Market Outlook | August 17, 2015

“When in doubt, don't.” (Benjamin Franklin 1706-1790)


Summary
‎
• Sideways US stock markets reiterate the fading catalysts for upside moves. The standstill remains as anxiousness builds.

• Interest rate hike chatters resurface, but real economic data is far from justifying real strength from US to Eurozone.

• Actions taken in China further illustrate depth of the global growth crisis and bursting of the Chinese bubble.

• Commodities, currencies, and emerging markets are in terrible shape, reflecting the massive shocks that’s ongoing in the financial system.


Doubt Looming

As more investors buy protection (insurance) in anticipation of enhanced risk, the US key indexes remain in a sideways trend. We're not in a period of blind optimism nor are we in all-out crisis mode, either. What does that lead to? Certainly, a dull trading pattern that lacks any clear direction. At least that’s the overwhelming message from broad based US indexes such as Nasdaq and S&P 500 index, especially last week. It is fair to say that confusion is quite clear in the trading pattern.

So far 2015 has witnessed neutral investor reaction. At the same time, there is a delayed realization of lack of growth in a period of tame volatility. Inflation, rates, and wages remain very low end and mere words from policymakers are not convincing. In the week ahead, FOMC will get some attention, but the soft growth is evident. Until there is an actual rate hike, the Fed’s words carry less weight and meaning, except to calm the nerves of the mostly confused participants.

The Fed rate hike discussion may not be the only top problem considering the ailing growth and need of long-term revival. The glorification of "data- dependent" chatter only makes a mockery of dismal global market conditions. For US market observers there are too many mixed messages. Even the Fed has sent various signals about possible rate hikes, raising doubts about the economy and doubts about Fed’s ability to generate real growth. Perhaps, the Fed would acknowledge that job creation is not in their “job description” and that managing bubbles is supposedly the Fed’s expertise. The bulls strongest point (before and now) is the lack of alternatives, which gives the US a relative edge. That’s been vital recently in which developed markets have held their ground versus emerging markets as the US remains the leader. However, in a global environment, multi-national companies cannot be insulted from multiple, ongoing shocks. Thus, beyond QE, buybacks, and relative strength, the US equity markets await multiple tests of conviction ahead.

Recognition

‎In recent years, the Chinese bubble was discussed—from overheating real estate to less credible GDP numbers to massive rush by retail investors in China. So many pundits warned even before the commodities demise, which of course confirmed the bubble bursting in Emerging Markets especially in China. Last week reflected the dire conditions of the Chinese markets where devaluation measures were a reaffirmation of a weak economy. No surprise here, considering all the interventions and stimulus efforts recently by Chinese lawmakers. Simply, the Chinese central bank is responding to what Financial markets loudly illustrated by the vicious commodities sell-offs and softer economic conditions. Collectively, we knew this last year from the slowdown in global economies from Turkey to Brazil. It was clear that Emerging Market currencies were already in deep trouble at the start of the year. Some called the Yuan devaluation as another chapter of the currency wars. Others see it as a desperate move, but when all said and done there is fragility in the system:

“Over the past several years, borrowers in emerging markets have built up more than $2 trillion in dollar-denominated debt. When the U.S. currency was cheap and the Federal Reserve was holding interest rates close to zero, that debt seemed like a great deal.” (Bloomberg, August 16, 2015)

Coping & Preparing

Some attempts to link Chinese currency actions with possible Fed's rate hike might be misleading or incorrectly interpreted. The answer remains to be discovered, but there is one clear issue – massive uncertainty. The confirmation of desperate economic conditions and slowing emerging markets lead to a vulnerable climate for leaders. This fully impacts foreign policies and domestic attitudes towards businesses which end up influencing polices. The mostly pro-business mindset of prior decades is being questioned now after the persistence of weakness in real economies. As witnessed in the financial crisis in 2008, there is an overreaction on the regulation side that can have further consequences. For market observers these big picture concerns may not be felt in the day-to-day, but surely a shift in sentiment is impactful. Ultimately, the low rate, higher stocks story is unsustainable (even in US) and seems more illusionary than the burning reality. The true economic health conditions need to be flushed out sooner rather than later, and already some truths are boldly revealed in the market.

