Market Outlook | November 9, 2015

“Taking shelter in the dead is death itself, and only taking all the risk of life to the fullest extent is living.” (Rabindranath Tagore 1861-1941)

Summary

Regardless of earnings or sentiment, one thing is clear: US dollar based assets offer a relatively appealing investment for those looking to preserve wealth. A massive rush towards shelter is ‎a sign of increased demand for safety. US stocks, real estate, and bonds end up seeing cash inflow, especially at a time when emerging markets are crumbling or seemingly shaky. ‎Thus, the more selling in the commodities market the more troublesome action in Emerging Market currencies, which supports further strength in the US Dollar. This by now is a well established theme, and escaping it or ignoring it is not an option. Survival is the crux of the current market mechanics despite all the obsession around rate hikes.

The Fed’s Enigma

It's hard to tell what’s overly puzzling in this market – the participants asking for Fed guidance or the Fed enjoying the attention and PR game. It’s unbearable for some, who simply see the same ol’ policy of zero interest rates, a congress that’s out of ideas on job creation, and a market limited with the exception of few innovative ideas (tech, biotech). The faith in the global economy is still shaky despite the market dancing near-all-time highs. Certainly any positive economic movement is to be celebrated given the desperate need for good news, especially related to wages. Yet, the jobs numbers for October were exceptional versus expectation, while September was too ugly, so the truth is still being deciphered. Here is one balanced perspective:

“According to Sentier Research, median household income in September was 1.7 percent lower than in January 2000 after adjusting for inflation. Wages are expected to grow a bit faster in 2016: Private companies surveyed by PricewaterhouseCoopers in the third quarter predicted they’d raise wages next year by 3.1 percent, the first time since 2008 the number hasn’t been below 3 percent.” (Bloomberg, November 5, 2015)

Wealth Dissected

First, there are folks looking to create wealth via venture capital, real dollar investments, and human capital. Secondly, there are those looking to create jobs to sustain the middles class, which becomes a critical economic engine especially during an election seasons, of course. However, the job market faces a mismatch between skills and demand in some areas. The constant struggle between new, efficient technologies and antiquated business models creates further sluggishness in the current environment, especially for small businesses. Yet, low wage jobs growth has been a dominate theme and the enigma of dealing with a competitive global markets plagues business owners:

“The recovery has seen more low-wage job growth as these industries bounced back. But low-wage industries that cut wages have seen stronger employment growth since the end of the recession.” (Observer News, November 6, 2015)

That’s sums up the real economy in the trenches. With low inflation, the wage growth numbers are a bit tricky to digest or to at least it becomes difficult to claim a victorious recovery. Meanwhile, the S&P 500 index or Nasdaq may not reflect the real economy as shares are influenced by buybacks (impacting supply demand) as much as perception and investors desperation for safety.

Endless Questions

In terms of investments, those who’ve already created wealth seek shelter in liquid and proven assets. That’s where the market discussion becomes a bit lively, and risk tolerance is such a critical variable. If investments are doing well because folks are seeking shelter from a crumbling economy then is that really healthy? How does that look for the next 2-3 years? Commodities collapsed, but so did segments of the global economy. How does one expect growth? China is slowing down, but still tied to many economies – how does one analyze the inter-connected impact? Until these questions are answered, it’s difficult to see massive changes in the current status-quo. Surely, these unanswered questions will invite more safety rather than risk taking.
For now, the attraction of US assets over other areas is quite evident. The dollar index resurged recently, sparking further strength—a theme that was emphatic last year. The hype and anticipation of a rate hike is not impacting the already elevated, innovative based US themes (technology and healthcare). The collapse of BRICS mixed with increasing tensions in foreign policies and conflicts in Emerging Markets all lead to massive appeal of dollar based assets. Perhaps, that’s one question that’s already answered.


Article Quotes:

“China faces fundamental economic policy choices in which the whole world has a great stake. At a time when its economy is slowing and its wealth-holders desire to diversify their assets abroad, it is incoherent to favour both financial market liberalisation and exchange rate appreciation, as some in the US do. The necessary reforms if China is to grow sustainably and strongly over the next decade — such as closing unprofitable state enterprises and limiting the ability of local governments to borrow and build on a vast scale — will surely take a toll on growth in the short run. This will reduce demand for imports from the rest of the world and raise China’s trade surplus. Reasonable policy dialogue requires a recognition of the tensions between short and long term, and national and global interests. The world is likely to benefit from recognising that its deepest interests lie in China pursuing more not less reform, even at the expense of modest reductions in its contribution to global demand over the next couple of years, and possibly more exchange-rate depreciation than we would prefer.” (Financial Times, Lawrence Summers, November 8, 2015)

“Support for the euro has increased among citizens of the euro area in 2015, reaching an all-time high, according to the latest Eurobarometer survey of the European Commission. An overall 61% of respondents have confirmed that they see the European single currency as good for their own country, compared to 57% last year, the Commission said on its website.‘This marks the highest level of support since the Commission started the surveys in 2002,’ the EU executive body said. Support was highest in Luxembourg at 79%, followed by Ireland, which completed an economic adjustment programme in 2013, with 75%. Support for the euro has also increased in all other countries which have implemented or are implementing economic adjustment programmes. In Portugal, 61% of respondents see the euro as good for their country (+11 percentage points). The share of those supporting the euro as good for their country, has increased in Spain (64%, + 8pp. Support has also increased in Cyprus, reaching 50% (+ 8pp) and Greece (65%, +6pp). Moreover, 71% of respondents said that the euro is good for the EU as a whole. The survey was conducted from 12 to 14 October among some 17 500 citizens of the 19 member states of the euro area.” (Novinite JSC, November 6, 2015).

Key Levels: (Prices as of Close: November 6, 2015)

S&P 500 Index [2,099.20] – Climbs back to the familiar 2,100 level, where the index stayed for most of 2015. May 22nd highs of 2,134.72 are on the radar next.

Crude (Spot) [$44.29] – Selling pressure is mounting around $50. Although early technical signals of a bottom around $45, a follow-through is needed. Again, the supply-demand picture does not seem convincing enough to stir a sustainable upside move.

Gold [$1,088.90] – A commodities' cycle slowdown is further confirmed as Gold failed to hold $1,100, which was highlighted by an 8% drop in the last few weeks. Annual lows of $1,080.80 from July do not appear far removed from Friday's close.

DXY – US Dollar Index [99.16] – Since mid-October, the dollar strength has re-accelerated, which is very close to the March 2015 highs of 100.39.

US 10 Year Treasury Yields [2.32%] – A dramatic turnaround since the October 2nd lows of 1.90%, and a recent resurgence reflects responses to positive economic data points as rate hike discussions circulate.









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 | November 2, 2015

“The first step toward change is awareness. The second step is acceptance.” (Nathaniel Branden)

Summary

The status-quo continues to be well defined as low interest rate policies remain in place from Europe to Japan to the US. The ultimate risk is not clearly pinpointed by the consensus in the current narrative despite identifiable economic worries and looming global tensions. Market ‎participants are not overly bothered by a massive near-term risk or volatility based on recent actions. However, there is a very clear distinction between developed and developing markets, yet again. Developed markets are deemed safer and more liquid. Meanwhile, the uncertainty in Emerging Markets (EM) is still high, as practical economic concerns go beyond BRICS given recent weakness.

Premium paid

Innovative themes in technology and healthcare have been a bright spot from shareholders perspective. Unlike commodities and EM themes, innovative areas have mostly evaded the cyclical global downturn, while keeping investors optimistic on future potentials. This is illustrated by the Nasdaq 100 index which is around all-time highs, reflecting the massive appeal of large cap technology over financials, energy and materials. The more EM based groups crumbled the more Tech themes became relatively attractive for capital allocators. Of course, questions about tech valuation linger‎: Is it a bubble or not? Amazingly, investors have showcased willingness to pay-up for growth companies even now late in bull cycle. Of course, when the options of "encouraging" ideas are vastly limited, then premium is paid by purchasers of US tech. surely, this momentum may lead to “over-valuation” discussions in some circles, as that's only natural. Nonetheless, the demand for growth ideas (especially US dollar based investments) outweighs the grumblings of further risk at this movement.

