Market Outlook | October 13, 2014

“In seed time learn, in harvest teach, in winter enjoy.” (William Blake 1757-1827)

New Season

The autumn season has marked a market cycle filled with realizations of long ignored and accumulating dangers. Ultimately the inevitable reality check for the global economic and geopolitical health is more visible than before. A bullish run conducted by the Fed has headlined the script, but substance needs to back perception given share price appreciations.

At a quick glance, Emerging Markets (EEM) declined over 10% since early September. Similarly, the Nasdaq dropped around 7% since September 19th and the small cap index (Russell 2000) is down over 13% since July 1st. Various signs of weak economic data points came and went without major emphasis. Nonetheless, stocks are showing that invincibility from reality is unsustainable. The antiquated and classic Dow Jones Index is down on the year (for scorekeepers) despite the excessive cheerleading sequences of prior months. Talks of rate hikes turned out to be a mere chatter. To the surprise of many, the US 10 year Treasury yields stood below 2.30% as of Friday. The yields are dramatically low when considering analysts' expectations from the start of the year. Inflation expectations continue to be lower. This setup in rates and inflation showcases the lack of growth. Rightfully so, this creates more unease for longer-term investors.

The summer months provoked grand changes to the status-quo mindset that began since the 2008 recovery. Some of the drastic changes are highlighted by:

1) Crude prices declining at a rapid pace
2) US Dollar’s strength and momentum
3) Stock markets struggling to make new highs

Some crowds await a stock market rebound, then a rally from these levels. Surely, the power of the recent perception and the familiar patterns left create a bias towards positive sentiment. Yet, how are these current market levels deemed “cheap”? How can the current sell-off be ignored again like prior 4-5% broad US index corrections? Risk, valued so cheaply in early July, has erupted in the last 15 trading days. This awakens new sorts of thoughts. Safety may be set to trade at a premium and hope appears deeply overvalued.

Macro Climate

In last twelve months investors had a chance to prepare for potentially unsettling patterns. Sure, mid-term elections are approaching in the US which can shift political perceptions and dynamics. Amazingly, what has transpired in the last twelve months is stunning to quantify. First, Middle East nations lack any further stability, as has been documented in the past few years. Second, the Western world attempts to restore economic fruitfulness, yet revival remains extremely difficult especially in European economies . Third, events in Ukraine, fragile relationship with Russia and China, and Eurozone stimulus efforts appear enough to stir concerns. Or at least future concerns appear to be brewing. Elements of a cold war like traits reappear in some form, and the geopolitical saga will find a way to affect the day-to-day eventually. Even if macro items do not drastically drive the market; at some point, analysts will have to question impact on globalization after decades of facing various challenges.

Psychological Points

Last Wednesday the Fed sparked a massive rally, only to see Thursday and Friday turn into a selling frenzy. The ongoing theme of the Fed "saving the day" has been the mantra for this (and most) rallies, yet lack of rally during the last two days may have rattled the Fed's ability to orchestrate a rise in asset prices via confidence. In looking ahead, further declines may require the Fed to step in for further emergency actions – if we get there. Simply, the spike in turbulence (VIX) last week begs the question of the Fed's role as a last resort or next move. After all, t majority of participants believe and accept the power of the Fed-led rally. A true test has yet to play out between earnings, macro changes and whether or not recent sell-off is enough.

Meanwhile, the Nasdaq index, which stayed above its 200 day moving average for so many days is being challenged now. The sudden shift is catching the attention of basic technical observers. Buyers may be enticed to buy at a very slight discount, but if that fails to induce then selling pressure looms. Some believe that earnings may tell a better-than-expected story. Others will be in suspense as they ponder the dollar's impact on earnings. Perhaps, market mood swings may turnout to be more sour that expected.

Finally, share buybacks have limited the supply of shares outstanding in recent years, contributing further to increase in share prices. Whether a gimmick or a tactical move, buybacks helped lift many large company shares. Skeptics wonder at some point if this momentum can slow as well. It is one of many factors, but the supply-demand dynamics of stocks are certainly critical. In fact increased buybacks have left a strong mark in this bullish run.
Early sell-offs are not initially over dramatized, but when various factors begin to point towards shakier conditions then deceleration occurs faster than imagined. Thus, minor clues are not to be taken lightly, especially at this cycle junction.

Article Quotes:

“Since then oil prices have dropped to nearly four-year lows, pushing the sale price of Mexico’s main crude stream well below the $83 level that is the basis for next year’s budget. One-third of Mexico’s budget is funded by oil revenue in response, the government last week paused its purchases of insurance from large investment banks against lower oil prices. according to market participants. Mexico’s growth screeched to a halt last year after the government was slow to open the public purse strings, but recent data indicated that the economy grew a stronger-than-expected 2.52 per cent in July. If the government is forced to cut spending it could put the recovery at risk.

As volatility has increased, costs have risen for the hedging programme. The latest 5m-barrel batch of put options to appear on a new US derivatives database, dated September 29 and identified by market participants as part of the deal, showed a premium of $2.77 per barrel, almost twice that of the first batch 12 days earlier. The current premium would be higher still if Mexico were to trade now. Mr. Lacaze estimated the hedging programme, for about 180m barrels of net oil exports, was less than half finished. Mexico’s hedging effort has been further complicated by new rules requiring basic deal terms with Wall Street banks to be made public in data repositories.” (Financial Times, October 12, 2014)

“At home, Chinese media each day feature news from Hong Kong but avoid images of the demonstrations themselves, and instead focus on collateral impact such as snarled traffic, empty shops and experts who highlight risks to Hong Kong’s reputation as an international finance center. As proof of U.S. backing for protests, the editorial cited alleged activity by a senior official of the National Endowment for Democracy, a foundation funded by the U.S. Congress, including meetings held with protest organizers months ago. The official, Louisa Greve, couldn’t immediately be reached. On social media, Ms. Greve has appeared to support Hong Kong’s student protesters. Her most recent post to Twitter on Oct. 4 makes reference to the United Nations’ International Covenant on Civil and Political Rights, to which Hong Kong is a party under prehandover agreements and which sets out requirements for fair and democratic elections.

