Market Outlook | December 14, 2015

"All enterprises that are entered into with indiscreet zeal may be pursued with great vigor at first, but are sure to collapse in the end." (Tacitus)

Inter-Connected Demise

Finally, there is mainstream realization that the commodities slow-down is highly tied to slowing emerging markets, including China. Also, impossible to dismiss, that the slow global demand only portrays one-side of the equation. So, the BRICS and commodities are in absolute turmoil - nothing new for avid and close market observers. Instead, this is an ongoing commodity down-cycle that has played out for few years, but new lows do spark further attention and boldly reawaken volatility.

However, there is another element to this madness. The very highly regarded Fed decision on interest rates mixed with the powers of central banks, which have dominated countless hours in the financial media, will resurface again this week. Suspenseful decision has obsessed waiting observers and now the chess-game just got more adventurous. More and more, the Fed is running out of excuses and the truth is being quickly revealed in financial markets already. From Brazil to Turkey to Russia, finding upbeat data points seems nearly impossible even for the most optimistic. In fact, risk is mounting in riskier assets (and riskier nations):

"The yield on South Africa's 10-year government bond has rocketed 65 basis points (0.65 percentage points) today to a seven-year high of 9.46 per cent. The yield hasn't been that high since the peak of the financial crisis in 2008, writes Joel Lewin." (Financial Times, December 10, 2015)

In the background, burning EM, complete collapse of commodity prices, and a credit market crisis are all brewing. The Fed lacks the basis to support a rate hike, beyond the clearly relative advantage of the US versus other nations. But on an absolute basis, the labor or business growth numbers are not overly impressive. Not to mention, inflation is much lower than expected. It is simply difficult to claim the real economy is growing-A point that's been mentioned, since Quantitative Easing has failed to revive small businesses and profit margins. The macro picture is looking bleaker and bleaker even as the Fed attempts to convince the audience that there is legitimate job creation and decent growth. The idolized central banks are running out of ideas and the truth is uglier than expected for global markets. Although, the "truth" has many false interpretations, for the first time in a while perception and reality might be singing the same exact tune. If that's the case, then danger is confronted and perception is re-set.

The Overdue Awakening

Emphatically, those that doubted the global growth are getting an alarming reminder of global slowdown. Massive sell-offs in energy related areas are just a single chapter in the big commodity breakdown. But the commodity breakdown is not an isolated matter, it is a reflection of soft demand globally mixed with the "endless" glut of supply. The soft demand is highly concentrated from the absolute weakness in EM's highlighted by China. If this is a difficult year for hedge funds and various money managers. If one goes back to the summer sell-off in August, that period stirred the status-quo and panic like wave served as a gut check.

Now the junk bond demise is in-line within this context of slow growth and low interest rate environments, leading to irrational yield chasing by investment managers. Over the last few years, those desperate to find returns went out and took on additional risk in obscure areas. Reckless or not, the risk of a Central bank led low rate environment was the risk of yield chasing. Many over-reached into less known areas and the fallout is being discovered now. Each investor must take responsibility of course, but it would be naive to dismiss the Fed's role in this behavior.

Symptoms of Crisis

From all angles, it feels like 2008 all over again. Crude prices hitting lows since the last crisis, funds blowing up, and major downside market movements all seem too familiar. Synchronized sinking across various sectors is the real feeling of a crisis. Commodities, Credit, and China are causing feeling so sour that nationalism is being geared to be a popular distraction to ongoing economic woes. The conflict between Russia and Turkey illustrates two countries that were clobbered in economic terms, and both are sensing they have less to lose. The same cannot be said about the US, which is appealing to those looking to preserve wealth. Though further shift to "safer assets" is not a new trend, a near-term rush into safer assets is to be expected. At the same time, the outflow of capital from riskier assets should accelerate.