Sour chess match

Chinese markets summer woes are not fully digested by some in financial market. Still the depth of financial crisis /slowdown in China is not bluntly discussed or clearly discovered. One thing is certain, the weakness in China (i.e declining GDP) is strongly tied to the softer commodity demand. In terms of foreign policy, “desperation” (after shaky economic conditions) is a key factor that may leads to multiple war or tensions. This is possible especially when leaders feel they have less to lose. Clearly, the Crude oil collapse last year has reshaped the mindset of key global leaders. Russia's economy has collapsed leading Putin to showcase further aggression and explore military options from Ukraine to Syria. Saudi Arabia is not thrilled by Oil collapse, as Iran enters the oil market that's already seeing softer demand and expanding supply. Similarly, the affliction in the energy sector further damages the US economy as well, given last decade’s critical contribution to the real economy. Thus, non-democratic nations have less to lose when the global and inter-connected economy’s slowdown leading to bitterness and hostility. Eventually, this creates danger in foreign policies which eventually turn into market risk quicker than imagined. Perhaps, "foreign policy" risk deserves more consideration these days as it impacts global wealth creation.

Current Setup

For now, beyond fundamentals or day-to-day macro data points, there are few key points to consider.

Three factors helping elevate US stock prices:

1) Lack of alternative investment options as EM currencies, economies and investments remain very sour. US Dollar based assets are believed to be the best option as high demand for US equities is clearly visible in the past few years.


2) Share Buybacks - Companies buying own company shares leads to less available shares in the marketplace which ‎reduces the overall supply of available shares for investors. Limited shares essentially contribute to a bullish bias as that trend remains intact.

3) Low and lower yields drive investors’ behaviors as investors seek shelter into overcrowded "safe assets". In a world where one is risk sensitive, then US stocks and government bonds stand out versus other markets.‎ A sign of slow real economy growth in which the Fed lacks basis for a rate hike.

The major question that lingers is which of the three factors above will change first? In other words, what catalysts will change the status quo? At this stage, Fed's hints of rate hikes have come and went filled with tons of posturing and limited substance.

Meanwhile, buybacks seem addictive as a mechanical tool that enables companies to increase their share prices. Finally, the EM fundamentals are not going to turn positive overnight. That said, there is a surprise element awaits, in which a synchronized global sell-off can be triggered anytime (like the August short-lived panic). Like most shocks, the timing is unknown but the clues are hardly mysterious. Until then, these status-quo factors remain annoyingly in place for market observers.

Article Quotes:

“That is what’s happened among US businesses as their aggregate return on capital has increased. Intellectual property–based businesses now account for 32 percent of corporate profits but only 11 percent of capital expenditures—around 15 to 30 percent of their cash flows. At the same time, businesses with low returns on capital, including automobiles, chemicals, mining, oil and gas, paper, telecommunications, and utilities, have seen their share of corporate profits decline to 26 percent in 2014, from 52 percent in 1989 (Exhibit 2). While accounting for only 26 percent of profits, these capital-intensive industries account for 62 percent of capital expenditures—amounting to 50 to 100 percent or more of their cash flows. Here’s another way to look at this: while capital spending has outpaced GDP growth by a small amount, investments in intellectual property—research and development—have increased much faster. In inflation-adjusted terms, investments in intellectual property have grown at more than double the rate of GDP growth, 5.4 percent a year versus 2.4 percent. In 2014, these investments amounted to $690 billion.” (McKinsey & Company, October 2015).

“Emerging markets such as Brazil, Indonesia, and Turkey among others, have become darlings of international investors over the past decade, attracting capital to their fast-growing industries and delivering a boost to the global economy. But unlike the United States, United Kingdom, Japan, and, increasingly, China, emerging markets have an inherent weakness: few investors are willing to stockpile their currencies. If cracks are detected in an economy, investors will dump the local currency and extract dollars, leaving behind devalued reais, rupees, and liras. This dynamic has caused crises in several regions over the past decades. …. Private capital inflows to emerging markets surged to over one trillion dollars in 2010. Inflows to emerging markets hit a record of $1.35 trillion in 2013 and declined to $1.1 trillion in in 2014, according to the Institute of International Finance (IIF), representing the reversal of a trend of elevated outflows from developed economies since 2009. (There was a "flight to quality" in 2008–2009, when investors bought U.S. financial assets in the depth of the global recession). Net capital flows to emerging markets were forecast to decline in 2015 for the first time since 1998, the IIF said in an October report.” (Council on Foreign relations, October 28, 2015)


Key Levels: (Prices as of Close: October 30, 2015)

S&P 500 Index [2,079.36] – Most of the year the index has spent plenty of time between 2050-2100. Attempting to climb back to 2100 after a near 12% run since September 29, 2015 lows.

Crude (Spot) [$46.59] –Once again prices remain below $50 as buying momentum remains tame. The supply/demand imbalance is being sorted out as participants reset expectations.

Gold [$1,142.35] – Failed to hold above $1,180 in mid-October which reiterates the cycle slowdown is still in effect. The bottoming formation is taking much longer than desired by goldbugs.

DXY – US Dollar Index [97.12] – Remains strong. Although not above annual highs of 100.39 reached in March, on a relative basis the strength is intact. This highlights the fragile conditions of emerging market currencies.

US 10 Year Treasury Yields [2.14%] – In August and early October yields reached the 1.90%, reflecting a slow growth environment in which rate hikes are not justified. Recent bottoming around 2% requires follow-through to showcase some shift in trends.

Market Outlook | October 26, 2015

“A lesson that is never learned can never be too often taught.” (Seneca)

Recurring Themes

The major themes from the financial market in 2014 continue to resurface again in a vicious form. Last year, the US dollar strength was quite visible, especially with the collapse of Emerging Market currencies. EM risk has not declined and weak growth numbers suggest the level of risk is being discovered. In fact, the risk to emerging markets is openly addressed by various policymakers:


“ ‘What worries me about the global economy right now is that we see the consequences of some of the policies that were used in response to the crisis, specifically big build-ups of debt,’ he [Mark Carney, Bank of England’s governor] told an audience in Lima, Peru. ‘A lot of it comes from outside the formal banking sector in a number of countries and emerging market economies. That debt and the policy response to that debt is going to be key.’” (The Telegraph, October 8, 2015)

As a result of concerns in developing markets, investors rushed (and continue to rush) into safe assets as capital rotates into US dollars. When said and done, investment options are very limited in a less-thrilling growth environment where yields are closer to zero. That’s the recurring message felt by investors and policymakers alike.

Limited Options

Although, stocks are not exactly at all time highs, the lack of investment options have lead to a rotation into US equities. This, in turn, minimizes the selling pressure of US stocks, which are deemed positive from a relative perspective. The mild scare from last August regarding Chinese markets came and went. The spikes in volatility are short-lived or isolated to regions or specific countries. A broad based panic that forces a dramatic selling for months has not arrived, yet.

In fact, the multi- year bullish run appears intact, despite the wobbly nature of US stock markets. Recent recovery in broad indexes from S&P 500 to Nasdaq confirm how the optimists have not bailed out of their stock holdings. Similarly, even the bears are noticing the resiliency of liquid markets. Meanwhile, participants seem to have a numb response to known “bad news,” which is hardly surprising these days.

More stimulus efforts via Quantitative Easing (QE) become a never-ending theme as exhibited by the European Central bank last week. At the same time, no rate hikes from the Federal Reserve tells the story:

1) Lack of economic growth is not overly bothersome to financial markets—as learned before, many times in recent years.

2) More QE has become an accepted justification to keep share prices higher for larger companies. This is already witnessed in the US, and the Eurozone is seeing the same pattern.

3) Commodities' weakness persists, reflecting soft demand. A quick turnaround seems difficult; it surely takes time as cyclical downturn is lengthy.


Discoveries & Questions

Truth discovery is the first part of navigating markets. Understanding the real catalyst beyond headlines or Central bank trickery is essential. Then implementing the discovered truth is a massive challenge for investors, but very important. In late 2015, there are not many surprising discoveries, instead the same lessons keep repeating again and again.

