Market Outlook | July 27, 2015

“Tricks and treachery are merely proofs of lack of skill.” (François de la Rochefoucauld 1613-1680)

Summary
‎
• Mounting evidence of a rate hike is not justified given soft current economic conditions and lower commodity prices.

• No major, convincing reason gives cause to abandon US assets or US dollar relative to Emerging markets, which continue to struggle.

• Policymakers in US, Eurozone, and China have over-relied on the art of intervention and deferral of problems.

• US Investors are realizing that poor earnings cannot be ignored any longer and share buyback trends are unsustainable.


The Inter-Connected Narrative

For those only tracking US equities in the last few years, the investment climate seems rather calm. Especially when a roaring bull market is quite established, even with a shaky geopolitical set-up elsewhere. If one steps away from the elevated Nasdaq index and from the depressed US stock volatility (VIX) measures another reality awaits. A reality that's not been addressed by a majority of investors who have been blinded or convinced by the Fed's assurance. However, the Fed, like investors, cannot dismiss the forces that impact economic well-being for too long.

First, no one can ignore the commodity price debacle that has ranged from Gold to Crude. Multi-year lows were reached for commodities last week and highlighted by financial journals. As a result of this, one can celebrate cheaper oil prices and buy airline or retail stocks—the common knee jerk reaction. However, declining commodities reflect not only an end of a commodity boom cycle but also signals a period of a significant global growth, especially in Emerging markets. Even in the US the energy boom is impacted from labor numbers to poor investments, and those seep through the real economy:



“There seem to be broader signs of concern about the global economy which the commodity price decline seems to reinforce. Composite purchasing managers' indices for the manufacturing sector in the emerging market countries have dipped slightly below 50, indicating a decline in output. Figures show that unemployment in emerging markets has risen from 5.2% to 5.7% since the start of the year. The IMF cut its global growth forecast for this year to 3.3% from 3.5%, largely on American first half weakness.” (The Economist, July 21, 2015)

Secondly, the China story has many twists and turns. The last decade rush into this theme is now back firing and being viewed as a "bubble" that's severely close to popping. Yes, the Chinese economy is large and China does invest globally from US to Africa, but ‎confidence is mixed. As learned in last few weeks, desperate government interventions are needed to stabilize the market. Perhaps, policymakers globally have come to terms with intervention as the last resort to fight off natural worries and sell-offs. Meanwhile, the bubble-like climate of retail investors naively piling on and state media controlling the messaging should be worrisome enough. At the end of the day, waning confidence raises more uncertainty in China. Eventually, this can lead to changes in the foreign policies alliance with Russia and trouble with Western supported neighbors like Japan. These developments should not be dismissed by economic observers, since crisis typically leads to radical shifts in policies.

Thirdly, western leadership, especially in the Eurozone, has made a questionable series of decisions ‎and the crafty deferral of problems remain part of the desperate strategy. The Greece saga only affirmed the weak position of all those in the European Union. Demonizing and humiliating the Greeks as the sole trouble maker of the continents is not only misleading, but shows the less-than-honorable leadership that's struggling severely. In fact, it's laughable (or sad) that the market rallied after the Greece saga this summer, which solved nothing but further exposed EZ problems. A cheerful bunch only realized the short-term market lift, but long-term planners are reassessing the further waves of concerns. Beyond deferring problems and markets reacting to instantly gratifying news, inter-woven issues are infesting the Eurozone economies.

