Market Outlook | August 25, 2014

“Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that's creativity.”(Charles Mingus, 1922-1979)

Narrative Reflected

When larger corporations have low borrowing cost, low tax structures, low wages, low supply of shares (via buybacks), low volatility and massive scale global distribution, then what did investors expect? Surely, this set-up leads to multiple record highs in the share prices of large companies. Basically, it explains the favorable stock market momentum from various angles. Of course, it is easier to see the key drivers today versus a few years ago in a one-sided bull market. In hindsight, analysts or money managers that have narrowed their thesis in this manner were absolutely right in betting on a bullish stock market. And here we are in summer 2014, and yet again the US stocks are at near all-time highs despite endless macro and foreign policy concerns that loom for next decade. However, markets react profoundly to relevant indicators while being in the habit of ignoring other worrisome parts.

Certainly, directional index guesses are one matter for risk-takers, but identifying the big driving forces such as interest rates, desirable tax treatment and internationally diversified corporate revenue stream is vital.

Two Worlds

Imagine all the perceived market moving factors and noise between 2009 and today. Frankly, it seems to boils down to a few items that are a bit more influential than the nitty-gritty fundamentals. Albeit, the key forces listed above do end up impacting corporate profits enough to keep the ongoing capital inflow in to US equities. Of course, this favorable set up for share prices does not quite apply in same manner for mid-to-small companies that impact most of the real economy on daily basis. For example here is one perspective:

“Across the U.S., small-business lending has been stuck in a slow, grinding recovery behind most other types of business and consumer loans. At the end of the first quarter, banks held $585 billion in loans to small businesses, up 1% from last September but still 18% less than the peak of $711 billion in 2008, according to the Federal Deposit Insurance Corp” (Wall Street Journal, August 17, 2014).

Perhaps, the much belabored “disconnect” between street level economy and the financial market is becoming tangible for causal participants. The Federal Reserve could not even pull off a magical approach to the struggles in the labor market as outlined last Friday. An artful presentation of reality from the Fed has its limits, even if timing is unknown. Simply ignoring the wounds of this recovery via technically maneuvered stock market appreciation is an insult to most experts. After the bailouts, the financial markets were under scrutiny, but the reward of owning S&P 500 companies has evaporated those prior concerns. Even if mid-to-small business concerns arose in the background, the rising market has found a way to sooth some of the pain while rewarding shareholders. In turn, this has boosted confidence for Fed believers; whether this is for good or for bad will be discovered soon.

Catalyst Search

As summer is winding down, the low borrowing costs are stirring up again to new heights. As the attention is obsessively focused on interest rates, other factors are set to change too. For example, if share buybacks reduce, then there is enough to muster critical questions for this bull market. Perhaps, pending changes are forming:

“Companies in the S&P 500 bought back $120bn of shares in the quarter to June 30, down from $159bn in the first quarter, which was the second-largest amount ever, according to preliminary data from S&P Dow Jones Indices.” (Financial Times, August 24, 2014)

For a while, deferring concerns have been the fashionable approach of policymakers. Perhaps, the deference is to prevent an all-out panic in response to an unsolvable problem. August has also been a roller-coaster, a reflection of the nature of the recent market examination. Early in the month, volatility spiked after a few danger signs. Nonetheless, that was short-lived and led to a quick return back to the status-quo of explosive markets and a decline in worries. Notably, the last two months the dollar has strengthened and a follow-through is eagerly awaited as a key catalyst. Collapse in crude prices all summer and slowing momentum in Gold reinforce that a commodity spike is not worrisome either.

The narrative may appear set to change, unlike the past few years, but collective comfort in status-quo also delays shifts in sentiment. Forecasting a top has been close to a “miracle work” and feels like a nearly impossible task. Equally, betting against Central Banks requires courage, but lacks evidence of success in recent years. Importantly, real economy woes are hard to ignore, but expressing a directional view (via bet) in the market is an artful task by itself .

Article Quotes:

“The trade and investment figures are hard to verify, too. According to one source used by Mr. [Howard] French, “China’s Export-Import Bank extended $62.7 billion in loans to African countries between 2001-2010, or $12.5 billion more than the World Bank.” Other figures go even higher. What is clear, at any rate, is that Chinese people and money have flooded into Africa in the past decade, chiefly to buy raw materials to fuel China’s roaring economy. What is tantalizingly unclear is whether the Chinese economic onslaught is the result of a methodical policy fashioned in Beijing as part of an imperialist venture to promote “Chinese values” and dominate the continent as Europeans did a century ago, or whether it has become a self-generating process fired up by individual Chinese who are simply keen to enrich themselves without the slightest intention of kowtowing to the authorities back home. The conversations recorded by Mr. French in a dozen of sub-Saharan Africa’s 48 countries leave an impression that strongly supports the second thesis. Indeed, many of the Chinese in Africa excoriate the Communist Party back home and have dared to start new lives far away precisely to breathe fresher air—much as pioneers from Europe did when heading to the new world or to the dark continent. Many cite the Chinese ruling party’s corruption as a spur for seeking a freer climate elsewhere and even say that Africa is a lot less corrupt by comparison.” (The Economist, August 23, 2014)

“Switzerland’s two largest closely held banks are poised to publish their earnings after two centuries of secrecy. Cie. Lombard, Odier SCA, the Geneva-based bank established in 1796, is due to publish its financial statement on Aug. 28th, according to a company official who asked not to be named in line with the bank’s policy. Pictet & Cie. Group SCA, the third-biggest Swiss wealth and asset manager after UBS AG (UBSN) and Credit Suisse Group AG (CSGN), is also poised to report this month. Under pressure from regulators overseas, the two companies dropped their centuries-old partnership structures in January, bringing with it the requirement to report earnings publicly. They’re doing so as Switzerland’s private banking industry and traditional secrecy comes under unprecedented scrutiny from tax authorities in the U.S. and Europe… While Pictet and Lombard Odier haven’t disclosed which figures they will publish in the earnings, they are set to produce a trove of information for industry analysts, investors in publicly traded asset managers and the banks’ own customers regarding their performance. The banks, traditionally used by the world’s richest families to protect their fortunes, oversee about $630 billion for private and institutional clients, according to the companies.”(Bloomberg, August 22, 2014)


Levels: (Prices as of close August 22, 2014)

S&P 500 Index [1,988] – On three occasions in July, the index did not stay above 1,980 for a sustainable period. Perhaps, that suggests waning buyer's momentum. In a recent rally, the new all-time intra-day highs were set last week at 1,994. Fair to say it is an inflection point between selling pressure versus acceleration.

Crude (Spot) [$93.65] – Has dropped nearly 15% since July 20th highs showcasing that the downtrend remains intact. The January 10th lows of $91.24 are the next key target to see if the “bleeding can stop.” Supply-demand dynamics in Crude from the last two years explain most of this current move with expanding supply mixed with weakening demand.

Gold [$1,275.25] – Several pieces of evidence showcase that the $1,320 range has been a challenging hurdle for buyers. Meanwhile, the next critical point is a move below $1,240, which may delay the odds of pullbacks.

DXY – US Dollar Index [82.33] – Like July’s strong move, August is playing out as another month of strengthening the Dollar. No signs of change in momentum as macro observers watch closely.

US 10 Year Treasury Yields [2.40%] – Potential bottoming around 2.35% based on last week’s action. Further evidence is needed to confirm that there is a change in rate directions.





***

Dear Readers:

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

Market Outlook | August 18, 2014

“The opposite of a correct statement is a false statement. But the opposite of a profound truth may well be another profound truth.” (Niles Bohr 1885-1962)

Mesmerizing & Misleading

It is abundantly clear that more Central bank “stimulus” effort does not quite translate into economic growth. This tactic of low rate reinvigorating the real economy has been overly discussed in US and Europe. Yet, this discussion of stimulus has become a joke to close observers, who for several years heard the potential and promise of growth. Meanwhile, a closer look of recent evidence suggests the opposite. For example, here is one summary, “After four quarters of meager growth, the fragile economic recovery in the 18-country eurozone creaked to a halt in the second quarter” (AP, August 14, 2014). Sure the markets have translated bad news as good news because that sets the expectation more stimulus. This in-turn has driven shares much higher merely on fragile expectation, rather than substance. By any sane measure, the trickery is not only disruptive to market flow, but paints a grossly false picture of current conditions and sentiment. Cheerleading a bull market is understandable for those keeping score and tracing wealth; however basic questions need to be asked.

Growth Over-promised

If the economy was growing then why is the US 10-year yield at 2.31%? That’s one major question. Similarly, key European 10-year bonds are also trading at very low interest rates. Despite the awareness of slowing 2nd quarter growth data in Europe; it still had a positive weekly finish in European stocks. Delusional or the current “normal” remains to be determined, but that's been the nature of market dynamics for the past few years.

