Market Outlook | July 6, 2015

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

Summary
‎
Hints of risks are hardly foreign to this post 2008 market where many concerns have been raised from slowing real growth to Fed-reliant markets to fragile emerging markets. Despite the Greek/EU debate monopolizing financial headlines, more concerns have been building. Interestingly, the market has been stuck in a trading range and reached an inflection point with massive anticipation of the next move. Perhaps, Greece is the one known macro issue that can quickly turn into a catalyst for emotional investor responses. China’s Emerging Market woes are another volatile matter. Market participants and the Fed are in need of a new narrative especially since volatility has been numb and low rate policies have been the norm, but growth remains weak. Resilience will soon be tested which is only a natural way to gauge investors’ sentiment under duress.

Political Drama

Greece related drama is polluting the airwaves as the debate has just as much to do with political crisis as financial mismanagement. The root of the problem should not be dismissed in this never-ending discussion.

So the public debate and negotiation resume. Meanwhile, the painful reality is here again and no magic can change it. The smearing and finger-pointing between Greece and EU is useless in terms of substance, especially considering "it takes two to dance.” As in, behind every lender there is a borrower and vice versa. The fallout of mismanaged risk and lenders scrambling to get paid is one matter. The ugly resolutions via political based statements by both sides are playing out publicly. The structure of EU is the bigger problem and was witnessed in 2011. The noise at times is much louder than the actual financial troubles according to the risk or volatility measures thus far. However, the next few days will provide some clarity on the mindset of investors and the magnitude of this chaos. Even if this Greece chaos seems fully understood, the element of surprise may find a way to add more suspense.

Beyond Greece

Some look for unexpected shocks or looming dangers, but what about understanding the present concerns from China to Puerto Rico? Even without the Greece /EU circus, there is plenty to digest and plenty risk to assess in a deceivingly low volatile world. There is more turmoil beneath the surface than revealed by the Fed and analysts of multi-national corporations.

Puerto Rico's default may not ‎hit the worrisome scale as Greece did for noisemakers, but China's equities sell-offs are alarming quite a few folks. Mutual funds making bets in what's assumed to be safe yields now find those bets severely back firing.‎ This itself is another reminder for how risk taken in “junkiest” investment turns out to be junky. Unlike Greece negotiations , which is marred with political crisis, the Puerto Rico near default crisis seems to be a business-only matter to be resolved via legal means:

“Municipal bond researchers at Franklin Templeton, whose funds are among the largest owners of Puerto Rico debt, on Wednesday predicted a "long and costly" legal battle as the Caribbean nation tries to restructure more than $70 billion in obligations.” (Reuters, July 1, 2015)

Chinese equity markets felt bubble-like traits for a while. That’s been well documented and the recent sharp selling pressure awoke a wider audience. Considering other BRICS have been in bad shape, many felt that China surely is more stable than other Emerging Markets. Yet, there are plenty of concerns, and, importantly, volatility in the Chinese markets are not quite seen in developed markets:

“China Securities Regulatory Commission (CSRC) unleashed a string of supportive policies, including a 30-percent transaction fee cut and green light to bond issuance among brokerages, on Wednesday evening after the Shanghai gauge plunged 5.2 percent… The amendment, whose draft were scheduled to be on public consultation till July 11, was released on Wednesday evening ‘in haste for special circumstances’, said the securities watchdog on its official microblog weibo.” (China Daily, July 2, 2015)

Does a volatile stock market also reflect a softer economy? Perhaps, that’s the bigger question that awaits an answer more quickly than many may have imagined. Yet, the first signs of “blood” have persisted in recent weeks.


Further Slowdown Hints

1) Commodities are in a downturn from a cyclical point of view. We can gain a lot of perspective into weakening global growth from the downturn of commodities. The first half of 2015 reveals the same weakness with Gold, Copper, Silver and Iron ore falling into the negative by end of June. Crude's moderating prices are not quite convincing of a full recovery either, as the supply-demand imbalance is being discovered.

2) An increasing number of Central Banks continue to lower rates further which showcases a lack of growth— a desperate attempt to induce an unnatural recovery. Asset appreciation is not quite economic growth, and at some point these illusions or untruthful chattering can turn into bitter reality. China's central bank cutting rates for the fourth time since November tells a story itself.

The near-zero interest rate narrative sold as fueling economic growth has shaped the main plot. Yet, the substance behind real growth is slim to none and highly questionable.

3) The Dollar's strength showcases the unstable conditions of Emerging Markets as much as weakness in Gold or the appeal of the most sought after currency. More demand to own dollars is nothing new in last twelve months.

4) US labor numbers suggested much weaker growth than expected. For a while, rate hike discussion has centered around a growing economy and stronger labor. With labor participation at a multi-decade low, it is harder and harder to convince observers the improving labor numbers. Surely, the middle class and business owner can relate to this as much as they can relate to the low inflation data. Thus, celebrating “growth” due to elevated assets again proves to be misleading.

Article Quotes:

“China gets all sorts of credit for managing its economic boom over the past three decades. But promoting an equity market bubble—including vocal cheerleading in state media—was a clear policy mistake. It is a reminder that China’s reputation for omnipotence in economic matters is hardly unassailable. Similar mistakes handling the economy’s deleveraging could prove more devastating. A campaign this year to clean up local government debt turned out to be insufficiently thought through. Beijing had to walk back key elements and supplement the program with a bailout through a central bank bond swap program… The weakness of the euro and the yen means that on trade-weighted, inflation adjusted terms, the yuan has strengthened 13% over the past year, according to the Bank for International Settlements. Against this backdrop, the yuan would probably be falling against the dollar if left to its own devices. While the chances of a currency unraveling are remote, Beijing’s ability to withstand the pain of a strong yuan in the face of a sluggish economy may necessitate a change in tack when investors least expect it.” (Wall Street Journal, July 5, 2015)


“The United States pushed both sides [European creditors and the International Monetary Fund (IMF)] very hard to reach an agreement, and it does still have significant influence with Europe and with the International Monetary Fund. American leaders had a number of fears, starting with concern that a failing state at the south end of the Balkans and not far from the Middle East and North Africa would be seriously problematic. This was compounded by fears of the outside possibility that financial distress emanating from Greece would trigger another, albeit smaller, financial crisis. Not to mention the recognition that Greece has strong cultural affinities with Russia and might become a Russian ally within the European Union. Many European leaders also shared these fears.” (Brookings, June 25, 2015)

Key Levels: (Prices as of Close: July 2, 2015)

S&P 500 Index [2076.78] – On several occasions in 2015, the index has failed to convincingly surpass 2120. This reiterates the neutral state between buyers and sellers. Reinvigorating another upside run has been a struggle recently.

Crude (Spot) [$56.93] – In recent weeks, a defined range between $58-61 has mostly summarized the trading pattern. If Crude stays below $58, then sellers will wonder if a wave of selling pressure awaits ahead. Critical days and weeks are ahead for trend implications.

Gold [$1,168]– The multi-year decline remains intact. Despite the debate of gold being a currency or a commodity, the trading pattern reflects a commodity that’s in a longer-term decline. Clearly, that’s been defined for many months. As long as gold stays above $1,142, buyers will be compelled to sense a potential recovery.

DXY – US Dollar Index [96.11] – Despite a somewhat shaky action in the near-term, the dollar strength remains well established. Staying above 94 suggests continuation of the strong dollar theme.

US 10 Year Treasury Yields [2.38%] – June 11th highs of 2.49% and June 26th highs of 2.48% set the tone in terms of the next upside targets. Meanwhile since January, yields have moved from 1.65% to 2.39%, which reminds us of the slow recovery of an already depressed yields.







Dear Readers:

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

Market Outlook | June 29, 2015

“It has yet to be proven that intelligence has any survival value.” Arthur C. Clarke

Summary

The Nasdaq index made all-time highs earlier this month. Climbing back to all-time highs took 15 years, which puts several market moving elements in perspective. First, shares of innovative ideas primarily in technology and biotech remain much more attractive these days than resource or commodity based ideas as seen in last decade. Second, but importantly, US equities, (and US dollar based assets) as an investment, remain in high demand as growth driven liquid themes are rewarded by investors. Third, it takes a long-time to revisit “all-time” highs which stresses the importance of grasping and tracking market cycles. Finally, the Greek sideshow is distracting day-to-day news, but other macro events might turn out to be more critical. A synchronized volatility can stir reactions which are hard to guess since “survival” mode investor decisions are unpredictable.


Turbulence Isolated

The currency markets along with commodities sparked a wave of turbulence last year. That awoke participants to take actions by reducing exposure in EM currencies and limit bets in low growth EM areas. Then the bond market volatility in the first half of 2015 re-emphasized that other key markets are not as smooth as US equities. With Greece back in the forefront, the volatility in bond markets is back. In the last 12-18 months volatility is visible commodities, currencies, and bonds. On the other hand, US Equities continue to escape from spikes in volatility as worrisome trading patterns and price adjustments are not visible. Therefore, equity volatility (VIX) remains insulated from the rest of the financial markets as the established bull market marches on:

“The Standard & Poor’s 500 Index hasn’t posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007, according to data compiled by Bloomberg and Deutsche Bank AG. The last time the gauge went without a 2 percent move in the first half of the year was in 2005.” (Bloomberg, June 23, 2015)


Connecting the Pieces
‎
Investors emphasizing survival as a theme have piled on to US dollar based assets, as exhibited by the demand for US equities. Recent unfolding events of the EM currency debacle, commodity sell-offs, Russia's political crisis, and Greeks never-ending chatter all served as "marketing" promotion to own US stocks. The same lesson has echoed again in 2015. When Chinese stocks drop over 7% in one day, while US stocks barely move over 2% for many days (as stated above), then it serves as another reason for wealth preserves to shift into US assets. Even with Nasdaq around its all-time highs, the markets behavior is less focused on "stretched" valuations; however, the collective investors decision turns their attention to liquidity and stability.