Europe remains so desperate to find growth, and Asia is slowing down. Perhaps the Iran deal was that attempt to stimulate business opportunity for European companies in a new market. European leaders are desperate—lacking the class or a moral compass in figuring out the future and by not confronting past mistakes. Yet, developed market bond yields still remain low and fail to tell the real story, while the calmness keeps investors comforted and the low rate stimulus formula has proven to be a good enough distraction from crisis mode: “As the Greek debt crisis has calmed, the ECB's €1.1tn quantitative easing programme has resumed its steady hammering down of bond yields.” (Financial Times, July 24, 2015)

‎Finally, when coming back to US markets, the broad indexes (i.e S&P 500 and Nasdaq) cannot hide the real economy worries for long. Plus, corporate earnings weakness is slowly revealed, especially in this earnings season. Bond yields are not rising, rate hikes are not convincing, and poor/disappointed earnings continue to resurface. The strength of the US dollar is bound to impact earnings. Obviously, when the world is in turmoil the dollar is preferred, but the shift in currencies affect companies revenues. Now, the global concerns are becoming real to some observers. The few technology new school giants, such as Amazon and Google, ‎cannot carry the whole index or the economy, for that matter. No question, share buybacks and low interest rates have rewarded stocks. Over-reliance on both factors seems riskier than risk indicators project.



Article Quotes:

“Germany’s immense current-account surplus – the excess savings generated by suppressing wages to subsidize exports – has been both a cause of the eurozone crisis and an obstacle to resolving it. Before the crisis, it fueled German banks’ bad lending to southern Europe and Ireland. Now that Germany’s annual surplus – which has grown to €233 billion ($255 billion), approaching 8% of GDP– is no longer being recycled in southern Europe, the country’s depressed domestic demand is exporting deflation, deepening the eurozone’s debt woes. Germany’s external surplus clearly falls afoul of eurozone rules on dangerous imbalances. But, by leaning on the European Commission, Merkel’s government has obtained a free pass. This makes a mockery of its claim to champion the eurozone as a rules-based club. In fact, Germany breaks rules with impunity, changes them to suit its needs, or even invents them at will. Indeed, even as it pushes others to reform, Germany has ignored the Commission’s recommendations. As a condition of the new eurozone loan program, Germany is forcing Greece to raise its pension age – while it lowers its own. It is insisting that Greek shops open on Sundays, even though German ones do not. Corporatism, it seems, is to be stamped out elsewhere, but protected at home.” (Project Syndicate, July 23, 2015)


“The government has launched several plans to reform its exchanges, but these have been dwarfed by its efforts to stop the decline in stock prices. Apart from pouring state money into the market, it is also believed to have been behind announcements by China’s brokers association of a new target—4,500—for the Shanghai Stock Exchange Composite Index. (It peaked above 5,000 in mid-June before plunging to 3,500 in early July; it’s recovered to about 4,000.) Beijing halted initial public offerings, recruited state banks to funnel at least $200 billion to brokerages to help buy shares, and used official speeches and commentary to assure citizens the market will stabilize. According to a leaked document posted by China Digital Times, the government also instructed state media to reduce coverage of the market… Some analysts have noted that China’s slumping stock market hasn’t yet caused a significant slowdown in economic growth and that Beijing’s handling of equities might have minimal impact on the government’s management of China’s macroeconomics. But the response to the crisis sets a tone for the broader economy. Xi had promoted financial reforms, including changes in the equity market, as part of the overall agenda of economic liberalization. Market forces would be allowed to play a 'decisive' role in determining the direction of the economy, Chinese leaders announced in a major communiqué in November 2013, after a meeting of the party’s Central Committee.” (Bloomberg, July 23, 2014)

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

S&P 500 Index [2079.65] – On five occasions this year, the index failed to climb above 2120. The index has been defined by a sideways action recently, and there is a sense of uncertainty visible in the chart pattern.

Crude (Spot) [$48.14] – A dramatic and sharp sell-off since June 24, where at one point the commodity dropped from $61 to $47.72. Amazingly last July, Crude traded mostly above $100.

Gold [$1,080.80] – After failing to hold at $1,180 for a while, a building selling pressure materialized for gold, leading to a break below $1,100. Psychologically damaging, but this is continuation of a slowdown where the bottom remains unknown.

DXY – US Dollar Index [97.24] – Strength remains steady. Given the weakness in commodities and currencies of most emerging markets, no major influences have yet to alter the established dollar strength.