Truth discovery in the following topics serves as critical market understanding:

1) Are stimulus efforts re-energizing the real economy?

2) Is the real economy growing globally?

3) Have central banks run out of ideas and in a desperate mode?

The test for investors has been to avoid the temptations of thinking that weakness in economic themes leads to lower stock markets. Figuring out the mixed data and reaching a conclusion is challenging, as well. Clearly, economic trends haven’t changed as desired, inflation is low along with rates, and sustainable growth is hard to come by. If actions speak louder than words, then the Fed would’ve raised rates if the economy was in good shape. At this stage, outside of posturing by the Fed and selective data points, it becomes fair to say that there are not many pieces of tangible evidence that show improvement in the economy. However, the disconnect between the economic conditions and stock prices are not that shocking to close market observers. Considering the fact that investors flock to what’s safe (i.e. liquid assets) and capital follows momentum, the resurgence of US broad indexes is understandable. However, the status-quo should not be overly celebrated as a sign of elimination of risk or clear-cut signs of robust growth. Instead, the recent action should be recognized as a sign that policymakers and investors are running out of ideas with few exceptions. Plus, commodities and Emerging Markets have not fully showcased a healthy and reliable recovery.

Article Quotes:

“China has never said the economy must grow seven percent this year, Premier Li Keqiang said in comments reported by the government ahead of a key meeting this week that will set economic and social targets for the next five years. Li's comments coincide with remarks by a top central bank official, who said on Saturday that China would be able to keep annual economic growth at around 6-7 percent over that period. The statements come at a time of growing concern in global financial markets over China's once mighty economic juggernaut. China cut interest rates for the sixth time in less than a year on Friday. Monetary policy easing in the world's second-largest economy is at its most aggressive since the 2008/09 financial crisis, as growth looks set to slip to a 25-year-low this year of under 7 percent. China's economy grew 6.9 percent in the July-to-September quarter from a year earlier, data showed last week.‎” (Reuters, October 25, 2015)

"Some companies including GMK Norilsk Nickel PJSC, Russia’s biggest mining company, and Turkey’s largest mobile operator, known as Turkcell, have returned to the debt market this month after weakness in the dollar helped lower emerging-market borrowing costs from a four-year high. In Brazil, the redemptions are contributing to capital outflows. At least three small and medium-sized Brazilian banks, including Banco do Estado do Rio Grande do Sul SA and Banco BMG SA, have offered to buy back their overseas bonds in the past month amid a selloff in developing-market assets. The Institute of International Finance forecast on Oct. 1 that about $540 billion will leave emerging markets this year, the first net capital outflow since 1988. The unwinding of dollar borrowings is more than a fleeting phenomenon, which will contribute to the weakening of emerging-market currencies against the U.S. currency, according to Pierre Lapointe, the Montreal-based head of global strategy and research at Pavilion Global Markets Ltd. The Fed’s broad measure of the dollar against major U.S. trading partners has rallied 16 percent since the middle of 2014 and reached a 12-year high.” (Bloomberg, October 16, 2015)


Key Levels: (Prices as of Close: October 23, 2015)

S&P 500 Index [2,075.15] – An upside run continues from August lows and is approaching a critical 2,100 range. The recent break of the 200-day moving average (2,060.11) showcases revived momentum.

Crude (Spot) [$44.66] – Once again, Crude fails to stay above $48. This confirms the slowing momentum closer to $50. Again, the supply-demand set-up suggests lower prices than prior projections.

Gold [$1,161.25] – Attempts to climb to $1,200, but not quite convincing to observers. Gold remains range-bound at this time. Surpassing $1,200 is a near-term challenge, yet again.

DXY – US Dollar Index [97.12] – Dollar strength regained its momentum. A sharp turnaround since October 15, 2015 has reiterated the dollar strength—a dominate theme for over a year.

US 10 Year Treasury Yields [2.08%] – Yields are closer to 2% and confirm the weak economy, though bond markets are not convinced yet. Interestingly, a move below 2% shouldn’t be overly shocking, even at this stage.









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 | October 19, 2015

"No degree of dullness can safeguard a work against the determination of critics to find it fascinating.” (Harold Rosenberg)

Dullness & Anxiety

The status-quo pattern has resurfaced again: no rate hikes, lower growth and low inflation. This leads the investor crowd to fall-back to the usual and common narrative. There is a sense of dullness that’s mixed with occasional anxiety when attempting to paint the current investor sentiment.

Dullness represents the endless QE policies (low rates) applied across multiple continents as the theme is repetitive while failing to produce desired and tangible growth. A major shift in the prices of macro indicators has yet to occur given: US 10 year Treasury yields around 2%, Crude is dancing around or below $50 and the S&P 500 index is hovering above 2000. This symbolizes the very common and familiar ranges at this point. Meanwhile, anxiety has come in waves from one crisis to the next. First, heightened anxiety was felt in the Eurozone with major attention focused on Greece. Then it was the Chinese’s meltdown in the summer, in which mild panic came and went. Then sudden spikes in volatility proved to be short-lived just like some investors memory.

Last year’s anxiety in commodities and Emerging Markets (EM) is less eventful these days as the dust has mostly settled in for now. In other words, the "shock factor" has declined in how investors view the shock of oversupply and weak demand. Yet, even if the shocks appear short-term in nature, each blow (caused by softer global demand) has a lasting long-term impact in which the consequences remain mysterious. The investor who has to plan for the next 3-5 years faces many uncertainties as the previous five years seem like outliers. Maybe investing time to understand prior crisis is one step to discovering the roots of volatility ahead. Yet, the mystery of timing the next burst in anxiety is illusive even to so called financial wizards. The magic of timing is nonexistent!

Pain Realized

A minor rally in the near-term re-energized avid market observers as they seek further upside moves. Yet, the year-to-date performance (S&P 500 index and Dow Jones is negative in 2015) numbers are not overly enticing for momentum chasers. Mounting selling pressure has subsided a bit since August despite brewing concern and very sluggish growth. Ongoing stalemate between buyers and sellers continues to require more patience in US equities. Meanwhile, seeing sharp moves in the Russian rubel or Turkish Lira is not earth shattering anymore for observers who are accustomed to emerging market volatility. Both nations are facing grave economic concerns as they resort to military actions instead of focusing on wealth creation. That’s evident in both countries military involvement in Syria as investors lose confidence with increased capital outflow. Here is the status in Russia:

“Cash fled the country [Russia] in 2014. Last year, net purchases of foreign financial assets by Russian banks and companies reached $122.4 billion, driving total capital outflow to a staggering $153 billion.” (Bloomberg, October 14, 2015)

At the same time, there is wide recognition of vulnerable currencies and struggling economies like Brazil, which have confirmed weakness on multiple fronts. Not to mention, the many nations/economies that are closely tied to China as they felt the effects of lower growth rates especially Latin America. Perhaps, there is numbness to the slowdown in EM, as investors further decipher the magnitude of recent “collapse”. We are nearing a stage where investors may look to “reset” expectations while seeking relatively appealing investments.

Search for Guidance

The key conductors of financial markets are certainly the central banks when measuring by collective perception. Their credibility is (and has been) on the line, yet again. Simply, the act of pundits praising high stock market is one angle in appreciating wealth creation. However, on the ground level, there is brewing tension from struggling middle classes in developed markets to lack of favorable policies that can actually create growth. Beyond savers frustration with low interest rates (not earning enough yield), there is a well-known major disconnect between the stock market and economies. That disconnect has been bothersome and tricky for observers throughout the recent bull market. Yet, an investor calling for an all out collapse must consider the art of financial markets where truth discovery takes up time. Until Emerging Markets can restore confidence, capital will prefer developed market assets as witnessed recently. Amazingly, stability in EM would add a twist to the current dynamic. Yet, what’s the next big surprise? Weakness in Developed Markets via corporate earnings? Or undiscovered turmoil in China and other Emerging Markets? In today’s landscape figuring out these two questions potentially presents an attractive reward ahead. The critical thinker that sees beyond the known dullness and occasional anxiety, one can only ask for the fortune of being on the right side of the pending surprise.