Surely, the low rate climate affects investor behavior more than real economic factors, which are drivers of misery, unrest and political decisions. Layers of messaging regarding economic strength are misleading. A well documented disconnect remains evident between rising stocks and the over-perceived health of economic conditions despite data that might showcase a few positive signs here and there.

Interestingly, a fair amount of skepticism about the Fed’s tactics has not led to an overly volatile market . At least it is not dramatically turbulent so far. On one end, to have a “bubble”, an overheating economy is needed, first. Certainly, this stage is not quite where it can stir a major scare at the top. On the other hand, a dull growth rate would make one think that corporations would be concerned and that shares prices would reflect that natural concern. Instead, the overwhelming demand for higher returns is more dominating than assessing absolute risk in developed markets. It remains a relative argument that the US is favored; and that is visible with the S&P 500 index near all-time highs.

Unease Revisited

The troublesome Emerging Markets (EM) climate witnessed massive sell-offs in 2013. BRICS struggled along with commodity related themes. Basically, the last decade fueled the emerging market and commodity run, and the cycle has possibly shifted from a l0ng-term cycle perspective. In the near-term, Crude is pulling back and Gold is neutral as the CRB index (commodity index) is more than 20% removed from 2011 highs. Changing dynamics were triggered in the first half of last year and similar symptoms are now reappearing. In fact, even if there has been desperation for higher yield with risk-taking highly encouraged, the lingering headline concerns are simply too hard to ignore.

“One trader said that following the African Bank rescue, as well as problems in other emerging markets, such as Argentina, which has entered into a technical default and Russia, which continues to be embroiled in a political standoff with Ukraine, Swiss investors have become acutely aware that emerging markets bonds pay a higher yield because there is a higher risk.’”(IFR August 14, 2014)

The emerging market (EM) fund has recovered so far this year. Key indexes are entering a fragile territory where conviction regarding risks are set to be tested. Plenty of headline concerns (e.g. Russia, Iraq) continue to build, but the hints of a slowdown in EM have been hinted at since last year. The risk-reward has increased as investors realize that not many areas are keeping up with growth expectations. Plus, the strengthening of the Dollar in July may serve as a key event in the perception of risk, especially in Emerging Market currencies. Certainly, sensitivity to Federal Reserve rate decisions are highly expected to impact the mindset of EM. In an inter-connected global market this is another clue worth tracking as the Dollar maybe more attractive than EM currencies again.





Article Quotes:

“Japan is a wild card in global credit markets. The central banks of the United States, the Eurozone, and Britain are far more independent than Japan's, and their leaders coordinate policies more closely as well. But a shift in domestic political winds can change economic policies dramatically in Tokyo, as it did when Shinzo Abe led the Liberal Democrats to a huge victory in 2012. Within weeks, the Bank of Japan initiated a whatever-it-takes quest for inflation. The next general election is in 2016. If Abe's policies fail to yield growth by then, Japan could be under new management once again. A sudden disruption in the global economy's ample supply of liquidity is most likely to come from here. The Bank of Japan currently buys about $70 billion in securities every month as part of its credit easing program, which is only a bit less than the Fed bought at the height of its activities. The Fed has tapered its purchases slowly and with plenty of warning. Japan might not.’”(Foreign Policy, August 14, 2014)

“Facing sanctions from the West for its actions in Ukraine earlier this year, including the annexation of Crimea and supporting Ukrainian separatists, Russia will increasingly turn to China for its military and aerospace components. According to a RIA Novosti report citing a Russian-language report by Izvestia, ‘Russian aerospace and military-industrial enterprises will purchase electronic components worth several billion dollars from China.’ The information is based on a source ‘close to Roscosmos, Russia’s Federal Space Agency.’ According to the Roscomos source: ‘[Russia does] work with the China Aerospace Science and Industry Corporation (CASIC) … Its institutions have already offered us a few dozen items, representing a direct alternative to, or slight modifications of the elements [Russia] will no longer be able to acquire because of the sanctions introduced by the United States.’ Currently, Russia’s extensive military and aerospace industries do not source their components in China. ‘Over the next two, two-and-a-half years, until Russian manufacturers put the necessary space and military electronic components into production, plans call for the purchase of such items from China amounting to several billion dollars,’ the source adds…..If Russia is indeed looking to China for military and aerospace components, it further signals that the Beijing-Moscow relationship continues to tilt in the former’s favor. The recent $400 billion natural gas deal between the two sides also showed another aspect of the changing dynamics in bilateral relations. Reports suggest that Moscow acquiesced to Beijing’s price demands in order to seal a 30-year deal.” (The Diplomat, August 12, 2014)

Levels: (Prices as of close August 15, 2014)

S&P 500 Index [1,955.06] – Approached the all-time highs from July 25 of 1991.39. Perhaps, there is a psychological level of 2000 which may influence movements in the near-term .

Crude (Spot) [$97.35] – Very close to a 200 day moving average, ($96.07) as signs of stability and are awaited after a sharp sell-off. Over the past year or so, strong evidence suggests buyer’s interest around or below $95. This prior trend sets to be tested yet again.

Gold [$1,313.50] – Sideways patterns in place as a new definitive range has formed between $1280-1320. Yet, eclipsing annual highs will require further near-term momentum. July highs of $1340 will be on the radar for many observers.

DXY – US Dollar Index [81.42] – The recent strength that started in July remains intact. Continues to stabilize.
US 10 Year Treasury Yields [2.33%] – Downtrend in yields continues to be profound this summer. Once near 2.70%in early July, now closer to 2.30% continues to make a strong macro statement. This wave of downtrend begs the question if 2% is first more reachable than 3%.

Dear Readers:

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

Market Outlook | August 11, 2014

“Fatigue makes cowards of us all.” Vince Lombardi (1913-1970)

Mistakenly Fatigued

Another week that sparked massive global events for historians, political pundits and foreign policy makers. However, accumulating troublesome signs of globalization failed to create a bone rattling drama of sorts in highly followed and tracked US market indexes.

Russia made several headlines. Certainly that’s not new this year as participants have not shown big worries concerning implications from sanctions. Fundamentalism threatens in several regions and Iraq attacks are back making headlines, yet this seems like a fatigued story (especially for Americans) even though the dangers to globalized markets might be greater than last decade. Danger is hard to ignore even for the half-hearted onlooker. Then there is Italy, where economic weakness has been highlighted for a while, as the country entered another recession. In all three headline events, the consequences are not understood. More clarity is needed to grasp the impact on corporate balance sheets. For now, the impact on earnings and corporate profits as it relates to macro concerns does not appear as a concern issue for market participants.

Risk Conductors

Eurozone struggles and eerie long-term outlooks are not viewed as new or primary concerns for now. Perhaps, like most issues, it feels like “bad news is exhausted” as a wave of multi-day panic is not quite visible. Portugal and Greece carry prior symptoms of crisis, which still linger. Italy and Spain were on the radar of danger for a long while, too. Nonetheless, investors have chosen to trust the ECB as the provider of solution. Thus, again trusting the Fed or ECB is reflected in the very low global bond yields. This suggests investors heavily discounting risk as out of desperation for higher returns. Central banks, acting as the conductor of broad risk perception, have orchestrated a powerful inter-connected message to not fear risk or crisis. Participants blindly or wisely have followed this and those that bet against central bank policies have been ridiculed severely. Whether bullying tactics or a cherry picked script, central banks still possess and command the strength to move markets.

Similarly, the US stock market moves on regardless of macro risks. An occasional brief hiccup within the bullish run is followed by the “same ol’ movement” that’s been the script for weeks since March 2009. Being fatigued of the ever-so-growing religious fundamentalism, political unrest to vital regions and unrecoverable economic woes are tragic in some ways, but the rewarding Fed-driven stock market can blind even the sharpest minds. However, money managers are not paid for making foreign policy decisions or identifying dangers; they are basically measured by index benchmarks and against their peers. Deeply enveloped in the financial markets world, fund managers are balancing the noise from reality, but again it all comes back to the nucleus: Central Banks. The Fed-led engineering of low rates, higher markets, increasing buy-backs and lack of alternatives is powerful enough to lift shares as observers have fully discovered. The question remains if this perception of reduced risk matches the real economy data points which have been fragile.

“The sluggish pace of recovery for both discretionary and non-discretionary services expenditures suggests that the fundamentals for consumer spending remain soft. In particular, it appears that households remain—almost five years after the end of the recession—wary about their future income growth and employment prospects.” (Federal Reserve of New York, August 6, 2014)

Hints Galore

Unlike prior periods, this market has witnessed movements of up and down 1% in recent weeks while piling on to endless excuses for sell-offs. A few sirens went off; some heard the light warnings. For example, Southern European stock indexes since late June have sold-off sharply. Same goes for the Russian index. Similarly, July 3rd marked a turning point for a reawaking of volatility index (VIX). The dollar strengthening in the month of July is not to be taken lightly, either. In terms of fundamentals, the valuation of the small cap has been questioned as they reached elevated ranges earlier this year. “Small cap stocks in the S&P 600 are down an average of 19.0% from their 52-week highs” (Bespoke, August 7, 2014).