In the near-term, there seems to be more uncertainty underneath the surface (as usual), but markets with relative stability become a much more appealing story. Nothing is really "stable" but a multi-year bull market suddenly appears like an "insurance" for those looking for both growth and liquidity. The questions boil down to one critical matter: When does “safety” turn into misery? That's the unknown and those assessing risk have calculated all possibilities except narrowing the time-frame. Timing seems near impossible as markets harshly teach investors. The Greek episode has been heard before ad nausea, and that is hardly a shock for participants. Timing is not answered by the Fed, either. Instead, the long search for catalysts reverts discussion back to Central bank actions or less expected shocks. As month-end trading and the first half of the year draw to a close in the near-term, the big picture narrative has hardly changed.

Fed’s Messaging

For some, the Fed messaging seems a mixture of comical smooth talk rather than substance driven. As usual, central banks appear like a PR machine in their approach to calm nerves, to provide some albeit very limited guidance, and to influence the ‎narrative (market chatter):

"The U.S. hasn’t reached 3% annual growth in gross domestic product since 2005 and few economists, inside or outside the Fed, believe the good old days are coming back anytime soon. Most believe the upper speed limit for the U.S. economy is now significantly lower: 2% to 2.5% vs. a historic growth rate of 3.3%."‎ (Marketwatch, June 21, 2015)


The Fed has succeeded in helping guide the equity market higher and in calming nerves from crisis mode. However, the substance that follows the near all-time highs in the market is highly questionable and will soon be confronted by overly anxious risk-takers and believers of the Fed. The rate-hike guessing-game lives on as speculation without basis.


Emerging Risk Reassessed

EM equities tell a different story, though. The shaky behavior in commodities and currencies was directly linked with EM stocks. Plus, slowing global growth brutally impacted EM markets as their prior decade-long favorable run became questionable. The collapse in Crude and Gold reaffirmed the slowing global economy and waning demand. Risk-takers of EM investments are now assessing if there is value opportunity in finding new ideas in less favorable regions. For now, the more established US stocks do not offer the same risk-reward as EM. Those patient, value-seeking investors may revisit EM, which has been dull for a while.

Unlike the Nasdaq or S&P 500 index , the MSCI Emerging market index is far removed from its 2007 all-time highs. Clearly, the BRICS are struggling despite China’s recent explosion and recent sharp collapse. BRICS are attempting to rediscover any fundamental strength that’s long been missing from Russia to Brazil. Lower rates were not enough to spark a noteworthy recovery in EM, but if the risk is better understood then patient investors might step in aggressively. In terms of China, which has roared at a rapid pace, some reality is setting in with massive correction:

“A 20 percent fall in Chinese stocks over the past two weeks, mainly blamed on a flood of initial public offerings, highlights the risks that regulators face as they try to use the stock market to support the slowing economy….. The stock market, which has seen indexes gain as much as 150 percent since November, has been one of China's few bright spots as economic growth has flagged and property prices have slid, and regulators have tried to take advantage of it to support the wider economy.” (Reuters, June 28, 2015)

Article Quotes


“In the past year, volatility in global financial markets began to rise from the unusually low levels that prevailed in mid-2014,spiking a few times. The spikes, which followed years of generally declining volatility, often reflected concerns about the diverging global economic outlook, uncertainty about the monetary policy stance and fluctuations in oil prices. Investors also began to demand higher compensation for volatility risk. In particular, after narrowing until mid-2014, the gap between implied volatility and expectations of realised volatility ("volatility risk premium") in the US equity market started to widen. As risky assets such as equities and high-yield bonds were hit during these bouts of volatility, investors flocked to safe government bonds, sending their yields to new lows. The easing actions of central banks helped to quickly quell such spikes. Nevertheless, nervousness in financial markets seemed to return with increasing frequency, underscoring the fragility of otherwise buoyant markets. A normalisation in volatility from exceptionally low levels is generally welcome. To some extent, it is a sign that investors' risk perceptions and attitudes are becoming more balanced. That said, volatility spikes induced by little new information about economic developments highlight the impact of changing financial market characteristics and market liquidity.” (Bank For International Settlements, June 28, 2015)

“China quadrupled the number of countries to which it was the biggest export market in the decade to 2014, the UBS analysts wrote. In the same period, the U.S. almost halved the number of countries for which it held the same title. In terms of exports as a share of GDP, nearly all countries UBS covers saw their China exposure rise; some doubled -- Japan, South Korea, U.S., Brazil, Canada, Chile -- while some tripled -- Germany, the EU -- and some even quadrupled, like Australia. For commodity exporters including South Africa, Australia, Indonesia and Brazil, the impact of a slowing China has been predictably negative. Re-exporting countries -- those most dependent on China's electronics demand such as Taiwan, Korea, the Philippines and Vietnam -- fared better. Vietnam and the Philippines did this by increasing their market share and the value of their electronics and textiles exports to China. Taiwan and Korea, meanwhile, increased supplies destined for China's final consumers.
The UBS economists note that the role of processing in China's export story has shrunk since the global financial crisis. Due to weaker developed-market demand and eroding competitiveness in lower end and labor-intensive sectors, China is moving up the value chain. That could mean less Chinese demand for developed exporters and more competition, too.” (Bloomberg, June 23, 2015)


Key Levels: (Prices as of Close: June 19, 2015)

S&P 500 Index [2101.49] – Since mid-April, the index is stuck in a narrow trading range with very contained to minimal volatility. Either buyers and sellers both lack conviction or this is a natural stalling phase within a bull market. Directionless describes most of the market action in recent weeks.

Crude (Spot) [$59.61] – In the last two months, Crude has hovered around $60 with swings that are within $57-61 levels. This appears as an ongoing breather after a sharp spring recovery from last year's demise.

Gold [$1,172.65] – On multiple occasions in the last four months, the commodity has failed to climb above $1,200 in a meaningful way. This further illustrates the lack of momentum and limited catalysts at this junction.

DXY – US Dollar Index [95.47] – Returns back to familiar above 94 range. March highs of 100 have not been reached in recent weeks. Despite the multi-month pause, the Dollar strength remains intact.

US 10 Year Treasury Yields [2.47%] – The June 11, 2015 high of 2.49% remains a critical hurdle rate as last week’s run appears to re-test these highs. A critical junction is reached as traders await the month-end behavior.




Dear Readers:

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

Managing the Present

Today's mechanics of low rates, low volatility, increased buybacks, more Mergers & Acquisitions, and US equities relative appeal reflect the present state of inner workings. These factors serve as the different ‘engines’ that enable this bull market to roar. These forces of supply/demand of available shares, limited investments options, and demand for liquidity in times of uncertainly all rationally justify elevated equity prices. Even the gloom and doomer must acknowledge these ‘engines’ that tell a story of survival (for investors) rather than sentiment. Money managers must live in the present as they're inclined to generate returns, not over-think outlier events. Taking no risk and glorifying cash positions is not the pragmatic option for most, albeit there is the right time for everything.

Chatter of tomorrow’s fears is not aligned with the limited investment options offered in the market. Until this set-up changes, patience is desperately required for those contemplating the next noteworthy and fruitful move.

Market Outlook | June 15, 2015

‘‘Man spends his life in reasoning on the past, in complaining of the present, in fearing future.” (Antoine Rivarol)

Summary

The last four months have showcased narrow trading patterns from commodities to equities to the US dollar. Either the known trend (low rates, bullish equities and low volatility) is becoming exhausted or trepidation is looming ahead from a series of unknown events.

The tug of war between the status quo and the potential suspenseful moves ahead lives on. As seen before in prior periods, this debate is nothing new since the fate of the status quo is tied highly to the Fed’s messaging. Basically, a much needed catalyst remains long awaited and the Fed is deemed to have the answer. For investors the reward seems to lie in figuring out the present and not fearing the future. Perhaps that’s the mental challenge that’s playing out at this critical junction.

Contemplation

On one side, the markets have softly spoken in recent weeks. Prices reflect the sentiment and reasoning of participants. Right now, the lack of significant movement in prices, which reflects dull like patterns from S&P 500 index to Crude to Volatility index, seems to be uneventful for day-to-day observers.

Suspense, as usual, is mounting when reading current sentiment-based expressions. Meanwhile, speculating on the next direction is tricky, as usual, but recent price patterns suggest a mixture of calmness or neutrality. However, that “calmness” can be interpreted by some as the silence ahead of a looming, large move in either direction.

Why the “suspense”? Is it Fed driven? Greece? Extended Valuations? Or is the mood of anxiousness the usual feeling surrounding not knowing the shift or trend or magnitude of the pending moves. The hype around interest rate hikes is dominating financial services news but it has been for a while. Predicting the rate hike is a daunting task, and many will flood the airways pondering this topic. However, it only matters when the Fed takes action. Otherwise, it is merely a contemplation or intellectually stimulating chatter.