Article Quotes

"At the 6th Forum on China-Africa Cooperation last Friday in Johannesburg, a new relationship between the world's second-largest economy and its fastest rising continent was on display. The forum is the main platform for official high-level political and economic dialogue between Africa and China, held once every three years. China made headlines at the event by announcing a $60 billion package of loans, aid, investment, and other financial support to Africa. Yet for all the fanfare, the relationship between China and Africa is under strain. That is why Beijing must now rethink its engagement with the continent, focusing less on the size and number of commitments it offers and more on sustainability, with an approach that goes beyond government-to-government initiatives." (Foreing Affairs, December 7, 2015)

"The sharp drop in currencies in Brazil and Russia appears set to claim an unlikely victim: appliance sales. Market researcher Euromonitor expects this year's consumer appliance sales globally will grow only around 2 percent in retail volume terms, largely driven by sharp slumps in Brazil and Russia. That's down from 3.8 percent growth in 2014 and would mark the lowest level since 2009, during the Global Financial Crisis. Major appliance sales in Russia and Brazil are expected to drop 28 percent and 6 percent respectively this year, Euromonitor said. Those two countries have seen their currencies drop sharply over the past year, hurt by declining prices for their commodity exports and fund outflows from most emerging markets amid expectations the U.S. Federal Reserve will soon hike interest rates for the first time in nine years. Russia has also been hit by international sanctions over its annexation of Crimea in March 2014 and its role in the pro-Russian uprising in Ukraine. The dollar has gained 18 percent against the ruble and soared 43.4 percent against the real so far this year." (CNBC, December 11, 2015)



Key Levels: (Prices as of Close: December 11, 2015)

S&P 500 Index [2,012.37] - Numerous occasions in 2015 confirmed heavy selling pressure around 2,100. This was felt again as the index topped at 2,104 (on December 2nd). Clearly, this is a meaningful range where buyers' momentum dries up.

Crude (Spot) [$41.71] - Unlike the spring rally from $44 to $62 and unlike the summer stabilization around $44, the selling pressure is now gushing. Buyers are not viewing mid $40's price level as a bottoming process, as the fallout has reached a new low.

Gold [$1,081.50] - Bottom-pickers have seen Gold prices fail to bottom on numerous occasions. First, in 2011-2013, many felt $1,600 was a possible bottom. It wasn't as selling mounted. Recently, $1,200 had magical appeal based on charts and trends, yet again new lows shattered.

DXY - US Dollar Index [100.51] - As a dominant theme, the dollar remains very strong and comfortable at its current level. Since last December, the demise of other currencies has boosted the Dollar's relative edge. Outside of major macro events, this trend does not seem easily shakable.

US 10 Year Treasury Yields [2.12%] - The mighty anticipation of interest rate policy does not alter the well know behavior in yields. Recently, hovering around 2.20% is a familiar sight. June highs of 2.49% seem rather far away, but not as far as the annual lows of 1.63%. A wide range of actions (i.e surprises) need to develop to break out of the current range.


Dear Readers:

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

Market Outlook | November 30, 2015

“There cannot be a crisis today; my schedule is already full.” (Henry Kissinger)

Themes Revisited

Three inter-connected themes from last year (2014) are bursting at the forefront of market discussions: Anguish in Emerging markets, the absolute demise of the commodity prices, and the strengthening of the dollar. These trends highlight the macro set-up. Amazingly, to understand some of the foreign policy tensions today, one can start with EM economic weakness. Perhaps, that was the critical prelude that’s driving the current market and foreign policy behaviors. The frailty in EM and commodity prices reflects the overall slowing global growth that is turning ugly and sour these days.

In hindsight, 2011 marked a critical period. In the spring of that year, the US dollar bottomed and in that same autumn Gold peaked. Since then, that trend has remained in emphatically in place. During that period, EM demand and growth suffered and that toll is being reflected brightly today.

Emerging Mess

If there was any doubt about the slowing global growth climate, last week reaffirmed a few reminders from all directions. It's a bit ironic that around key economic circles the discussion is around QE or "better than expected numbers" and a time frame for hiking interest rates. Yet, for real economic operators the concerns deal with a string of chaotic events that re-confirm the ongoing slowdown.

Across various continents, there is an edginess beyond what’s illustrated in US volatility (VIX) measures. The major scandal in Brazil may have put a nail in the coffin for an already struggling market. Further angst is felt in a country that witnessed decent growth during the commodity boom:

“Until now, the Petrobras scandal has been mostly confined to the murky underworld of the oil and gas and construction industries, where former executives are alleged to have conspired with construction bosses, black market money dealers and politicians to extract an estimated R$6bn through fraudulent contracts.” (Financial Times, November 27, 2015)

This news dampens an already muted sentiment, but still illustrates the sour environment in EM.