However, collectively major hints are waiting to suggest an all-out panic. Thus, the daring have a chance to make big moves (regarding risk positioning), while the causal trend-follower waits another day or week for an obvious declaration from markets. Nothing daring about betting on higher US markets and lower volatility at this junction. Is it strange to blindly to trust the Fed or stranger to bet against the status quo? The mind numbing question enhances the suspense. Many have opinions, but market action will ultimately tell the real, hidden story.

Articles Quotes:

“There was some surprise in the market when holders of senior bonds escaped a bail-in in the rescue of Banco Espirito Santo, but perhaps there shouldn’t have been given that the European Central Bank was a major creditor of the Portuguese bank. Forcing a contribution from seniors in addition to subordinated bondholders would have posed a dilemma about what to do with the ECB’s claims, which amounted to a net €7.4bn at the end of June. Imposing losses on ECB claims would, in effect, have meant Eurozone taxpayers helping to pay for the recapitalisation, something that bank regulators and politicians have pledged to avoid under new bank resolution legislation shortly to take effect across Europe….. The new pan-European rules must be applied by the end of 2015. That will create a strict hierarchy of creditor seniority that must be followed to decide which claims should be bailed in to recapitalise financial institutions in trouble.That situation may place the ECB in peril, since it is a major creditor of many Eurozone banks. It could also leave it wide open to accusations that it has a conflict of interest when it takes direct control of bank supervision across Europe from this November.” (IFR, August 5, 2014)

“This combination of rising labor costs and low value added is clearly unsustainable. If China is to transform itself from a large trading country into a powerful one, it must raise its productivity, with the manufacturing sector adding more value to exports (and, increasingly, to goods for domestic consumption). To be sure, China’s enduring comparative advantage in processing and assembling industrial products has enabled it to retain its status as the world’s largest exporter. As massive quantities of labor-intensive processing and assembly work have been transferred to China from Japan, South Korea, Singapore, Taiwan, and Hong Kong, so have these economies’ trade surpluses. Moreover, this has contributed to large – and widely criticized – trade imbalances with the US and the European Union, the primary end markets for Chinese-processed industrial products. But, again, the data may not be what they seem. Consider China’s growing re-import trade, whereby goods that have been exported to nearby countries, particularly Hong Kong, return to the mainland. China’s re-imports have increased more than 12-fold since 2000, and now dwarf those of other re-importing leaders as a share of total trade.” (Project Syndicate, August 8, 2014)


Levels: (Prices as of close August 8, 2014)

S&P 500 Index [1,931.59] – From March 2009 lows to summer 2014 highs, the index is up nearly 200% reflecting the long-term bull market. Meanwhile, since the July 14th peak to the August 7th low point, the index dropped over 4%. A pullback is generally expected and mildly hinted, yet more pressure is needed to convince sellers.

Crude (Spot) [$97.88] – Over a 10% drop in prices since late June suggests a selling pressure in the commodity. Supply expansion is a fundamental driver that’s been long awaited. Macro events have generated less of an impact versus supply-demand dynamics. Charts suggest the next critical point is closer to $94 if a short-term bounce fails to gain momentum.

Gold [$1,305.25] – Once again back around $1,300, which has been so familiar since last summer. In fact, the 50 day moving average is $1,293 and the 15 day moving average stood at $1,299. Basically, since the massive sell-offs in early 2013, Gold has struggled to find a catalyst for an upside move.

DXY – US Dollar Index [81.02] – Since mid-May, the dollar has found a renewed momentum for an upside move. Strong signs of bottoming at current levels, July highs of 84 deemed as the next critical point, if the strength continues.

US 10 Year Treasury Yields [2.42%] – Since January, there has been a one-sided trend in which yields have relentlessly dropped from 3.05%. Interestingly, last Friday marked an intra-day low for the year at 2.34%. There is a clear message of low yields in which the 2.50% point has been breached for the third time. This raises the question if trend change is in sight.





Dear Readers:

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

Market Outlook | August 4, 2014

“The Siren waits thee, singing song for song.” Walter Savage Landor (1775-1864)

Siren Heard

Last Thursday (July 31), stirred a loud siren of market danger that’s been long awaited. Perhaps, it was a mild nudge to rethink the definition of “risk” or simply a one day plunge at month’s end. Either way there is enough to ponder on pending market correction as participants digest the first signs of a notable sell-off.

Previously silenced skeptics suddenly woke-up just like the volatility index,which stood near death for an extended period. Finally, a day where the broad indexes from Nasdaq to S&P 500 witnessed a drop of more than 1%. A bloody day in the terms of the financial market. Out of panic or curiosity, participants did not quite feel like they did in the autumn of 2008 or the summer of 2011 in which turbulence quickly swept in. However, today, the looming drama appears to be in the early chapters given the early cool off from the multi-year bullish run. Knee-jerk panic is natural, but getting some answers on global growth, interest rate polices and valuable sentiment indicators is vital at this junction. Money managers are forced to consider a move or at least a theme driven thesis to understand how the perception of risk can change.

The wake-up call is not only found in market peaking or in the rise of volatility, but the strength of the U.S. dollar is noteworthy from the macro landscape. Is there a rush for safety? Potential bankruptcy talks from Argentina to Ukraine to Egypt are taking hold despite the vibrant talk of frontier market bond issuance, especially in Africa. Yes the status-quo has encouraged risk-taking and created desperation for the yield seeking investors, but, ongoing investor demands for higher yields comes with risks and at some point the market will acknowledge the hidden risks that have been conveniently omitted. Essentially, layers and layers of risks have been ignored and a gut check waits in August. The songs of reality check are slowly being sung and general inflection points will bring forth unpleasant realities.

Memories Ignited

Portuguese bank problems in July reinforced some of the forgotten memories of the '08 crisis and the volatile conditions of the Euro-zone. In fact, the Portuguese stock market index is down more than 10% for the year; silently the turmoil continues even if the topic is nothing new to European market observers.

Amazingly, calmness was felt for months when viewing the bond yields of Spain or Greece in recent months. One would be surprised to see how low the yields declined following the Euro-zone crisis that consumed markets in recent summers. Basically, the Southern European bonds began to mirror the turbulence index (VIX), suggesting that risk is low and concerns were deemed as over-rated. Yet, how can professionals act surprised? Junk bond issuance and false hope of recovery were quite visible for critical observers. In fact, signs of trend shift in risk is taking place:

“Investors pulled $578.9 million from U.S. junk-bond exchange-traded funds yesterday alone, with BlackRock Inc. (BLK)’s $11.8 billion and ETF (HYG) seeing $362.8 million of withdrawals, according to Bloomberg data. Shares of BlackRock’s iShares iBoxx and High Yield Corporate Bond ETF have plunged 2 percent in the past week to the lowest since October, Bloomberg data show” (Bloomberg, August 1,2014).

Silencing the skeptics will be hard, just as justifying the concept of "low risk" is awfully difficult. From domestic policy matters to foreign policy blunders and movements, maintaining the status-quo is harder than it was during the last two autumns. There is plenty of room for doubt. First, Fed officials scream for a hawkish stance in interest rate policies. Russian capital out flow as result of sanctions and tensions is not to be ignored on financial implications to the Euro-zone. Defending the old Fed script is a daunting task without a bit of near-term eruption or dramatic response that resets the disconnect between reality and perception.

Unconvincing Growth

As if there were not enough reminders of slowing growth, crude price decline reinforces the expansion in supply and weakens global demand. Surely, crude prices have faced selling pressure and reached multi-week lows. Similarly, if key economies were strengthening at a desired pace then interest rates would not be this low. Critical questions were asked before, but now these issues can become mainstream matters ahead of mid-term elections.

Putting parts together, weak commodity demand, unimpressive growth in Western economies, and financial crisis symptoms in Europe are factors that dampen sentiment. Not to mention, foreign policy uncertainties (various regional power struggles), which have risen incrementally giving less “happy times” in those believing in globalization. Challenges ahead and ultimately managing and surviving the turbulence are the rewards for any trader and money manager. Intriguing times and intense days are ahead.