Article Quotes:

“Disappointing eurozone numbers released on Friday demonstrate the fragility of the region’s recovery despite a cocktail of cheap oil, a weaker euro and mass bond-buying by the European Central Bank. Gross domestic product in the eurozone increased 0.3 per cent, undershooting analysts’ estimates of 0.4 per cent, as France’s economy stagnated and Germany, Italy and the Netherlands grew less than expected. While the currency bloc remains on track for its best year since 2010, the latest figures, released by Eurostat, the commission’s statistics agency, underline how the eurozone is still struggling to recover from the economic crisis. Unemployment is still in double figures and data from Germany indicate that companies in the eurozone’s economic powerhouse remain reluctant to invest, regardless of record low interest rates. The region’s economy remains slightly smaller than in the second quarter of 2008, before the collapse of Lehman Brothers, the US investment bank.” (Financial Times, August 14, 2015)

“Brazilian equities wrapped up their second weekly decline, driving the Ibovespa benchmark closer to a bear market as Latin America’s biggest economy faces its worst recession in a quarter-century. Stocks also slumped amid concern the country will lose its investment-grade credit rating and as a corruption scandal that started at the state oil producer adds to instability. Nationwide protests are planned for Sunday as President Dilma Rousseff fights for her political survival, and a devaluation in China this week is weighing on prospects for exporters including the miner Vale SA. The Ibovespa slid for a fourth straight day, declining 1 percent to 47,508.41 at the close of trading in Sao Paulo. It extended its drop from its 2015 high on May 5 to 18 percent, with a decrease of 20 percent indicating a bear market. Forty-eight of the Ibovespa’s 66 stocks fell Friday as meat exporter JBS SA contributed the most to the decline in the benchmark equity index.” (Bloomberg, August 14, 2015)

Key Levels: (Prices as of Close: August 14, 2015)

S&P 500 Index [2091.54] – Trading within a familiar range between 2080-2120. This mostly tells the story of 2015 as one of neutral action.

Crude (Spot) [$42.50] – Further price deterioration driving oil prices to further lows. August lows of $41.35 are on the radar. Previous lows were in March at around $42. Fragile trading ranges appear at this stage.

Gold [$1,118.25] – In prior months, gold failed to hold above $1,180 on several occasions. Too premature to call a bottom as the risk-reward may attack some speculators at this range.

DXY – US Dollar Index [96.52] – Slight pause. Again, reaching above 100 has been a struggle. Last time the Dollar index stayed above 100 for a sustainable period was in the 2000-2002 period.

US 10 Year Treasury Yields [2.19%] – The summer showcased yields with ability to remain above 2.50%. The 200 day moving average of 2.14% may serve as some near-term barometer. Mainly it has been dancing between 2.20%-2.40% in recent weeks.

Dear Readers:

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

Market Outlook | August 10, 2015

“It is hard to free fools from the chains they revere.” (Voltaire 1694-1778)

Summary
‎
• US stock market indexes appear directionless while awaiting catalysts to confirm or negate the growing doubts.
• US bond and developed markets yields suggest a lack of global growth.
• Commodities and Emerging Markets remain in a cyclical downturn. Now, the impact of these moves should impact currencies, company’s earnings, and foreign policies.
• Although the massive panic has been mostly contained, the central banks cheerleading tactics appear misleading rather than convincing.


Overly Revered

‎The reverence of the Federal Reserve is a powerful matter. In fact, talk to veterans and observers of financial markets and one saying is heard across multiple cycles: “Don’t fight the Fed.” A reference that has been used too many times to suggest that if you bet against the Fed then financial pain/loss awaits. A saying that illustrates the Fed sets the tone, the script, and expectations which remain highly revered if not feared. Since 2008, it was no different when the near zero interest rate policies lifted equity markets and investors were rewarded by sticking to the script. Perhaps not challenging or questioning the Fed became too profitable (or dangerous) and left others too intimidated. Of course, when one is rewarded with the rising stock market over six years or so, being skeptical against the main conductor is a tough task. Yes – gloom and doomers were proved wrong, and, surely, the task of an investor is not to impose one's own views, but rather seek fortunes. For now, fortune seekers view the Fed and the Fed’s policies as the “truth” barometer – at least in the scope of financial markets.