For years, China’s government has tracked the activities and donations of U.S. groups like the National Endowment for Democracy. A task force of mainland scholars was set up five years ago to study “the activities of U.S. [nongovernmental organizations] in Hong Kong and their impact on Hong Kong’s politics and policies,” according to an outline of the project’s works.” (Wall Street Journal, October 11, 2014)

Levels: (Prices as of close October 10, 2014)

S&P 500 Index [1,906.13] – Since September 19th the index has fallen over 5%. Technical indicators alarms observers as the 200 day moving average stands at 1,905. The late July to early August sell-off was short-lived. Therefore, short-memory suggests an oversold bounce is due. Interestingly, the August 7th lows of 1,904 remain critical in the weeks ahead.

Crude (Spot) [$85.82] – Since June 20, 2014 the commodity has declined over 20%. From supply-demand standpoint, not quite alarming considering expanding supply and slowing demand. However, from a price movement perspective this downtrend is notable. The four month deceleration sparks a massive global trend.

Gold [$1,220.50] – Since September 9, 2011, gold prices have dropped over 35%. At around $1,200 some selling pressure may ease temporarily. No evidence of a trend change, but three years of sideways patterns confirms the sell-off from a cycle peak.

DXY – US Dollar Index [85.91] – After a surging run since July, there has been a very slight pullback. Yet, the strong dollar theme lives on. Quite a statement from the macro standpoint as the sustainability remains suspenseful.

US 10 Year Treasury Yields [2.28 %] – 2014 continues to amaze most pundits at how low rates can fall. Three percent was very short lived. Then 2.60-2.80% remained a steady range from February to April. Recently, staying above 2.60% has proven difficult as 2.26% marked the low last Thursday.

Dear Readers:

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

Market Outlook | September 29, 2014

“Nature has always had more power than education.” (Voltaire, 1694-1778)

Selective Hearing

Bulls and bears continue to hear the message that they want to hear. The bullish spin is well documented. Simply put, optimism has been driven by the recent historical performance of low rates and higher stocks. More stock buybacks and less turbulence have summed up the trends for years. Lower yields and lower collective fears are the consequences of policies and sentiment. At this point all of these factors are so evident for market observers that little argument is needed to promote and glorify this multi-year market run. The scoreboard tells the story: Market bulls are more hubristic due to the several record highs and price appreciations. A period where no one wants to miss out the rally combined with high profile IPO’s surely creates the buzz of a bull market even to a casual observer.

For bears, many naysayers have overused "crisis" or “gloom and doom” outcomes dating back a few years. Some over-bet on commodities as a safe haven, particularly Gold; while others underestimated the Fed's power (as trickery or magic by some interpretations). Other cynics incorrectly screamed "top" or "bubble" to no avail. In the past some felt inflation was a critical issue for the economy. Meanwhile, others likely focused more on the rising rates as the catalyst. Another bearish argument centers on the slowing or not so vibrant real economy in Western nations. The lack of stock market correlation with fragile and weak economies was puzzling of course. Low wage growth combined with a lack of growth in small to mid-business is another matter. Bears have criticized this unhealthy set-up by stressing this climate is overly favorable to super large companies. With weak economies comes further sentiment changes, which has been long awaited by the highly bearish crowd, who were silenced in recent months.

A market breather now seems both overdue and needed if there is a natural flow to this market cycle. Amazingly, with each record high the bears' momentum appears crushed, but more than ever prior arguments are still worth keeping on the radar. Presumably, a natural response is looming.

Reconciling

As October approaches, the bullish argument faces more difficult questions in preserving the status-quo's dynamics. Certainly, the Fed-led rally has been battle tested, so far surviving the “crisis” or “panic” like reaction by global investors. Not only have low interest rates and low volatility benefited from this market, but so have other technical issues.
First, the supply-demand of outstanding shares suggests that corporate buyback has played even a bigger role in accelerating share prices. As many ponder past events and implications, a potential shift in the reduction of an overall supply of shares shows that:

“Second-quarter S&P 500 buybacks decreased 27.1% compared to the prior quarter, and fell 1.6% vs. to the second quarter of 2013, S&P Dow Jones Indices” (Pension & Investments, September 23 ,2014).

Secondly, if investors look beyond the surface, small cap indexes (non-S&P 500 stocks) have shown to be weaker relative to larger names. The Russell 2000 index, a small cap barometer, has declined by nearly 8% since peaking on July 1st 2014. Unlike the Dow Jones and S&P 500 indexes, which trigger plenty of day to day attention, the smaller cap areas have not preformed in the same manner, and the ongoing weakness signals another warning sign. Perhaps this is similar to Emerging Markets' struggles of 2013, which provide investors with another perspective in which valuations are stretched and a reset is deeply needed.

Timing is everything, but timing the market is a daunting task. Nonetheless, tracking the buybacks and small cap trends can serve as catalysts that contribute to shift in the status-quo. One may argue that instead of looking for an external catalyst, it is better to track the shift in factors that contributed to this run. As all eyes are focused on interest rate policies, other indicators become even more vital.

Bigger Picture

Investor sentiment has not dramatically reacted to the unfolding global events and historical matters. There is a sense of immunity by the equity markets, which did not respond to Ukraine or extremist group threats or even other political deadlocks. Interestingly, these events did not overly sway participants to react in a negative manner. Most notably the Eurozone crisis came and went and most appear numb to the known troubles. ECB’s attempt to lower rates is not a convincing prospect especially given the Fed’s inability in the US to create a robust economy during a low rate period. Instead, we’re in a political and leadership crisis amongst the Eastern nations (Russia, China) who oppose the interest of traditional Western nations.
Many are asking the status and value of globalization at this junction. Emerging Markets had their moment, but trouble loomed. China’s growth is highly questionable, and Russia is at the forefront of reexamining relations with Western nations. Surely, corporate interest and foreign policy matters are not aligned, and markets are focused on earnings rather than the 10-20 year implications for now. However at some point, the status-quo of a higher global stock market will have to confront pragmatic realities and not only perception.