US 10 Year Treasury Yields [2.26%] – In the last two months, yields have struggled to climb above 2.45% on four occasions. This stalling raises further questions about bond markets confidence of a resurging US economy.






Dear Readers:

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

Market Outlook | July 20, 2015

“The greatest intelligence is precisely the one that suffers most from its own limitations.” (Andre Gide 1869-1951)

Summary
‎
With weakness in commodities, worries in Emerging markets, and ongoing fuzziness in Europe the US markets have regained upside momentum. Particularly, this is evident by the strength of the US dollar during the last three months, as other currencies seem riskier. Interestingly, shareholders of innovation driven themes, such as technology, continue to benefit, and resource based themes are struggling and out of favor. The ongoing stock market rally highlights the overwhelming participants' responses to larger tech driven companies. However, the real economy and smaller companies are struggling to fathom how a near all-time high stock market reflects the sluggish day-to-day economic activities. This conundrum is now a nightmare for the Federal Reserve, which has to create some hype/sense to explain the lack of convincing substance for interest rate polices.

Innovation Desired

There is strong momentum for select large cap technology, as exhibited by Google shares last week. Unlike, commodities (e.g. Crude) affected by the supply-demand imbalance or emerging markets that are cooling and failing to generate growth stories, the US tech giants are in a world of their own. The Nasdaq, a symbol of Technology and Biotech, is roaring again in an explosive manner. An over 6% jump for the Nasdaq index since July 8th tells the story of a further buying or reaffirmation of an ongoing trend. However, the mega-tech companies with a dominate market share do not insinuate the well-being of US or global economies. That’s the tricky part in making an investment versus analyzing the well-being of a broader economy. In the near-term, investors are chasing returns, while being comfortable with the recent trends for US equities. After all, the well defined status-quo is in place as the feeling of “risk” seems to evaporate. At least, that’s the feeling in developed markets, where volatility is contained and bond yields are not quite spiking.

The positive movement in innovation stocks summarizes the story of our current times. Obsolete business models have either lost out due to this globalized world or simply cannot compete due to more efficient-based technologies entering the scene. That applies across wide sectors from retail to financial services, and the impact is being felt. Surely, this is obvious in all facets of life and investing is no different. In fact, the labor markets are slumping due to vast shifts in industries, and newer companies are more efficient or technical. In short, the labor market needs to adjust. Value managers must be having a hard time finding old school companies with growth potentials, especially those that are mid- to smaller sized. Massive changes in the marketplace continue and newer business models are desperately needed.

Deciphering Messages

As US stocks rally along with the Dollar, the international community still grapples with developments in Greece, China, and Iran. Greece reflects a political crisis in the Eurozone, which is akin to an ongoing public divorce. Yet, when all said and done, the Greek exit chatter is way too premature (at least for now) and the Eurozone goes on (despite murmurs). China is a debate about bubble-like patterns versus unconvincing GDP numbers published by the government. And the Iran deal raises not only discussion about crude supply but the changing (moral) values of Western leadership in years ahead. In fact, if troubled by all three uncertain events then a rotation to the US dollar surely makes sense, and that’s what the markets have showcased.

In addition, Brazil and Russia are on shakier ground than imagined during a period when investors have piled tons of capital into BRICS. Both remind us of a not-so-robust global growth. The struggles in Brazil continue and are quite visible in the data again and again:


“Another day, another disastrous data point from Brazil. The national statistics office revealed on Tuesday that retail sales fell a seasonally adjusted 0.9 per cent in May from April and by (an unadjusted) 4.5 per cent year on year… The broad retail index — which captures these items as well as construction materials, another beneficiary of the boom years — reflects the extent to which Brazilians have pulled in their spending. It was down 10.4 per cent year on year in May.” (Financial Times, July 15, 2015)

The same can be said about China, where the slow global growth is being felt:

