed by action.” Johann Wolfgang von Goethe (1749-1832)

Doubts deferred

No matter how many times this market is doubted, the broad indexes continue to trade near or at record highs. Despite various pundits loudly proclaiming skepticism and illustrating justifiable reasons for pullbacks, the six-year bull market lives on. Political disarray, economic weakness, brewing macro concerns, earnings slowdowns and changes in the regulatory framework all fail to take down the collective shares of US-based companies. Whether absurd, illusionary or simply a normal cycle, this end result has participants wondering about the mechanics, risks and the magic to pursue fortune. Regardless of experience, know-how or directional biases, this market is designed to puzzle participants, since the future is full of surprises.

Despite the doubts of all kinds in the past and gloomy forecasts by some, both failed to impact a market that marches to its own beat. After all, the reflection of the top 500 companies’ shares is not always a measurement of small business health across the US. Not to mention, when the supply of stock shares available for trading has shrunk, supply-demand would support a rise in prices (of shares).
“Companies hard-pressed to grow their businesses organically are paying dividends and reducing share count in order to maintain 5 percent to 7 percent cash-on-cash returns for investors.” (Bloomberg, May 2, 2014).

Numerous times, history teaches us to distinguish between current economic conditions and future expectations of shares. What about the classic relative argument? Yields overall remain low, the world is less stable than usual and there are limited liquid and “trustworthy” options outside of US equities. Maybe that partially explains the capital inflow and increased investor demand for stocks. Is this an issue of desperation from a lack of ideas, or rather the eagerness that urges one to chase returns? The puzzle requires further deciphering to answer questions such as: Is there rotation from developed markets to emerging markets?

Forced messaging

The Federal Reserve had a plan, a vision and a story to paint a picture of recovery following stimulus efforts. A great deal of cleverness and trickery has resulted in rising markets and increased risk appetite as the final chapters of the Fed script are played out. The ending to this master plan (QE / taper) appears to suggest a strong labor market, rising stock market and perceived economic growth. Perhaps, it is up to the participants to be believers in the Central Banks. Regardless of adjustments or potential spins, the 0.1% headline GDP result is hardly something to be proud of as a conductor of financial markets. In fact, the action of US 10 year Treasury Yields below 3% showcases a disbelief in strong economic recovery. Clearly, making the case that QE had the ability to stimulate the real economy drove the “taper” plan. Skeptics questioned this several times, and now doubt the results of QE, which is quite reasonable. The unfathomable disconnect between the economic strength measures and ground-level reality is huge. Yet, one cannot dismiss that from the dark moments of early 2009 until today, there was stability and some uptick to restore economic and investor confidence. For now, the Fed’s messaging is forcing people to have confidence in its ability, and fighting the Fed is a discouraged trait in financial circles.

Refining market view

Identifying the catalysts that would punish stocks for a poor economy is a daunting task. It’s fair to say that no formula or magic exists to figure out the ultimate top. A lesson that mega-bears had to learn recently is that even global tension or talks of a government shutdown do not simply affect the trading of shares. However, Fed or corporate tactics that have worked in recent years may face further resistance and change in tone. At this stage, another 50-100% upside in stock prices may end up being rather ambitious, even for the most optimistic participant. In fact, the NASDAQ has slowed down since March 6, 2014, as high-growth stocks began to stall. Similarly, the S&P 500 index has stalled and in search of a catalyst for price re-acceleration. Yet, more and more, many have documented cautionary messages. From the credit bubble to China peaking, there are gloom-and-doom habits (and talk) that have yet to evaporate. Thus, investors are forced to ponder what’s the more surprising move in the near term: a 20% upside move or 20% downside move? For now, the real fear is tilted toward missing a further upside run. It is also less comforting for bulls to give up their thesis, at least based on the low-volatility indicators. Until fear is reflected in actual trading indicators, calm is part of the status quo. However, if further signs of a lack of trust in economic recovery continue to persist, then that may move the needle in fear gauges.



Article Quotes:

“If Europe were politically unified, the issue would dominate the run-up to next month’s European Parliament election as well. One camp would call for massive north-to-south fiscal transfers. Another would emphasize the need for structural adjustment as a precondition for investment and job creation. A third would propose that governments, rather than hoping that jobs move to people, should accept that people will have to move to jobs. There would be enough sound and fury to interest the voters and lure them into voting. Instead, such ideas – reminiscent of the debate in the United States in the 1930’s about how to respond to the Great Depression – are barely discussed in Europe. Rather, mainstream European parties have cautiously avoided proposals that could prove divisive. Their manifestos and campaign materials do not convey the sense of urgency that the current situation demands. This caution benefits fringe parties that advocate radical solutions. They hope to profit from the voters’ anger against whomever can be held responsible for the current situation. But the fringe parties are not united. In the north, they object to the risks entailed by financial assistance provided to the south. In the south, they protest against the austerity imposed by the north. This hardly forms the basis for a common message, let alone a unified policy.” (Project-Syndicate, April 29, 2014)


“China’s exchange rate policy has, of course, always been a controversial matter. After a decade of deliberate undervaluation, intended to promote export led growth, China finally succumbed to international pressure in 2005, and allowed the real value of the renminbi (RMB) to start rising. Since then, it has risen by about 30 per cent, with only one interruption in the aftermath of the great financial crash. The new prices data suggest that the renminbi is now approximately fairly valued. Arvind Subramanian and Martin Kessler have already crunched the numbers, and have concluded that the average level of prices in China is almost exactly where it should be compared to the US, allowing for the economy’s relative level of development. Other methods produce slightly different results, but the conclusion that the currency is no longer substantially undervalued seems robust. In this respect, China has been a good global citizen in recent years, no doubt in part because a rising exchange rate helped with its domestic objectives by boosting consumption. The rising RMB has helped to reduce the huge trade imbalance between the US and China, and taken some of the pressure off other emerging economies whose competitiveness was under threat. The inexorable rise in the RMB has also led to burgeoning ‘carry trades,’ involving a surge in short term capital flows into the onshore market in mainland China. This has been a two-edged sword. It has provided a source of funding for the financial system, at a time when more credit was needed to disguise the stresses in the highly indebted local government and corporate sectors. But it also extended the internal credit bubble even further into unsustainable territory, and forced China to intervene even more heavily in the foreign exchange markets to keep the currency down.” (Financial Times, May 4, 2014)

Levels: (Prices as of close May 2, 2014)

S&P 500 Index [1881.14] – A few points removed from all-time highs of 1897.28 set on April 4. For several weeks, the market has shown a familiar range from 1840-1880. Breaking out of this range has been a challenge awaited with suspense.