Perhaps, the dollar strength is one indicator that screams of a trend shift, or at least is sounding an alarm of sorts. Essentially, the strong dollar is changing the landscape not only for other currencies (Euro) and commodities (i.e. Gold and Crude), but soon this may impact corporate earnings. Perhaps, this may play-out in day to day stock movements. As many speculate the next catalyst or turmoil in global events, the Dollar is loudly making a wake-up call to collective assets. However, the stock-market and volatility are the indicators of a broader interest, and the numb responses to concerns have been stunning. How long can stocks live in a world of their own? How long can investors tolerate the calmness directed by the Fed? The biggest puzzle of all: how long can the status-quo drive these stocks higher based on perception rather than reality? A new season and a new month look to tackle these unanswered questions.

Article Quotes:

“Russia’s state-run OAO Rosneft said a well drilled in the Kara Sea region of the Arctic Ocean with Exxon Mobil Corp. struck oil, showing the region has the potential to become one of the world’s most important crude-producing areas. The announcement was made by Igor Sechin, Rosneft’s chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today. The well found about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said… The discovery sharpens the dispute between Russia and the U.S. over President Vladimir Putin’s actions in Ukraine. The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia’s Arctic offshore. Rosneft and Exxon won’t be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today… The development of Arctic oil reserves, an undertaking that will cost hundreds of billions of dollars and take decades, is one of Putin’s grandest ambitions. As Russia’s existing fields in Siberia run dry, the country needs to develop new reserves as it vies with the U.S. to be the world’s largest oil and gas producer… The importance of Arctic drilling was one reason that offshore oil exploration was included in the most recent round of U.S. sanctions. Exxon and Rosneft have a venture to explore millions of acres of the Arctic Ocean.” (Bloomberg, September 27, 2014)

“China is likely to delay its financial reform agenda in favor of stabilizing growth, economists and investors say, in a move that could hinder efforts to correct distortions in the economy. Deregulation of interest rates was a key plank in the ambitious reform agenda that top Communist party leaders approved last November, which promised to give market forces a “decisive” role in capital allocation… China has taken steps in recent months to impose market discipline on state borrowers. In May, the cabinet approved a pilot plan to allow local governments to sell bonds directly, rather than borrowing through opaque financing vehicles. The agency that manages SOEs also announced its own pilot aimed at raising the efficiency of state groups. But it could take years to transform SOEs and local governments into entities able to withstand a rise in borrowing costs.” (Financial Times, September 28, 2014)

Levels: (Prices as of close September 26, 2014)

S&P 500 Index [1,982.85] –For several weeks the 2,000 mark served as a critical psychological point. For now the September 19th number of 2,019 serve as a record high. Recent wobbly action and slowing momentum begs further questions about sustainability.

Crude (Spot) [$93.54] – Since 2011 the commodity has struggled to stay above the $105-110 range. On three occasions since 2012, selling pressure mounted from $105 to $90. The current sell-off is attempting to bottom yet again as $90.43 (Sept. 11) serves as a key low.

Gold [$1,213.75] – The demise in gold prices since October 2012 ($1,791) is visible. As a two year anniversary awaits from the Gold “topping” period, observers wonder if the $1,192 from July 2013 is the ultimate bottom which will satisfy sellers. $1,200 is a fragile and critical point in the weeks ahead.

DXY – US Dollar Index [85.64] – Continuation of an explosive run. Since May 2014 the index has gained over 8%, making a key macro statement by making multi-year highs. Resounding statements given the index remained in a well established trading range for a long while. A break above $84 is a big statement to solidify the dollar’s strength for eleven weeks in a row.

US 10 Year Treasury Yields [2.52%] – Once again Yields failed to stay above 2.60ish percent and in the recent past did not dip too much below 2.40%. Again, critical inflection points await as the summer lows of 2.30% from August are on the radar for observers.

Dear Readers:

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

Market Outlook | September 22, 2014

“For me the greatest beauty always lies in the greatest clarity” (Gotthold Ephraim, 1729-1781).

Some Clarity

For a while now, on a daily or weekly basis, the questions surrounding the Federal Reserve’s polices examine the impact on interest rates and stock market directions. Surely, there is a mixture of some mystery and suspense. All-time highs along with rate-hike chatter create enough commotion to entice plenty into the risk-taking business. It is a guessing game of sorts that invites intense punditry and speculations.

At this stage plenty of explanations have been presented (i.e. stock buybacks, lack of alternatives, risk taking encouraged, IPO boom etc.), but the market gets to have the last laugh as timing a catalytic move is more difficult to predict. As attention zooms into stocks and rates, other areas such as currencies and commodities are reflecting some reality and changing perceptions that are valuable for the months ahead. Surely, risk-taking is not a defined science, but recognizing trends and identifying potential catalysts are two ways to increase odds.

The decline in commodities is visible in gold, crude, copper and natural gas. This is less debatable as the direction is defined. In fact, the CRB (Commodity Index) peaked in May 2011; in hindsight this turned out to be a prelude to the demise of gold and crude prices. Similarly, Emerging Markets (EM) have sold-off since September 5, 2014; and, not to mention, the ongoing underperformance versus US stock indexes. Finally, the decline in commodities and EM are inversely linked with a strong dollar. Interestingly, the dollar index’s empathic run for the last several weeks sums up current global conditions. Therefore, the relationship between Commodities—EM—Dollar is vitally interconnected. What this says about US stocks and volatility has yet to be deciphered.