Articles Quotes:

“The annual rate of inflation in the euro zone fell further below the European Central Bank's target in July, and to its lowest level since October 2009.The decline is a setback to the ECB which, in June, launched a series of measures designed to boost growth and start to move the inflation rate back toward its goal of just below 2.0%. It is too soon for those measures to have had an impact, but the further drop in the rate at which consumer prices are increasing underlines the severity of the threat confronting policy makers. Eurostat said consumer prices were just 0.4% higher than in July 2013, as the inflation slowed from 0.5% in June. The inflation rate has now been below 1.0% for 10 straight months…. Low inflation is a particular problem for the euro zone because it makes it more difficult for companies, households and governments in southern Europe to cut their high debts and recover from the currency area's twin banking and fiscal crises.” (Wall Street Journal, July 31, 2014)

“China has acknowledged the existence of a new intercontinental ballistic missile said to be capable of carrying multiple nuclear warheads as far as the United States, state-run media reported Friday (August 1). A government environmental monitoring centre in Shaanxi said on its website that a military facility in the province was developing Dongfeng-41 (DF-41) missiles, the Global Times reported. The DF-41 is designed to have a range of 12,000 kilometres (7,500 miles), according to a report by Jane's Strategic Weapon Systems, putting it among the world's longest-range missiles…..China's military is highly secretive, and the Global Times said it had not previously acknowledged the existence of the DF-41. The original government web post appeared to have been deleted on Friday, but the newspaper posted a screengrab. China's defense ministry in January responded to reports that it had tested a hypersonic missile delivery vehicle by saying that any military experiments were ‘not targeted at any country and at any specific goals’. It made the same response last December when asked about reports that it had tested the DF-41.Tensions between Washington and Beijing have risen in recent months over territorial disputes with US allies in the East and South China Seas, and cyber-hacking. Beijing has boosted its military spending by double digit amounts for several years as it seeks to modernise its armed forces, and now has the world's second biggest military outlays after the US.” (Channel NewsAsia, August 1st, 2014)


Levels: (Prices as of close August 1, 2014)

S&P 500 Index [1,925.15] – For several weeks, the 1980 level appeared to be a key resistance level. Now, last week's sell-off confirms that buyer’s momentum is being exhausted in near-term. Yet, further confirmations are needed as a move below 1850 can reset thoughts on perceived risks.

Crude (Spot) [$97.88] – June’s sell-off was followed by further price weakness in July. For a while, supply expansions have raised questions if further down slide waits, and certainly it has in the near-term.

Gold [$1,285.24] – Trading near its 200 day moving average. Several notable peaks including a top on August 2013 at $1,419, then a stall at $1,385 in late March 2014 and recently another peak on July 11 at $1,340. Basically, the downtrend in Gold prices remains intact over the big picture and moments of resurgence have been short-lived.

DXY – US Dollar Index [81.02] – Strength visible throughout July. In fact, since May 9, 2014 the dollar index has gained momentum and is setting up for a potential macro turning point.

US 10 Year Treasury Yields [2.49%] – Several signs suggest that yields are bottoming somewhere between 2.40-2.50%. The last two years showcase this point when viewing the charts. Yet, surpassing the 2.70% has been a challenge as many wonder about this mixed economic growth combined with demand for safer assets.


Dear Readers:

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

Market Outlook | July 28, 2014

“Truth indeed rather alleviates than hurts, and will always bear up against falsehood, as oil does above water.” Miguel de Cervantes (1547 - 1616)

Massive Anticipation

The upcoming week may provide clarity on numerous fronts ranging from key economic data to corporate earnings. Much anticipation awaits as record highs have been achieved numerous times by US stock market. At the same time, improvement is expected in the economic data despite weak first quarter GDP. Monthly labor numbers as usual are set to cause a knee-jerk reaction. Meanwhile, the Federal Reserve interest rate decision will draw a large global audience hoping for a different message, hint or tweak. A rising stock market has not told the full story of real economic concerns, but now the perception of improving conditions is picking up momentum. Perception or not, skepticism is plenty and there is no shortage of doubters who have been proven wrong on a call of massive collapse. Extreme views aside, over 800 companies plan to share their quarterly earnings report as sustainability of future growth becomes scrutinized. It is fair to assume that any guidance or hints of future earnings growth will have a suspenseful and sensitive crowd looking to react via buying or selling shares. In a way, stakes are much higher today given the resounding bull market that has taken new highs, this has surprised plenty.

Status-quo Revisited

First, the Fed has preached that the economy is improving. Secondly, the bond market has suggested that economic growth in not impressive as 10-year yields have failed to reach above 3%. Thirdly, the stock market is rosy and powerful while humming to two themes: 1) The lack of options in low rate environment makes US stocks relatively attractive. 2) The combination of cost-cutting and share buy-back (reduction of shares available for purchase) leads to high stock prices. Cost-cutting is not quite organic growth nor is it a symbol of robust economic strength. Finally, a Fed driven rally reduces the fear displayed by the volatility index.

At the same time, the power of the Federal Reserve is in full display; the global engine for driving markets and doubters has not been rewarded. Now, the Fed expects further optimism, not in sentiment or share prices but, in real economy data. Perhaps, if anticipations are too high then disappointments are building up this week where an abundance of data points will be digested, however a new midsummer script awaits for the overall sentiment.

Mounting Catalysts

Foreign events related to Eurozone economy, Middle East power struggle, commodity supply-demand dynamics and sentiment to globalization ahead have all shown signs of being shaky. Despite the very low volatility that has soothed market observers, the pundits on the foreign policy side have witnessed more turbulence in foreign relations highlighted by Ukraine and Russia. Emerging market decline from 2013 still lingers as the Developed Markets Rally is stretching its surprising momentum. Many have wondered, how can financial markets ignore these uncertain behaviors and tensions? Or at least, for how long can key macro events be ignored? Maybe at some point these day-to-day market events become catalysts of noteworthy proportion.

At the end of the day, interest rates and currency reactions may set the tone rather than mild or massive wars that may potentially stir up. The U.S. dollar has shown strength last month; interest rates have appeared to bottom out. And if the U.S. economy improves then both indicators are set to make a statement. Importantly, both the dollar and interest rates should provide the needed tools to unlock the “game-changing” catalysts that are highly sought after. Yet, any disappointment in economic growth is set to stagger the hopeful who have bought into the stronger second half of this year. If earnings do not create some temporary view of positive results then the sentiment could shatter even if the status-quo suggests calmness and the continuation of rising share prices.

In short, the watershed week ahead will spit out tons of data points. Connecting the results and drumming up a new script will be left up to the Fed. But there is not much room for error (or disappointments) to defend the status-quo of low rates, low volatility and higher share prices. The Fed is expected to convince the market that the plan is progressing as desired. The crowd thus far has been rewarded in trusting the Fed, but the old script might be close to worn out. All-time highs and record–highs are equally losing their luster especially without a strong substance to explain the present and future conditions.

Article Quotes

“Bullard then discussed how close the FOMC’s monetary policy settings are to normal. In response to the financial crisis, the FOMC lowered the policy rate to zero and implemented outright asset purchases. While the FOMC began tapering the pace of asset purchases in January 2014, Bullard noted that the two main policy actions have not been reversed so far. That is, the Fed balance sheet is still large and increasing, and the policy rate remains at the zero lower bound. Bullard measured the distance of the monetary policy stance from normal using a simple function that depends on the distance of the policy rate from its normal level and on the distance of the size of the Fed balance sheet relative to GDP from its long-run average. This version puts equal weight on the policy rate and the balance sheet, he noted. In these calculations, the normal level of the policy rate was set at 5.5 percent, the average value of the federal funds rate from January 1975 to March 2014. The long-run average size of the Fed balance sheet as a percent of GDP was set at 7.4 percent, the average value over the same period. “Currently, the function measuring the distance of the policy stance from normal shows a high value, far from pre-crisis levels,” he said. Thus, there is a mismatch. “The macroeconomic goals of the Committee are close to being met. However, the policy settings of the Committee are far from normal,” Bullard said. “While this mismatch is not causing macroeconomic problems today, it takes a long time to normalize policy and the mismatch may cause problems in the years ahead as the economy continues to expand.” (Federal Reserve of St Louis, July 17, 2014)

“We argue here – building on discussions we began during the World Economic Forum Summit on the Global Agenda 2013 – that the rise in global financial-market integration implies an even broader set of drivers of the future roles of international currencies. In particular, we maintain that the set of drivers should include the institutional and regulatory frameworks for financial stability. The emphasis on financial stability is linked with the expanded awareness of governments and international investors of the importance of safety and liquidity of related reserve assets. For a currency to have international reserve status, the related assets must be useable with minimal transaction-price impact, and have relatively stable values in times of stress. If the risk of banking stress or failures is substantial, and the potential fiscal consequences are sizeable, the safety of sovereign assets is compromised exactly at times of financial stress, through the contingent fiscal liabilities related to systemic banking crises. Monies with reserve-currency status therefore need to be ones with low probabilities of twin sovereign and financial crises. Financial stability reforms can – alongside fiscal prudence – help protect the safety and liquidity of sovereign assets, and can hence play a crucial role for reserve-currency status…International capital flows yield many advantages to home and host countries alike. Yet the international monetary system still faces potential challenges stemming from unanticipated volatility in flows, as well as occasionally disruptive spillovers of shocks in centre-country funding conditions to the periphery. With the events around the collapse of Lehman Brothers, disruption in dollar-denominated wholesale funding markets led to retrenchment of international lending activities.” (VOX, July 26, 2014)

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

S&P 500 Index [1978.22] – As all-time highs are only few points removed, traders will ask if the 1980 level is a hurdle for days ahead.