The Cost of Worrying

In the past, worrying about “suspenseful” results or turbulence ended up being irrelevant in day-to-day trading patterns. Acknowledging past results is only part of the puzzle, so one asks: What's the major fear‎ about the future? As if any future is known—It's not. Fearing the unknown (i.e. interest rate moves or spikes in volatility) has not proven to be a successful strategy; it's only a natural feeling that's to be expected. Fearing the past will repeat itself is equally just as natural a response, but when and how the past repeats itself is a mystery. A mystery that's quantified (or incorrectly assessed) as risk. So fearing the future without an actionable stance is pretty much meaningless. A lesson that's been taught by these markets for those who are willing to attentively dive into the wisdom that's not pleasant to hear. Even with this understanding, the mystery lives on.

Amazingly, enough pundits have addressed issues related to upcoming crisis or bubble-like symptoms. Some of those troubling points carry more weight than others and knowing what concerns to weigh is the ultimate challenge in risk taking. Frankly, risk-taking is accepting the “unknown”. Commodities are weak, emerging markets are struggling, and both are in a cyclical rut. Eurozone troubles are well documented, China’s near-term troubles are commonly discussed, and the US tech boom is often presumed to be in the late innings. The worries are known, the timing is not.

Some have realized there are more things to worry about than imagined. That’s the nature of risk management. Similarly, some disconnects between the Fed conducted interest rate policy and various hints of slowdowns from data points have been well established. Yes, some economic trends are not that great, but are better than the days after the post-2008 melt down. Plus, US assets are relatively better than most markets, too. Anxiety has been plentifully addressed, but it has not bothered the market either. Thus, those betting on sentiment have realized that it does not reward in practical terms (at least thus far).

Even before the next move, up or down, there is massive trepidation that's building. It starts with the latest worry of increasing bond volatility which has been lively enough to get attention:

“The ‘unprecedented’ volatility in government bond markets is making it ‘a lot more difficult to get trades done,’ said Henk Rozendaal, global head of fixed income trading at Rabobank. Mr. Rozendaal said that banks’ risk appetite is low at the moment due to volatility in German bonds in particular. ‘Bond volumes used to be good. Now, banks don’t want to trade large blocks of bonds, because they have no way of getting out of these positions quickly if things explode,’ he said.” (Wall Street Journal, June 5, 2015)

Managing the Present

Today's mechanics of low rates, low volatility, increased buybacks, more Mergers & Acquisitions, and US equities relative appeal reflect the present state of inner workings. These factors serve as the different ‘engines’ that enable this bull market to roar. These forces of supply/demand of available shares, limited investments options, and demand for liquidity in times of uncertainly all rationally justify elevated equity prices. Even the gloom and doomer must acknowledge these ‘engines’ that tell a story of survival (for investors) rather than sentiment. Money managers must live in the present as they're inclined to generate returns, not over-think outlier events. Taking no risk and glorifying cash positions is not the pragmatic option for most, albeit there is the right time for everything.

Chatter of tomorrow’s fears is not aligned with the limited investment options offered in the market. Until this set-up changes, patience is desperately required for those contemplating the next noteworthy and fruitful move.


Article Quotes:

“China's leadership has long been impressed with the Singapore model. Since Deng Xiaoping, its government has been much more interested in capitalism in the style of Lee Kuan Yew than class struggle in the style of Karl Marx. In China, the mix of markets and smart management has indisputably worked another miracle, and on a vastly larger scale than Lee's. It's a record that can make investors credulous. Lately, the government has defied predictions of an economic hard landing: The economy has slowed, but hasn't crashed. Beijing wanted a gentle slowdown -- part of its effort to rebalance the economy toward consumption and away from exports and investment -- so it pulled some fiscal and monetary levers and that's what happened. Targeted growth of 7 percent in gross domestic product this year, fast by any other country's standards, looks achievable.” (Bloomberg View, June 14, 2015)

“Fed stimulus, widely accepted as a tonic for stocks, usually kicks off in the middle of weak spells. The six months following the start of the last three easing cycles saw stocks lose 8.2% on average, while returns were barely positive in the preceding six months.Equity downturns usually precede economic ones, and the Fed often takes financial markets into account when making policy. So the fact that easing cycles are associated with more calamity for stocks than tightening shouldn’t be surprising. This tightening cycle will be different simply because rates should remain very low by historical standards for months or even years. Meanwhile, stock investors never have been so attuned to the Fed’s actions, jumping on every nuance in language. The ultimate impact on stock prices this time is harder to predict. A safe bet, though, is for extreme choppiness around the Fed’s move.” (Wall Street Journal, June 14, 2015)

Key Levels: (Prices as of Close: June 12, 2015)

S&P 500 Index [2094.11] – On several occasions buyers have stepped in at the 2080 range in recent weeks. Meanwhile, buyers' enthusiasm has waned at 2120 in the last 50 days. Both are awaiting some game-changing catalysts.

Crude (Spot) [$59.96] – The last several weeks have witnessed an uneventful movement between $58-62 levels. This confirms the price stabilization after the demise in 2014.

Gold [$1,178.50] – Mostly flat from March–June. A narrow range is forming from $1,180-$1,220. The lack of catalysts tells the story of unmoving trading patterns.

DXY – US Dollar Index [94.97] – After an explosive 2014, the dollar strength has moderated during the last 2-3 months.

US 10 Year Treasury Yields [2.39%] – There is further evidence of a break-out above 2.20%, which was not the case in March. The highs of 3.05% from January 2014 are the next key target for observers. This recent run mirrors the move in 2013, from 1.99% (June 2013) to 3% (September 2013).




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.

Dealing with market paradoxes

(From June 1, 2015)

There are few contradicting factors that tell the story about trading and investing in this market. A multi-year bull market is adored, of course, given recent success, but also feared since it has had a good run. Thus, recognizing these points is vital:

• The more the Fed talks about the “strong” possibilities of rate hikes, the more confirmation of economic slowdown.

• The more interest rates remain low, the more folks feel justified taking additional risks by chasing yield.

• The more the volatility index declines, the more unforeseen risk ahead due to complacency.

This is a mind game, after all, where the trickery is plenty and truth discovery requires sharpness and some luck as well.

Mechanical Market Drivers

Beyond the low rates, there are forces that elevate stock prices:

1) Companies buying back their own shares and reducing the available supply of shares.

• “In April, a staggering $141 billion in buybacks were authorized—the most ever in a single month and an increase of 121 percent from April 2014. If this pace keeps up, a record $1.2 trillion in buybacks could be reached by year’s end, crushing the all-time high of $863 billion set in 2007.” (Valuewalk, May 31, 2015)

2) Increase in Merger & Acquisitions continues to reduce available company shares in the market place.

• “There have been $406 billion in deals to buy technology and telecommunications companies so far in 2015, on pace for the highest yearly total since 2000, after hitting a nearly decade-high mark last year, according to research firm Dealogic.” (Wall Street Journal, May 29, 2015)

3) The lack of reliable, safe, and liquid markets with stable currencies results in another favorable reason to own stocks. In this respect, US markets remains resoundingly attractive for capital allocators.

These technical or mechanical factors play a massive role in driving price direction. Surely, this is not the best fundamental description of the real economy in terms of wages, job creation, and sales. Nonetheless, these factors cannot be dismissed when assessing liquid markets.

Market Outlook | June 1, 2015

“Truth lives on in the midst of deception.” Friedrich von Schiller (1759-1805)

Summary

A mixture of outrage and dullness are playing out in financial markets. Two opposite feelings that co-exist and paint a picture of today’s inter-connected market realities. Outrage is driven by the disconnect between deteriorating economic conditions for business operators versus a near all-time highs stock market. Meanwhile, the known trends of the Central bank led to low rates, elevated equity prices, weaker commodities, and an increased demand for US assets define the dullness. Similarly, the known risks of Eurozone uncertainties, BRIC slowdown, and low inflation are also dull in providing a game changing catalyst. Interestingly, this dullness might be deceiving, but the ultimate judgment (or truth discovery) has not arrived for this bull market.

Outrage & Dullness

Some observers are outraged by the under emphasis regarding increasing signs of a weak global economy. Weak commodity demand, low inflation, and slow growth rate appear both in Developed and Emerging Markets. Here is one example last week: “The Institute for Supply Management-Chicago Inc.’s business barometer fell to 46.2 in May from 52.3 the prior month, a report showed Friday. Readings lower than 50 indicate contraction” (Bloomberg, May 29, 2015).

Yet, these fragile revelations day after day are quickly trumped by the long drawn out “miracles” of QE. In turn, low rate policies have driven asset prices much higher and as a consequence have created some ease from massive collective and visible worries. However, the verbal artistry in the Fed’s public statements and ongoing posturing regarding rate hikes are turning out to be massively misleading.

Dullness is when volatility is nearly dead, while the synchronized lift off in equities remains in full gear. This is navigated and credited to central banks that have influenced asset appreciation while calming nerves and dramatic worries. In addition, the constant over-glorification of the US recovery is triggering a misleading feeling of safety. The more the bull market extends, the more the trust in the Fed strengthens. Sure, there are some bright spots in the economy, but these are very limited and not quite broad based. The discussion points regarding catalysts and trading patterns of this market are dull, but the uncertainty that’s building up is huge (and has been a plenty). Deciphering when this dullness turns into outrage is the question for money managers of all kinds. Inevitably, that’s how it ends, but timing is the mysterious element that determines one's fortunes in this game of speculation.

Mechanical Drivers

Beyond the low rates, there are forces that elevate stock prices:

1) Companies buying back their own shares and reducing the available supply of shares.