Visibly Sluggish

Decline in commodities and sluggish emerging markets beg other questions: Is there a slowdown in the global economy? Or are there changes to last decade’s trends? One can argue that a slowdown in EM contributes to a slowing of demand in commodities. That has been visible and correlated enough to make a convincing statement to investors. For months, talk of the Eurozone slowdown mixed with sluggish China data has lingered. Both contributors to global growth are seeking stimulus measures as an attempt to reawaken the economy.

“The People’s Bank of China is injecting 500 billion yuan ($81 billion) into the nation’s largest banks, according to a government official familiar with the matter, signaling the deepest concern yet with an economic slowdown” (Bloomberg, September 17, 2014).

Fair to say, it’s widely recognized that the global economy is slowing down. For a long while many wondered why yields are so low if key economies are growing. If these real economy woes are going to be reflected in stocks or volatility is the ultimate pressing question. Challenges for ECB to stimulate the economy will be debated and political factors will get in the way. The collective price of low rates to stimulate economies is a trick that’s been tried and certainly is not magical. A sense of desperation can be felt in Europe as QE is up for consideration. Beyond the clever technical words and hopes of economic tactical moves, the woes continue and somehow the stock markets do not reflect the pending turmoil that’s cooking slowly in the desperate “kitchen.”

Current Theme

For now US bulls are arguing that rates will remain low, volatility will stay calm and stocks run-up will have room to go. This has been heard for several years. No credible methodology has been discovered to figure out the timing or end to this. Thus, the trend lives on. Last week’s Fed message dominated financial markets, but the end result led to the same status-quo of all-time high stocks. The sideshow of hyped IPO mixed with the urgency to chase market rally distracts from macro concerns stated above, as well as foreign policy developments that are brewing. Current scripts and investor habits appear oversimplified in their promotion of risk. “Fear is not to be feared” is the ultimate and dangerous takeaway of this. However, for staunch bull participants to ignore the various signals of macro realities from larger economies and other assets is a reckless approach. Even if the day of crisis is unknown, it helps to know the few symptoms that are silently moving.

Article Quotes:

“G-20 economies have submitted individual plans to boost gross domestic product by an additional 2 percent over five years, a goal the group committed to in February. The group will say in their statement that measures proposed so far will boost GDP by 1.8 percent. Members will commit to additional action to meet their target ahead of a summit of G-20 leaders in Brisbane, Australia, in November, the official said. Even as the group discusses longer-term measures to lift economic output, officials in the U.S. and Canada are pressing for more immediate steps to boost demand… G-20 finance chiefs are considering asking investors in the communique to be vigilant against taking excessive risks, according to another official from a G-20 economy, who asked not to be identified because the talks are private. Some emerging markets argued against including the warning in the statement due to concern it could cause reactions in the financial markets, the official said. German Finance Minister Wolfgang Schaeuble told the G-20 meeting yesterday that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official, who briefed reporters on condition of anonymity in line with policy.” (Bloomberg, September 20, 2014)

“Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing's counter-investigations. Three reports published this month separately accused three Chinese companies - Tianhe Chemicals, 21Vianet and Shenguan Holdings - of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public. The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number. In the last wave of short-selling that peaked in 2011 and wiped more than $21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public. Carson Block of Muddy Waters, one of the most prominent short sellers, openly accused several Chinese companies of accounting fraud. Block said in 2012, according to several media reports, that he moved to California from Hong Kong because he had received death threats.” (Reuters, September 22, 2014)

Levels: (Prices as of close September 19, 2014)

S&P 500 Index [2,010.40] – A short-lived stay below 2,000. Another run-up last week to new record highs. Interestingly, the recent move from 2,011 (Sep 4) to 1,978 (Sep 15) did not stir enough of a reaction, this did not result in a selling pressure. Instead, the bullish bias resumed based on last weeks’ finish.

Crude (Spot) [$92.41] – In the last twelve months, crude has lost its momentum and in the past 3 months, the deceleration has been pronounced. The next critical level is closer to $90 while technical observers await for a lively bounce at current levels. Two vital takeaways from early 2012 and mid2013 suggests that $100 is where buyers have been exhausted. Perhaps, it is a hint to ongoing decline below $100.

Gold [$1,220.50] – A near $500 drop from September 2012 highs has marked a beginning of a cyclical bear market for Gold. The inability to entice buyers above $1,400 has triggered even less belief in the previous bullish story. July 5th lows of $1,192 are desperately awaited by some buyers as much as sellers. Revisiting 2012 highs for now seems ambitious.

DXY – US Dollar Index [84.73] – An explosive run in recent months. The index is up more than 6% from the lows in July 2014. Investors are awakening to the dollar strength story. The sharp rise may lead to suspicion about the sustainability; however, it is hard to deny the massive shift in the index from cycle/pattern observers.

US 10 Year Treasury Yields [2.57 %] – 2014 was mostly defined by the trend that saw yields decline from 3.04% (January 2nd) to 2.30% (August 15th). Remarkable declaration of ongoing lower yields. However, Since August 15th the downtrend has been slightly broken with a move above 2.50%. It begs the question if this trend reversal is a fundamental change or a short-lived rise in yields.