Crude (Spot) [$99.76] – In many ways, the $100 mark is not only a psychological level, but also where the current 50 and 15-day moving averages currently stand. Basically, supply shortage is not a massive issue to spark a catalyst; instead, supply-demand is perceived to be contained.

Gold [$1291.50] – The last six months have showcased that prices fade around $1360, and late December 2013 lows of $1195.25 are again talked about.

DXY – US Dollar Index [79.51] – At a fragile state here, as the dollar weakness is on the verge of making new lows. Yet again, another mild inflection point within the weak dollar trend.

US 10 Year Treasury Yields [2.66%] – For the fifth time in 2014, Treasury Yields are being tested. Can yields stay above 2.60%? This has been asked before, as the convincing answer has not been defined yet.




Dear Readers:

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

Market Outlook | April 28, 2014

“Vision is the art of seeing things invisible.” Jonathan Swift (1667-1745)

Clarity awaits (yet again)

As April draws to a close, eager participants seeking hints on Fed policy, labor conditions, GDP status and some guidance on housing growth await several data points. Surely, waiting and reacting to data has not always proven to be instrumental in altering the existing bullish stock market. Whether corporate earnings or economic recovery, the catalysts for price declines are a mystery. As much as pundits want to rave about one or two factors, it takes a lot to bring down this market. Surely, signs of slowing in momentum-driven stocks have been quite visible in the last few weeks, considering biotech, as well as some high-growth tech names. On a company-specific basis, those weaknesses are identifiable but have not been enough to trigger broader, meaningful corrections.

At the same time, the pace of the housing slowdown and interest rate policies require clarification. With the US 10 year yields at 2.66% (a relatively low range), the market is not suggesting that the economic strength is vibrant. In turn, any doubt about US economic growth is reasonable. Plus, the dollar has not shown any strength. Therefore, investors need to be convinced that economic “strength” is a supportable trend, rather than a stalling trend. The questions will be asked, especially regarding the “taper,” and suspense will linger despite volatility hovering at familiar calm/low levels.

Search for sense

Does supply-demand make sense when markets are tinkered with and simple logic goes out the window? Gold owners have been learning that in the last few years, with prices declining. Is there real demand? Is supply understood? Similar logic (or lack thereof) applies in the patterns of oil prices. In terms of oil prices, one would think price decline is highly possible with US supply expansion and a not-so-vibrant global economy recently. Yet again, the logic of supply-demand is not enough to be a speculator, and certainly, grasping more of the inefficient dynamics is vital. Perhaps, this is a telling point for various markets, from stocks and commodities to interest rates. The irrational nature of markets is normal, and sometimes the prevailing theme or momentum can drive the direction of prices. Thus, logical explanations are not always available in this tricky market.

Rotational game

Any wobbly pattern in US stock markets may trigger interest (or the consideration of shelter) in emerging markets which have shown signs of revival since early February 2014 lows. Certainly, investors have slowly trickled money back into EM funds in recent weeks. Some may argue that short-term recovery from 2013’s underperformance is not quite convincing, but long-term participants continue to favor EM upside potential. The relative-basis argument here simply suggests any pullback in US markets will require rotation into developing markets, and the recent cycle supports that. Equally, some European markets that have underperformed may appeal to those bargain hunters.

Macro puzzle

More than the general emerging market climate, the status of the Chinese economy is a puzzle within itself. On one end, large US corporations view the Chinese market as a great contributor to earnings:

“China has proven to be a strong engine for Apple (AAPL), with its new partner China Mobile (CHL) helping push fiscal Q2 iPhone sales to more than 43 million, far more than expected. The $9.2 billion that China added to Apple's coffers comprised nearly 25% of the company's total quarterly revenue, up 13% from a year earlier. … Starbucks (SBUX) saw net revenues in its China/Asia-Pacific region grow 24% year over year to $265.3 million during its fiscal Q2, driven in part by nearly 700 stores opening over the past year. Comparable store sales were up 7%.” (Investors Business Daily, April 26, 2014)

On the other hand, China’s domestic growth and currency management remains a suspenseful international story. The growth rate of last decade is hard to replicate, and investors are coming to terms with that. Meanwhile, the Yuan continues to weaken. The currency markets are seeing speculation on drivers and partially discovered facts. This Yuan devaluation is hitting new multi-month lows, which will force corporations to hedge currency exposure. Other participants will interpret these as weak economic signs. Surely, this can stir political talk of “currency wars” and intervention, which certainly can stir up a bigger macro debate. Frankly, lesser-known currency-related news might result in a sensitive market reaction.