Crude (Spot) [$102.09] – Mainly stuck between $102-104 range. Attempting to stabilize after a strong sell-off in June.

Gold [$1,292.75] – Buyers momentum faded around $1320. Trades closely will watch the action near the 50 and 200 day moving averages. Perhaps, another drop may suggest that $1340 on July 11th is a short-lived rally.

DXY – US Dollar Index [81.02] – The month of July has seen a stronger dollar. From 79.74 to 81.02 may not seem like a big move. However, for this currency index it is quite noteworthy upside move.

US 10 Year Treasury Yields [2.46%] – Last seven trading days have demonstrated that yields are not fragile enough to go below 2.43-2.40% ranges. Perhaps, a bottoming process in anticipation of



Dear Readers:

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

Market Outlook | July 14, 2014

“There is no terror in a bang, only in the anticipation of it.” Alfred Hitchcock (1899-1980)

Eagerness for substance

The last few months and weeks have reignited a spark of hubris mixed with a feeling of semi-invincibility by the bulls, showing that maybe a logical reset or reality check is highly anticipated. With the NASDAQ down 1.7% and a nearly 4% drop in the Russell 2000 (small cap index) last week, this is still not enough to alter the established strength.

An outcry for potential pre-crisis traits, as witnessed in 2007, is commonly found in financial literature. Yet all this chatter is hardly influential for market-moving forces, which overwhelmingly paint a one-sided view. Basically, “Nothing but upside” is the simple mantra and chant when markets go up, despite the bewildered crowd of market observers and veteran risk takers. Surely the “terror” of waiting for collective collapse/correction has been greater than actual market pain experienced in terms of share prices and volatility.

For nearly a year and surely half a year, for bears, it was difficult to comprehend the divergence between the roaring large-company shares and not-so-glorious economic data points. Talks of negative GDP either in the US or Europe made for good discussion points, but were shrugged off in daily market actions. Mainly, the consensus expects a better second half and that bravado is picking up steam, especially in GDP.


“Federal Reserve Bank of Chicago President Charles Evans said Friday it’s pretty unlikely the economy will suddenly grow fast enough to drive him to move forward his expected timing of the central bank’s first interest rate increase. Speaking to reporters, Mr. Evans said he could envisions a scenario where economic growth accelerated very sharply relative to expectations, inflation moved back toward the Fed’s target and wage gains returned to their historic levels.” (Wall Street Journal, July 11, 2014)

The realization that identifying events or data of weakness is not enough to claim an ultimate top is occurring. Too many false alarms take a toll, even if the top is closer than before. It’s fair to say that a 1% down day in the S&P 500 index would be an early sign of worry.

Hint searching

On May 28th, when the US 10 year yield reached a new low of 2.44%, it became difficult to proclaim that growth in the US was strongly visible. Surely, this is another twist to the script, as the 3% level once reached in late 2013 seemed so far. Perhaps, bond markets realized and could not ignore the less convincing economic growth in labor and wages. In fact, even Wall Street is struggling to make impressive revenue as in past years with declining trading activities. Perhaps, one should quickly realize this economy needs to show tangible strength. It is a messy recovery all around. Cheerleaders can cheer and markets can reward, but logic is not so simple, even when the consensus suggests a full-blown bull market.

As for stocks, corporate profit marches to its own beat and low rates only suggest further rotation into a sizzling or overheating stock market. Flow after flow poured into US stocks (and developed markets), and that was a massive train that could not slow down or seek other alternative areas.

It was unbearable to watch bears of all kinds surrendering when they saw volatility approach near-death. Meanwhile, the crowd anointing the Fed as the authority could not stop quoting the famous saying: “Don’t fight the Fed.” Pointing out the misleading perception of a bull market did not merit financial reward, from the gloom-and-doomers waiting for collapse to others who thought danger in foreign policy mishaps would actually turn into a bleeding stock market. Russia, Ukraine, Iraq and rest of the Middle East came and went as the China slowdown story started to get old. In fact, the China collapse story has been heard enough, and after a year of emerging market collapse, any susceptibility to downfall in BRICs did not overly shock. Now, the global growth pace is debatable as bargain hunters reexamine positions.

Another minor signal

European stocks last week sent an alarm to participants as memories of Eurozone collapse were contemplated, albeit briefly. In a period when many have surrendered to the concept that market collapse is around us, it would take Portuguese bank health concerns to stir some skepticism or search for safety. Maybe a follow-through of old European banking and system-related worries would give sellers enough reasons to exit. Meanwhile, earnings are expected with eagerness, but will vary by industry and specific names. Reaching a conclusive answer might take a few more days or weeks. Tech, biotech and other growth areas may set the tone, but the macro secret or magic is unclear. Pundits speculate, but this week needs to showcase that concerns are legitimate as much as growth. The Fed script has not lost its luster, but expectations are higher and higher by the day. Thus, risk management has been long contemplated, but waiting for the unexpected is a suspenseful task for buyers and sellers alike.

Articles Quotes

“Two of the world’s biggest banks have come out with very different takes on emerging-market debt. Strategists at UBS AG (UBSN)’s wealth management unit turned bearish on U.S. dollar debt of developing nations on June 26 as the securities rallied on renewed confidence that central banks will maintain their stimulus. Meanwhile, JPMorgan Chase & Co. (JPM) strategist Jan Loeys said in a report last week that the debt still offers good value compared with other options in developed nations. The contrasting views show how difficult it is to find value in markets inflated by more than five years of easy-money policies, where everything starts to look expensive to someone. Bonds of nations such as Mexico, Turkey and Russia have returned about 9 percent this year, their biggest gain since 2009. ‘We don’t think this asset class will perform as well in the second half of this year,’ said Mark Haefele, who oversees the investment strategy for $2 trillion at UBS’s global wealth management units. Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows. Last year, investors fled from emerging-market debt amid panic over the Federal Reserve’s plan to curtail its monthly asset purchases. The notes lost 8.3 percent in May and June, faring worse than most pockets of the credit markets.” (Bloomberg, July 9 2014)

“A property boom in the German capital pushed up the value of the average apartment by 27.5 per cent from 2010 to 2013, according to property researchers bulwiengesa. Prices in towns and cities across the country have soared by a fifth over the past four years. Since 2012, the average time it takes to sell a house privately has fallen by almost a fortnight to eight weeks, figures from property website immobilienscout24.de show. The lustre of what locals have dubbed betongold, literally concrete gold, has provoked concern among policy makers over the risks for financial stability. … The Bundesbank, which along with the finance ministry and regulator BaFin, sits on the Financial Stability Commission, the body tasked with maintaining the health of the financial system, said earlier this year that property prices in the big cities were now overvalued by as much as 25 per cent. Germany remains a nation of renters. The owner occupancy rate is just 53 per cent, according to Eurostat, compared with 78 per cent in Spain and a euro area average of 67 per cent. The rate has barely changed since 2010. Barriers to home ownership, such as transaction costs of around a tenth of a property’s value, are high. Strong tenants’ rights and a vibrant rental property market also help in swaying Germans from becoming homeowners. But conditions are ripe for change. At 0.15 per cent, economists view official interest rates as low for an economy expected to grow by 2 per cent this year and next. As Germany’s economy nears full capacity, borrowing costs are likely to remain on hold for at least another two years as the eurozone’s recovery stutters. There are anecdotal signs that cheap money is already shifting attitudes, with the younger generation increasingly viewing property as a sound investment. In research on Frankfurt’s property market early this year, bulwiengesa reported mounting interest from people in their 30s.” (Financial Times, July 13, 2014)



Levels: (Prices as of close July 11, 2014)

S&P 500 Index [1967.57] – Slightly off all-time highs set earlier in the month. Above 1985 or below 1960? The answer may potentially speak for the rest of the week, although low volume has persisted in recent days.

Crude (Spot) [$100.83] – Since June 20th, a sharp decline and sell-off is in full gear as the $100 point is revisited, yet again. The 200-day moving average is also near $100 and should set the tone moving ahead.

Gold [$1340.25] – Questions remain: Is $1280 is a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, a mild positive moment is visible in the last month, as the start of July should provide further answers.

DXY – US Dollar Index [80.36] –Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Since May, the pattern has been defined by a lack of meaningful movement, as reaching above 2.70% seems difficult.