Market Outlook | September 15, 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)

Summer Shifts

The summer presented two massive trends: Strengthening of the Dollar and ongoing decline in Crude prices. For a long while the weakening dollar combined with the stable rise of Crude prices has been regarded as a “normal” macro occurrence. Basically, the status-quo that’s been ingrained in many analysts’ expectations may change their tune. Pundits in the past few days have addressed the Dollar’s multi-week run as well as its best run in 17 years. Part of the strength in the greenback is driven by further ECB rate cuts and stimulus. Perhaps, the recent ECB decision has stirred further changes in currency markets:

“Many central banks have simply given up the pretense of independent monetary policy, and the ECB's move will lead them further down that path. That, in turn, creates challenges for currency traders, who have long relied on differentiation in interest-rate outlooks to determine which currencies to buy or sell. It makes it difficult to pick standalone winners, even if traders have lately done well betting on broad-based losses for nearly all currencies against the dollar.” (Wall Street Journal, September 14, 2014)

The strengthening Dollar trend awaits the Fed for clarity this week, of course, especially as attention shifts to interest rates, which remain a top priority for observers. The slow awakening to changing Dollar dynamics can impact the big picture script. Analysts will have to dissect the Dollar’s impact on corporate balance sheets and how those perceptions may play out. For now, the multi-week run is slowly digested and speculators debate the sustainability.

Meanwhile, the commodities sell-off of 2013 is now brightly reflected in Crude prices as well. Therefore, it raises questions about a weak global demand or the expanding supply, especially in the US. It is fair to say both are market moving factors. The slowdown in the global economy is playing its part suggests further hint to the sluggish economic factors, not just in Europe, but in emerging markets as well. This is primarily led in China where the slowdown is accumulating.


Turning Points?

So many inflection points in the past twelve months have come and gone. Several macro shifts were talked about (e.g. rates, euro zone struggles, etc.) have also come and gone. Surely, interest rates are on top of the list as usual. It remains suspenseful and mostly guess work. Meanwhile, it was a year ago that “Septaper” dominated headlines. Surely, that coined term came and went as well. At the same time, US 10-year yields consensus rates were expected around and above 3%, but never quite got there either. Meanwhile, few minor sell-offs of around 4-5% in S&P 500 index did not lead to a massive sell-off, but rather a rush by participants to buy on weakness. Essentially this has led to more days of stock indexes reaching record highs with evaporating volatility and hardly any major “earth shattering moves.” Certainly, complacency has been visible for too long.

Thus, here we are in another autumn, six years removed from 2008, a period when all out panic defined the financial climate. A reset of sorts has redefined the perception of risk. Yet now, at a multi-year bull cycle, the destiny of stocks embarks to new levels, and justifying the run is a classic question that has reappeared. The hints from dollar and crude movements is one matter, but the reversal in volatility and interest rates may have a bigger say than the former on stock performance. Psychologically, there are two factors in play: 1) Unlike other times in the past two years, skeptics appear very cautious to challenge the status quo 2) The combination of upcoming mid-term elections and worsening foreign affairs can spark sudden change in sentiment. For now, the obvious answer is not presented, but the hints accumulate from various markets and directions.

Near-Term Hints

The challenge in deciphering hints is sorting the noise from the substance. The anticipated Fed meeting should provide guidance on interest rate policies. For some observers and speculators, volatility (VIX) bottomed around 11.24 on August 25, 2014. Similarly, US 10-year yields marked their lows on August 15, 2014 at 2.30%. Finally, the S&P 500 fell below 2000, a self-proclaimed psychological range that’s created some buzz. All suggest vital hints that may potentially alter the status quo of low rates, low turbulence and higher markets. It is too early for many given the prior false signals, but there are enough hints to build on. Basically, the tide is shifting even if it is not convincing on a mass level. Regardless of pending events or comments/words from policymakers, the market has silently spoken for those willing to listen. From dollar to crude and from rates to volatility, there is unease mixed with newer trends that are mildly tangible but surely visible.

Article Quotes:

“China's factory output grew at the weakest pace in nearly six years in August while growth in other key sectors also cooled, raising fears the world's second-largest economy may be at risk of a sharp slowdown unless Beijing takes fresh stimulus measures. The output data, combined with weaker readings in retail sales, investment and imports, pointed to a further loss of momentum as the cooling housing market increasingly drags on other sectors from cement to steel and saps consumer confidence. Industrial output rose 6.9 percent in August from a year earlier - the lowest since 2008 when the economy was buffeted by the global financial crisis - compared with expectations for 8.8 percent and slowing sharply from 9.0 percent in July…. China's economy got off to a weak start this year as first-quarter growth cooled to an 18-month low of 7.4 percent. Beijing responded with a flurry of stimulus measures that pushed the pace up slightly to 7.5 percent in the second quarter, but soft July and August data suggest the boost from those steps is rapidly waning.” (Reuters, September 13, 2014)

Eurozone: “The key problem is that in most countries it is impossible to generate a credible commitment to reduce spending in the future, let alone by the staggering amounts required by a tax cut of 5% of GDP. Take the two biggest and most celebrated consolidation plans Europe has seen – Finland and Sweden in the 1990s. Over the period 1992–1996, Finland’s primary deficit should have been reduced by 11.4% of GDP, of which 12.1% in spending cuts; the corresponding figures for Sweden over the 1993–1997 period were 10.6% and 6.8% of GDP, respectively. The IMF took these enormous figures at face value in its recent database on discretionary changes in fiscal consolidations. However, in my own research I have shown that these cuts are based on the announced plans by the incoming governments. The reality turned out to be very different – at the end of the period, Finland cut its primary spending by a mere 0.4% of GDP, and Sweden by 3.6%. But one need not go so far back into the past. In almost one whole year of work, the spending review initiated by the Italian government in 2013 – without a doubt the most thorough and serious such attempt so far in Italy – has identified at most €10 billion (about 0.6% of GDP) of spending cuts, most of which are still highly controversial and subject to political approval. As of now, nobody knows what fraction will be effectively implemented, or when.” (VOX EU, September 13, 2014)


Levels: (Prices as of close September 12, 2014)

S&P 500 Index [1985.54] – The glorified 2000 landmark point created some hype for bulls and observers, but sustaining those gains is questionable. Buyer’s momentum seems wobbly based on last week’s pattern.

Crude (Spot) [$92.27] – The downtrend continues and confirms the massive shift in trends since late June. Trading around $92, which was last seen around January 2014. Signs of a minor selling relief are apparent despite the well-defined cycle weakness.