Article Quotes:

“What went wrong in Latin America? The short answer is China’s slowdown, which has punctured commodity prices and, with them, exports from and investment in South America. In some cases the woes are mainly self-inflicted. Brazil and Venezuela kept spending even after the commodity boom began to subside. Both are now suffering deep recessions. Exclude these two and Latin American countries will grow by 2.6% this year on average, according to the IMF. From the Panama Canal north, the region’s economies are tied much more closely to the United States than to China. Mexico, Central America and the Caribbean are net commodity importers. Growth there is steady, if mostly unspectacular. Well-managed economies in South America, such as Peru, Chile and Colombia, are adjusting gradually to a harsher world. They are still growing, albeit at only 2-3%, because they have been able to apply a modest amount of monetary and fiscal stimulus. Currency depreciations should eventually pave the way for recovery. But in the short term they have stirred inflation. The central banks of both Peru and Colombia raised their interest rates last month; Chile may follow.” (The Economist, October 10, 2015).

“Without anyone quite noticing, Europe’s internal balance of power has been shifting. Germany’s dominant position, which has seemed absolute since the 2008 financial crisis, is gradually weakening – with far-reaching implications for the European Union. Of course, from a soft-power perspective, the mere fact that people believe Germany is strong bolsters the country’s status and strategic position. But it will not be long before people begin to notice that the main driver of that perception – that Germany’s economy continued to grow, while most other eurozone economies experienced a prolonged recession – represents an exceptional circumstance, one that will soon disappear. In 12 of the last 20 years, Germany’s growth rate been lower than the average of the other three large eurozone countries (France, Italy, and Spain). Although German growth surged ahead during the post-crisis period, as the graph shows, the International Monetary Fund predicts that it will fall back below that three-country average – and far below the eurozone average, which includes the smaller high-growth countries of Central and Eastern Europe – within five years.” (Project-Syndicate, October 15, 2015)



Key Levels: (Prices as of Close: October 16, 2015)

S&P 500 Index [2,033.11] – A near 9% rally since the August and September lows showcasing some recovery from prior sell-offs. Easing of the selling pressure is reflected in the declining volatility. Climbing back up to 2100 is the next critical mark for observers.

Crude (Spot) [$47.26] – Some stabilization in prices in last few weeks. Clearly, the $50 range is the near-term level for gauging momentum.

Gold [$1,180.85] – Long drawn out bottoming attempt around $1,200. The lack of catalysts for upside move is visible. Yet, the heavy selling multi-year cycle pressure has eased.

DXY – US Dollar Index [94.81] – Following a major surge in late 2014 and early 2015, the dollar is calmer now. The dollar strength is not overwhelming like before but still much stronger than other currencies on relative basis.

US 10 Year Treasury Yields [2.03%] – Once again, closer to 2% rather than 2.50%. Not surprising when considering the low inflation and low growth forces.



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 | October 12, 2015

“When we remember we are all mad, the mysteries disappear and life stands explained.” (Mark Twain 1835-1910)

Mystery vs. Brutal Facts

If there was any mystery to the lack of growth globally, that mystery is actually being revealed quickly. It is actually evident as more data supports the lack of basis for a rate hike. Emerging Market outflow is rampant, which is highlighted by China’s struggles and sell-offs this summer. Commodity prices might recover 10% or 20%, but this is dramatically lower than last cycle’s peak, which reinstates the soft demand and ample supply. Amazingly, these macro factors are slowly being digested since most attention was spent on Greece and Eurozone weaknesses. Massive implications await on how the financial markets will deal with the realization of softer growth. Perhaps, “madness” is one way to explain how harsh realities have been deferred. Even the Fed has reached a point where denying the weak growth data is not believable. In a recent interview, the Federal Reserve vice chairman offered the following:

“Recent employment reports have been somewhat disappointing and, as always, we are closely monitoring developments that could affect our sense of the economic outlook and the risks surrounding that outlook.” (Wall Street Journal, October 11, 2015)

Is there any mystery to the US job numbers? That’s been confirmed by weakness in wage growth and last month’s data that was sourly observed by participants. Inflation expectations are so low that growth revival or job creation via government policy is at near-death levels, and corporate profits are generated by cost-cutting as much as expansion. Being upbeat about the US relative edge seems to be wearing out at times, but unquestionably remains a key driving factor. The preference of investors continues to be to own dollar-based assets that are more liquid than tinkering with further risky assets. The commodity and Emerging Market fallout only strengthened the relative edge of US assets. Thus, the zigzagging broad US market (S&P 500 index and Nasdaq) only reflects how a massive US sell-off is hard to justify. The buyers vs. sellers debate comes down to what are the other alternatives? Again and again, the answer is not very appealing growth, so liquidity and strong currency remain preferred.

The Fed’s Creditability

Fed-dependent analysts are in a painstakingly confusing state. The Fed’s credibility is tarnished and their ability to change the real economy is close to zero, unless they are cheerleading or influencing headlines. Are there still suckers for cheery headlines? Sure, at a time of desperation for good momentum, the masses are suspitable to trickery. Some investors may feel hard-done by the expectations of a rate hike in September. Now it sadly laughable because the “posturing” overtook common sense and that should be unsettling. Even now, the Fed target for a rate-hike is unknown and may not have material impact on corporate earnings or wages.

The biggest risk ahead is if investors feel “betrayed” by the Federal Reserve and other central banks. That’s the worst case set-up for those looking to avoid volatility and turbulence. As Eurozone and Japan continue to apply QE policies, perhaps the reception is less warm than prior years. A shift in attitude towards Central banks is a critical sentiment that’s worth tracking closely. At the end of the day without growth, hiking rates is nearly impossible:

“China’s slowing growth, which could spill over to other emerging market economies, raised risks the dollar might strengthen further, making U.S. exports more expensive in foreign markets and creating an additional drag on the economy.” (Bloomberg, October 8, 2015)

Survival Tactics

Last week, the recovery set off some optimistic results in equity markets. The Dollar’s slight weakness begs the question of a possible trend change. The same can be said about the recent rally that gave the sense of relief from uncertainty following the turbulent summer months. As the narratives on gloomy outcomes has been tiresome to some, shocks were felt in August—mainly in fragile economies such as Brazil, Turkey, and South Africa.

The disappointment with the Fed’s policy should lead to a resounding response, barring few surprises. However, there are no surprises about the mutli-year near-zero interest rates. An election year ahead promotes defensive (or non-decision) actions by the Fed, policy makers, and investors, alike. Without many alternatives, the status quo of low rates, low inflation, lower volatility, and higher ‎stocks remains highly favorable. In fact, that's the “safe” play that's being promoted once again. Even Eurozone investments seem appealing to those cautious of taking a bigger risk/reward in emerging markets and commodities. At some point, value seekers must explore cheaper and more opportunistic assets, even in a tough economic and political climate.

Article Quotes:

“The prevailing expectation is of extraordinarily low real interest rates, which is the difference between interest rates and inflation. Real rates have been on a downward trend for nearly a quarter-century, and the average real rate in the industrialized world over the next 10 years is expected to be zero. Even this presumably reflects some probability that it will be artificially increased by nominal rates at a zero bound — the fact that central banks cannot reduce short-term interest rates below zero — and deflation. In the presence of such low real rates, there can be little chance that economies would overheat.” (Larry Summers, Washington Post, October 7, 2015)

“Following this summer's turmoil in Greece, leaders from France's Francois Hollande, the European Commission's Jean-Claude Juncker, and European Central Bank chief Mario Draghi, have spearheaded the drive to create new supra-national institutions such as a eurozone treasury and parliament. But Mr. Blanchard, who departed the IMF two weeks ago, said radical visions for a full-blown ‘fiscal union’ would not solve fundamental tensions at the heart of the euro.’[Fiscal union] is not a panacea’, Mr. Blanchard told The Telegraph. ‘It should be done, but we should not think once it is done, the euro will work perfectly, and things will be forever fine.’ Although pooling common funds, giving Brussels tax and spending powers, and creating a banking union were ‘essential’ reforms, they would still not make the ‘euro function smoothly even in the best of cases’, said the Frenchman. Any mechanism to transfer funds from strong to weak nations - which has been fiercely resisted by Germany - would only mask the fundamental competitiveness problems that will always plague struggling member states, he said.” (The Telegraph, October 10, 2015)




Key Levels: (Prices as of Close: October 9, 2015)

S&P 500 Index [2,014.89] – Signs of stabilization appear as some attempt of a bottom. Once again buyers’ conviction is tested around the 2,000 level. Since September 29th, lows are near an 8% rally, which begs the question of further stability.