Article Quotes:

“To be sure, Beijing's willingness to inject itself into the South Sudanese crisis is driven by the simple fact that China buys almost 80 percent of South Sudanese oil exports and has watched with alarm as the current fighting has crippled the country's ability to produce and export oil to customers in Asia. Oil production in both Sudans has dropped from a peak of about 480,000 barrels a day in 2010 to about 160,000 barrels today, and even that last bit is under pressure from rebels in South Sudan, who have ordered international oil companies to pack up and leave as part of a strategy to cut off the main economic lifeline of the South Sudanese government. China may also not have much of a choice. The cease-fire in South Sudan brokered in early 2014 imploded in the last week, with rebels advancing on key cities in oil-producing regions and slaughtering civilians as they went. The political nature of the fighting – which pits Salva Kiir's South Sudanese government forces against rebels led by Riek Machar – has by some accounts descended into an ethnic bloodletting. China has been caught in the middle; a pair of its oil workers were abducted by Machar's forces last week and Chinese oil firms have been told to leave the country. … China's traditional interests in both Sudan and South Sudan, and its newfound interest as a mediator, were on full display in the wake of the attacks. China's foreign ministry on Wednesday ‘strongly condemned’ the killings in Bentiu and called on ‘relevant parties in South Sudan to resolve their issues by pushing forward political dialogue and achieve reconciliation.’ But the ministry also called on South Sudan's government to better protect Chinese oil firms and workers there after the two workers were abducted last week.” (Foreign Policy, April 24, 2014)

“Major organizations that carry out banking activities, but are not banks, may become so important to the financial system that they need to be regulated like traditional banks, a European Central Bank governing council member said on Saturday. Financial regulators are seeking to shine a light on so-called ‘shadow banking,’ a 24-trillion-euro ($33 trillion) industry in Europe – half the world's total – that comprises money market funds, some hedge funds, and firms involved in securities lending and repurchase markets. Such groups borrow and lend like banks, but because they are not banks they often fall outside the remit of regulators. Speaking at the Finnish Social Forum, Erkki Liikanen said there was a risk that tighter banking regulation in the aftermath of the global financial crisis could lead to growth in unregulated shadow banking. If markets then began to expect that shadow banks would have to be bailed out with public funds to prevent a financial sector collapse, the problem would not have not been solved, Liikanen said, adding that authorities were following developments.” (Reuters, April 26, 2014)

Levels: (Prices as of close April 25, 2014)

S&P 500 Index [1863.40] – Numerous hints of stalling; surpassing 1900 has proven to be challenging. Interestingly, the index peaked closer to 1850 to start the year. Although currently above the 50-day moving average, further tests await. Staying above 1880 would restore further confidence.

Crude (Spot) [$100.60] – Buyers’ demand above $105 appears to lose momentum. As usual in recent times, trading is around $100. Early hints suggest that without a noteworthy catalyst, downside pressure is a near-term possibility.

Gold [$1291.50] – The 1280 range is setting the tone as a bottom for optimists of gold prices. Realists are wondering if 1360 is the next critical range.

DXY – US Dollar Index [79.74] – For now, the April 10 lows (79.33) are the benchmark to measure potential future weakness. Trend-shifting moves have not transpired in the last three months.

US 10 Year Treasury Yields [2.66%] – The common range these days is between 2.60-2.80%. The 3% level has proved to be a tough place to reach throughout all of 2014. Interestingly, the 50-day moving average is almost at Friday’s close.






Dear Readers:

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

Market Outlook | April 7, 2014

“It is the eye of ignorance that assigns a fixed and unchangeable color to every object; beware of this stumbling block.” (Paul Gauguin, 1848-1903)

Some stumbling

Chatter, debate and uproar about market mechanics dominated last week’s financial discussion points. More will follow on this trading maze, and there will be worthwhile debate where more guidance is needed. However, markets of all kinds are trying to examine whether share prices are justified at this junction between all-time highs in US market and the mixed and less-stable emerging market world. Nickel-and-diming strategies on high volume are eventually a regulatory challenge rather than a cyclical or psychological matter. Regardless of how the day-to-day mechanics (some abstract) have transpired, this is and has been a bull market. It has been for a while, with the revival of economic conditions and growth in select industries. Refocusing the attention on bigger issues is in the minds of risk-takers and it has been for weeks. Certainly, inflow to US equity markets has not stopped either, and the expectations for better-than-prior-year returns still persist.

Finding perspective

As a start, the S&P 500 index didn’t reach all-time highs overnight, and the Fed’s message is not reexamined daily. Neither are the labor conditions that have been brewing. In the last few weeks, the market had moments of silent stumbling as highlighted by trading action last Friday. Yet, the current bull market is easily painted as stable, well-established, Fed-driven magic that turned into reality. Of course, that’s one version, and the view of this market run-up depends on the perspective. Investors gaining from appreciation are not too worried about the ifs and whys. Corporate leaders who have averted showcasing real growth might get a bit nervous playing the share buyback and layoff game as a short-term fix for higher share prices. The post-2008 recovery has been fruitful for shareholders, and the buzz felt from the ease of 2013 may linger more than desired by rational seekers. Critical thinking is now required in risk allocation. Against this backdrop, memories of 2000 and 2007 peaks are in the minds of cycle observers who know that bull markets build slowly and sell-0ffs are explosive to take away gains, especially for the latecomers. Yet, many ponder this again and again: Can we have a bubble with not-so-glorious economic recovery, but a roaring stock market?

Near-term dynamics

If the volatility index provides any worthwhile hints, then for now, it mirrors 2013 trends. Basically, calm is the dominant force, despite mild, occasionally worrisome periods. In terms of the “taper,” the decision by the European Central Bank and the pace of an emerging market slowdown, the market is comfortable that issues are known and surprise hasn’t overly crept up. Perhaps, the potential for a meaningful correction lies in the possibility that these “known” or “expected” matters end up being underestimated. Basically, a Fed-driven market is reliant on messaging and the Fed’s leadership, from an unemployment target to inflation status to the definition of “economic growth.” Yet, NASDAQ’s recent action symbolizing momentum and innovative companies tells a story of minor pullbacks as early signs. Since March 7th, the tech and biotech-heavy index is down more than 5%. The question ahead is if buyers are seeing a discounted entry point or declining momentum. The same applies to the Russell 2000 index, which is led by growth-driven companies and, like the NASDAQ, another area with wobbling signs. At least bubble seekers can focus here to see the level of breakdown.