Gold [$1,241.25] – Broke below June lows of $1,242. A few months ago this range triggered a buy point; however, this time around perhaps buyers are reexamining the revealing decline in commodities. The next critical level was $1,192, which was reached in July 2013. The commodity sell-off theme has become convincing.

DXY – US Dollar Index [83.73] – The last 90 days showcased a powerful run in the dollar. In July 2013, the index peaked at 84.75 which is few points away from Friday’s close. Chartists are wondering if this run is set to pause around 84 after this explosive surge.

US 10 Year Treasury Yields [2.61 %] – The recent move from 2.32% to above 2.60% triggers questions of whether or not this run can keep up. Perhaps, a few more weeks are needed as the 3% benchmark serves as the more meaningful 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 | September 8, 2014

“All deception in the course of life is indeed nothing else but a lie reduced to practice, and falsehood passing from words into things.” (Robert Southey 1774-1843)

Simplicity Glorified

Hindsight gives the impression to investors that the market is simple. The current story goes: Invest your money in 2009 in US stocks and the rest is nothing but an upside gains. Eventually lack of turbulence mixed with lax view of risks enables the market conductors to gather additional believers with all-time highs. Wealth creation via stock ownership is expanding from theory to actual dollars and cents. The status quo in the recent years’ serves as powerful evidence of the simplicity of markets and the power of the Fed. Regardless of the various causes, the effect is quite clear and the oversimplification is picking up momentum, and typically that’s when critical details are omitted.

This development begs a few questions besides relying on the known trend. Is it a grave mistake to think the US economy is recovering at the pace of the all-time high stock market? Isn’t it too relaxed to think the Eurozone risk has calmed down? Are corporate profits sustainable? Are ignored macro issues (i.e. Ukraine /Russia) going to spark a market response? In a world where there is no scarcity of opinions plenty has been said. However, the historical data screams of simple maneuvering leading to higher share prices. For years the disconnect between stocks and real economy has been digested; however, this cycle (post 2008) embarks on a new level of day-to-day deception that should trouble even the most profitable of bulls as much as the gloom and doomers whose timing has been off. The concept of low rates and low volatility are creating even more complacency and discouraging the skeptics.

Grasping the Script

Where is the reward in belaboring past results? This is a question haunting investors of all kinds as the autumn season moves in to full gear. There is trickery in perception, and even more data may be deceptive. Important to remember that analysts are only humans pretending to know the future, but are really just hoping for luck. The suspense in markets is trying to grasp the script that’s driving the thought process. Then there is the anticipation to when the script might change, which can leave many mesmerized, humbled or simply amazed by the crowd response. The labor conditions are not so robust and even the Fed has made that point clear. The much discussed data point will center on participation rate:

“The participation rate, which indicates the share of working-age people in the labor force, decreased 0.1 percentage point to 62.8 percent, matching the lowest since 1978.” (Bloomberg, September 5, 2014)

Financial markets stumbled into a new era with advanced technologies impacting trading, further talks of regulations and ongoing evolution of complex products, but the human element of emotions (fear, greed etc.) never goes away. The desire to break new record highs mixed with crowd chasing returns is to be expected. Basically, investing in large brand names (e.g. Dow 30) enables companies to expand profits due to large distribution access, while borrowing at favorable low rates has helped corporate profits. Sure, that’s one version that’s closer to a tangible reality, but the brutal truth is becoming clearer. Politics and other distractions aside, speculators of all kinds must reconsider the difference between wealth creation and a robust economy. For now, the bearish sentiment is at lows that have not been seen in over two decades. It suggests that confidence is growing and that the script has been magical, especially for the S&P 500 index.

Brewing Hints

Emerging markets (EM) have recovered this year, considering the over 23% move since February 3rd lows. Despite the sluggish economy, the EM indexes are roaring which is surely a global theme at this point. Interestingly, recovery in EM has not translated to gains in commodities despite both being correlated in the past.

Meanwhile, the dollar recovery is stunning in some ways, and presently is the most meaningful macro move over the last few months. As the ECB continues to cut rates, the US has contemplated raising rates in turn benefiting the Dollar. Perhaps, there is a rush that awaits to purchase European stocks given the success of US stocks with low rate polices. Central banks have seen the US script working and replicating it seems appealing and convincing. After all, as stated above when simplicity works convincing many are convinced easily and complexities are ignored. In the case of Eurozone, the growth has been sluggish and well documented. Perhaps, the biggest hint of them all is how low rates do not spur growth. Thus, if Europe replicates what has been tried; then it surely feels like desperation, and that they are in need of potential “miracle.” Of course surprises are always possible. This illustrates how the market has succeeded in eliminating skepticism and volatility, but when simplicity fails typically the truth is recognized in an ugly fashion. Timing the inevitable is miraculous as well, but ignoring these danger sings is fully reckless.

Article Quotes:

“The ECB has had years to plan asset purchases (QE Lite), yet Mr. Draghi dodged all questions about the scale. You might conclude that there is still no real agreement on the course of action. Little wonder since Germany’s member of the ECB board – Sabine Lautenschlaeger – said only two months ago that QE is unthinkable except in an “emergency”, and no such emergency exists. By default, the ECB is making the same mistake as the Bank of Japan in its dog days, trying to buy time with half measures, hoping that global recovery will lift Europe off the reefs without anything being done. They may get away with this, but there is a very high risk that Europe will instead remain trapped in mass unemployment, with ever rising debt ratios. The overall policy settings remain contractionary. Monetary policy is still too tight. Fiscal policy is too tight. Bank regulations are too tight. Little is in fact being done to stop a deflationary psychology taking hold across half of Europe. Nobel laureate Joe Stiglitz warns of a depression running through most of this decade. Mr. Draghi said he hopes to ‘significantly stir’ the ECB’s balance sheet back towards the levels of 2012 (€3.1 trillion). That means a €1 trillion boost, and there begins the first big confusion. Much of this will be in the form of cheap loans to banks (TLTROs) in exchange for collateral. As the IMF said earlier this summer, this not remotely akin to QE. The ECB is not taking the risk on its own balance sheet. The monetary mechanism is entirely different, and far less powerful.” (Telegraph, September 5, 2014)