Crude (Spot) [$49.36] – Since the lows in August ($37.75), a recovery over several weeks has occurred. Interestingly, the 200-day moving average is at $50.96. Psychologically, the $50 mark is a new benchmark that gives collective rest in expectations.

Gold [$1,151.55] – Stabilizing around $1,120, as gold attempts to climb back to $1,200, which has been a hurdle following the cycle peak. Very neutral action with some hints of early bottoming possibilities are not quite fully convincing.

DXY – US Dollar Index [94.81] – Failing to stay above 96 in the near-term, the dollar remains strong but relative; the strength is a bit weaker than before.

US 10 Year Treasury Yields [2.08%] – Rates continue to be lower, showcasing lower growth environment mixed with a lack of inflation. The August 24th lows of 1.90% are not too far.









Dear Readers:

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

Market Outlook | September 21, 2015

“It pays to be obvious, especially if you have a reputation for subtlety.” (Isaac Asimov 1920-1992)

More Hype Than Substance

The circus around interest rate decisions was merely a sideshow when all is said and done. Amazingly, before the rate decision, the Fed gave mixed signals while acknowledging the slowdown in various US and global data. For the most part, the Fed faced a lose-lose situation in gauging the reaction to a hike or no hike.

So much hype, speculation, and chatter about Fed's decision created some short-term drama for observers. Instead, the collective attention should be channeled to the ‎big picture themes: China, along with Emerging markets, continues to demonstrate a remarkable slowing global economy and fragile EM currencies. Eventually, that’s what it comes down to when assessing to hike or not. The verdict could not have been reached in a week or month. Mounting evidence of unimpressive growth has been persistent for too long and the all-time highs markets were a bit deceptive of real conditions.

Dollar strength for a long while confirmed the demise of some EM currencies and re-confirmed the lack of confidence in non-developed nations. Financial market observers have witnessed a complete collapse of EM from Turkey to Brazil, in a stunning manner. Thus, the Fed had all these visible signals to consider. Substantial weaknesses sounded and some economists did not want to hear. Similarly, US bond markets since June suggested that low rates are here to stay, as exhibited by action in the US 10 year treasuries. Not to mention, the commodities multi-year slowdown turned the decade old boom to a very quick bust from copper to crude.

Can’t Fight Reality

So what did the Fed decide? Despite making promises of "we'll raise soon" and claiming the "economy is improving," the Federal Reserve felt the pain of raising rates without strong support from recent data. Clearly, Yellen & Co lacked a solid justification in an awfully sluggish growth climate. US employment numbers are one misleading piece of data, since the numbers focus on low-wages and non-innovative sectors. Plus, small business has been facing ongoing pressure from regulation mixed with massive competition. The Fed, by not alternating the status-quo, admits their flawed promises, and this is the ultimate capitulation to prior narratives. Again, the reality simply equals no growth and no one wants to hear that for obvious reasons of course.

Misled and naive investors that expected rate hikes must be dejected, but for a long while bond markets have loudly signaled a low interest rate environment. Here is one survey from this summer:

“About 82% of economists surveyed Friday through Tuesday by The Wall Street Journal said the Fed’s first rate increase will come in September, versus 13% who said the central bank will wait until December.” (Wall Street Journal, August 13, 2015)
It is stunning how many economists had high conviction for a September hike while they ignored major financial market hints. Not to mention, the Fed’s wishy-washy approach adds further trickery.

Basically, the big picture vital signals and clues were clear: US 10 year treasury yields are below 2.50%, Crude is below $50, and Emerging Markets are way off their highs. Isn't that clear enough? Surely, interpretations are not highly required when markets themselves hint, confirm, and showcase reality via price movement. Perhaps, the illusion is in thinking the Fed (or other central banks for that matter) can stimulate the real economy. Plus, ‎an election year is looming, which favors doing nothing. At the same time, the usual art of words and trickery by government institutions are to be expected.

Implications

Now uncertainty still persists, especially in equity and currency markets. To be fair, it was brewing even before the Fed's hyped "no decision." Pundits have pointed out that by not raising rate the Fed is benefiting Emerging Markets. Before the announcement, a rate hike was feared to cause further damage to Emerging Markets:

Emerging markets have accumulated $7.5 trillion of external debt and are acutely vulnerable to a rapid rise in US interest rates, regardless of whether they borrowed in dollars or their own currencies, Fitch Ratings has warned. (Telegraph, September 14, 2015)
As for Europe and Japan, the implication of no US interest rate hike signals a different currency challenge. In other words, it is anticipated that ECB will continue with more quantitative easing (QE) to weaken the Euro. Similarly, the Yen is expected to strengthen given the status quo of low US rates. Risk managers will have to access both closely as the implication are significant to financial markets.

As for stocks, the re-test of August lows does not seem far-fetched. Investors must recognize two issues: 1) If the Fed did not raise rates then the economy is much weaker than touted by the consensus. That’s alarming for some, but the weakness is confirmed. 2) The Fed can not save the economy and heavy reliance on the central banks is dangerous. In fact, investors might say – the Fed is unreliable and limited with their perceived “magical” powers. These factors are bound to cause further uncertainty as the bottom has not settled. It is fair to say, the status-quo is unsettled.

Article Quotes:

“ Inflation in the euro area slowed almost to a standstill in August, adding to the challenges for the European Central Bank in its efforts to revive price growth in the region. Consumer prices in the 19-nation currency bloc rose 0.1 percent in August compared to a year earlier, after 0.2 percent in July, the European Union’s statistics office in Luxembourg said on Wednesday. That reading is the lowest in four months, and compares to an initial estimate of 0.2 percent in August… Core inflation, which strips out volatile elements such as energy and food, slowed to 0.9 percent in August from 1 percent in July. Prices in the euro area have been almost stagnant since the ECB started its 1.1 trillion-euro ($1.2 trillion) QE program in March. The inflation rate rose to 0.3 percent in May before slowing again in the following months.” (Bloomberg, September 16, 2015)

“China’s grand vision of an interconnected trade network for South and Central Asia represents the realization of an older U.S. policy initiative. For the last four years, the U.S. State Department has been trying to foster a similar regional trade network through its “New Silk Road Initiative,” a policy unveiled in 2011 to foster economic cooperation, trade liberalization, and better ties across South and Central Asia. The economic initiative had a clear security goal: helping set the conditions for a stable Afghanistan after the withdrawal of U.S. troops, a point outlined by Bob Hormats, who was then the undersecretary of state for economic, agricultural and energy affairs… The crucial element of the initiative was to integrate key pieces of infrastructure in Kazakhstan, Turkmenistan, Pakistan, and Afghanistan, such as telecom networks, railways, and highways.” (Foreign Policy, September 18, 2015)

Key Levels: (Prices as of Close: September 18, 2015)

S&P 500 Index [1,958.03] – Failing to rise above 2,000 after the major sell-off last month, the index chart pattern appears vulnerable as stability remains fragile. Buyers and sellers are fighting for control between 1900-2000.

Crude (Spot) [$44.68] – Weakness that has persisted for months continues to linger. Failure to hold above $50 again confirms not only a soft demand with tons of supply, but a cyclical weakness.

Gold [$1,141.50] – Four years ago, Gold hit the highs of $1,195.00. Since that peak the downside is well known and established. Some bottoming pattern is forming around $1,100, yet a recovery seems to be a drawn out process.

DXY – US Dollar Index [94.86] – Twice this past summer, the dollar index failed to climb above 98. Signs of a relatively waning dollar strength appear; albeit, in the big picture, the dollar strength is resoundingly intact.