“The world's largest auto market saw auto sales tumble 2.3 percent in June year-over-year, according to China's Association of Automobile Manufacturers. It's the first year-over-year decline in monthly auto sales in more than two years.” (CNBC, July 19, 2015)


The Rate Saga

Corporate earnings, labor market health, and business growth are all essential for determining the status of the real economy. Surely, the FOMC meetings, in their intellectual and gentle approach, dissect this matter. Yet, beyond the endless articles and casual chatters regarding rate hikes, justifying an interest rate increase has been difficult to muster. Surely, the US political climate plays a role in rate hike factors, as well— especially heading into an election year. Yet, the standstill in the no-interest decision has helped the status-quo prevail higher asset prices without panic-like bursts. The narrative goes on, Congress, along with market participants, exhibited skepticism, but the market has not been shaken dramatically. It has come down to this: Does the market trust the Fed or do participants realize the Fed is in a lose-lose situation? This question has been deferred for too long:

“Federal Reserve Chair Janet Yellen told lawmakers that waiting too long to raise interest rates holds risks for the U.S. economy, along with tightening too quickly. ‘There are risks on both sides,’ she [Janet Yellen] told the Senate Banking Committee on Thursday in her second day of congressional testimony.” (Bloomberg, July 16, 2015)

It is fair to say that the Fed somewhat acknowledges the lose-lose situation it faces at this junction. At some point, the markets may get tired of the status-quo and these words might actually have some value. By then, managing risk maybe more difficult than desired.


Article Quotes:

“But while questions remain over how much more oil Iran will be able to export, and by when they’ll be able to do it, OPEC still has to start preparing for another one of its members to increase production in a bear market, as Reuters reports. The cartel is hoping that demand, which has been tepid this last year on weak growth in Asia and Europe, will tick upwards again and help to absorb new Iranian supplies. Time will tell if that bet pays off. While historically OPEC has cut production in times of oversupply as a way to keep prices high, this time around it’s chosen to sit tight and try to squeeze out non-OPEC producers for market share. But shale’s resilience is throwing a wrench in that plan, and a flood of new Iranian crude looms ominously on the horizon. Saudi Arabia is the only realistic candidate capable of cutting production to make room for Iran, but it’s hard to imagine Riyadh willingly doing that for its regional rival. What we’re left with are some strong long-term forces acting to keep the global oil supply booming, likely ensuring cheap prices for the foreseeable future. For producers like OPEC’s petrostates or American fracking firms, that could be a big problem. For everyone else, well, it’s a buyer’s market.” (The American Interest, July 15, 2015)

“According to Nassim Nicholas Taleb and Gregory F. Treverton, appearances can be deceiving, especially when it comes to the stability of a nation. In their essay in Foreign Affairs, ‘The Calm Before the Storm,’ Taleb and Treverton argue that what you see is not what you get when it comes to the apparent ‘stability’ of the political system of a given country. They argue that countries with relatively decentralized governments and a wide variety of political expression such as Italy or the U.S. are actually quite strong politically despite the perception of conflict and lack of national cohesion. The corollary to this is that a strong central government and the lack of political diversity you see in countries such as Saudi Arabia, North Korea, Venezuela and China actually makes these countries more fragile… They start by asserting that China’s more than a decade run of strong economic growth makes it difficult to assess the future of the country. China has recovered surprisingly well from the huge shocks of the Maoist period over the last 35 plus years. That is, however, a long time ago and therefore less likely to protect the country against future shocks. On the negative side of the slate they highlight that China’s political system is among the most centralized in the world, its economy is somewhat diverse, depends on exports to the West, and its government has been taking on hundreds of billions in debt lately, leaving it more vulnerable to slowdowns in both domestic and foreign growth.” (Valuewalk, July 19, 2015)



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

S&P 500 Index [2126.64] – In the last 90 days, the index has traded in a range between 2060 and 2120. After peaking in May (2134.72) and June (2129.87), the index is close again to revisiting and testing prior highs.