“China’s weak demand for electronics parts and other goods made in Asian countries has economists scratching their heads. U.S. economic growth is picking up, and if history is any guide, this should lead to stronger demand for Chinese-assembled electronics. That in turn should fire demand for electronics parts supplied from across Asia. Something is different this time. South Korea is China’s main source of intermediary goods for computers and other electronics. But Korea’s exports to China declined between May and July. Exports from Taiwan to China also have been subdued. Officials in Seoul worry that China is moving up the value chain, producing its own higher-end electronic parts, and eating Korea’s lunch in the process…. Over time, as China does move up the value chain, HSBC sees risks for Korea and Taiwan. Countries like Thailand, that currently compete with China in lower-end manufacturing of computers, could benefit as China exits some segments.” (Wall Street Journal, September 5, 2014)


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

S&P 500 Index [2,007.71] – About a month ago, S&P made an intra-day low of 1,904. Since then it has not looked back and has gained over 5%. The infatuation with the 2,000 level continues, with September 4th highs (2,011.17) being the next all-time high range for traders.

Crude (Spot) [$93.29] – Downtrend continues. Since the July highs of $107, the commodity has dropped significantly. August lows of around $92 set the benchmark for new lows.

Gold [$1,271.50] – The rally from $1,200 lacks vigor and momentum. The next hurdle remains at $1,300, which has been a struggle for buyers. Since September 9, 2011 Gold has dropped from peaking at $1,895. That downtrend is still intact as short-lived rallies have failed to produce a noteworthy recovery.

DXY – US Dollar Index [83.73] – Explosion continues. After bottoming in May, the last few months have seen a stronger dollar. Critical trends shift as the ECB looks to lower interest rates in turn making the dollar stronger. A game changer of sorts potentially brews, many looking at summer 2013 highs of 84.75 as the next critical level.

US 10 Year Treasury Yields [2.45%] – After testing 2.35% on three occasions recently, rates settled above 2.40%. The last five trading days suggest a new upside move, but a follow through is eagerly awaited.


Dear Readers:

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

Market Outlook | September 2, 2014

“The person who in shaky times also wavers only increases the evil, but the person of firm decision fashions the universe.”(Johann Wolfgang von Goethe 1749-1832)

Themes Rehashed

As August draws to a close, the month's theme only rehashed the unanimously accepted bull market that roared yet again. Of course, the dynamics of extended period low interest rates, low volatility and low regard for fear are brightly reflected in key indexes. Surely, the few sirens of danger have come and gone. Short-lived worries in financial markets were briefly attributed to rate hikes. As usual, the desperate yield-chasing remains an addictive habit fueled with assurance from the Fed. The central bank continues to marshal market movement and the prevailing perception of asset prices. Central banks resume the quest to justify stimulus efforts while pragmatic observers are more and more skeptical of actual growth particularly in Europe.

Meanwhile, the late summer days are known for low volume. There is a danger to making a lot of some minor moves witnessed in last two weeks. Nevertheless, there are certain victories that the bulls will point to because of record highs and the lack in selling pressures. Geopolitical events of a long-term nature, such as Ukraine tensions to fragile European economies, failed to rattle markets for now. Silently, the rising dollar and weak commodity prices are noteworthy hints that have not been fully understood by investors. That said, another month passes where risk-takers were unscathed as general sentiment turns into hubris in some circles.

Occasional Memories

Seven years ago this week, it was the quiet before the storm in Autumn of 2007— ahead of the 2008 crisis. Memories of those late bull market days linger for this generation. Back then, broad indexes flirted with all-time highs, then eventually topped in October 2007. Historic indeed. Surely, inerasable from modern memory. However, the comparison to today’s set-up might be overused as history rarely repeats in the same fashion. Yet, we know historical patterns do repeat, and there are plenty of reasons to ponder regarding a long-awaited market scare. Many sought downside protection, and others have expected a correction for several months. Thus, the test of conviction is setting up ahead (yet again) this autumn where talks of Fed policy change, mid-term elections and the questionable health of the global economy can suddenly shift the comfortable ride. One-sided markets are glorified and occasionally simplified when unwavering patterns (i.e stocks, volatility) become the norm quarter after quarter. This type of market behavior was seen from 2002-2007, therefore reflecting on the past is to be expected. As for looking ahead, fighting complacency while not overreacting to fear is the balance that can be very rewarding and key to survival for money managers.

Beyond Traditional Sentiment

Foreign policy (FP) concerns have mounted to new levels, but how exactly is that related to day-to-day market behavior? Perhaps, it is a puzzle that maybe rewarding for those willing to decipher. If S&P 500 company buybacks reduce the supply of shares and the markets go up, then that’s simply a function of the supply and demand of shares. Less to do with FP but more to do with market mechanics.

In other words, market intricacies drive movements more than any actual "danger" that may materialize. At least it seems so in recent market actions. Similarly when interest rates are low, risk taking is encouraged due to relative reasons rather than the absolute health of economies. Sure headlines do not translate into an instant panic or real-time shakiness as some would initially suspect. If a terror/extremist danger surfaces in Middle Eastern countries (and beyond) then how is one calculating the damages on global trade and global indexes? Is one able to? Is the impact even meaningful? If sanctions in Russia expand, how is the potential danger to the Eurozone translated into share price damage? Not to mention an escalating war in various regions is part of the consideration, as well. Surely, these are unanswered questions and markets have not fully bothered to contemplate the outcomes, unlike FP experts who passionately debate potential consequences. Plenty of day-to-day headlines can serve as an excuse for "selling" equities at this point, but other traditional financial/economic factors are sounding the alarm for those willing to listen.