Interestingly, with US momentum names slightly slowing, the EM themes have shown signs of liveliness. It’s unclear if this is a new trend or a short-term rotation. Nonetheless, momentum areas in US markets, especially in tech and biotech, may set the tone for the rest of the sectors. At some point, the health of business fundamentals may re-shift the focus from the interest rate policies that have mesmerized and captured participants’ thinking.

Article Quotes:

“Buybacks are such a common feature of corporate life and the stock markets that it’s easy to forget that they were essentially illegal not too long ago. They are used to manipulate share prices and earnings per share, all in the name of ‘maximizing shareholder value.’ The result has been an explosion of wealth among executives who are typically loaded with stock-based pay and who enjoy the luxury of determining the amounts of the buybacks as well as their timing. As buybacks increased in frequency and value, so did the share of executive pay in the form of stock options and stock awards. The result was a positive feedback loop that enriched all executives and handed a few unimaginable wealth. A new research paper written by William Lazonick of the University of Massachusetts Lowell, which will be presented at the conference of the Institute of New Economic Thinking in Toronto on April 10 to 12, noted that in 2012, the 500 highest-paid executives in the United States received an average pay of $24.4-million (U.S.) – 52 per cent from stock options and 26 per cent from stock awards. ‘The more one delves into the reasons for the huge increase in open-market [share] repurchase since the mid-1980s, the clearer it becomes that the only plausible reason for this mode of resource allocation is that the very executives who make the buyback decisions have much to gain personally through their stock-based pay,’ Mr. Lazonick said. As executive pay soared, workers’ wages stagnated when measured against productivity gains. Between 1948 and 1983, when regulations severely limited the size of buybacks, real compensation per hour and gains in productivity per hour closely tracked one other. That’s no longer the case. In the early 1980s, a significant gap between productivity and wages emerged and kept getting wider. By 2012, the 100-per-cent rise in productivity (partly due to corporate ‘downsizing’) from its level in 1963 was met with a mere 60-per-cent increase in real wages.” (The Globe and Mail, April 4, 2014).

“More than Sino-European relations, though, the unstoppable river may be the flow of Chinese goods around the world. A recent paper for Bruegel, a think-tank, co-written by Jim O’Neill, a former Goldman Sachs economist who coined the term ‘BRIC’ (for the fast-rising economies of Brazil, Russia, India and China), predicts some striking changes. China has already overtaken America as the biggest single trader and will match the EU by 2020. By then, China’s share of global GDP (measured at purchasing-power parity) will also probably surpass the EU’s. Some European countries will lose their share of global trade faster than others. On current trends, by 2020 China will become the biggest single destination for German exports (overtaking France) and the second-biggest for France (displacing Belgium, but still behind Germany). Italy and Germany will export more to emerging and developing markets than to their euro-zone partners (unlike France, Spain, Belgium and the Netherlands). All this raises some big questions. Internationally, it will be ever harder for Europeans to justify their disproportionate seats and voting weights in the IMF and World Bank. That may push some to reconsider the idea of a single seat for the EU or perhaps the euro zone. At home, the implications may be harder still. If European countries trade more with the outside world than with each other, the commitment to a single currency may weaken. Yet diverging trade patterns may also mean that euro-zone countries have to become more integrated to be better prepared to resist asymmetric shocks from external partners.” (The Economist, April 5, 2014).



Levels: (Prices as of close April 4, 2014)

S&P 500 Index [1865] – Another sign of momentum stalling around 1880. Overall, the bullish cycle remains in play as some pullbacks are awaited.

Crude (Spot) [$101.14] – During the last few weeks, a narrow trading range between $98-102. Appears steady at current levels without major directional shift.

Gold [$1284.00] – Since peaking on March 17, 2014, the commodity has dropped more than 7% after making a 15% run since late December 2013. Fair to say, gold is seeking and reaching a normalizing level.

DXY – US Dollar Index [80.42] – March 13 bottom of 79.26 may signal the beginning of new strength in the dollar. Yet, a major move is not quite visible, as witnessed for years.

US 10 Year Treasury Yields [2.72%] – Patterns suggest again that surpassing the 2.80% mark is challenging in the near-term, as the 3% target is long awaited.


Dear Readers:

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

Market Outlook | March 31, 2014

“Dreams are today's answers to tomorrow's questions.” Edgar Cayce (1877-1945)

Today’s answers

Stock market appreciation in the recent bull run can be attributed to ongoing stock buybacks, increasing dividend payouts and limited investable options. All contribute to lifting the shares of established and more liquid companies making up the major indexes in particular. In reflecting back, this has been a dream-like period for stockholders in US stock indexes. From tech companies to banks, companies are buying back their own shares and in turn shrinking the supply of available shares for investors. Of course, this strengthens the market perception and the reward appeases existing investors – a critical supply-demand factor for those seeking exposure to US equities. Clearly, rewarding investors appears more critical than growing businesses and earning potential for the next 5-10 years. That’s the central debate, as investors will be asking these “tomorrow’s questions” very soon, with earnings season approaching.

“Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares—a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion—or nearly one-fifth of the total value of all U.S. stocks today.” (Wall Street Journal, March 21, 2014).

As for matters related to labor growth, bank-lending expansion, sustainable earnings and more capital expenditure, this all presents a different story. Perhaps, real economic barometers have been dull and not an overly stellar trend relative to a flamboyant stock market that continued to register all-time highs. There is a severe disconnect between fulfilling shareholders’ desires and those seeking creation of long-term value and economic strength. Perhaps, this is a conflicting reality that always existed but is more pronounced at this junction. So, as the first quarter draws to an end, the run-up in share prices and the pace of economic growth are questioned equally. Are banks now going to lend? Is there more momentum left for further economic growth? Are public policy uncertainties less of an unknown?