• “In April, a staggering $141 billion in buybacks were authorized—the most ever in a single month and an increase of 121 percent from April 2014. If this pace keeps up, a record $1.2 trillion in buybacks could be reached by year’s end, crushing the all-time high of $863 billion set in 2007.” (Valuewalk, May 31, 2015)

2) Increase in Merger & Acquisitions continues to reduce available company shares in the market place.

• “There have been $406 billion in deals to buy technology and telecommunications companies so far in 2015, on pace for the highest yearly total since 2000, after hitting a nearly decade-high mark last year, according to research firm Dealogic.” (Wall Street Journal, May 29, 2015)

3) The lack of reliable, safe, and liquid markets with stable currencies results in another favorable reason to own stocks. In this respect, US markets remains resoundingly attractive for capital allocators.

These technical or mechanical factors play a massive role in driving price direction. Surely, this is not the best fundamental description of the real economy in terms of wages, job creation, and sales. Nonetheless, these factors cannot be dismissed when assessing liquid markets.

Dealing with paradoxes

There are few contradicting factors that tell the story about trading and investing in this market. A multi-year bull market is adored, of course, given recent success, but also feared since it has had a good run. Thus, recognizing these points is vital:


• The more the Fed talks about the “strong” possibilities of rate hikes, the more confirmation of economic slowdown.

• The more interest rates remain low, the more folks feel justified taking additional risks by chasing yield.

• The more the volatility index declines, the more unforeseen risk ahead due to complacency.

This is a mind game, after all, where the trickery is plenty and truth discovery requires sharpness and some luck as well.

Growth Desperation

It has been discovered that the BRIC's are struggling, especially in 2014. Brazil has felt pain for a long while, Russia is affected by several visible forces, and China is reevaluating its status as a growth story. The investment returns and excitement are not the same as last decade, and as usual frontier markets offer more risk and more reward for high return seekers. In the context of a sluggish developed world, where rates are low and "safety" is the driver, some growth stories will be sought after. For now, the biggest EM story revolves around China as bubble like symptoms persist. Last week's sharp and heavy sell-off’s in Chinese markets begs another question about inter-connected "risk" and early awakening of crisis-like mindsets:

“Were Chinese stocks to plunge, that would weigh heavily on the economy — and, in turn, the rest of the world. It’s worrying, then, the Shanghai Composite fell by almost 7pc on Thursday, one of its steepest single-day drops for 15 years.” (The Telegraph, May 30, 2015)

Meanwhile, the dollar strength is reviving, as it seems to do during chaotic climate for Emerging Markets. Unlike the woes of Brazil and Russia, any sensitive response in China can spark far greater reaction. Perhaps, that’s the catalyst for another tangible reminder of the slowdown in BRIC’s.

Article Quotes:

“Ironically enough, such monetary binge from a heavy-loaded easing by the PBoC can only harm the Chinese economy. The key reason is that it will continue to feed leverage by Chinese agents, by artificially lowering the cost of funding, at the worst of all times, namely that of a renewed reform push. The low shadow of the FED’ recent history, namely the complacent idea of a Great Moderation right before what has ended up being the US worst financial crisis in decades should constitute an important warning signal for the PBoC in its current deliberations. China has already pushed reforms during other periods of financial fragility. The most recent of all occurred during the early 2000s, when the banking system was saddled with bad debts. However, there were a number of key factors that helped the Chinese authorities manage that situation without major consequences. First and foremost, China’s debt level was very moderate. Second, potential growth was much higher since China was enjoying an earlier stage of development and urbanization. Third, the economy was smaller and closer so the rippling effects on the rest of the world remained much more limited. Today’s situation is not only more worrisome but also much harder to cushion. First of all, China’s overall debt level has more than tripled from its 2007 level and it is also very large when compared with other emerging markets in terms of its percentage to GDP.” (Bruegel, May 5, 2015)


"With the fourth-highest yields among developing nations, South African debt attracted foreign investors even as the global sell-off accelerated. Non-residents bought a net 909 million rand ($77 million) of South African bonds on May 13, bringing inflows this month to 1.4 billion rand, according to Johannesburg Stock Exchange Data. Rising gasoline and food prices, together with above-inflation wage demands by government workers and gold miners, have reignited price pressures in Africa’s most-industrialized economy, weighing on fixed-income investments. The yield difference between five-year fixed-rate bonds and similar maturity inflation-linked securities, a gauge of investors’ expectations for inflation over the period, climbed 1.93 percentage points to 6.46 from a record low in January." (Bloomberg, May 14, 2015)


Key Levels: (Prices as of Close: May 29, 2015)

S&P 500 Index [2116.10] – Despite dancing with all-time highs recently, surpassing the 2120 level for a reasonable period has been a challenge. Certainly, doubt is building in bulls' minds based on the narrow trading range for weeks.

Crude (Spot) [$60.30] – The spring rally from $42-60 showcased: 1) After a multi-year lows, a recovery bounce was inevitable 2) Last summer highs of $100 are not on the radar in the foreseeable future 3) Stabilization in pricing is taking place within the cyclical downtrend.

Gold [$1,225.00] – For almost two years, Gold has struggled to rise above $1,200 and refused to drop below $1,200. Basically, the bulls are realizing that gold trades like a commodity unless there is major shift in financial markets. Lack of catalysts keeps it in a narrow trading range.

DXY – US Dollar Index [96.90] – After a three month pause from the explosive dollar strength, some revival is visible, especially since May 14. Signs of dollar re-acceleration loom as the strongest and highly demanded currency.

US 10 Year Treasury Yields [2.12%] – On three occasions yields failed to hold above 2.30%. Seemingly they are stuck between holding above 2% and lacking upside momentum.







Dear Readers:

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

Market Outlook | May 18, 2015

“There is no conversation more boring than the one where everybody agrees.” (Michel de Montaigne 1533-1592)


Summary

The market narrative appears “boring" and, on relative basis, more and more predictable rather than suspenseful. Low rates, higher equities and contained turbulence—all too common for participants. Of course, using the term "predictable" is dangerous and misleading at any cycle or junction. If it was so predictable then ‎the mystery and puzzle associated with risk would be non-existent. But that's not the case, even if it feels like the risk has been systematically extracted from the system. Even calm (or sideways) market price movements can suddenly become riskier than imagined, but recent behaviors continue to discount (or nearly ignore) worries. With key US indexes revisiting all-time highs, the bullish trend is resoundingly confirmed. In this process, assessing tangible versus theoretical risk is awfully deceptive and greatly challenging.

Uneventful Climate

Similar to the polarizing political environment these days, the market opinions also have formed two main but varying crowds: The hopeful crowd, who point out the signs of improvement from the gloomy days of 2008/2009 and the skeptics who doubt the Fed’s ability to reenergize the real economy. The truth lies somewhere in between and the status-quo for liquid markets has hardly changed. The near-death of volatility mixed with less dramatic reactions regarding real economy matters make this market dull, especially for volatility seekers. Interestingly, the volatility index (VIX) for US equities is trading closer to 2015 lows:

“Instead, as the S&P 500 ground to fresh record highs, the index hasn’t had a single move, up or down, of 2% this year, compared with three such swings by this time in 2014 and two in 2013.” (Wall Street Journal, May 13, 2015)

The combination of unglamorous corporate earnings results and weak GDP and wage numbers failed to rattle the confidence of investors. Again, the Fed’s game plan is highly trusted and skepticism is not quite reflected in day-to-day action. If volatility is too calm with markets appreciating, then it hints of a collective agreement. As in, sellers are holding off and buyers are not changing their sentiment.


Identifying Catalysts

In addition to the less eventful price action, the catalysts of major trend shifts are becoming tiresome, as well. What are viewed as potential catalysts are well known by now, such as pending interest rate hikes, ECB rate cut impact, resolution to Greek debate, economic mixed data, and disparity between large corporations and small businesses. All discussed so often, but not quite impactful for risk takers seeking actionable moves.

The rate hike guessing games live on without much clarity. At the same time, central banks continue to lower interest rates in a synchronized manner—a theme that’s loudly visible in 2015. Experts of all kinds are scrambling to decipher the next unknown major move or surprise that may derail the status-quo. Last year the Dollar strength and commodity collapse told a powerful story about weak global economy and softer emerging markets. This year, investors continue to settle into the concept of seeking US assets and currencies. The collective mindset is not quite geared to change despite the ground level pain that’s been felt in developed nations. Interestingly, those that feared inflation realized that picking the wrong catalyst is costly. Instead, now deflation is the buzz word from the US to the Eurozone.

Perhaps the takeaway from several years of observation is to seek catalysts that are not necessarily making daily headline noise, since the known catalysts have been less impactful and quickly numbing. Thus, the reward of risk taking begins with identifying the right and meaningful catalysts as much as timing the actual event.

Rude Awakening

Amazingly, in a period where markets are hitting all-time highs, key high profile fund managers have warned about either the elevated stock market valuations or the consequences of the Fed’s polices. However, the warning signs have been stated even if skeptics have nothing to show for it on the financial scoreboards. From yield chasing to revival of leverage to ambitious IPO valuations (more under article quotes), defending solid fundamentals in a genuine manner remains questionable. Yet, the reward is not in the warning of gloomy outcomes, as many have learned the hard way. The desperation for growth stories leads to irrational behaviors and some are taking place. Amazingly, a rude awakening is how markets typically react when previously feared and ignored items take center stage. Thus, that epic moment naturally takes its own pace, but decision makers have a choice in managing expectations.