US 10 Year Treasury Yields [2.13%] – Since June highs of 2.49%, it is quite clear that yields are on a short-term and multi-decade downturn.








Dear Readers:

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

Market Outlook | September 8, 2015

“Pain and death are part of life. To reject them is to reject life itself.” (Havelock Ellis 1859-1939‎)

Summary

• More signs of weak global growth are leading to further truth discovery of anemic economic conditions.
• Buyers are losing enthusiasm even in the relatively appealing US markets.
• Federal Reserve and other central banks are losing credibility at a rapid pace.
• Volatility, once suppressed, is increasing these days while expressing the collective uncertainty.
• Failed stimulus policies are now being exposed while the impact on corporate earnings is not fully realized.
• Fragile global economy stifles business confidence, leading to rise of rouge nations and detrimental actions.
• Rejecting the truth is not an option for central banks, policymakers, or investors at this junction.

Ongoing Awakening

Major global indexes are shaken by volatility as various asset classes are re-setting their prices. Meanwhile, regulators in the global arena are slightly panicking ‎and the limitation of central banks is becoming evident. Uncertainly is ramping up at a rapid pace, as felt recently. On top of these big, noticeable themes, the labor numbers in the US are not strong, the commodity plunge has hurt the economies of several nations, and global trade is weakening beyond what's being publicly admitted. Vicious sell-offs in China have been visible in recent weeks, but the Eurozone has been struggling to revive itself beyond central bank stimulated moves. Currency tactics or government press releases are not enough to dodge the truth. Investors are losing conviction on policymakers’ ability to fight the natural and inevitable sell-off. Beyond quantitative easing (QE) many are running to come up with a noteworthy solution. Amazingly, ECB hinted toward further plans of QE (more on this below) while the Federal Reserve sends mixed messages regarding a rate hike. If one does not admit he or she is confused then most likely they’re not a genuine market expert or veteran. Actually, even experts are nervous or at least in major suspense seven years after the last major crisis.

If Brazil and Turkey are considered in complete demise, then other Emerging Markets must be nervous, wondering when the pressure will ease. The endless spins, trickery, and misleading attempts to paint a rosy picture have reached the late innings as reality sets in. “Investors have pulled an estimated $44 billion out of emerging-market equities and bonds since mid-July, according to EPFR Global, a data provider” (The Economist, September 4, 2015). Claiming gloom is not unheard of as pending fear looms in the background. Emerging Markets feeling pain in commodities is one major factor. In addition, the EM currencies are in a fragile state and that’s not subsiding either.

There is some rush to call the bottom, but too many macro issues are unsettled. The August 24th lows in US markets set the benchmark as the critical lows. Eager buyers and nervous sellers ponder the thought of another selling wave. Massive search for the ultimate bottom is underway, but it may take weeks to discover the natural verdict.

Unanswered Questions

A contradictory and puzzling list of unanswered questions:

• How can China continue growth at 7%? Is this possible when global trade numbers are down (from Eurozone to US), especially with low commodity demand?

• How can corporate earnings continue to be insulated from a burning. but interconnected world?

• How come the NYSE exchange is tinkering with the exchange (Rule 48) to ease further selling pressure?

• How does one digest the contradictory Federal Reserve messages?

• How can the Fed raise rates if the world's key economies are clearly slowing?

• If China is slowing while the Eurozone is projecting near zero growth and theUS is sluggish, then what is left?

• What legitimate upside catalysts are awaited by market participants?


Each question above should provide further clues to a near zero growth environment globally.

Consequences to “No Growth”

Several stimulus efforts have glued together a multi-year bull market in the US and European markets. Sure, there are few legitimately appealing companies (and themes), and there is enough capital for investors to seek risky returns or attractive yields. However, at some point, investors will demand to deal with the pragmatic conditions of the “real economy.” Frankly, that’s inevitable and long overdue. Commodities remain in a cyclical decline, the Emerging Markets crisis has not calmed, and even developed markets are struggling to find positive catalysts.

The decline in oil prices creates risky consequences in foreign policy. A country like Russia, in desperate conditions after oil price demise, has less to lose than before. Iran’s entry into the oil market increases supply, creating further unease in oil producing countries' futures. China’s economy’s fragility being reevaluated can lead to shaky actions in the pacific. The tie between China-Russia-Iran is dangerous for Western interest if the global economy struggles to revive itself. Again, when the global economy is weak, key nations attempt to take advantage of the situation, which impacts the attitude of traditional Western business. That sentiment is being tested from Ukraine to Syria, where crisis is looming and wealth creation is dissipating. Not to mention, failed stimulus policies from China to Eurozone are struggling to restore confidence. Thus, crisis mode is not limited to the financial market and forces. Political and military consideration are more relevant in this cycle than prior corrections like in 2011, 2008, and 2000.

That said, policymakers cannot take a casual approach any longer. The stakes are much higher and the healthiest approach of all is to start by confronting the ugly truth soon. It is a painful realization after decades of celebrating globalization. However, without the financial markets fully realizing the severity of economic conditions, a real solution can not be reached. Instead it’ll be deferred further delaying any hopes of substantial recovery. There are eventful days and weeks ahead as the extended inflection point remains in place.

Article Quotes:

“Russian military technology has significantly contributed to the development of the People’s Liberation Army Navy’s (PLAN) surface warfare capabilities – including long-range precision strike – and has made Chinese naval vessels increasingly capable of defending themselves against U.S. air strikes and long-range missile attacks, according to a new report published by the Washington-based Center for Strategic and International Studies (CSIS). While the report treads no new ground with this assertion, it nevertheless provides a good overview of Sino-Russian arms and technology transfers to prop up the PLAN’s surface fleet and expand its burgeoning anti-access capability in the Western Pacific. In that respect, Russian air defense technology, long-range sensors, and anti-ship cruise missile (ASCM) systems have played a crucial role. For example, Russian-made and Russian-derived air defense technologies now enable PLAN surface warfare ships to slip out from underneath the PLAN’s land-based air-defense umbrella and to increasingly operate further away from Chinese shores. In addition, new Chinese/Russian-derived ASCM systems along with long-range sensors can now threaten medium-sized naval U.S. surface ships and even strike U.S. military installations as far as Guam and Okinawa.” (The Diplomat, September 4, 2015)


“When Siemens revealed a €200m investment in a new wind turbine plant at Cuxhaven, on Germany’s North Sea coast, last month, it was hard to know who had more reason to cheer: the 1,000 people who will be employed at the facility — or the European Central Bank. Earlier this year, when the ECB launched its quantitative easing programme, one of its chief aims was to stimulate lending — and in turn encourage more investment in moribund European economies. Without a revival in corporate spending, Europe is at risk of entering a vicious cycle where low economic growth begets weak corporate investment, which then begets weak productivity and lower growth. Disappointing growth is among the reasons why the ECB is now considering beefing up its €1.1tn QE package, with Mario Draghi, its president, opening the door to more bond buying should global market tremors threaten Europe’s still-fragile recovery. Yet the evidence that more aggressive action will boost corporate spending is mixed.” (Financial Times, September 7, 2015)



Key Levels: (Prices as of Close: September 4, 2015)

S&P 500 Index [1,921.22] – From August 5th highs (2,112.66) to August 24th lows (1,867.01), the index dropped over 11%. The last 10 days may hint of a bottom around 1,900, but this may be premature considering the increased volatility and not being at the early stages of a bull market.

Crude (Spot) [$46.05] – August 24th lows of $37. 75 seemed like a cyclical low as Crude prices bounced closer to $50. Yet, surpassing $50 appears like a challenge and a critical inflection point, especially from a foreign policy point of view.

Gold [$1,118.00] – Reflecting the commodity downturn like all assets, the recent low on August 24th for gold stands at $1,080.80. The next critical level is climbing back to $1,180. Limited catalysts within a bearish commodity cycle remain in effect.

DXY – US Dollar Index [96.10] – As it has nearly the whole year, the dollar index remains above 94. The profound theme of the Dollar being the most favored currency lives on, especially as other EM currencies continue to collapse.