1) Eurozone weakness persists:

a. Fragile conditions across key European economies

"Germany is teetering on the edge of recession. France is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago. Since these three countries account for two-thirds of euro-zone GDP, growth in places like Spain and the Netherlands cannot make up for their torpor." (The Economist, August 30, 2014).

b. Russian sanctions by EU persists further doubts to interconnected economies

"Russia’s ban on imports of western food could cost the European Union an annual 6.7 billion euros ($9 billion) in lost production, according to ING Groep NV." (Bloomberg, August 20, 2014)

2) Despite rising shares of Emerging Market indexes this year, growth is visibly slowing:

a. Brazil faces technical recession after months of weakness

"Gross domestic product shrank by 0.6 percent in the April-June period from the previous three months, after contracting a revised 0.2 percent in the first quarter." (Bloomberg, August 29, 2014).

b. Chinese economy has slowed down for a while and evidence has grown recently

"The drop in the official [Chinese] PMI in August was broad-based, with the biggest falls in output and new orders. New export orders also fell but by a smaller margin, indicating that manufacturing weakness last month was primarily the result of lackluster domestic demand." (Financial Times, September 1, 2014)

3) Crude oil demand is down along with other commodities reiterating less global growth:

“The IEA[International Energy Agency] cut estimates for oil demand growth this year and next after the annual expansion in fuel consumption slowed to 700,000 barrels a day in the second quarter, the lowest level since early 2012… While demand growth will rebound next year, the pace will be 90,000 barrels a day slower than previously expected because of lower estimates for China and Russia.” (Bloomberg, August 12, 2014).

Big Picture Perspective

These are three macro factors that point to less stable growth conditions when compared to the last decade. Also, the three catalysts are worth tracking weekly between now and year end. Potentially these factors may impact corporate profits and sentiment alike. Despite fear being out of fashion this is the time to reexamine. At least any damage to perception can stir an unknown response. A smooth-sailing market has plenty to justify, what’s the next upside hurdle if it is already at all-time highs? Fed appears to be in the late innings of the stimulus plan. The same can be said about the buyback phenomenon. Thus, a trend shift is not wishful thinking or a fear mongering tactic (many got it wrong before); rather, it is more tangible than in 2013 or 2012. Even the most optimistic bulls must wonder what is the next upside target when all bullish dreams have been fulfilled.


Article Quotes:

"The European Central Bank has talked up the chances of launching a bond-buying programme to ward off deflation and having led markets down that path there could be a serious adverse reaction if it does not follow through. ECB President Mario Draghi pledged on Aug. 7 to use all necessary means to avoid deflation, including ‘quantitative easing’ if necessary. He upped the ante at a U.S. Federal Reserve symposium in Jackson Hole on Aug. 22 by insisting ‘all the available instruments’ would be used to preserve stability. Markets needed no more invitation to start pricing in QE, no matter how difficult it remains for other ECB policymakers to swallow. Long-term borrowing rates for euro zone governments from Germany to the ‘periphery’ in Spain tumbled to new record lows and the euro currency shed almost 2 percent against the dollar. Ten-year German bond yields shed 26 basis points in August, the biggest monthly fall since January, and 30-year yields lost 31 bp, the biggest loss since May 2012. Equivalent Spanish yields dropped half a percentage point. If the ECB does not meet market expectations, government bond yields could spike in countries like Italy, which is already back in recession, and fellow high-debtor Spain. Deutsche Bank estimates bond investors have now factored in a 50-70 percent probability of some ‘QE-infinity type’ programme from the ECB." (Reuters, September 1, 2014).


“EM’s ‘fragile five’ back under pressure: The two moons that govern the fortunes of emerging market investors are starting to wane in unison. China’s investment spending – the lodestar for EM commodity exporters – is slowing and the US Federal Reserve is sounding more hawkish toward unwinding monetary stimulus. The last time such a lunar aspect held sway – in early 2014 – EM market mayhem ensued. Hit particularly hard were the currencies, equities and bonds of the so-called ‘fragile five’ countries – Brazil, South Africa, Indonesia, India and Turkey. But is history set to repeat itself this time around? ‘Growth in emerging markets has been driven by Chinese demand and easy global liquidity, but both of these are now under pressure,’ says Maarten-Jan Bakkum, strategist, emerging markets equity at ING Investment Management.’ Generally, EM equity is probably less vulnerable than EM debt . . . because EM hard currency debt markets have been pushed up more by liquidity (under the easy money conditions supported by the US Fed),’ Mr Bakkum adds. His concerns are underlined by Institute of International Finance (IIF) statistics published this week showing that estimated portfolio inflows to EM assets fell sharply in August to $9bn, down from a monthly average of $38bn between May and July.” (Financial Times, August 28, 2014).

Levels: (Prices as of close August 29, 2014)

S&P 500 Index [2,003.37] – From August 7th lows to Augusts 26th highs, the index gained over 5%, highlighting an explosive month while surpassing the 2000 mark. Given all these bull mark achievements, expectations are set even higher as the room for disappointment increases as well.

Crude (Spot) [$95.96] – After a very steep sell-off, there are mild signs of bottoming. August 21st lows of $92.50 suggest that the selling pressure is on pause. The $200 day moving average is nearly at $100 ($99.77); observers wait to see if a sustainable bounce is in play.

Gold [$1,292.00] – Stuck in the $1,300 range for a while. Has settled at a neutral place and is lacking momentum on either direction. In the near-term reaching above $1,320 can trigger additional questions, otherwise it is range bound.

DXY – US Dollar Index [82.74] – Since early May, a convincing upside moves with very limited interruption. One of the more notable summer trends as the Euro is expected to weaken.

US 10 Year Treasury Yields [2.36%] – 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.

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.