Article Quotes:

“The sudden reversal in bond markets in the middle of April, coming immediately after the financial markets were said by some commentators to be “running out of bonds to buy” has been one of the sharpest sell-offs seen in fixed income since 2008. It is a salutary reminder of the much bigger shock that might occur when the central banks finally abandon their zero interest rate policies, though this still does not seem imminent. What explains the recent “bund tantrum”? Its causes can be traced back to the summer of 2014, when oil prices suddenly collapsed. With headline inflation rates plummeting, fears of “bad deflation” spread like wildfire, especially in the eurozone. Eventually, the ECB adopted a major regime change, culminating in the announcement of a €1tn programme of sovereign bond purchases on 22 January.The initial response of financial markets to these events seemed well justified. Led by the eurozone, government bond yields trended sharply downwards, and the euro and dollar exchange rates adjusted appropriately. By the end of January, markets had adjusted to ECB quantitative easing very much in line with the playbook established in previous QE episodes in the US, UK and Japan.”(Financial Times, May 10, 2015)


“HUNTING unicorns used to involve entrapment by a virgin. Now it requires merely the writing of large cheques. Hardly a week passes without a promising tech startup earning a valuation of more than $1 billion from venture capitalists, so becoming a “unicorn” in tech parlance. There are now more than 100 such firms. But doubts about such valuations are growing, even in Silicon Valley. It is easy to see why promising startups (and their backers) want to become a member of the unicorn club. It helps entrepreneurs gain credibility—their greatest hurdle—with future investors, business partners and, most importantly, their most talented staff. Even mid-ability app developers have lots of choice in the job market today. Research shows that they are more likely to opt for, or stay at, a firm that is worth more than $1 billion. And unicorn investors, often big hedge funds, help startups postpone their initial public offering (IPOs) and avoid demands from public investors for instant profits. Yet high valuations come at a price, says Fenwick & West, a law firm. It has analysed 37 unicorn deals and found that all included terms to protect investors against losing money—in particular, putting them first in line to get their money back if the company is sold. Such “liquidation preferences” are not nefarious, nor new. But they mean that unicorn valuations are not directly comparable to public-company valuations.” (The Economist, May 13, 2015)


Key Levels: (Prices as of Close: May 15, 2015)

S&P 500 Index [2122.73] – The index is only a few points removed from previous intra-day highs of 2125.92. Again, this is another confirmation of established strength, but the new upside wave is not fully defined.

Crude (Spot) [$59.39] – Recent weeks has showcased some mild recovery. Questions remain if the commodity can rise above $60.

Gold [$1,225.00] – After bottoming around $1,160, another recovery attempt for gold awaits. The next key hurdle for bulls is for gold to break above $1,280, which has remained difficult.

DXY – US Dollar Index [93.13] – March and April signified a slowdown on the powerful dollar's momentum. After peaking on March 13th at 100, the dollar index has retraced over 7%. It's too early to draw conclusions on the Dollar and overall currency implications.

US 10 Year Treasury Yields [2.14%] – As witnessed earlier this year, 10 year yields held above 1.80%. However, there was plenty of skepticism until the notable upside move. Interestingly, for another week yields remain above 2%.




Dear Readers:

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

Market Outlook | May 4, 2015

“He who is not everyday conquering some fear has not learned the secret of life.” Ralph Waldo Emerson (1803-1882)


Big Picture Landscape

In the last few weeks, the US Dollar run has cooled a bit, and the Crude demise has recovered a bit; unlike in prior months, but the lull seems short-lived. The economic picture is stuck in a rut for most, while participants desperately search for answers. Similar to investable assets, which have been scarce for many years, finding growth stories is equally difficult. Sellers or profit takers have hesitated in last few months, but sensitivity towards negative headlines is picking up. With the market's obsession with central banks, the market-moving event is driven around a perception of trust. For now, markets have not relinquished full trust in the Fed’s leadership. The trust in the Fed’s policies seems to supersede the brewing and familiar macro worries not only in the US, but globally, as well.

Discovery & Realization

The attention is shifting from the well established magic of QE to the actual day-to-day impact of growth expectations. Corporate earnings season or GDP data are showcasing either mixed or softer results:

“The Fed’s two-day policy meeting concluded a few hours after the Commerce Department reported that gross domestic product, the broadest measure of economic output, grew at a 0.2% annual rate in the first quarter. That followed advances of 2.2% in the fourth quarter and 5% in the third.” (Wall Street Journal, April 29, 2015)

This naturally begs the questions regarding the re-acceleration of the US economy. The clarity of the economy's direction hinges on many absent data points, so the mystery and fuzziness continues. April’s jobs numbers raise the suspense of those investors seeking to reach a conclusion for a directional bet in stocks and bonds.

Major headlines are not necessarily needed as a major catalyst thus far, but fatigue is kicking in for this aging bull market. Frankly, this can irritate investors. It is a test of patience that keeps reoccurring in this neutral market, which contains subdued volatility. In fact, with more mixed data, the neutral behavior lingers on as the broad indexes are trading in a narrow range.

The discussions within financial circles revolve around interest rates and the potential for a hike. Surely, this has been talked about with a fuzzy timetable even among the so called 'experts.' If the economy is not growing rapidly in terms of wages and commodity demand, then why should the fed raise rates? If inflation (measured by traditional method) is not rising, then how is there further growth? It’s becoming clear that inflation is not as troublesome as many expected. Of course, how inflation is measured is an all out debate that will continue. Yet, the inflation mystery lacks solid clues to spark a reaction in the bond markets.

Preparation

These days there is no shortage of warnings of market risk. Last year, the dollar strength, at the expense of Emerging Market currencies, was clear. Weakness in commodities with expanding supply was a powerful reminder of the business cycle, as well. A few tech based companies' (Twitter and Linked-In) earnings last week showcased a slowdown in momentum. Yet, on a very simplistic level, broad indexes are trading at or near elevated valuation. Thus, warning about a coming collapse in stocks in not breaking news or a novelty at this stage. Similarly, dealing with unclear or mixed data is challenging for most, and forcing markets to favor the status quo of low rates and higher stocks also brings challenges.

The reliance on central banks is stronger today because the low rates, low volatility, and high equity prices are convincing to mass participants. As the Fed continues to publicly communicate (while testing the waters), clear language is not something to reasonably expect. In fact, the Fed is too artistic with words, and risk takers are left with only a gut feel. Thus, with all the unknowns brewing at this junction, it is fair to say that in a game where no one knows, it surely comes down to gut. After all, this is a speculative game for market participants. Anxiousness is immeasurable, but enough mild warnings have been signaled.


Article Quotes:


“Suddenly, such trends have gone into reverse. Euro zone equities in April notched up their first monthly loss of the year. German 10-year Bund yields, which had been flirting near negative territory, this week climbed more than 20 basis points to 0.37 per cent — an unusually large jump. The euro rose 4 per cent to $1.12 against the dollar. It seemed Mario Draghi, ECB president, may have lost his magic touch. Reassuringly for the ECB, analysts and market experts are not yet calling the end of QE rallies. Instead, a host of technical factors were blamed for this week’s upsets, including overhyped trades and market distortions. The bad news is that the volatility could be a harbinger of bigger traumas to come. What happened ‘is very telling of what investors will have to live through in the coming two or three years’, warns Pascal Duval, European chief executive at Russell Investments. The easiest explanation to dismiss is that markets reacted because QE had served its purpose in pumping up economic growth. Eurozone inflation data this week suggested Mr Draghi had averted a deflationary slump — which, at least according to economic textbooks, might have pushed bond yields and the euro higher. But the euro’s rise — which will hit exporters’ prospects — was triggered largely by much weaker than expected first-quarter US economic growth figures. Eurozone share price falls also fitted with a gloomier global economic outlook, especially with Chinese growth slowing, and expectations about future eurozone inflation rates remain modest.” (Financial Times, May 1, 2015)

“Chinese monetary policy was excessively tight in 2014 but started loosening in late 2014, in an attempt to cushion growth, facilitate rebalancing, support reform and mitigate financial risk. There are three main reasons for this policy shift. First, there is evidence that the Chinese economy has been operating below its potential capacity. Second, among the big five economies, China’s monetary policy stance and broader financial condition both tightened the most in the wake of the global financial crisis, likely weighing on domestic growth. Third, a mix of easy monetary policy and neutral fiscal policy would serve China best at the current juncture, because it would support domestic demand and help with the restructuring of China's local government debts, while facilitating a move away from the soft dollar peg.” (Bruegel, April 29, 2015)


Key Levels: (Prices as of Close: May 1, 2015)

S&P 500 Index [2108.29] – As witnessed earlier this year in February and March, the index is losing steam above 2100. Selling pressure has been building mildly as a follow-through is awaited.

Crude (Spot) [$59.15] – From March 18, 2015 the recovery run continues. This multi-week run is surprising to some, as a form of stabilization is taking place.

Gold [$1,180.25] – For the last few weeks, gold elevating above $1,200 has been a clear struggle. A catalyst for a momentum is not visible.

DXY – US Dollar Index [96.92] – Near-term pause after a multi-month surge. Since Mid March, the uptrend has shifted with mild reversal from multi-year highs.

US 10 Year Treasury Yields [2.11%] – Trading is at familiar ranges again between 1.80-2.20%. Breaking above 2.20% would trigger a reasonable response; however, the last two attempts have failed to hold above 2.20%.