US 10 Year Treasury Yields [2.12%] – Once again breaking out of 2.20% is still a major hurdle. Staying above 2% will be a major test in the weeks and months ahead.



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 31, 2015

“If every day is an awakening, you will never grow old. You will just keep growing.” (Gail Sheehy)


Summary

• Turbulent action with massive down days are followed by major recoveries.

• The Fed is posturing, yet again sending as many mixed messages regarding rate hikes and the health of the economy.

• The looming fear and uncertainty combusted as volatility surged, but suspense still remains.

• A rush to safety into quality assets is to be expected as confidence restoration is a priority for policymakers.

• The inter-connected and worrisome actions in commodities and Emerging Markets have not quieted down.


Pronounced Moves

Last Monday (August 24th), massive sell-off marked new lows for Crude and other commodities. It also marked new lows for broad equity indexes and US Treasury Yields. A collective and quick shock that’s been in the making. Concerns and worries were felt in a tangible manner as reflective of the state of economic health. A strong and historic sell-off in US stocks occurred during the first hour of trading. but quick recovery took place to lessen some of the blow. Amazingly there was a shift from all-out “panic selling” to “panic buying.” This swing and sharp response mostly defined the trading pattern of last week.

Taking a step or two back, it is fair to say the current wave of uncertainty lingers, regardless of rallies. Narrowed losses and retracement of the VIX (Volatility index) signaled restoration of calm. Yet, the calm is still fragile heading into this week. Amazingly, the markets' multi-year status-quo of low volatility and smooth sailing are now officially rattled. After zigzagging through massive moves in the last two weeks, the stock market finds itself confused in neutrality. Interestingly, before the recent storm, neutrality defined the US equity markets. In other words, buyers and sellers lacked momentum as indexes remained in a sideways pattern. At the same time, the word collapse summarized the behaviors in Emerging markets and commodities. Through all this series of events (China and Crude collapse, etc), it should not be forgotten that the slowing global growth is the ultimate catalyst to this financial turmoil.

Mega rallies after interventions are not uncommon. It was seen in 2008, including the famous short-selling ban to stop the bleeding. Similarly, last week the New York stock exchange took some measures to ease the selling pressure:

“The New York Stock Exchange invoked the little-used Rule 48 to pre-empt panic trading at the stock market open for the third day in a row on Wednesday… The goal of Rule 48 is to ensure orderly trading amid financial market turbulence. It's only used in the event that extremely high market volatility is likely to have a floor-wide impact on the ability of designated market makers (DMMs) to disseminate price indications before the bell.’” (CNBC, August 26, 2015)

Between interventions and rapid policies, the real market level is hard to determine. How these recent reactions cause further damage is unknown.

The Messaging Crisis

From regulators to central banks (primarily concerning the Fed), there is ferocious concern about participants' response. Exchanges made adjustments with trading, China tinkered with various policies including devaluing currency, and Central banks adjusted their language meticulously to palpate the obvious angst. Basically, the art of public relation is a critical aspect of managing investors' expectations and reactions. Clearly, the Fed’s PR efforts have been more noticeable than actual visible signs of growth in real economies. Although inflation has been low, central banks are trying to make the case that inflation is or will increase. Frankly, this is just a battle of words to justify a rate hike, but participants have been fooled by the Fed’s slick words too many times.

At this point, the Federal Reserve is admitting they are limited in their powers. The idolization of the Fed by the financial community has been out of hand, and a reality check awaits. Plus, justification for a rate hike has seemed baseless for a while since the world economy is so slow:

“'The bottom line: we [ The Fed] have been assessing domestic and international financial markets closely in terms of their implications for the U.S. economic outlook and we will continue to do so. From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,' Dudley [New York Fed President William Dudley] said.” (MarketWatch, Inc August 26, 2015)

This illustrates that the Fed is not keeping their promises yet again, despite not ignoring the anemic global growth. Thus, a lose-lose situation awaits Yellen & Co as fear resurfaces seven years after the epic 2008 crisis and four years after the Eurozone panic. Fuzziness best describes the Fed’s conviction.

Periods of turmoil may be profitable for some media related sources, but remain viciously suspenseful for actual risk managers. Nothing entertaining about daily surprises after such a sober sideways market. Suppressing volatility and intervening with a desperate stimulus policy may trick or please the “hopeful,” but there is enough unease for buyers and sellers at this powerful inflection point.

Digesting the Shocks

There is eagerness and anxiousness by investors. Eagerness to exploit opportunities as any sell-off is viewed as an opportunity—particularly those in good companies or innovative related themes. After all, the market is rewarding non-resource based or companies with limited exposure to Emerging Markets. Therefore the eagerness for bargain hunting by fund managers is to be expected. On the other hand, there is anxiousness, especially after a well established multi-year bull market. Before China, the worries were related to interest rates; before that, concerns mounted about inflation; and before that, the impact of the dollar strength was greatly feared. In short, macro indicators are unsettled and the shock has yet to settle, as well. The magnitude of eagerness to buy and anxiousness to sell is very high, thus turbulence is to be expected. Unlike the smooth-sailing bull market, the current environment is suspenseful hour-to-hour and day-to-day. Yet, denying the very weak global growth is not an option for regulators, companies, investors, or casual observes.

Article Quotes:

“Many other EMs will feel the squeeze when US rates rise. Turkey and South Africa, as well as Brazil, have high foreign capital funding requirements, which will become increasingly expensive. This illustrates the dilemma facing the Fed: if it raises rates as planned, it risks exacerbating an already volatile situation for EMs and beyond. However, while postponement of a rate hike might give some short-term relief, markets could interpret it as a sign things are going wrong with the global economy, states Deutsche Bank in a fixed income research note. This might create panic in its own right, and in times of panic EMs have traditionally been among the first casualties, as investors abandon their careful credit analysis in favour of a ‘sell now, ask questions later’ strategy… If investors are in the mood to be selective, Deutsche argues: ‘Emerging markets facing domestic political problems and/or with high US dollar-denominated debt burdens may be most at risk.’ That would put Russia, another country heavily reliant on commodity exports that suffers from considerable political risk as its economy continues to be strangled by sanctions, squarely in the firing line. Thailand’s political situation will also deter investors in a risk-off environment, as will Brazil’s. The taper tantrum of 2013 will be fresh in the mind for all EM investors. It showed how dramatic the market’s response to Fed diktats can be, and, arguably, how addicted they have become to low US rates.” (Euromoney, August 27, 2015)


“The difference between core and peripheral euro zone countries' exposure to China is clear from trade flows. Around 8 percent of Germany's exports go to China and about 5 percent of both France and Finland's, according to Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York. Compare that with the periphery: 3 percent of Italy's overseas sales go to China, around 2.5 percent of Spain and Ireland's, and only 2 percent of Portugal's. Of the top 37 European companies' exposed to China in a list drawn up by UBS, only 16 are from the euro zone. Of those, 15 are from core countries Germany, France, Finland and The Netherlands.” (Reuters, August 3, 2015)


Key Levels: (Prices as of Close: August 28, 2015)

S&P 500 Index [1988.87] – An 11% drop from August 10th highs to August 24th lows has occurred. Although the index is off the lows, it is still on shaky grounds since the bottom is not fully convincing.

Crude (Spot) [$45.22] – After hitting new lows last Monday at $37.75, the commodity got back over $45. A desperate bottom awaits even though the supply-demand imbalance continues to suggest weakness.

Gold [$1,135.00] – New lows were briefly established at $1,080.80 in July. That stands out since most commodities saw their lows last week. Staying below $1,200 further confirms the cyclical lows, but a bottoming process has been forming for a while.

DXY – US Dollar Index [96.10] – After pausing in recent weeks, the last few trading days showcased strength in the Dollar. Above 90 is well-defined and reaching above 100 is the next challenge.

US 10 Year Treasury Yields [2.18%] – Attempting to climb back toward 2.20%, which is a familiar range. This is based on historical measure, which are closer to the lows.