Amazingly in recent years, the Federal Reserve has become a character of its own. Holding press conferences, giving highly anticipated speeches, and leaking to writers about market conditions all make for a Hollywood-style of management rather than a dull risk manager seeking no attention. The idolization of the Federal Reserve is dangerous and an illusionary picture at times. How many times can investors believe the Fed will raise rates soon enough? How many times can one trust the Fed’s claim of a strong recovery?

In today’s climate, Central banks are following these low interest rates in which are becoming the focal point for desperately needed catalysts. From the UK to Europe to China, central banks are highly coordinated and appear to mimic each other. Yet, all their messages seem to be more or less similar:

“QE -- a monetary policy tool first deployed in modern times by Japan a decade and a half ago and since adopted by the U.S. and Europe -- is being echoed in China as Premier Li Keqiang seeks to cushion a slowdown without full-blooded monetary easing that would risk spurring yet another debt surge. While the official line is a firm “no” to Federal Reserve-style QE, the PBOC is using its balance sheet as a backstop rather than a checkbook in efforts to target stimulus toward the real economy” (Bloomberg, August 9, 2015).

Terms like “data-dependent” make a mockery of the Fed and its followers. Since when are markets not data depending? (Always are). Since when are investments decisions data-dependent? There is a humbling development in all this; perhaps the Fed seems as clueless as its audience about the next move. And being “clueless” about the next move is normal and closer to the less-than-pretty truth. Yet, the challenge for the Fed is justifying a growing economy in a period of low inflation, low yields, and lackluster growth. Maybe the truth seekers need to have a mindset that says “don’t fear the Fed!.” Perhaps, that’s too courageous for some risk-managers, but sooner or later the truth will be revealed. Many have been fooled again and again that a rate hike is coming “soon.”

Markets Responded

Regardless of Central bank messaging or interpretations, other markets illustrate a different picture. The currency and commodities markets provide a view of crumbling emerging markets that were too resource dependent. Surely, the commodities bubble has started to burst a while ago as new lows are the dominate these days. As crude crumbles with massive supply and lack of demand – there has been an awakening of sorts. Similarly, emerging market currencies are feeling the pain tied to nations that are overly tied to resource-based nations.

Bond yields of developed nations still remain low. The drama with Greece came and went, but yields are much lower. Despite cheerful responses of European equities and actions led by the ECB, weakness persists in economic data:

“Surprisingly soft German industrial output and exports data also supported lower yields in Europe. Industrial output fell by 1.4 percent in June, falling short of economists' mid-range forecast in a Reuters poll for a rise of 0.3 percent” (Reuters, August 7, 2015).

In the US or Eurozone, the bond markets are not buying the improving economy story. Skepticism persists. And the volatility of currency and commodity markets further illustrates the damages being felt by companies and nations.

Tracking Tangibles

The big picture themes that have been lingering need some resolution. To start, equity markets are stuck and desperately seeking the next move. Beyond the Fed rate-hike anticipation, finding upside catalysts is severely challenging after six years of strength. Meanwhile, share buybacks which have been favorable to a bullish trend are slowing down. Dollar strength has been a result of slowing commodities and emerging markets, but the impact on corporate earnings is slowly being felt. Finally, GDP or labor numbers are not overly promising either. If results turnout to be in-line, that’s not good enough given the building pressure for a clear-cut answer. Yet, there are too many gray areas and too much spin. One must acknowledge that the Fed remains in a lose-lose situation: A rate hike without a strong economy or no hike that keeps the near zero interest rate policy intact. Thus, the volatility of equity markets will have a major say in weeks and months ahead. Basically, US stocks have not feared any miscalculation of risk in the current policies. Thus, cautiously we collectively watch.