Dear Readers:

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

Market Outlook | April 27, 2015

“Our fatigue is often caused not by work, but by worry, frustration and resentment" (Dale Carnegie, 1888-1955)

Summary

This headline of US stocks reaching all-time highs is a symbol of strength that's becoming old news to casual observers. For others, ‎buyers' convictions will be reexamined and tested yet again this spring (just like other times before). The fatigue of "all-time" highs is here and the upside surprise factor is not as shocking. The Fed’s script has worked again and again and now the Nasdaq strength can be attributed to innovative areas that have rewarded investors. The markets have not zoned onto one worrisome matter to cause a sour turn of events. For now, worrisome big picture issues (from Eurozone to China slowdown to wages etc.) are only contemplated and are piling up. However, dissecting and digesting worrisome issues is not a collective priority for participants.


Searching Variables

It feels like the fatigue of the “all-time highs” chatter is becoming less authentic than before. Instead, it is more like the norm that’s being accepted. Stories of “improving the economy” are also tiresome to hear, especially when the tangible evidence is not easily visible. As is plenty of mixed data in the US. On the other hand, in the global economy, strength has not been easy to find; it is more selective than in the past. Meanwhile, discussions of a Fed rate appear numbing, since we've heard it before but no one has a good read on timing. It behaves more like a theoretical exercise as much as an actionable, tradable event. As witnessed before, the status-quo is too dominant and investors seem out of ideas and desperately seek Fed guidance. Interestingly, the Fed is not full of ideas either, as lofty expectations for digestible assets continue to loom.

Yet, if the economy is not “growing” as robustly (by some measures) and investors are not tangibly convinced, then why should stocks continue to go higher? Again, on the broad level, a classic argument to buy stocks is primarily driven by the low rates and lack of alternatives. Sure, limited options are understandable and quite clear, but chasing yields for the sake of "chasing" does not seem sound, either. Or fair to say, there is risk that’s misunderstood and not quantifiable. Bears must at least acknowledge one point: this bubble is not quite like 2000 or 2008. Each peak has its own nuances, such as the tech bubble or credit crisis, but here the interconnection of central banks plays a vital and, for most, an unprecedented role. All that said, volatility is hardly feared, Eurozone slowdown is not a shock, Fed rate hike is unknown, and the rest seems like business as usual. In this set-up any economic data beyond “mixed data” is instrumental to provide further guidance. The week ahead presents some clarity on wage growth. However, in the past few months any excitement for a grand discovery via economic data has disappointed investors. Basically, the status-quo is well defined and magical clues are nearly nonexistent. It is disappointing for those searching for a game-changing data point.

Message from Earnings

The common theme for this earning season revolves around the strength of the dollar and its impact on US corporations. Surely, the crafty company press releases find clever explanations for weakness of any sorts. We’ve heard excuses in the past and now the dollar strength is a reoccurring complaint or explanation for some under-performance. Here is an insightful explanation regarding the dollars’ impact:

“On average, revisions have been negative irrespective of foreign revenue exposure but companies with more than 60% Foreign Revenue have been hit particularly hard with respect to earnings expectations. On the other hand, earnings expectations for companies with between 20% and 60% Foreign Revenue have not been revised nearly as sharply even though revenue expectations for this group have seen meaningful negative revisions. Also of note is that the 125 companies, which do not report geographic segment data, do not appear to have significant foreign exposure on average, at least as reflected by consensus estimates for 2015.” (S&P Capital IQ, April 2015)

Meanwhile, savvy investors will continue to ask and to dig at the impact of the global economy on large corporations. Some answers are not as gloom and doom, and others have not been quite discovered. Thus, are markets more biased by the Fed’s (general) bias towards higher stocks? Or are markets focusing on basic fundamentals and future growth potential? Both questions linger at all-time highs with a collective participation. As stated above, what are the catalysts to drive markets even higher at this junction? Certainly in the innovative tech world, companies like Google, Amazon and Microsoft continue to showcase their value in making money, and investors are thrilled. Perhaps, the Nasdaq leaders are making a splash to justify the current levels. Other sectors may not be as rosy as tech has been in this bullish cycle.

Connecting the Dots

Forces that justify a bull market seem plentiful. Momentum is biased towards the upside: large tech public companies are making money, which justifies the current hype, and rates are low via coordinate central bank efforts with no signs of going much higher. This is puzzling set-up for most, since fighting the Fed has been punished severely; yet, finding common sense in all this is no easy task. Hints of a breakdown are not readily available, strength in the economy is not widely felt and thus some of the market action seems illusionary. In other words, all-time high stocks only reflect a very narrow perspective of trading markets. Thus the mind games are challenging for risk-takers who find it so convenient to ride the wave, as they had for several years, but common sense suggests thinking twice. This begs the question, in the next 2-3 years can markets create enough wealth without Fed interference? This question is not fully confronted because the short-term nature of liquid markets ends up being distracting.



Article Quotes:

“The explosive moves in equities really started in July 2014, with the Shanghai Composite and the CSI 300 rallying 110 percent and 114 percent respectively since then. The explosive moves have become much more pronounced since March and it's interesting to see just that over 7.4 million new A-share accounts have been opened in that time. What's more, many of these new investors are young enough that they won't have been too negatively affected by the 72 percent crash in the Shanghai Composite between 2007 and 2008. What we are seeing right now is a household portfolio re-balancing, with what seems like a fear of missing out and a growing view that equities are going higher. The authorities have even allowed individuals to have 20 separate A-share accounts, providing greater flexibility to investors on where they trade. The number of accounts being opened also suggests there is a wall of capital that has not yet fully been invested in the market (rumor has it that nearly $20 billion currently sits in Chinese bank accounts)... Some investors have also looked at using margin financing, in which an investor borrows money to buy securities. Margin financing really started in March 2010, but has grown in popularity recently. Purchases of stock using margin financing as a percentage of turnover has pushed up to around 16 percent, which is at a historically elevated level and helped by some innovations from brokers, who have designed various products to help high-net worth individuals achieve greater leverage ratios.”(China Daily, April 24, 2015)

“JPMorgan broke out returns for foreign investors into four components: dividends, change in earnings per share (in local currency) over the past 12 months, change over 12 months in the ratio of price to earnings, and the exchange rate. Dividends, naturally, where paid are always positive. In a few cases — China, India, the Philippines and South Africa — the change in both EPS and P/E ratios was positive. In many others, P/E ratios rose even as earnings per share fell, as investors decided the damage had been done and company performance would pick up from now on. But in many countries where investors took a positive view on local market performance, the gains for foreign investors were wiped out by the currency. Investors can take some heart from the turnaround so far this year. But the other thing the two charts make graphically clear is the importance of differentiation. For emerging market equities as a whole, foreign investors have made 10 per cent so far this year, compared with 7 per cent over the past 12 months. So things have picked up, but not by much. Those who got their choices and timing right did much better. Those who got them wrong, much worse.” (Financial Times, April 24, 2015)

Key Levels: (Prices as of Close: April 24, 2015)

S&P 500 Index [2117.69] – The previous high of 2119.59 from February was revisited last week with the index peaking at 2120.92. Interestingly, this sets the stage for buyers to contemplate if buying now makes more sense than it did in February. It is fair to say that this is yet another critical inflection point.

Crude (Spot) [$57.15] – A strong run since March 18, 2015 confirms stabilization from cyclical demise. Sustaining this recent move is the real question for trend followers.

Gold [$1,185.75] – Failed to hold $1,280 earlier this year, leading to more weakness. A new range has formed between $1,160-1,240. The commodity cycle dictates the current slowdown.

DXY – US Dollar Index [96.92] – Surely, the strong dollar was a vital and noticeable theme last year. Now, a slight breather is taking place. Since March 13, 2015 the pause is in effect; although, it is unclear if there is a major fundamental shift in currency market is a bit pre-mature.

US 10 Year Treasury Yields [1.90%] – A familiar sight again with 10 year below 2% and above 1.80%. Fixed income sentiment has not changed dramatically and remains at a standstill.



Dear Readers:

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

Market Outlook | April 20, 2015

“Without art, the crudeness of reality would make the world unbearable.” George Bernard (1856-1950)

Summary

The public markets continue to rely on Fed guidance while having less emphasis on the day to day ground level fundamentals. The low yield environment continues to reach a less bearable climate as key markets continue to see negative yields. The Fed is wrestling to justify an interest rate hike, but the economic data remains mixed and not quite convincing. This elevated stock market mixed with a sluggish global economy creates an unsettling conflict. And frankly, this conflict (or disconnect) needs to be settled soon despite the Fed’s artistry in navigating this climate.

Script Accepted

The roaring indexes across several continents reaffirm the power of central bankers as mass followers continue to pile into equities. The clear script of bidding up asset prices and enhanced risk taking has been quite visible and nothing new. Momentum driven names are gaining more interest from investors. In addition, more Merger & Acquisitions (M&A) talks have mixed with more inflow of yield chasing capital. There has been an increase in return chasing, especially in innovative themes such as technology and healthcare.

“Dealmakers forecast soaring growth in health care M&A over the next 12 months, as buyers continue to seek innovations to meet the market demands created by the Affordable Care Act, according to Mergers & Acquisitions' Mid-Market Pulse (MMP), a forward-looking sentiment indicator, derived from monthly surveys of approximately 250 executives and published in partnership with McGladrey LLP.” (Mergers & Acquisitions, April 15, 2015)

At the same time, in the most innovative and highly popular themes, there are questions being asked about valuation levels. As unprofitable companies are viewed as amazing growth stories, the irrational mindset becomes reflected in some recent IPO’s. In fact, Western European IPOs are at a 15-year high according to Reuters data (April 17, 2015). Yet, with markets being so Fed/Central Bank-centric, the breakdown of momentum names hasn't been fully felt yet in a tangible, panic-driven manner. Thus, bullish confidence does not appear fragile, at least from a psychological point of view. Instead, the desperation element of finding good growth stories and higher yielding assets is mildly blinding. The concept of “increasing risk” has taken a backseat, which is not new but with time becomes riskier.