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 24, 2015

“The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” (Winston Churchill 1874-1965)

Summary
‎
• All-out panic and massive selling pressure has persisted in Emerging Markets for many months and now the damage is being realized globally.
• The status-quo that was so calming is unraveling as the truth of real economic conditions is being revealed.
• The Fed’s posturing and multiple bluffs of rate hikes were misleading, as bond markets signaled a lack of growth and lower yields.
• Chinese policymakers intervened in stocks, currencies, and regulatory measures, which showcases the massive crisis.
• Global growth has been clearly weak and expectations continue to adjust, but without growth upside catalysts are very slim.
• The strength of the Dollar has emphatically demonstrated the demise of EM currencies and accelerated a rush to safety.
• Underestimating minor hints has proven costly and listing to the Fed’s messaging without skepticism is equally as costly.


Hints of Calamity

‎Last week's bruising action did not happen overnight and what occurred will not vanish overnight, either. Piercing volatility in Currencies, Commodities, and Emerging Markets (EM) were brewing for a while. In these areas volatility spiked and concerns mounted as the selling pressure accelerated, as noted many times. For over 12 months, markets clearly reflected demise in the Brazilian, Russian, and Chinese economies. The panic in Chinese policymakers has been so evident this summer and is surely a prelude for crisis. Major policy changes by Chinese policymakers were witnessed in prior attempts to the market up to recent currency adjustments. Massive decline in global demand is well known by now and China, the face of global trade, is feeling the pain. Plus, it is symbolic that the “new age” leader is struggling and this translates into near-term psychological concerns heading into the autumn.

Mainstream discussions spent so much time Greece and tons of talks about a eurozone break-up that China's economic impact has been neglected. However, as a few observers pointed out few weeks ago, the Chinese debacle was exponentially critical in tilting the semi-calmness into notable crisis. The Chinese economy that has been lauded and praised from investments in US to Africa, now finds itself at the desperate hour.

To think that Crude was over $100 not long ago, but now is at $40 is massive readjustment. This is not quite understood and the stakes are much higher than anticipated. Corporations, fund managers, countries budgets and sentiment have not fully realized the magnitude of recent moves. Yes, a commodity secular decline has been in place for few years, but the ripple effects of commodities on EM and developed markets are a mystery that lingers. From Asia to Latin America, growth has been scarce and the numbers are staggering:

“Corruption scandals from Brazil to Mexico, a collapse in commodities and a plunge in Latin American currencies have wiped out $800 billion in market value since 2010 -- equivalent to the economy of Turkey. The region now accounts for just 2.1 percent of global market capitalization, down from 5 percent five years ago.” (Bloomberg, August 18, 2015)

Status-Quo Shaken

The US markets hinted few signals that the upside momentum was fading, despite being the favored and relatively appealing global investment. Neutrality and sideways patterns defined the stock market most of the year. Meanwhile, the bond markets reflected slow growth via low yields. Regardless of the Fed’s messaging, the bond investors did not buy the ‘growth” story. Justifying a rate hike seemed baseless even before last week, and the disconnect between real economy and stock markets has been misaligned too long.

The US stock volatility has been tame, but finally awoke a little. It is now inevitable to suppress the uncertainly that’s plaguing investors. For a long while, US assets, particularly Nasdaq related company shares, remained insulated from global crisis that persisted left and right. Last Friday presented a massive wake-up call. Not terribly shocking considering the last major cycle reset was in 2008 and upside catalysts were barely convincing. A bull market has persisted for many years and now questions must be asked. A near 7% loss in one week for the Nasdaq sends a mild panic in the system, especially since Nasdaq was slowly becoming viewed as a “safe haven.” Perhaps that is why when so called “quality”, innovative related shares began to show weakness then an all-out selling pressure persisted during last Friday. Corporate earnings are slowly feeling the pain from EM and commodities. It might have taken a while, but corporate earnings are slowly acknowledging the soft economic numbers that have been somewhat dismissed (or ignored).


Realizations & Actions

Navigators of risk-reward now have an action-pact set up. The Fed is losing credibility even faster than imagined. In a inter-linked world, soft commodities and soft demand have major consequences. The recent, very mild US recovery that’s marketed by political forces dismisses the struggles of small businesses and the middle class. Isolating market risk to EM or commodities is reckless in many respects since markets do sink in a synchronized manner when all-out panic sets in. Lessons from 2008 remind us that when the truth is discovered, a collective emotional response is inevitable. Many anticipate intervention in developed markets like the one seen in China, if markets continue with sharp drops. However, it is an understatement to claim that the recent corrections are enough. There is no magic in timing the market, but regulators/policymakers are struggling to defer the truth further out. Central Banks have used tons of ammunition, but now must admit their limitations. The idolization of Central Banks is what glued the markets higher with a tame volatility. Yet, investors are realizing the Fed’s lack of power, which leads to unsettling results.

Many interpretations persist during panicky times like this, but, simply, this correction was long overdue. Fear is not the answer, but discovering the truth is the sane and only approach. BRICS have collapsed (hurt by commodities mainly), the Dollar is by far the best currency and interest rates are not set to go higher. These three themes were known before the start of the year and remain intact even amidst the current “crisis.”

Article Quotes:

“ The purchasing managers' index for the currency area, compiled by data company Markit, edged up from 53.9 in July to 54.1 in August — a figure well above the crucial 50 level that marks an expansion in activity and one of the highest over the past four years. The PMIs are watched closely by the region’s policymakers and the uptick will come as a relief after disappointing news on growth last week. The picture was less optimistic in the US where data also compiled by Markit, suggested manufacturing growth in August slowed to its weakest pace since October 2013. Businesses cited the strength of the dollar crimping exports sales together with weaker global demand, Markit said. The data could provide further pause for thought for the US Federal Reserve ahead of a decision next month whether to start raising interest rates. In the eurozone, preliminary GDP figures for the second quarter, published last Friday, suggested the region’s recovery lost momentum over the spring despite a cocktail of low oil prices, a weaker euro and aggressive monetary easing by the European Central Bank. The official figures put growth at 0.3 per cent, against 0.4 per cent for the opening three months of the year.” (Financial Times, August 21, 2015)

“Central banks are increasingly using communication as an integral element of monetary policy. While initially financial markets were the main audience, in recent years there has been increasing attention paid to communicating with the general public. The reason is that the effects of monetary policy largely operate through expectations, and that the set of relevant actors also includes the household sector. For instance, expectations about the economic outlook can be an important determinant of the consumption and investment decisions that households make on a daily basis (Blinder et al 2008)… Turning to building people’s knowledge of monetary policy, we find clear evidence that the media channel is important. In the survey, we ask people to indicate whether they use sources such as newspapers, television or the Internet to acquire information on the ECB. We use this information in various ways to study the effects on knowledge. For instance, following Blinder and Krueger (2004), we compute a measure for the intensity of information and a measure for the diversity of information. The first measure is the fraction of sources through which the person often hears about monetary policy, while the second measure is the fraction of media sources through which the person never gets information about the ECB. We use these two measures in a set of regressions that seek to explain variation in knowledge across respondents.” (VOX, August 23, 2015)


Key Levels: (Prices as of Close: August 21, 2015)

S&P 500 Index [1970.89] – The very sharp drop revisits levels from February 2015. In May, June, and July, markets hinted of a top around 2120 with buyers' interest fading.

Crude (Spot) [$40.45] – Prior attempts to bottom at $50 failed. The attempt to surpass $60 ended up being rejected due to seller’s pressure. Two years ago in August, Crude stood at $112 to put things in perspective. The bottom has not formed yet.

Gold [$1,118.25] – Selling pressure eased around $1,200 on multiple occasions. Yet, the recent break below $1,100 was short lived. In the near-term a climb back to $1,200 is not surprising, but the cyclical weakness remains.

DXY – US Dollar Index [96.52] – Since March the dollar strength has paused. However, that occurred after the major surge from the second half of 2014. In the near-term trading pattern appears range bound.

US 10 Year Treasury Yields [2.03%] – The peak on June 11, 2015 at 2.49% suggests the realization of slow growth. Since then yields have declined, showcasing a lack of growth and, in turn, a lack of rate hike potentials.




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 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.