Then, of course, there is the ever so escalating Russia-Turkey rift. Tons of economic implications appear as tension mounts and counter-punches are traded by leaders. The Syrian massive crisis that’s producing a proxy-war and political posturing has been much ignored, at least by equity market day-to-day action. Yet, one does not need the Syrian crisis to analyze the demise of Russian and Turkish economies at the start of 2015. In fact here is an article regarding the Turkish economy from this spring:

“Four years ago, Turkey grew at a rate of 8.8pc but in 2012 this dropped to 2.1pc and 4.1pc in 2013. The forecast for 2015 and 2016 is GDP growth of 3.5pc and 3.7pc.” (The Telegraph, May 30, 2015)

No surprise that EM nations are feeling like they have less to lose, at least leaders are fearless than they would have been during rosy periods. Grim periods have been felt and perhaps lead to harsh investor realization.
In this headline shuffle, the China slowdown should not be dismissed considering that was the catalyst of the summer sell-off. Interestingly, last week produced another notable sell-off, which was triggered by Chinese regulators' action against financial firms:

"The Shanghai Composite ‎closed 199 points, or 5.48 percent, lower; the Shenzhen Composite closed 6.1 percent lower, the Chinext was down 6.1 percent, and the CSI300 Index saw a decline of 5.38 percent.‎" (CNBC , November 26, 2015)

At the same time, Saudi Arabia and other oil producing nations are nervous with plunging oil prices. In this inter-connected world, slowing China also means slowing demand for Crude and that’s raising a few blood pressures, as well. Suspense is surely escalating and risk-reward set-ups are rearranging, as well.

The Convenient Narrative

With the last month of 2015 approaching, major media and known pundits are debating the rate hike possibilities by the Fed. Central bankers again are overly idolized. The endless stimulus efforts have led to low rates which is numbing by now. Surely, the conductors of the “market orchestra” continue to shape sentiment.Mystery aside, this narrative of low rates and higher assets in developed markets is tiring. Love it or hate it, this narrative has rewarded those parking capital in “safe assets,” as US based investments gain strength. The intellectual justification of elevated asset prices is (and has been) part of the Fed’s narrative policy. Thus, the Fed reacts to reality, but their reality is political. By placing a verdict on current growth, the posturing and messaging from Central Banks again fails to tell the full story. Slowing corporate earnings, unclear fundamentals, and mixed economic data do not tell a convincing story. There is no magical answer. Yet, market participants are yielding to the Fed for guidance, even though a clear-cut answer is not available to anyone.

Article Quotes

“While ECB policy makers have so far pledged to buy at least 1.1 trillion euros of assets, they are still seeking a silver bullet to push price growth toward the central bank’s target of just under 2 percent. Economists surveyed by Bloomberg predict that a flash estimate published on Dec. 2 will show inflation rose 0.3 percent in November. Negative-yielding securities now total $2.2 trillion, or around one-third of the Bloomberg Eurozone Sovereign Bond Index. That compares with $1.38 trillion before Draghi’s Oct. 22 pledge. The deposit rate has become a focal point for investors after Draghi said that day that officials discussed a reduction. ECB restrictions currently prevent the central bank from buying any security yielding below the minus 0.2 percent level so a change to the rate would bolster the number of bonds eligible for purchase. A 15 basis-point cut is more than 90 percent priced in, according to futures data compiled by Bloomberg. All but one of 44 economists in a Bloomberg survey forecast a reduction, with the median prediction at minus 0.3 percent. Banks including Commerzbank AG and Citigroup Inc., are also calling for the for the ECB to extend or expand its bond-buying plan next week.” (Bloomberg, November 28, 2015)

“There are plenty of oil bulls who are keen to latch on to the notion that Saudi Arabia might change its mind, as the rising price this week shows. However, it might not matter in any case. As HSBC senior economic adviser Stephen King tells Bloomberg, there’s a demand story here too. ‘If you look at the path of oil prices, the surprises to oil prices over the last 15-20 years, they closely correlate to the waxing and waning of the Chinese economy. The China slowdown is probably the biggest single influence that is depressing oil and other commodity prices.’ King makes the other point – which is frequently forgotten – that Opec doesn’t have the sort of deity-like power over the oil price that many believe. Output was cut during the price slump ‘in the mid-to-late 1980s and prices didn’t go up.’ China’s economy might be turning around now. But the sort of demand surge that we saw in the decade leading up to the financial crisis is unlikely to be repeated. In short, I’m not betting on oil prices collapsing to $20 a barrel – it’s possible, but it’s also hardly a contrarian call. However, it’s hard to see prices rocketing back to that $60-$80 ‘comfort zone’ in the near future either.” (Moneyweek, November 27, 2015)

Key Levels: (Prices as of Close: November 27, 2015)

S&P 500 Index [2,089.17] – Breaking above 2,100 proved to be difficult all year for the index. In fact in August during the summer, sell-offs and sellers' pressure forced a move below 2,050, which is critical to point out.