Inflection point

At the start of the year, value seekers were viewing beaten up assets that underperformed in 2013 and a full-blown sell-off took place. Among the notable areas that were deeply discounted and mostly disliked were gold and key emerging market areas. Interestingly, gold’s behavior since the Fed’s taper announcement has been telling in the near-term, in which a higher rate and the end of QE makes the gold story less thrilling. Meanwhile, the EM landscape is not only a bargain-hunting exercise, but an area where value investors with limited investment options may continue to bet on a noteworthy recovery. Interestingly, the EM index was up 4% last week, showcasing very early revival from low ranges. The pace of outflow is slowing.

“Funds that specialize in emerging market stocks, meanwhile, posted just $43 million in outflows, marking their smallest outflows in 22 weeks.” (Reuters, March 28, 2014)

Yet, to claim a rotation out of developed markets into EM is premature for now (as there is no concrete evidence yet). But opportunities are opening up for those looking to exploit speculative risk-reward setups.

Cycles viewpoint

Seven years ago, the market was robust and thriving ahead of the 2008 crisis. Some similarities to 2007 are commonly pointed out by pundits, mainly in how risky assets have recovered and recouped last cycle’s losses. Certainly, key indexes demonstrate that point at which housing has climbed back, and volatility has stayed calm as risky assets flourish. One can argue these trends are a restoration of stability. If so, what stage of “stability” are we currently in? The seven-year cycle may have a magic meaning/offer a clue, or simply be a coincidence without substance. At least, it serves as a historical reminder that’s not worth dismissing. Surely, these factors will end up playing a role in mind games of decision making for risk takers. Data points resembling the pre-crisis behavior are worth tracking as we approach this wobbly period. Here is one example:

“For all the warnings from the Federal Reserve over excessive risk-taking as loan growth soars to levels last seen just before the crisis, bankers still have 10 trillion reasons to lend. That’s the dollar amount that banks hold in deposits in the U.S., which exceeded the value of all loans by a record $2.5 trillion last month. Banks are amassing more cash even as lending to U.S. companies this quarter is poised to increase by the most since 2007, according to data compiled by the Fed.” (Bloomberg, March 28, 2014).

Momentum names (social media, biotech, etc.) have showed signs of slowing, but not at a pace to trigger notable sell-offs. The S&P 500 index pattern is stalling at current levels. Surely, the recent week’s actions suggest markets are a bit wobbly where a breather is much needed, like earlier in the year. The bullish bias has been resilient, as the Fed-supported and Fed-guided messaging has led to the joy of shareholders of US companies. Unaddressed economic concerns have accumulated; therefore, triggers of “bad news” are plenty and should not be overly shocking to most in-tune observers. Timing is unpredictable, but cyclical hints are profound and awareness of the current junction is essential in managing risky assets. For now, reexamining the thought that markets are “invincible” is as valuable as speculating on the next macro-driven event.

Article Quotes:

“Like other parts of the US economic recovery — housing, the labour market — capital expenditures by companies have been a letdown recently, even accounting for the weather. The latest example came in Wednesday’s durable goods report, in which the ‘nondefense capital goods orders excluding aircraft’ component fell. (That figure is a proxy and obviously doesn’t capture everything that normally counts as capex, which also includes investment in property and structures, imported capital goods, and certain intangible assets. Capex is often poorly or loosely defined in discussions about it.) But capex has been disappointing for more than a year. The growth rate of investment in both equipment and structures declined last year after a strong 2012, which economists credit partly to a one-off tax incentive that pulled investment forward in time. Equipment spending rebounded quickly after the recession ended in 2009, but its year-on-year growth rate has fallen in every year since 2010. (See page 13 of the revised Q4 GDP release.) The good news here is that it climbed an annualised 10.9 per cent in Q4, the best quarterly growth rate since the third quarter of 2011. Investment in structures has been more volatile, declining much more than equipment spending during the downturn and showing sings of healthy growth only in 2012, before rising just 1.2 per cent last year. The category declined slightly in the fourth quarter.” (Financial Times, March 28, 2014)



“The word dollar didn’t even come up. ‘The volume of transactions that can be carried out in the Chinese currency in international and German financial centers is not commensurate with China’s importance in the global economy,’ the Bundesbank explained in its dry manner on Friday in Berlin, after signing a memorandum of understanding with the People’s Bank of China. President Xi Jinping and Chancellor Angela Merkel were looking on. It was serious business. Everyone knew what this was about. No one had to say it. The agreement spelled out how the two central banks would cooperate on the clearing and settlement of payments denominated in renminbi – to get away from the dollar’s hegemony as payments currency and as reserve currency. This wasn’t an agreement between China and a paper-shuffling financial center like Luxembourg or London, which are working on similar deals, but between two of the world’s largest exporters with a bilateral trade of nearly $200 billion in 2013. German corporations have invested heavily in China over the last 15 years. And recently, Chinese corporations, many of them at least partially state-owned, have started plowing their new money into Germany. This ‘renminbi clearing solution’ – the actual mechanism, clearing bank or clearing house, hasn’t been decided yet – will be an important step for China to internationalize the renminbi and ditch its reliance on the dollar. It will be located in Frankfurt; that the city is ‘home to two central banks,’ Bundesbank Executive Board Member Joachim Nagel pointed out, made it ‘a particularly suitable location.’ As a world payments currency, the renminbi is still minuscule but growing in leaps and bounds: in February, customer initiated and institutional payments, inbound and outbound, denominated in RMB accounted for only 1.42% of all traffic, but it set a new record, according to SWIFT, the NSA-infiltrated, member-owned cooperative that connects over 10,000 banks, corporations, the NSA, and other intelligence agencies around the world.” (Wolf Richter, March 29, 2014)

Levels: (Prices as of close March 28, 2014)

S&P 500 Index [1857.62] – Any movement closer to or below 1850 will trigger noteworthy clues. At this point, buyers’ conviction is being tested with a narrow range of 1845-1875.