Dear Readers:

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

Market Outlook | June 30, 2014

“The naked truth is always better than the best dressed lie.” Ann Landers 1918-2002

Unscathed theme

A new month awaits as the first half of 2014 draws to a close. Surely, the major themes have not been rattled. Asset prices continue to inch higher, from stocks to real estate to commodities. Yield chasing is reaching desperate levels as risk taking extends from southern European to African bonds. The belief in central bankers appears to outweigh future concerns including the macro-climate that's full of tension, from Iraq to Ukraine. A panic-like response is not on the minds of investors. Stability mixed with confidence is the script the Fed preaches, and the lack of investor alternatives is the hymn sung by participants. Desired or not, that’s the reality for those risking capital. Surely, cash is not deemed king by asset allocators, given unattractive savings rates. And inflation is not a current worry that has been heard too often and feels like a slogan in financial circles. It’s a new season, but the same ol’ policy.

The takeaway is that low rates are here to stay, with corporations continuing to borrow at ‘attractive’ borrowing rates. This is the heartbeat of this daily market movement, which continues to fully believe in and respect the powers of the Fed. Frankly, dissenting with the Fed’s policy is not an option when putting capital at risk.

Shock-averse

Low-volume days persist, and the slow summer months play a role. Last week, the discovery of a negative first-quarter GDP did not shock the market influencers, as common-sense seekers attempted to reconcile the impact of a negative GDP on future corporate profits. Certainly, drivers of GDP can be attributed to healthcare spending or the brutal winter, yet the corporate profit has not collapsed, explaining why share prices are near record highs.

The mind-numbing connection between the real economy and stock market drivers can either confuse plenty or recreate a new wave of optimists (or latecomers). Importantly, the message from the Fed boldly states that rates are set to remain low; thus, the status-quo fanatics are roaring with taking risks and not fearing recession. On the other hand, the worrisome bunch is left stranded on either missed prior opportunities or tame volatility – at least for now. Certainly, the consensus anticipates a recovery in GDP numbers in the second half of 2014, and labor numbers are touted as successes rather than emphasizing weak wage growth. Perhaps, the labor numbers this week can add further clarity if the thought of a second-half economic recovery has merits.

Limited power

Increasing collective confidence in central banks might be carried overboard when growth rates are expected to regain momentum along with job creation. Frankly, the real economy awaits policies and innovations that have been sparse and not quite robust. Money managers have struggled to assess the risk of a market top for a long while. Clues are not wrapped with warnings and known disclaimers, as the low-volatility period continues to feel abnormal– as if the market rhythm is broken. Certainly, trading revenue for financial services is struggling and performance is tricky to manage in this climate. How much power is afforded to the Fed? Some issues of small business growth, demographics, organic growth and business-friendly legislation are not all in the hands of the central bank. Thus, liveliness in real-economy growth is eagerly and desperately awaited. Surely, one day, attention will focus on real growth rather than intellectual justification of an elevated market. Thus, a surprise is awaited, and the reward for guessing is attractive today as much as prior periods in this bull market.
Articles Quotes

“In its continued push to make the yuan a global currency, China's central bank said Sunday it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centers battle with London to become the leading European offshore yuan-trading city. The People's Bank of China announced the move in two separate statements Sunday. It didn't say when it would designate the clearing banks. The French and Luxembourg central banks said Sunday they had signed agreements with PBOC allowing for greater cooperation in the oversight of their domestic yuan market. The weekend moves are the latest salvos in the race to win a major share of business in cross-border transactions in the Chinese currency. Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China's fast-growing economy. … Luxembourg, home to a powerful asset-management industry, has built strong ties with Chinese investors in recent years and currently hosts the European headquarters of China's three leading banks. Last year, former Luxembourg Finance Minister Luc Frieden cited figures showing that the country was the leading center for yuan business in the euro zone, with some 40 billion yuan in deposits, 62 billion yuan in loans from Luxembourg banks and 220 billion yuan under management in the fund industry. For China, the move to allow the yuan to be used more freely abroad aims to boost demand for the currency and reduce the amount of dollars entering the country. China still maintains a tight grip on the yuan's value, with its trading strictly controlled in the mainland market.” (Wall Street Journal, June 29, 2014)


“Initial public offerings priced from January 1 to June 26 were worth $26.5 billion. This was up from $5.7 billion in the same period last year and 123% higher than the same period in 2007, which at $11.9 billion was the previous record since Dealogic started recording the data in 1995. Piers Coombs, head of UK equity capital markets at Canaccord Genuity, said the combination of improved sentiment in the equities markets and a desire to launch IPOs before the ‘political risk’ of the UK general election, due by May 2015, had helped drive flotation activity in London. He said a busy first quarter had been followed by some ‘indigestion’ in the second. He predicted the market would be back on ‘an even keel’ over the third quarter. Among shares that have underperformed since flotation by their private equity sponsors in recent months are motoring organisation the AA, over-50s holiday and insurance group Saga (both backed by Permira, CVC Capital Partners and Charterhouse Capital Partners), online travel firm eDreams Odigeo (Ardian and Permira) and retail chain Pets at Home (Kohlberg Kravis Roberts).” (Financial News, June 30, 2014).

Levels: (Prices as of close June 27, 2014)

S&P 500 Index [1960.69] – A recent move from 1860 to 1960 triggered potential re-acceleration of the bullish run. Yet, 1960 marks a hurdle for the index in the near-term based on the last three days of last week.

Crude (Spot) [$105.74] – The recent spike is now slightly pausing. Certainly, the move from $100 to $107 reawakened the sensitivity of oil prices when it comes to turbulence in the Middle East. Yet the justification of this move needs some tangible follow-ups.

Gold [$1311.75] – Questions remain: Is $1280 a sustainable bottom? Or is the break above $1300 a critical momentum-builder for buyers? For now, mild positive momentum has been visible in the last month, and the start of July should provide further answers.

DXY – US Dollar Index [80.36] – Since June 11, the downtrend in the dollar has been quite visible. Any break below 80 may signal a new wave of currency weakness.

US 10 Year Treasury Yields [2.53%] – Once again, surpassing 2.65% has proven to be difficult and the very low rate environment is playing out again. May lows of 2.40% are on the radar as annual lows, and the next moves in upcoming trading days can trigger directional hints.


Dear Readers:

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

Market Outlook | June 23, 2014

“Never ignore a gut feeling, but never believe that it's enough.” (Robert Heller 1826–1878)

Trend reinforced

The near death of volatility combined with record-high stocks are numbing by now. This is nothing new, if you’re only watching the scoreboard of known index performances. Still, it never ceases to amaze as an ongoing theme of recent years, where the Fed’s messaging is the powerful force. Equally, some money managers have been talking down the market, given unimpressive economic growth rates, and macro unrest is brewing despite being ignored for a long while. Various sour or risky realities from all angles are barely impacting sentiment, which also is rather remarkable. Thus, the daily news flow and implication analysis of risk managers do not match the Fed-led rally that loudly proclaims the death of risk and the appreciation of share prices in a calm process.

There are some concerns from oil markets regarding Iraq, barely highlighting the macro concerns in the Middle East. Surely, the impact is first felt in commodities, as resource-based concerns linger. The consensus view anticipates crude will accelerate, as it has in prior tension-filled periods. Yet impacting the rest of the equity and bond markets remains a suspenseful question. For now, even bond markets are not viewing the Iraq concerns as a worry. So far, not much turbulence has been witnessed, even with weaker earnings, which are not at the forefront of investor discussion. Perhaps, domestic worries in the US, Eurozone and China are replacing foreign policy-related worries. Not to mention, mid-term election implications and less certainty by voters in the US are in the back of the minds of some managers. Accumulating factors build up for those looking to think a step or two ahead, but presently, those thoughts do not carry much weight in day-to-day trading.

Old questions

The paradox of a one-sided market: The vocal bearish skeptics have struggled to wrestle down bulls, who are actually gaining more momentum despite the lack of many days of 1% or higher moves in broad indexes. Yellen's support of this status quo welcomes yet another quarter where risk allocation is revisited closely. How much deploying of new capital to equities awaits? What's the peak potential given record highs? Perhaps, the Fed provided some hints of pausing.

Few calls for bubbles, demand for sell-offs and worries of over-valuations point to a lack of substance in the eyes of market influencers. Sure, warning signs are common and have been heard before. In fact, many argue valuations (compared with historical norms by some measures) are not stretched and the economy is not overheating; thus, worrying is overrated. And that’s the vibe that’s felt in the market. Not asking critical questions is not an option.

Stock markets’ disconnect with a tangible reality suggests that one or two major events outside of the Fed's scripts hardly bother investors to alter tactics. Against this backdrop, the “globalization” or “free-market” story is being reevaluated. Yet, frontier markets appear like today's version of yesterday's BRICs, with increasing bond issuance and soaring stock markets.

“Individual countries have posted some significant returns, too. Since the start of 2013, Bulgaria’s market has soared 91%, Pakistan’s has jumped 88%, and Nigeria’s has risen 47%. The strong performance is helping frontier markets – usually defined as countries that have a stock exchange but don’t meet the size and liquidity requirements to be in the emerging-markets index – to gain more acceptance in the investment community.” (Wall Street Journal, June 1st, 2014).