Article Quotes:

“China's fledgling municipal bond market is showing increasing signs of stress after a provincial bond market auction went undersubscribed for the first time in four years. One auction of 10-year bonds by the northeastern province of Liaoning failed to sell out on Friday and yields on other auctions by the province rose by between 20 and 29 basis points from an auction by the Xinjiang ethnic autonomous region on Thursday. Beijing revamped its bond market in 2014, allowing local governments to issue such bonds directly. It followed up by launching a massive local debt swap that exchanged high-yielding local government financing vehicle (LGFV) debt for the new municipal bonds. Average muni bond yields have been rising since May. The average yield for seven-year municipal bonds, which in May were trading only 20 basis points above the sovereign rate, had by end-July opened up a 50 basis point gap above treasuries and were trading in line with policy bank debt. Analysts have flagged China's recent move to further open the domestic bond market to international capital as a response in part to lukewarm demand, especially from non-bank clients, for new municipal debt, whose issuance could reach more than 2 trillion yuan ($322 billion) this year.” (Reuters, August 7, 2015)

“The economic logic says that there are two different problems. Greece needs debt relief and the eurozone does not work. That requires two instruments. If the IMF is true to its word, then it should forgive Greek debt—not least to be accountable for its serial mistakes in the conduct of the Greek program and for delaying by six precious months a transparent discussion of a necessary debt relief. This would force the European authorities to contribute their share of further debt relief and may even induce them to repay the Fund on Greece’s behalf. The solution to the eurozone’s more fundamental problem requires deeper reflection. French President François Hollande has invoked the vision of Delors to move Europe closer to a political union, a theme that has been reiterated by Italian Minister of Economy and Finances Pier Carlos Padoan. Schäuble, in contrast, has made it politically legitimate to discuss the breakup of the euro area. The German Council of Economic Experts has now added its voice to that idea, suggesting that exit from the euro area now become integral to the way the euro area works (paragraph 8 of the Executive Summary). But if a euro break up is now open to discussion, some would argue the least disruptive way to do so is by Germany exiting from the eurozone. That will open up many possibilities for a new configuration. Of course, the most likely outcome is that Greece will continue to borrow new money from the creditors to pay its old debts to those creditors. As it undertakes more austerity, Greek output and prices will fall, making its debt burden greater. That will be blamed on Greek intransigence. More weekends of high drama will lead to driblets of debt relief. The Greek tragedy and euro area fragility seem destined to continue.” (Bruegel, August 6, 2015)

Key Levels: (Prices as of Close: August 7, 2015)

S&P 500 Index [2077.57] – Barely moved since last week and has been wobbling between 2080-2120. Increasing evidence of lack of conviction by both buyers and sellers. This matches the theme for 2015 of neutral behavior and great anticipation for catalysts.

Crude (Spot) [$43.87] – December 19, 2008 lows of $32.40 remain a benchmark on the minds of long-term observers. Meanwhile, in the near-term, March 20,2015 lows of $42.03 stand out as a barometer. More supply expansion worries remain over further pricing pressure.

Gold [$1,093.50] – A break below $1,200 sets the tone for another wave of downside moves. July lows of $1,080.80 are on the near-term radar. Cyclical decline remains in place.

DXY – US Dollar Index [97.56] – The strength remains. Although below annual highs of 100.39, being above 90 suggests the relative appeal of the greenback as a currency.

US 10 Year Treasury Yields [2.16%] – Recent breakdown below 2.30% hints of lack of faith about the story of the improving economy. Certainly, far removed from annual lows of 1.63%, but 3% is looking further away, yet again.

Dear Readers:

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

Market Outlook | August 3, 2015

“Reality is merely an illusion, albeit a very persistent one.” (Albert Einstein 1879-1955)

Summary
‎
• US equity markets continue to trade sideways as credible upside catalysts remain very scarce.
• The justification of a US rate hike due to improving economic conditions is not fully convincing to observers despite the Fed’s optimism.
• The commodities cyclical downturn has reaffirmed negative results on resource-based companies and countries.
• Chinese regulators panicking, bond yields remaining low, and softer housing data raise more growth questions.