Crude (Spot) [$101.67] – Again revisiting the $100-102 level. Increasing hints of bottoming at $98. The 200-day moving average remains at $100. The next key target is the annual high of $105.22 (set on March 3).

Gold [$1296.00] – Sharp decline since March 17, around the time of the Fed’s message regarding rate expectations. Now below 200- and 50-day moving averages, which can trigger some selling pressure. The break below $1320 may have been meaningful in terms of the stalling momentum.

DXY – US Dollar Index [80.10] – For now, the annual lows of March 13 (79.29) appear to be a bottom for the dollar index. Yet this familiar level is hardly a major turning point for now.

US 10 Year Treasury Yields [2.72%] – Surpassing 2.80% has been a challenge in recent attempts. Reaching 3% seems ambitious based on recent behaviors, while breaking below 2.56% would amaze most following the taper/post QE discussion. It is amazing that the 50-day and 200-day moving averages are not far from the current closing price.





Dear Readers:

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

Market Outlook | March 24, 2014

“Political chaos is connected with the decay of language ... one can probably bring about some improvement by starting at the verbal end.” (George Orwell, 1903-1950)

Convergence

Plenty has been mentioned about the varying path between the real economy and financial markets. Perhaps, markets are debating corporate earnings trends versus the health of an economy from the ground level. Too often, misleading messaging is heard when talking about stock indexes and other wellbeing barometers measuring labor or wage growth. Equally, the health and sustainability of large corporations in developed market versus mid-sized to small business in all markets has a unique, not-so-clear path as well.

At the same time, the mid-sized to small business concerns are intertwined with the level of consumer spending, regulatory changes and policy-driven variables affecting overall confidence. Surely, this is a junction where financial markets and economies would be expected to come to an agreement and narrow some of the disconnect that’s persisted for a long while. For now, the recovering/sluggish economy and the roaring stock market tell one story. Surely, low interest rates have benefited larger corporate earnings and have been less influential in other areas. Yet, consumer spending and confidence is felt enough by large and smaller companies; therefore, how it impacts businesses might provide a better perspective. A convergence between larger firms and the real economy can demonstrate the real status of growth a few years after the last crisis. Maybe this can unlock the mystery, apart from financial tricks and a game of exceeding expectations.

Fragility

Meanwhile, financial markets are grappling and anticipating US interest rate hikes, ECB policies toward low rates and a shift in sentiment toward various economies. In recent decades, the collective pursuit of capital united the interests of leaders in emerging and developed markets. Overall, a perceived “peaceful” period in the last two decades has encouraged and emphasized borderless capital and risk allocation. Globalization swept away the mindset, expanded the real economy and synchronized most parts of financial markets. Now, fragility remains visible in these deeply interconnected markets.

“A world in which countries like Russia are doing things like they are in Crimea is one in which capital which ventures abroad is going to be more cautious. More cautious capital requires higher returns to entice it. Russia particularly is going to get hit by this, but there is a good chance it applies generally to emerging markets. Russia’s aggression in Crimea doesn’t just undermine this by itself, it does so through the very timid response it has thus far generated internationally. German interests seem inclined to block sanctions based on energy, while British ones seem wary of anything, such as seizure of the Russian elite’s assets abroad, which might threaten London’s banking franchise.” (IFR, March 23, 2014)

Additionally, last year showcased some EM nations’ failure to sustain growth – Turkey and Brazil being examples of social, political and economic weakness that attack in waves. Equally, China is too vital and interconnected to many economies, and softening data (PMI numbers over the weekend) creates some suspense and more unease. Surely, the Chinese slowdown or perception of a slowdown has big implications, and markets are anxiously watching. The Eurozone solution requires commonality and it presents its own challenges, as documented in the post-2008 crisis. Yet, the overwhelming shift toward developed markets such as US markets illustrates the ongoing search for safety. However, even broad US indexes are becoming more crowded with more questions asked. Justifying future potential with high predictability is challenging corporate leaders, central bankers and asset managers alike.

Next move – contemplation

The multi-year rally results in the S&P 500 index trading near or at all-time high levels, which is now all too familiar – even tiresome on some levels. There is a sense of comfort that a rate hike is not a near-term event and escalating turbulence is not overly feared, either. Thus, participants are virtually re-evaluating similar patterns that were witnessed early in the year, last fall and last summer. What has changed in the dynamics besides time? Perhaps, some growth and high beta sectors like biotech, tech and retail are susceptible to pullbacks as investors evaluate stretched valuations. At the same time, banks did well after the Fed’s comments on rate outlook. In addition, banks overwhelmingly met the capital hurdle requirements set by the Fed. Although positive and negative stories persist, overall corporate earning concerns may soon be reflected more in day-to-day market movements. Plus, geopolitical behaviors are sensitive to western corporate interests. For now, the general assumption is that matters are contained. If not, a true test waits for the conviction level of risk takers.

Amazingly, the concerns over Fed policy or Ukrainian implications continue to showcase that fear is short-lived. Thus, long-term holders who accept the risk may not be overly compelled to trim or exit exposure to US equities. Bargain hunters who looked into Europe last year might handpick select emerging and frontier market opportunities. However, the list of shrugged-off issues is accumulating, especially in developing markets. In some ways, it is daring to ride the current wave as much as betting against it.