Limited hints

Gut feelings may not have a place in the savvy analytical work of risk managers and market participants, yet they might have value at some junction. Charts of asset prices may not be enough to look ahead when they only tell of past actions. Comfort is a common theme for risk-takers, as low risk is perceived as not wishful thinking, but a description of present action; thus, the mystery of timing lives on. Expert advice is losing voice, and even pessimists are forced to take on a positive stance these days to play catch-up or chase returns. As absurd as it is to see the majority of markets in agreement with bulls, for some it seems even sillier to fight against a market that has been rewarding for years. For now, the unanimous bullish market may breed new waves of overconfidence, which is the trait worth tracking for those looking to readjust capital deployment.

Article Quotes:

“The theme of Federal Reserve Chair Janet Yellen’s press conference this week was ‘uncertainty’ – uncertainty about what’s going to happen to interest rates, about how fast the economy will grow, about inflation. Just how uncertain is Yellen? Well, we counted: She used the word eight times in her hour-long Q&A with reporters. (‘Certain’ didn’t occur at all, according to the Fed transcript.) In her first press conference, back in March, she used the u-word only once. Nothing about the economic outlook is ever certain. So why this sudden burst of ‘uncertainty’ from the Fed chair? It’s a message to buoyant financial markets: A little caution would be welcome. ‘To the extent that low levels of volatility may induce risk-taking behavior that for example entails excessive buildup in leverage or maturity extension, things that can pose risks to financial stability later on, that is a concern to me,’ she said, choosing her words with extreme care. (Translation: We know that low interest rates can lead yield-hungry investors to do dumb things and take big risks that can hurt them – and the rest of us.)” (The Brookings Institution, June 19, 2014)


“The growing bloodshed in Iraq and Syria is being watched as keenly in China as anywhere else in the world. Indeed, the greater Middle East is becoming an ever greater focus of Chinese foreign policy. At the just-concluded sixth ministerial conference of the China-Arab States Cooperation Forum, held in Beijing, Chinese President Xi Jinping called upon his Arab counterparts to upgrade their strategic relationships with China, by deepening bilateral cooperation in areas ranging from finance and energy to space technology. This reflects China’s broader goal – established partly in response to America’s ‘pivot’ toward Asia – of rebalancing its strategic focus westward, with an emphasis on the Arab world. Of course, economic ties between China and Arab countries have been growing stronger for more than a decade, with the trade volume increasing from $25.5 billion in 2004 to $238.9 billion in 2013. China is now the Arab world’s second-largest trading partner, and the largest trading partner for nine Arab countries. Within ten years, the volume of China-Arab trade is expected to reach $600 billion. Engineering contracts and investment have also enhanced ties. From 2004 to 2013, China’s crude oil imports from Arab countries grew by more than 12% annually, on average, reaching 133 million tons per year. And China’s ‘march west’ strategy furthers its goal of safeguarding access to these resources. As the director of the State Council’s Development Research Center, Li Wei, pointed out in February, at the current rate, China will be consuming 800 million tons of oil annually, and importing 75% of its petroleum, by 2030.” (Minghao Zhao Project Syndicate, June 18, 2014)

Levels: (Prices as of close June 20, 2014)

S&P 500 Index [1962.87] – Another record high leading to a more than 8% run since the April 11, 2014 lows. Previous highs were 1955.55, not far from Friday’s close.

Crude (Spot) [$106.91] – The breakout above $104 in the last two weeks sets the stage for a period of nervous response to Iraq and other unsettling factors. Yet, one should recall that crude has gathered momentum since early May, and this is a continuation of what’s building.

Gold [$1293.00] – After bottoming around $1200 last December, there are signs of a new stage in recovery of surpassing the $1300 range. Although bulls are somewhat reenergized, more evidence is needed in a commodity that’s fighting an intermediate-term bearish bias.

DXY – US Dollar Index [80.36] – At the low end of trading over the last 15 days. Early hints of a weak dollar will resume, but convincing price action is not available.

US 10 Year Treasury Yields [2.60%] – The 2.60-2.70% range is too familiar in the past year, while below 2.50% has become a rare event. Therefore, the status-quo trend is not quite disturbed. Seven years ago, yields stood at 5.32%, the highest point, which seems so far away in this downtrend.



Dear Readers:

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

Market Outlook | June 16, 2014

“The more efficient a force is, the more silent and the more subtle it is.” (Mahatma Gandhi 1869-1948)

Curious timing

As soon as the World Cup started at 4 pm New York time, or when the market closed on Thursday (June 12), there was a market event that stood out. The Bank of England announced that rate hikes might come sooner than widely expected. The timing of the announcement and the timing of the first rate hikes are both mysterious (perhaps Friday’s full moon is one answer). A warning or a prelude? To be determined. The rapid response in the form of a rising Euro affected the mindsets of the foreign exchange participants. Interestingly, a week before, the ECB negative rate action triggered some “dovish” responses, and now the rate hike speculation game lives on, with a little added twist. Similar questions will face the Federal Reserve – certainly there are questions to ponder, from “taper” talk to an unconvincing recovery painted as a success. In coming weeks, this talk of interest rates should dominate the financial punditry.
Here is one example to set the stage for the week.

“Although the Governor [Mark Carney] is still talking about a very gradual rise in UK rates, he appeared to have changed the dovish tone of the forward guidance given by the BoE last year. This has made investors nervous, with many asking whether Fed Chair Janet Yellen may do the same in her press conference on Wednesday. This seems unlikely, because the US economic recovery is still lagging that in the UK. Nevertheless, the parameters within which investors view forward guidance, including the Fed’s ‘dots’ showing the future path for interest rates, may have been somewhat shaken.” (Financial Times, June 15, 2014)

The synchronized global low rate might have the ECB going one way, the Bank of England potentially hiking, the US pondering its next move and Japan still offering the lowest of all yields. Thus, currency markets should provide the first clue and then risk should be reassessed.

Fighting urges

For the market, it has been mainly a one-sided action, where curious and skeptical minds were mocked or lost an audience when the melt-up persisted to endless unchartered territories. Frankly, it all comes down to “don’t fight the Fed,” or any central bank, for that matter. It is the human urge to ride out confidence to the maximum and only natural for novice participants not to walk away while pesky veterans have voiced their displeasure of the risk-reward setup. It’s not pleasant to desperately chase returns and not wise to overpay again and again by assuming history repeats itself. But again, this is normal, and it surely makes markets.

Complacency had been rampant even before the start of the week. Sure, oil price pressures from macro events had been brewing before and are always a possibility. Sure, pullbacks from record multi-year highs do lead to an inevitable price retreat. Of course, the very low volatility and very low 10 year treasury yields were poised for some reversals. Massive moves aside, even a minor price recalibration from extreme ranges was to be expected. The hubris of pundits picked up during the close two Fridays ago (June 6), when the S&P 500 finished on a strong note, with volatility collapsing to new annual lows then. Entering last week, any professional with a mindset of buying shares of large companies, must have at a minimum questioned the odds of further upside gains. Now catalysts are brewing. At the same time, temptations to ride this proven wave are growing, too. But to claim there are no hints of a crisis looming is naïve or an incomplete observation.

The narrative

In the last twelve months, several catalysts have failed to bring down US stock indexes (and emerging markets in 2014, as well): the government shutdown last fall, not-so-impressive earnings results, weakness of smaller cap stock prices, debacle in foreign policy including Ukraine, near-zero headlines GDP, and other worrisome issues. One had to wonder: Why not? One clear answer is in the narrative of the Federal Reserve: the mastery of forcing risk-taking by low interest rate policies, which rewarded those who bet on stocks, which in turn led to very low volatility. Shaking up these dynamics could stem only, it seems, from changes to the Fed narrative. If all real economy and real macro, tangible issues were ignored before, then simple interest rate policies are the driver of investor mindset. “In Fed they do trust” is not a bad statement to explain this bullish cycle. So waiting for Yellen's subtle or direct signal is too vital to other market-moving forces. Dismissing the message of the conductors of the so-called financial orchestra has been deadly for money managers. Thus, the simple narrative that has produced record highs may have a slight tweak, which all must digest.