Brewing Hints

Last week, there were hints of unrest as two common worrisome themes resurfaced. Firstly, the good ol’ Greek debt concern was back on the radar. It never left the minds of risk managers, but with Eurozone stocks roaring and with some indexes reaching all-time highs, a rude reminder was a bit inevitable.

Secondly, mainstream observers highlight the Chinese margin crackdown as what lead to sell-offs on Friday. Surely, the bubble-like behaviors are visible in Chinese equities, which have skyrocketed in last seven weeks. The sensitive sentiment response itself is telling that quick money has bid up assets and the merits of price appreciation may lack further real economic substance:

“Beijing wants banks to lend more to smaller private firms that drive the bulk of growth, but bankers say they run a higher risk of default than state-owned giants, given endemic book-cooking.” (Reuters, April 17, 2015)

Surely, justifying elevated stock price levels (as well as ambitious outlooks) is not constrained only to China but applicable in developed markets. Thus, the interconnected sell-off last Friday is worth observing closely. A follow through to this sell-off may lay the ground for a much needed breather in the US, Eurozone, and Chinese equity markets. At least, we know there is unease and it is not isolated to a region. That’s the brief message from the action of one trading day.

The Art of Bracing

If hints are accumulating and if the bullish run is not in the early innings, then the buried volatility index is only gearing up. Timing a burst in volatility has been proven to be near “impossible,” and surely those that tried have been proven wrong. Yet, near-term historical analysis should not blur one's logical senses. Sentiment is bound to change faster than imagined typically, but the market hints will be the fortune teller rather than analysts and pundits of all kinds.

Amazingly, the Fed has a story to sell, albeit in a calming manner. The same applies for other central bankers. The QE has been one calming manner for financial markets but less so for real economies across various regions. At times the responses by public markets seems so irrational, and at times what’s irrational becomes the norm. Yet, with commodity cycle sluggish, growth dismal to anemic, and more capital than ideas something must correct—at least logically. Even if markets have welcomed risk-taking for a while, the choice of further risk taking is up to individual managers and participants. Thus, blaming the Fed for one's misguided risk-taking is an unpraiseworthy approach, especially with looming hints.


Article Quotes:

“So what would bring the bond bull market to an end? A tightening of Federal Reserve policy might not do it, not least because the gap between Treasury and German bond yields is already high. Any surge in Treasury yields would prompt buying by European investors. A return to healthy global growth might not do it either, because of the problem already referred to: a surge in bond yields might end up sabotaging such growth because debt levels are still so high. The trigger for a crash would thus need to be a rise in inflation on such a scale that central banks would be forced to act, regardless of the growth consequences. Some bears think that this will be a two-stage process in which deflation is so severe that the authorities will be forced to target inflation by opening both the fiscal and monetary taps.”(Economist, ‎April 16, 2015)


“In a speech on Thursday, Boston Fed President Eric Rosengren noted that the Federal Reserve's policy committee in March provided two conditions for raising short-term interest rates. First, the policy statement indicated that the Federal Open Market Committee needs to see further improvement in the labor market. Second, the Committee needs to be reasonably confident that inflation will move back to its 2 percent objective over the medium term. ‘At this time,’ said Rosengren, ‘I do not think that either condition has been met. Although there has been noticeable improvement in the labor market over the past few years, ‘since March the indicators have been a bit mixed. Furthermore, inflation remains stubbornly below our target of 2 percent.’ When the Fed publishes Committee members' forecasts, many observers focus on the interest rate projections. But Rosengren urged a focus on ‘the recent striking reduction in the longer-run estimates of the unemployment rate and the reduction in the level of the federal funds rate that FOMC participants expect to see in the longer run,’ as well.” (Federal Reserve Bank of Boston, April 16, 2015)


Key Levels: (Prices as of Close: April 17, 2015)

S&P 500 Index [2,081.18] – For the third time this year, prices failed to hold above 2100. This suggests a fading and pausing momentum during this multi-year run. Technical observers can identify two points if selling pressure materializes. First, the 2040 level in the near term, which is then secondly followed by 1980-2000. Buyers conviction tested in the days ahead.

Crude (Spot) [$55.74] – After making lows on March 18th, crude has made a sharp recovery rally. However, in the big scheme of things, the downside is in place as buyers and sellers wrestle between $45-55.

Gold [$1,204.35] – Revisits the $1,200 range again. It is questionable if the January highs of $1,295 are achievable in the month ahead. It is more or less stabilizing at this junction.

DXY – US Dollar Index [97.52] – After an explosive run in the past year or so, the momentum has stabilized for now. 94-98 is becoming familiar in recent trading ranges.

US 10 Year Treasury Yields [1.86%] – Once again the 2% range seems illusive. Further signs of declining yields lay ahead based on current momentum.



Dear Readers:

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

Market Outlook | April 6, 2015

“Behavior is a mirror in which every one displays his own image.” (Johann Wolfgang von Goethe 1749-1832)

Summary

As interest rates seem low and asset prices seem elevated, the market is overly anxious for the next key catalyst. Although, the rate hike discussions have intensified recently, there should be more substance regarding the “recovering” economy. At this stage, robust real economic growth is not convincing month after month. Market participants are forced to re-think the current themes from bonds to commodities. A desperate search awaits for real interpretation of inflation and growth data. As convenient as it is to bash the Fed, the market will have the last and key voice regarding the status-quo trends.

The Build Up

As time passes, many hope to learn new facts about this current interest rate cycle's nuance and mystery. Anxious participants await inflation findings or other surprising or revealing economic indicators. There is a massive scramble for minor clues, but no formula has been revealed thus far. Elevated US asset prices fail to tell the full story. The Fed obsession is brewing, but the questions outweigh the answers, which frankly tests investors' patience.

The low interest rates mixed with (or resulting in) equity bubble-like patterns is a succinct summary of financial conditions. Basically, Fed induced or not, this is the reality of limited investment options and few clear trends. From the UK to the US and now into the Eurozone, the same ol’ game of inflated assets trumps the discussion of slowing down commodity demands. This is the “known” that is producing various interpretations. So the newest and most anticipated discussion looms around potential rate hikes in the US. Yet, the Fed needs data to strengthen the ‎argument for a hike.

Here lies the debate, what's more influential: The few signs of strength in the US economy, mainly in labor numbers in tangible terms, or the overall gloomier picture of the global economy? As stated in last post, the element of “bluff” in the Fed’s tone regarding a rate hike is very hard to ignore. Yet, an ex- Fed chairman claimed in his new blogging role reaffirmed the Fed's intention: “The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed” (Brookings, March 30, 2015).

Tracking Behaviors

The US 10 year yield is below 2% and Crude is struggling to recover, which may suggest ‎that no robust growth, no inflation and no anticipation of near-term rosy recovery looms on the horizon. All noise aside, based on bond and commodity markets there is an argument to be made of lower growth expectations. Surely, energy and emerging markets have corrected enough to showcase a tangible reality check. At least, those so desperate for bargains have something to contemplate:

“The Energy sector alone accounts for nearly half (46%) of the decline in expected earnings for Q1 from December 31 through March 31. The Q1 bottom-up EPS estimate for this sector fell by 50.3% (to $4.16 from $8.38) during the first quarter, which was the largest percentage decline for all 10 sectors.” (Factset, April 2, 2015)

Of course, the status of inflation or desired unemployment level are an unknowns. The Fed’s approach has become more theatrical and managing of expectation than a defined science. For participants expecting a sorted out, well formatted formula, that’s a set-up for disappointment. In fact, anticipating a trend shift on how the Fed chooses to highlight valuable or essential data point is hardly scientific . One indicator that's tracked by Fed watchers is rather decisive:

"The Federal Reserve’s preferred measure of inflation in February fell short of the central bank’s 2% target for the 34th straight month." (Wall Street Journal, March 30, 2015)

It is fair to ask after this, how can one contemplate a rate hike in months ahead?
Meanwhile, for those money managers in the trenches, ability to deal with conflicting data while not being fooled by a “soothing” Fed messaging is the ultimate test and reward. In fact, assuming the Fed knows it all is a bit more dangerous than many so-called professionals would like to admit. ‎So attempting to ride the current wave filled with indexes is at an all-time high.

Interpretations

‎There are two prevailing approaches at this current junction. First, the bulls are celebrating weak job numbers, which signal low odds of rate hikes in the near-term. That, of course, is translated as more upside in equities. The second view is where some optimistic US shareholders are convincing themselves that the job market is growing and economy is as strong as reported. Both fail to offer a simple logical explanations, hence the mystery and "misery" of predicting future events. However, celebrating economic weakness in hopes of further stock market gains is merely artificial and short-term oriented. Amazingly, the Fed appears stuck between desiring to hike and lacking the substance to do it. Thus, the pressure builds on the Fed as much as others. And only time can detect the rest.