Article Quotes:

“Some of the developing world’s larger countries, flush with capital after being recognized by investors as ‘emerging-market economies’ (EMEs), have been pursuing policies with little regard for the lessons of the financial crises of 1997-1998 and 2008-2009. As a result, countries like India, Brazil, South Africa, and Indonesia have been hit by the US Federal Reserve’s gradual exit from so-called quantitative easing (QE) – not just capital-flow reversals, but also a sharp decline in domestic asset prices. Various developments last year raised expectations that the Fed would begin to taper its $85 billion-per-month open-ended bond-buying program sooner rather than later. This drove up US government-bond yields, and reduced the appeal of higher-yielding EME currencies. As a result, several EME currencies, from the Indian rupee to the Turkish lira, declined sharply. Moreover, some EMEs have experienced financial-market disruptions and slowing economic growth. Such developments often lead to perverse economic behavior, as rumors and pessimistic predictions become self-fulfilling. Typically, after international investors ‘discover’ an EME, it receives massive – but easily reversible – capital inflows. The influx of cash fuels domestic asset-price bubbles and booms in related sectors of the real economy, pushing up the real exchange rate and, in turn, weakening incentives for domestic producers. This drives investors to put even more of their money in non-tradable sectors, such as construction and real estate. The growing current-account deficit is largely ignored, as long as capital inflows continue to cover it and economic growth remains strong. Short-lived market rallies make matters worse, frequently inducing further unfounded exuberance. And when officials recognize the problem, hurriedly announced policy measures, such as capital controls, are usually too little too late, and can have adverse effects in the short term.” (Project Syndicate, March 14, 2014)

“U.S. population growth had been around 1.20% per year post-1980, though it has slowed to a current level closer to 0.70% more recently, as the Baby Boomer generation passes on and both immigration and birth rates slow. If high debt levels in the U.S. are associated with 1% less GDP growth, perhaps half of this 1% drop in economic growth rates will coincide with the 0.5% drop in population growth rates. The drop in population growth could exacerbate the decline in GDP growth unless productivity fills the gap. As we noted in a related series, productivity growth rates are also falling with population growth rates, which is a very disturbing trend. On the other hand, perhaps Rogoff and Reinhart data surrounding high debt or low growth account for an associated decline in population growth. The challenge is that if investment is crowded out due to excess consumption and government spending or taxation in a high debt environment, investment-related productivity growth could slow—resulting in declining standards of living and consumption. In other words, too much consumption and too much debt could lead to real lower growth rates going forward. A shrinking labor pool equipped with greater productivity can mitigate some of these negative effects of excess consumption and high levels of debt. However, if current levels of consumption are crowding out investment in productivity growth, the U.S. economy could be facing a lower growth rate in a slower growing labor pool that has an even lower rate of productivity growth. That means slower GDP growth rates going forward, as well as declining purchasing power for the U.S. consumer. (Market Realist, March 20, 2014)





Levels: (Prices as of close March 21, 2014)

S&P 500 Index [1866.52] – Recent move above 1840 marked a new upside territory for this bullish run. Similarly, the 50-day moving average is 1832 and will be watched closely.

Crude (Spot) [$99.46] – As witnessed in the past few weeks, prices are attempting to hold above $98, while signs of a pause are visible. The 200-day moving average is around $100, which is a hurdle commonly mentioned and tracked.

Gold [$1327.00] – Signs of retracement after reaching a peak of $1385.00 (March 17, 2014). A move below $1300 can trigger further responses of slowing momentum. Long-term buyers are still exploring a recovery at this pricing range.

DXY – US Dollar Index [80.10] – Early pause to the recent downside move that has persisted since late January 2014. A turnaround for a strengthening dollar is expected in the near-term and closely linked with reactions regarding interest rate policies.

US 10 Year Treasury Yields [2.74%] –On three occasions this year, the market has signaled that the 2.56-2.60% range is a sort of a bottom. Perhaps, this is a hint that’s developing, as the retest to 3% is the next landmark move.








Dear Readers:

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

Market Outlook | March 17, 2014

“Time crumbles things; everything grows old under the power of Time and is forgotten through the lapse of Time.” Aristotle (384 BC-322 BC)

Silently crumbling?

Turbulence is reawakening a bit within the existing positive momentum that has formed a stable US financial market. Of course, hints of a trend shift are brewing more and more as perceived risk is being evaluated in developed markets. From the pending FOMC meeting to several EM nations increasing interest rates, the landscape is mildly changing. Similarly, pending responses to technical indicators as well as reshuffling of capital into new themes can trigger new thoughts. Plus, ongoing data will continue to seep through the investor mindset. How to perceive risk will be revealed further and the bulls’ confidence level will be tested – yet again. The status-quo approach is overly comfortable for those betting on rising stocks and low rates. However, the danger of being flatfooted ahead of turbulence begs the question of how to prepare for the next move.

The volatility index has not and is not signaling absolute panic, and previously, false signals have prematurely called for short-lived sell-offs. Thus, naysayers to this bullish run have had shaken confidence in recent trading action, where “bad news” has been deferred or deemed a non-forceful catalyst. Uncertainty of macro and micro concerns is calmly digested, and a collective rush to exit is not quite justified by mainstream investors. One part of the puzzle is deciphering the pace of economic and corporate growth, which offers plenty of tricks and data points to ponder. Perhaps, the market has a mind of its own, living and moving at its own pace.

Meanwhile, deflation and disinflation concerns are brewing in developed markets. In fact, the deflation debate has reached beyond speculation, but rather has become a reality that’s come to the forefront in Europe:

“Europe's headline price data understate the full deflation risk. Eurostat's HICP index ‘at constant taxes’ – stripping out the one-off effects of austerity – shows that 23 of the EU's 28 countries have seen a fall in prices over the past seven months.” (The Telegraph, March 12, 2014).

Big-picture parts

The macro-climate is awakening to the realization that post-crisis matters have stability, but long-term issues persist with a slowing global climate. In the recovery mode, optimism was restored and volatility significantly reduced, and soon, coping with unknown risk measurement was the ultimate test for portfolio managers. As usual, risk aversion, leading into more established currencies and commodities, is worth tracking. Thus far, hard assets have risen in 2014 and there are early signs of rotation into safe/established assets, given ongoing emerging market political and financial turmoil.