Crude (Spot) [$50.89] – Crude failed to hold above $60. The deceleration of a long-term cyclical decline continues. Weaker demand and expanding supply explain the dramatic fall over the last 12 months. There are no signs of stability around $50, yet.

Gold [$1,132.80] – For a long while the signs of calmness appeared around $1,180-1,200. Recent selling pressure confirms the commodity cycle slowdown. A break below $1,150 signals more weakness rather than a bottoming process.

DXY – US Dollar Index [97.86] – Regaining strength after a pause in prior months and with the recent Emerging market and European worries, the Dollar remains a strong currency that’s heavily sought after.

US 10 Year Treasury Yields [2.34%] – The last 30 days showcase a very narrow range between 2.20-2.45%. Perhaps, the rate hike discussion is more confusing rather than convincing as yields remain in somewhat of a neutral range.






Dear Readers:

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

Market Outlook | July 13, 2015

“Waiting is painful. Forgetting is painful. But not knowing which to do is the worse kind of suffering.” (Paulo Coelho)

Summary
‎
Looking beyond the Greece/EU talks is essential at this point, especially for data and other surprising market-sentiment related events. Sooner or later, the Greece debacle and obsession will be behind observers’ minds. Then markets will start to re-focus into less political and more fundamental matters. For now, commodities are in a cyclical decline, dollar strength is intact, and equity markets and bonds are on pause. A major waiting game is in full gear, as the established bullish stock market continues to hold on. Justifying a rate hike in a slowing global economy is a major challenge for policymakers.

Conviction Reexamined

‎Believers of the Fed and believers of this multi-year bull market await another test of conviction. Whether markets operate under an illusionary narrative or by a simple formula via the guidance of central banks remains a debate in itself. However, claiming that “liquid markets reflect the real economy” is a dangerously misleading statement. From the US to Europe to China, the stimulus efforts of policy makers and their respective messaging does not tell the full truth. Even when markets appear overly “stable,” it fails to tell the story of the uncertain, shaky climate.

In fact, the markets reflect a narrow perception that is generated by a few market-moving influencers and the rest of the observers ride the wave. Operators in risk-taking or opportunity-seeking segments must be in state of confusion from recent days. This is rightfully so considering the confluence of some negative events and the other usual “non-events .”

Are investors going to continue trusting Central Bankers? Are investors going to stay relatively calm? Both questions have been asked so many times in recent weeks, but they are worth asking again since multiple events are piling up. Ultimately, buyers and owners of risky assets will have a major say in how risk should be digested.

Unphased

Surely, the sideways pattern of the S&P 500 index reflects confusion and an ongoing waiting game. In fact, the index of larger US companies is not even up 1% in 2015. To be exact, the index is up 0.86% so far this year, which showcases the combination of stalling bull market and the uncertain and suspenseful market that’s data hungry. Volatility (VIX) for equities still remains quite; however, roaring volatility in currencies, bonds, and commodities are a good reminder of turbulent realities. Of course, technical factors, such as share buybacks and dividends, attract many to own stocks. However, envisioning fruitful returns in the next 1-2 years is becoming more challenging. Tough questions have been deferred and the US bull cycle has been untested for a long while. It's fair to say, complacency is alive and well, given the relative appeal.

The Global Dilemma

The political crisis and public humiliation of Greece have gone beyond worries related to financial matters. The concept of the European Union is being re-evaluated and politicized, of course. Hardly a shock where we are, given the financial troubles from 2008 and summer 2011 have already signaled all-types of warnings in reshaping the European landscape. Amazingly, it is worth noting that the Eurozone did recover from 2011 with some revival. Perhaps, the low bond yields in Germany and other developed markets reflect that, unlike 2011, there is a belief that this is more contained. Now the recent talks filled with deadlines and angst continue, but the long-term economic picture is still fuzzy. For longer-term investors these times are even more suspenseful than for a shorter-term trader.