Same Message, Different Paths

‎In a world where Private Equity firms are desperate for investment ideas or are waiting for distressed opportunities, we can surmise that the health of the global economy is not that vibrant. The current status is more like an ongoing struggle to find favorable yields and growth stories. Real economies are in a rut, policymakers have failed to generate growth policies, and stock markets march to a different rhythm.

Larger private equity firms are looking ahead and are not chasing existing or riskier returns. In fact, the continuation of recent demises is viewed as creating wealth in future years ahead. Perhaps, this is one clue for the casual observer from an operator in the investment world:

“The firm [Oaktree] has prepared for a coming crisis by gathering almost $10 billion for a new distressed debt vehicle, Opportunities Fund X. A further slump in commodities prices or the Chinese stock market may set off enough opportunities for Oaktree to seek more money, Karsh said.” (Bloomberg, July 28, 2015)

Certainly, the commodity and emerging market weaknesses, which are inter-linked, are visible now. The CRB index, which tracks major commodities, is near 2008 lows, which reflects the multi-year demise in commodity pricing. Crude oversupply is quite obvious now, and the weaker demand only adds to further selling pressure.

Certainly, the impact of commodities is being felt in China as much as Texas. Thus, the commodity bearish cycle is too inter-connected to dismiss and signifies a slowdown relative to last decade. In terms of China, it is a much bigger impact of a slowdown. Despite the headline 7% GDP number (which is doubted among seasoned investors), there is desperation and pain, which explains the numerous stimulus efforts. A 7% GDP does not require various stimulus efforts if it was real and natural. In fact, the whole Chinese rally was induced by policymakers rather than forming naturally. Now the same Chinese regulators that were celebrating a market rally are the same folks panicking these days:

“Their [Chinese regulators] determination to support the stock market has undermined all their earlier rhetoric about wanting to open up investment opportunities in their local markets. Stock suspensions, short selling bans, forced purchases of shares by state owned investors and a ban on sales of shares by leading shareholders have all the hallmarks of a regulator panicking in the face of market forces it can’t even begin to comprehend or control.” (CMC Markets, July 30, 2015)

That said, China’s regulators are panicking; their shares are selling off fast and commodities based economies are hurting growth, as well. Would justifying a 7% GDP be more daring than raising interest rates in the US this fall? Perhaps. In other words, leaders of the financial world may aim to use crafty calming words, but the markets/data points are screaming massive warnings.

Substance vs. Hype

When considering housing data and consumer well-being, there is further reminder of the slowdown. The momentum of recent growth is showing signs of pausing, as well:

“New U.S. single-family home sales fell in June to their lowest level in seven months and May's sales were revised sharply lower, in what appeared to be a minor setback for the housing market recovery.”(Reuters, July 25, 2015)

The Q2 GDP was mixed and the Fed's messaging of the rate hike in 2015 is seeming less plausible, especially from highly skeptical participants. Job creation and wage growth are not quite materializing as desired. Personal consumption is one area optimists find some encouraging news, meaning the consumer is spending more. Plus, the hope is for better second half recovery, but seeing a dramatic rosy picture (outside of increasing government spending) is becoming a daunting task.

Housing, GDP, and commodities were at the forefront last week as the US 10 year yield closed below 2.20%. Now, with that said, how can the Fed justify a rate hike? A nerve-racking question that creates further questions while waiting for a suspenseful answer. Yet, the Fed narrative might be disconnected from the day-to-day tangible matters. That’s the frustrating element in which illusionary narratives trump harsher realities.

Large, new tech and biotech are innovative enough to be in demand. After a quick glance of investment opportunities in China, Greece, and Brazil, folks are quickly rushing to own Nasdaq-based shares and dollar-based currencies. Innovation is expanding as commodities remain deeply out of favor.