Article Quotes:

“China is working on plans to launch its own crude oil futures contracts, in a move that could give it a key role in global oil pricing and create a rival to the London and US benchmarks that have dominated the industry for more than three decades. The Shanghai Futures Exchange is planning to extend a pilot programme for crude oil futures that it expects will be the first step in the internationalisation of its Shanghai International Energy Exchange. The country’s leading commodities bourse, which operates in Shanghai’s new Free Trade Zone, was granted regulatory approval by the CSRC last November. As the fifth-largest petroleum producing country in the world and the second-largest consumer, China produced 208m tons of crude oil in 2013 and imported a further 282m tons. But lacking a domestic crude oil futures market, import prices primarily refer to those of the New York Mercantile Exchange’s WTI and the InterContinental Exchange’s Brent crude oil contracts. … The exchange is the latest in a line of Asian firms seeking to align a rising share of consumption with greater influence over global oil prices. Japan, India and the United Arab Emirates have already launched crude oil futures, while the Chicago Mercantile Exchange has taken a stake in the Dubai Mercantile Exchange and the International Securities Exchange recently purchased the Singapore Commodity Exchange.” (IFR June 13, 2014)

“Since China joined the World Trade Organization (WTO) in December 2001, food price fluctuations in China started to be strongly correlated with those in the U.S. Between 1994 and 2001, the correlation was 40 percent. It was 62 percent between 2002 and 2013. Similarly, the correlation between consumer price index (CPI) inflation in the U.S. and China more than doubled from 23 percent between 1994 and 2001 to 59 percent between 2002 and 2013. This pattern of price correlations is interesting because food prices are an important component in the CPI. There are several possible explanations for why the correlations between food prices and between CPI inflation rates in both countries are so strong. The movement of world food prices (and other commodity prices) seems likely to be a reason, since China’s food prices are strongly correlated with world food prices (80 percent correlation between 2002 and 2013). However, the correlation between U.S. food prices and world food prices was not as strong during the same period (34 percent).” (St. Louis Fed, June 9, 2014)

Levels: (Prices as of close June 13, 2014)

S&P 500 Index [1936.16] – June 9 highs stand as the next record-high benchmark at 1955.55, following a 7% or so run since April 11. Above 1900 suggests a comfort zone for bulls. A move below 1800 could spark the first signs of panic, but for now, that’s not on the radar.

Crude (Spot) [$106.91] – Explosive upside move attributed to Iraq-related crisis. Interestingly, for weeks, a catalyst was deeply needed between $100-104. August 2013 highs of $112 may be tested if there is a further market reaction.

Gold [$1265.75] – Stuck. Attempting to regain some momentum around $1250-1300. A bottoming process is developing, and drivers for an upside move are unclear to participants.

DXY – US Dollar Index [80.36] – For more than nine months, no major movement, suggesting the dominance of the status-quo view on interest rates and risk. Unenthused and unconvincing moves for those seeking trend reversal.

US 10 Year Treasury Yields [2.60%] – In the last 12 months, the 10 year yield bottomed around 2.50% twice, and now potentially the third time. A familiar place for near-term observers, which may argue for more upside closer to the 2.70-2.80% range.





Dear Readers:

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

Market Outlook | June 9, 2014

“Truth is more of a stranger than fiction.” Mark Twain (1835-1910)

Understandably strange

This is a market that never ceases to amaze, as the run-up in stocks continues. But these days it feels like surprises are rare when speculating on the direction of interest rates, stock markets or volatility. What has been stunning is how the share price run-up continues without significant or major hiccups. Fending off various macro risks, the bull market has entered a phase where seasoned money managers so often caution publicly, but still fear missing out on the run. These mixed messages between talk and action are rather ambivalent. The fear of missing out on risk-taking (reward-seeking) opportunities is a bigger fear these days than the fear of a massive collapse.

It is rather strange that the increase in stock value does not necessarily suggest a robust increase in the economy or earnings. Sure, the job numbers are viewed as positive, but wage growth remains questionable or mysterious on a broader level. Similarly, the GDP numbers have puzzled but not shocked forward-looking participants. Near-term worries of finding sustained returns surpass any longer-term analyses of consequences. Frankly, the long term seems too far for market participants, and the Fed-dictated markets lives on.

The ongoing market mantra continues to suggest:

a) Worry less, as showcased by the collapse in volatility.

b) More and more people are feeling that “bubbles” have not expanded enough to burst.

In other words, a recovery may be the tagline for promoters of all kinds, but certainly markets cannot overheat when organically, the recovery is not actually “hot” enough. From data to data, these points continue to linger.

Subtle trends

What is not making all-time highs is equally interesting to track for trend followers. For example, the biotech index is not quite at all-time highs and has regressed from late February 2014 highs. Neither have the shares of banks (Goldman or Morgan Stanley) risen to record highs. They have struggled to replenish enough momentum for an upside move. Even the so-called homebuilders fund (XHB) has not mustered the strength to restore its annual highs. These signs of a lack of new record highs is not a suggestion of an overall top; however, they beg the question of whether this is a hint of downside, or whether these sectors will catch up to the rest of the major indexes. Certainly, emerging markets are far removed from the glory days and will attract value buyers. Perhaps, a rotation from developed markets to EM is the logical sequence of capital flow.

To be sorted

ECB’s decision about low rates hardly shocked economists, as negative rates made several headlines. This is a global phenomenon that has been witnessed in the US, UK, Japan and now the Eurozone. Dynamics that drive decisions are focused around the abnormal yield patterns, which happen to remain at the forefront of macro discussions. Importantly, can the low rate environment lead to economic growth, such as increased lending activity, and produce meaningful results in Europe? This is a question so familiar to US observers, where the Fed policies’ ability to impact the real economy is debatable. Thus, the recent yield demand and lack of it needs a regrouping or correction – a breather of sorts to redefine the meaning of risk-reward. Obviously, the risk-taking has extended to African bonds and asset-backed securities. The volatility index (VIX) closing at levels seen in 2007 reinstates the calm and boldness that are encouraged in this trading climate.

Traditionally, markets know how to humble hubris. When trading seems relatively “easy,” the danger does arise. Even if claims of caution have been exhausted, risk never evaporates. Instead, the narrative is where the catalysts form. By now, a synchronized global thinking that suggests comfort over worries has rewarded those who’ve ridden the wave. Brilliance or luck aside, we’ve learned that was the right move. However, an honest approach begs the following: How much upside news is not factored into the market? Unknown. Thus, the sequence of strange developments is identifiable, but how it will sort out is the mystery that requires risk management.

Article Quotes:

“Widespread anti-EU protest votes in last month's European Parliament elections will make it harder for many governments to pursue deficit-cutting and structural economic reforms or to deepen the integration of the 18-nation euro area. Public resistance in Germany, Europe's biggest economy, may make it impossible for the European Central Bank to go beyond last week's monetary easing measures to more radical U.S.-style asset purchases if low inflation persists or worsens. Berlin is balking at using its own healthy fiscal position to invest more in infrastructure or spur domestic demand with tax cuts that could help balance Europe's economic adjustment. European Union leaders and the ECB have done enough to restore market confidence for now by equipping the euro zone with a financial rescue fund, stricter fiscal discipline, a single banking supervisor and a de facto lender of last resort. But the political will to complete economic and monetary union looks ever weaker, especially if it requires winning public approval for changes to the EU's governing treaties. In a book published before the elections French economist Jean Pisani-Ferry argued that Europe's leaders were reluctant to give any more power to Brussels and sought to avoid controversy over further European integration.” (Reuters, June 8, 2014)


“Vietnam and other Southeast Asian countries are spooked these days by China's aggressive behavior. But the real threat to Vietnam's future may come from a different communist neighbor.Ambitious plans for hydroelectric development in the region, especially by Laos, pose a real danger to the food supply of Vietnam and Cambodia. Upstream dams will imperil the fish stocks that provide the vast majority of Cambodia's protein and could also denude the Mekong River of the silt Vietnam needs for its rice basket. Laos's drive to become the ‘battery of Southeast Asia’ is producing plenty of sparks, but not the right kind. Diplomatic tension over the dams – as well as their effect on fisheries and agriculture in a river basin that is home to more than 60 million people – threatens to drive Southeast Asian countries apart right as they are trying to present a common face toward China's increasingly brazen behavior in claiming parts of the South China Sea for itself. The whole region is caught in a hydropower frenzy, thanks in part to China's plans to build multiple big dams far upstream. Laos is building several of its own on the Mekong to generate electricity – for export. That includes the Don Sahong project, right near the Laos-Cambodia border, and the much bigger Xayaburi dam further upstream. The country of slightly more than 6 million people doesn't need more power, but it does need hard currency.” (Foreign Policy, June 6, 2014)

Levels: (Prices as of close June 6, 2014)

S&P 500 Index [1949.44] – Another record-high finish, 12% higher than February 5th lows. A melt-up from 1880, another explosive move re-confirming strength.

Crude (Spot) [$102.71] – No major change week over week. Quite a familiar place, with the 200-day moving average at $100. The wrestling match between buyers and sellers continues.

Gold [$1252.50] – Some signs of a bottom, although no strong evidence around or above the $1240 levels. Intermediate-term correction and pause is in full effect.

DXY – US Dollar Index [80.36] – Since May 8th, the dollar has confirmed stability and shown slight signs of gains.

US 10 Year Treasury Yields [2.58%] – July 2012 lows of 1.37% seem distant in time and percentage points. However, the January highs of 3.05% are on the radar, and it’s unclear when they can be achieved.





Dear Readers:

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

Market Outlook | June 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.