Article Quotes:

“In a sign of how China’s cooling demand for steel is affecting ore miners, last month Fortescue, an Australian company, was forced to call off a $2.5 billion bond issue, having days earlier tried to raise the same amount through the loans market. CITIC, China’s largest state-run conglomerate, recently announced that its net profits fell by nearly 18% last year thanks in part to the troubled iron and steel markets. It was forced to take an impairment charge of $2.5 billion on a massive iron-ore project in Australia that has run into delays and cost overruns. Aside from the risk of undermining the rationale for investments such as these, what are the potential knock-on effects of China hitting peak steel? Trade wars, for a start. Unable to peddle all of their output at home, Chinese steel producers have been exporting increasing quantities—to the consternation of producers elsewhere, who accuse them of dumping. MEPS, a consulting firm, estimates that China exported more than 90m tonnes of steel last year, which is greater than the entire output of America’s steel industry and was a rise of over 50% on the previous year. Exports are continuing to surge this year.” (The Economist, April 4, 2015)

“According to the ECB, in February, 12.7 percent of the total liabilities of the euro area's financial corporations, including banks, took the form of debt securities. That's 4.1 trillion euros ($4.5 trillion) worth of debt, a growing part of which is, in regulators' parlance, 'bail-inable.' At the same time, the Financial Stability Board recommends that big banks issue more such securities to create additional capacity for imposing losses on investors if things go wrong. Adhering to the guideline probably will drive up funding costs for banks, as will the growing risk of investing in bank bonds. Almost 53 percent of European financial corporation liabilities, or 17 trillion euros, come from deposits -- also an endangered form of funding because of ultralow interest rates. So, unless banks plan to start shedding assets (which have increased by almost 2 trillion euros since the end of 2013), financial institutions should look elsewhere for long-term and medium-term funding.” (Bloomberg, April 2, 2015)

Levels: (Prices as of Close: April 2, 2015)

S&P 500 Index [2066.96] – Rising above 2100 for a sustainable period has been a challenge. Meanwhile, buyers have shown strength at 2040. Range bound trading action continues, given the multi-year bullish trend.

Crude (Spot) [$49.15] – This year the lows of $44 and highs of $50 appear familiar since the massive sell-off last year. Prices are settling after the major supply-demand adjustment.

Gold [$1,197.00] – The well-established cycle decline since September 2011 is quite visible. Surpassing $1,200 remains a challenge, as has been seen on several occasions.

DXY – US Dollar Index [97.43] – Since March the Dollar strength has retraced a bit. Yet there are no signs that a major currency shift is developing, despite some speculators sensing a trend shift in the Dollar.

US 10 Year Treasury Yields [1.91%] – Another big statement is made with yields failing to hold at or above 2%.




Dear Readers:

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

Market Outlook | March 23, 2015

“The hardest tumble a man can make is to fall over his own bluff.” (Ambrose Bierce 1842-1914)

Summary

The Federal Reserve continues to send mixed signals about the rate hikes that stirred a massive response from participants. However, the numbing effect of prior QE policy keeps comforting investors to not fear volatility or to seek shelter in equity markets. Ongoing chatter of rate hikes has yet to change the well established, current status-quo. Yet, the Fed is struggling to justify a critical decision regarding rate hikes when multiple macro indicators suggest a fragile economy.

Bluffing Games

A Fed bluff game is taking shape as it relates to interest rates. The bluff—in terms of potential rate hikes as the "economy is improving" statement—seems hardly tangible when digging further, of course. Unless one assumes the broad equities indexes tell the full story, the rate hike expectations by some for June or even autumn of this year remain rather ambitious.

Year after year threats of a Fed rate hike have been discussed and pondered, but there's been a lack of basis for it. At least no convincing evidence exists right now for those looking beyond headline employment numbers.

As the heating equity markets dance with new or near all-time highs, there is a clear message from investors based on behavior:

1) "We get it." There are not many places to put capital when various central banks are lowering rates. Especially in an already well documented low rate environment. The ECB decision of lowering rates is not noble, but rather follows the footsteps of the US and UK policies of boosting asset classes via low interest rates. In short, the message is quite clearly across regions.

2) "We don't mind." The indirect responses by investors regarding QE future consequences is ambivalence. This is felt in sentiment since worry (or volatility) has failed to influence near-term discussions. Both reactions are visibly based on increasing inflow into equities within the last two weeks, as well as the lack of any meaningful selling pressure. Short-term thinking continues to look at QE as good policies while disregarding the “unknown” future results.

The stock market appears to serve more as a distraction rather than a good measure of well being; however, it still manages to serve as a great tool for increasing asset values despite this. Surely, those looking to create wealth are amazed and impressed with the multi-year bullish run. Essentially that encourages irrational behavior, and some signs of too much “cheerfulness” are persisting.

Mind Games vs. The Tangible

Why would one suspect of a rate hike? How is that justified? The numbing effect from QE/low rates combined with feel good data emphasis may have most likely created an illusionary feeling about the reality of economic health. If wages fail to grow, as exhibited in US along with soft business activities, then why would rates rise? A questions that's been pondered and asked for a long while now: ‎

“Meanwhile, everything other than monthly job gains seems to be in the pits. Wage growth throttled back in February after showing a spark, U.S. factories felt the pinch from a stronger dollar, and credit-card use hit a 14-month low in January, to name just a few.” (Bloomberg, March 17, 2015)

Perhaps, the more press releases and crafty words from the Fed the more reason to be suspicious. As more and more capital begins to blindly trust the Fed, then nasty surprises await—so far the “surprise” has not arrived, and the market is chasing trends rather than unlocking economic mysteries. The trigger for the downside surprise is the revelation of the economic weakness from consumer spending to business expansion. All the signs are there if the collective market decides to pay closer attention.

Value of Risk

The volatility index for the S&P 500 index hit annual lows last Friday. This reflects the inverse response of those seeking further reward in equity markets. Once again, the perception of pending turbulence is very low. The impact of a strong Dollar on corporate balance sheets may be discussed much sooner than imagined. Plus, at what point are companies going to justify their valuations? Regardless of a rate hike (or not) the irrational nature of the markets will require a reality check. However, valuation is more of a historical exercise than a tool to anticipate the next move. The challenge today for capital allocators is to find alternative and rewarding ideas beyond the status-quo. Energy related areas have adjusted their value after massive sell-offs, while Technology continues to benefit. A collective decline in share value is not overly feared, and risk is downplayed mainly due to the Fed’s ability to convince participants of their solid plan.

The more trust in the Fed, the lower the volatility index. Perhaps, believers are too optimistic of the Fed’s plan, some going so far as to defend some of the unexplainable valuations. At least this is what the market is saying, and investors are left to make a choice for the months ahead.


Article Quotes:

“IN THE EVENT, the FOMC caught the Street napping. The latter was so obsessed with ‘patience’ that Dr Yellen‘s totally cool and dispassionate explanation that removing patience from its statement did not indicate that it was impatient took many millions of highly paid IQ points totally by surprise. Wednesday’s knee-jerk reaction to buy stocks and bonds and to sell the dollar – the spike in dollar/euro up to US$1.10 certainly triggered a few painful stop-losses – didn’t last, but what will last, I hope, is the lesson that the Fed is no longer given to spoon-feeding the markets. Markets have become complacent and have continued to believe that central banks and their monetary policy decisions are principally here for their benefit. Dr Yellen may be grey and boring and the least charismatic Fed President in many years – being less charismatic than Ben Bernanke takes quite some doing – but that does not mean she’s stupid. The decision to make policy data-dependent buries forward guidance ¬– in my view not a minute too soon – but also shows that she and her Merry Men are not being dovish for dovishness' sake but that they will not be pushed into a tightening cycle simply because that is what the market expects. In that, they are ahead of the game and the Street had better get its skates on if it wants to catch up.” (IFR, Anthony Peters, March 20, 2015).

“The problem with northern Europeans is that they regard Greece as a typical European nation. This is not true. Greece is different. It has not experienced all the ideological movements that formed western Europe. There has been no Renaissance, Reformation or Enlightenment. It is a border country between east and west. According to Samuel P Huntington (in his The Clash of Civilizations and the Remaking of World Order), it belongs to an entirely different civilisation: the Orthodox one, together with Serbia and Russia. Having had a lot of problems with the west (starting with the Fourth Crusade, which instead of liberating Jerusalem sacked Constantinople), Greeks have always felt a deep mistrust of western initiatives. Being insecure because of their problematic identity (east-west/ancient-modern) they tend to reject change and restructuring. Theoretically they like reforms – as long as they do not affect their life.(This is why Greek politicians have been consistently sabotaging all changes, in order not to confront their electoral clients and the almighty unions of the public sector.) So instead of reforms, Greeks got pay cuts and austerity measures that resulted in a 26% unemployment rate – and a 25% loss of national income.” (The Guardian, March 21, 2015)

Levels: (Prices as of Close: March 20, 2015)

S&P 500 Index [2108.10] – Few points removed from the intra-day highs of 2,119.59 reached on February 25, 2015. Again, the positive trend is reinforced.

Crude (Spot) [$46.57] – The bottom remains fragile and undefined. In the current round of near-term trading, the $44 range may create a new test for buyers and sellers. Clearly, the supply-demand picture continues to suggest that prices at current levels seem reasonable.

Gold [$1,166.00] – Following an over 10% decline in gold since late January, some investors are wondering if there is a bottom in sight. Longer-term indicators suggest the negative cycle takes a few years to shake-out as the decline remains intact.

DXY – US Dollar Index [100.33] – Stabilized after reaching another multi-year high. An explosive first quarter thus far as the dollar strength remains emphatically in place.

US 10 Year Treasury Yields [1.93%] – Continues to struggle to hold above 2%: A common, but powerful theme from the last few months.