As Europe tries to resolve various issues, the Chinese markets are bleeding despite recent sharp recovery. When viewing the slowdown in commodities demand along with inflated Chinese valuations, one cannot help but expect more turbulence. The decade ahead seems even more mysterious, but the near-term appears even more nerve-racking:

“While the IMF expects global growth to pick up again next year, the bouts of turmoil underscore the fragility in the world’s economy, where anemic output in one region risks dragging down others across the globe. Policy makers have fewer options left to respond to downside surprises, the IMF said. Governments have pushed debt to dangerously high levels and central banks are constrained by the lower limits of rate reductions.” (Wall Street Journal, July 9, 2015)

Regardless of government interventions, the signs of slowdown are too real to ignore. At some point, the coordinated easing policies from the UK to Japan to the US to Europe may not be the only medicine for wealth creation. Perhaps, the uniform actions, plus political tensions, and alliances such as Russia, China, Iran will have an impact on corporate actions. Right now, those longer-term questions are not overly contemplated because the day to day noise pollutes the airwaves. Yet, evaluating long-term implication and making the right bets might be fruitful for those looking ahead.


Article Quotes:

“While meeting at a two-day summit of the Shanghai Cooperation Organization in Ufa, Russia, Russian President Vladimir Putin and Chinese President Xi Jinping are reportedly discussing a framework that would merge China’s multi-billion dollar network of roads, railways, and pipelines through Central Asia with the Eurasian Union, the post-Soviet economic bloc that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. The two projects would be combined under the auspices of the Shanghai Cooperation Organization, and if the proposal is completed, it would make the opaque organization the preeminent economic body from Shanghai to St. Petersburg… State media in both countries are already trumpeting the cooperation proposal and the SCO, with the Chinese state news agency Xinhua calling it a blueprint for 'cooperation and prosperity of the whole Eurasian continent.' That marks quite a departure from Moscow and Beijing’s previous tug of war over influence in Central Asia.” (Foreign Policy, July 10, 2015)

“Eleven of the 15 non-financial U.S. companies that spent the most on buybacks last year base part of CEO pay on earnings per share or total shareholder return, or both, according to data compiled by Bloomberg. These metrics get a boost when businesses return cash to investors, giving companies like International Business Machines Corp. and Cisco Systems Inc. added incentive to dole out cash to stockholders. Linking compensation to buybacks and dividends can encourage managers to sacrifice funds that could be used for long-term investments, economist William Lazonick said. It also raises the prospect that executives are being paid for short-term returns rather than running a business well… IBM drew criticism from analysts and investors last year for what they considered excessive share repurchases. The company returned more than $13 billion, the fourth-largest amount in the U.S., while it was struggling to reinvent itself to a provider of cloud services. In 12 straight quarters of year-over-year declines in sales, IBM boosted operating EPS in nine quarters -- with the help of buybacks.” (Bloomberg, July 7, 2015)

Key Levels: (Prices as of Close: July 10, 2015)

S&P 500 Index [2076.78] – During the last six months, the index has traded within a tight range of 2040-2120. Once again, buyers’ convictions are being tested.

Crude (Spot) [$52.74] – Already in an established bear cycle from a long-term picture, the recent deceleration and inability to hold at $60 confirms the low demand and expanding supply.

Gold [$1,159.39] – Once again, Gold is trading like a commodity rather than a “currency”. The weakness in the commodity cycle remains. The next critical level is at annual lows of $1,147.25 which were reached during March 2015.

DXY – US Dollar Index [96.02] – Staying above 94 is proving a test in the near-term. However, current levels seem to be stable, and this reemphasizes the dollar strength as one of the more dominant themes.

US 10 Year Treasury Yields [2.39%] – No major change since the prior week. In the last 30 days, trading has ranged from 2.20%-2.45. The next trend is not clearly established.





Dear Readers:

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

Market Outlook | July 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.