Meanwhile, China’s slowing growth is a topic that’s been murmured about, but its impact on the developed market is still being understood. Plus, the recent announcement of a wider trading band for the Yuan over the weekend, although anticipated, suggests more fluctuation in currency markets. The reaction is causing some suspense as to how traders would react in the near-term toward weaker Chinese currency and impact on global stocks. Surely, policy changes like this can be historic and transitions can cause some mild disruptions. Nonetheless, this is a new dynamic to the currency market and the impact on Chinese stocks is yet to be determined. The Chinese index (FXI) has remained cheap relative to US markets, and now the currency policy may serve as a catalyst to spark a response.

New cycle

The instrumental factor that’s driven market appreciation is low interest rate policies, and certainly that has impacted how investors demanded higher-yielding assets.

“Our results show that, in emerging markets, issuance would have been significantly lower without QE since 2009. A counterfactual analysis shows that issuance without QE would have been broadly half of the actual issuance since 2009, with the gap increasing in late 2012. In advanced economies, the impact of QE was less strong and concentrated in early 2009, mainly as a reflection of the MBS rather than Treasury purchases.” (ECB, Global Corporate Bond Issuance, March 2014).

The taper era remains a wildcard from a period where risk-taking has been encouraged and rewarded. How this will change has been asked but not answered. Again, the US 10 year Treasury yield is below 3%, the stock market is near all-time highs and EMs are less stable; these are the known themes. We are in more or less a vulnerable stage of this cycle, as assets are not valued cheaply. How will this shape up in the next 1-2 years? Which moves first: Either rates up and stocks down or otherwise? Mapping out a plan on interest rates and asset prices is challenging risk managers. Clearly, the disconnect between the real economy and the stock market is dangerous (despite crafty explanations) and the warning has been felt but not always heard. The messaging of the Fed or the response to the Fed’s message is clearly a vital sign where an inflection point can be felt. Already, the S&P 500 index showed signs of cracking in January. Thus, a repeat of price retreat is not far fetched. Catalysts are plenty for bigger moves, especially in the early stages of the taper era. The question is timing, and with limited ideas, risky assets serve a purpose and eager investors desire risk. Balancing the need for returns versus unmasked realities is the art for money managers.




Article Quotes:

“Major US banks are running away from lending to highly leveraged buyouts, industry statistics show. Bank of America, JPMorgan Chase, Wells Fargo and Citigroup have all fallen far down the list of top LBO lenders in 2014 after regulators pressed changes that would have made such loans more expensive. Stepping away from such business will surely crimp profits and is one example of how new regulations are forcing changes to the banking sector. BofA earned roughly $140 million in 2013 from financing new LBOs, sources said. The banks, which were all among the top 11 LBO lenders in 2011 to 2013, could do no better than No. 18 in 2014, according to Thomson Reuters LPC statistics shared exclusively with The Post. The change comes after the Office of the Comptroller of the Currency (OCC) stepped up a campaign last year against such highly leveraged buyout financing. The OCC and the Federal Reserve in the fall told the major banks if they funded new LBOs that had greater than six times debt-to-earnings before interest, taxes, depreciation and amortization (Ebitda) ratios, they would have to consider them non-conforming loans and hold more cash against them, sources said.” (New York Post, March 13, 2014)

“Skilled immigration is of great importance to the US, representing 16% of US workers with a bachelor’s degree, and 29% of the growth of this labour force over the period 1995-2008. Presently, proponents for increased skilled immigration argue that it supports economic growth, and some have gone so far as to say that the alternative would be paramount to ‘national suicide.’ Opponents believe skilled immigration is already too high and hurts the outcomes of citizen workers. In particular, Bill Gates has stated that Microsoft hires four additional employees to support each skilled worker brought into the US through the H-1B visa program. Matloff (2003) instead argues that US companies use skilled immigrants to displace older citizen workers that have higher salaries. Our research proposes a more subtle relationship than that suggested in the public discourse on immigration or from more aggregate models of international worker flows. We study the way in which the hiring of skilled immigrants affects the employment structures of US firms using employer-employee data from the US. While OLS and IV specifications find increases in total skilled employment by the firm with increases in skilled immigrant employment, we find evidence that employment expansion is greater for younger natives than their older counterparts.” (VOX, March 16, 2014)




Levels: (Prices as of close March 14, 2014)

S&P 500 Index [1841.13] – Very optimistic observers are wondering if 1900 wasn’t reached due to a momentum slowdown. Yet, for the upcoming week, holding above 1840 can trigger restoration of the ongoing bullish run. Notably, the January 15 highs of 1850.84 might have suggested a vital hint during the early sell-off this year.

Crude (Spot) [$98.89] – March 3 highs of $105.22 marked a peak in the recent run. The 200-day moving average sits at the all-too-familiar $100 range. Therefore, staying above $100 will be retested; if not, negative momentum might continue to build for months ahead.

Gold [$1368.75] – Since late December, the commodity is up nearly 15%, which suggests a recovery run after a weak 2013 performance. The next noteworthy target is $1400 (or $1419.50), which was a key resistance point in September 2013.

DXY – US Dollar Index [79.44] – The downtrend is intact, as new lows have been achieved consecutively in recent weeks. The next noteworthy low is not far removed. It stands at 78.91, which was set in February of last year.

US 10 Year Treasury Yields [2.65%] – Annual lows of 2.56% were reached on February 3, 2014. Yet, surpassing 2.80% remains a challenge, suggesting a weak growth environment. Annual highs of 3.05% appear further away now, given analysts’ expectations of rising yields. Interestingly, the 200-day moving average stands at 2.67%, which is in line with Friday’s close.


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.