The last twelve plus months reaffirmed the strength in the dollar. Now looking ahead the next year or so, the impact of the dollar strength on corporate earnings is a vital indicator to shareholders:

“The sharp rise in the US dollar may slice more than $100bn off dollar-denominated revenues at some of America’s largest multinationals this year, a sum larger than the sales of Nike, McDonald’s and Goldman Sachs combined, according to a Financial Times analysis. The FT analysis showed a $28.9bn loss to sales in the second quarter so far, or roughly 3.3 per cent of the $863bn in reported revenues. The figures compare with $23bn in the first three months of the year, or 2.7 per cent of first-
quarter revenues.” (Financial Times, August 2, 2015)

Managing Disconnects

By now the massive disconnect between equity markets (in US and Europe) and tangible economy is not a shock to most observers. At the same time, share prices rose due to low rate policies across many countries, which reiterates lack of real economic strength. The moment of truth for markets is long overdue, at least in developed markets. At least Emerging Markets felt some pain both in the illusion driven markets and real economy. As the Fed touts a strong message of rate hike, one should be alert enough not to dismiss other realities and warnings that are glaringly visible. The rest is the art of messaging, politics, and calming attempt by Fed to slice and dice at convenient truths. Yet, markets have been at the mercy of the narrative sculpted by the Central Banks. Thus, risk takers and risk managers must be prepared to distinguish hype from reality.

Article Quotes:

“European Central Bank (ECB) President Mario Draghi wants stricter rules for the banking union. French President François Hollande is calling for a separate economic government for the monetary union. And in Brussels and Berlin alike, financial experts are devising plans to provide the Euro Group with the same tool that has proven to be so successful throughout history: its own tax. If the plans were implemented, it would constitute the breaking of a taboo for the Continent. The people are used to the fact that some powers are shifted to Brussels as part of European unification. But there is one thing even the most devoted proponents of Europe had shied away from until now: giving the EU the right to impose taxes, a power many felt the member states should retain. It had long been a given that this was something the European people would never accept… But with European leaders shuttling regularly back and forth to Brussels to attend crisis meetings on an almost weekly basis, public opinion has shifted. Proponents of a European tax say that if revenues and expenditures were centrally administered, at least in part, a single government could no longer blackmail the others.” (Spiegel Online, July 30, 2015)

“Revisions to the U.S. gross domestic product since 2011 reinforce the shift to a slower era of economic growth and underscore the difficulties the Federal Reserve faces in gauging just when to inch interest rates away from the zero-lower bound.
According to the Bureau of Economic Analysis, real GDP from 2011 to 2014 increased at an annual rate of 2 percent, a downgrade from the prior estimate of 2.3 percent. The Fed's July statement, meanwhile, indicated the central bank will raise rates when it has seen ‘some further improvement in the labor market’ and is ‘reasonably confident’ that inflation will trend toward 2 percent. During the press conference following the Fed's June statement, Janet Yellen made a reference to the role that the output gap—the cumulative difference between estimates of how much the economy can grow and how much it has actually grown—plays in the formation of monetary policy. ‘I think we need to see additional strength in the labor market and the economy moving somewhat closer to capacity—the output gap shrinking—in order to have confidence that inflation will move back up to 2 percent,’ she said. Since potential growth cannot be observed directly but only estimated, economists typically turn to other indicators, such as inflation and unemployment, to get a sense of just how much excess capacity exists.” (Bloomberg, July 30, 2015)







Key Levels: (Prices as of Close: July 31, 2015)

S&P 500 Index [2079.65] – An ongoing tug of war between 2060-2120 keeps occurring with a directional battle playing out. Suspenseful, wobbly action occurs as the 50-day moving average of 2099.36 tells most of the story.

Crude (Spot) [$47.12] – The recent severe drop in prices from $61.57 (June 24, 2015) to below $50 remind us of expanding supply and limited demand—A deadly combination, especially in a bearish commodity cycle. Observers are wondering if current levels can stabilize the sell-offs.

Gold [$1,098.40] – Like all commodities, the sell-off continues. Holding above $1,200 proved to be a major challenge for buyers. Long-term charts suggest further downside pressure ahead despite the near-term appeal of being “discounted.”

DXY – US Dollar Index [97.24] – After months of making an explosive run, the dollar index is pausing. March highs of 100 remain the upside target and the lows of 94 are at the low end of the range.

US 10 Year Treasury Yields [2.18%] – For weeks a tight range formed between 2.20-2.40%. This is a fragile state in which yields may go lower if the status-quo remains in tact. A potential move below 2% could spark a noteworthy reaction.






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 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.