Crude (Spot) [$41.71] – Struggling to climb above the current range, which is around $40. Recent trading behavior suggests that surpassing $50 is a daunting task, unless there is a massive supply unrest.

Gold [$1,081.50] – Making annual and multi-year lows. Since the peak in 2011, the current move is an ongoing decline, confirming the commodity bearish-cycle. Despite all the chatter, Gold is highly correlated to commodities rather than as an alternative “currency.”

DXY – US Dollar Index [100.02] – An exclamation point to the dollar's recent strength. Crumbling EM currencies and declining commodities bode well for the US dollar. Since the bottom of May 2011, the dollar strength reveals the global demand for a “safe” currency.

US 10 Year Treasury Yields [2.22%] – The 200 day moving average is 2.15%, which tells the story of recent weeks. Yields are mostly neutral despite all of the rate hike chatter and anticipation.


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 23, 2015

“There are two ways to live: you can live as if nothing is a miracle; you can live as if everything is a miracle.” (Albert Einstein 1879-1955)

Summary

‎Last week, another run-up in equity markets painted a rosy picture for headline writers. All out attention on the Fed remains the focus to capture audiences, even though various realities and mixed signals resurface about the health of the economy. The status-quo is as firm as it has been for years: lower yields, higher stocks, and gloomier periods for commodity prices. A shock or a stunning eruption in volatility is not overly feared, as the suspense continues into year-end. The Fed's view of the world versus reality will be discovered soon, and any misalignment can be the watershed moment for risk-takers. To start, one must accept the two ways that the world is viewed from economic and financial markets.

Different Worlds

There are two worlds unfolding and that’s been the case for a long while. First, there is the investment world, where investors are looking for opportunities or safety or simply mild adventure to create/preserve wealth. The spirit of growth seekers is to exploit upside potentials or wisely asses relatively appealing investment ideas. After all, this concept is rather simple and straight foreword once fully understood.

Exploiting upside potential, in these days, has dealt a lot with innovation from technology to healthcare, which the Nasdaq demonstrates in the recent successes of several companies. The human ability to invent efficient technology or cure related solutions is still valued greatly by markets; particularly if one wants to test their fortune since risk is never inevitable. But more and more, investors are analyzing the relative appeal of the cards that we're all dealt rather than speculating recklessly. That's the consensus thought process driving the market action.

In other words, in this global landscape investors act and react based on what payoffs will appear in the near-term without taking massive risk-reward?

Is it seeking safety in developed market assets that are yielding closer to zero? Is the answer piling additional capital to an already well established stock market? Is it doubling down exposure in US dollars, given ECB policy, favoring the weaker Euro? Is it appropriate to avoid EM for now and to exploit a recovery later when the climate is less murky? On and on it goes as investment options seem so much less than what's offered by financial experts of all kinds. But, growth seekers must be having more difficult times than those seeking relatively appealing ideas. In a way, it is the lack of growth ideas (outside of few pockets) that are building up the well established "developed" market assets. These behaviors are surely influenced by Central bankers who create the perception, which leads to reactions by investors. ‎Yet, the Fed obsession alone doesn't produce answers. Rather it forms a collective narrative that's simplified for public consumption.
The second world, is the more practical world of government, policies, day to day realities, real economies, and, of course, foreign policy woven into politics, as usual. Sure, US elections are looming, the Middle East is crumbling, and cold war-like symptoms are revisited. ‎So, what's the implication of these issues on markets? A question that's so often asked, but who can answer with clarity after all? At some point, policies do impact corporate profits. Confidence in leadership can translate to some impact on investor sentiment. Sooner or later, the real world and the real economy can't be disregarded by the investment world.

Lack of good policies can impact the next 5-10 years and that lack will essentially be felt at some point or another. In this non-investment world where business operators have to gut it for a profit, the results are not as glorious as the "all-time highs" market. Not to mention, regulatory pressures and costs on business add some hurdles. In addition, enhanced competition from all sides have added challenges, unlike in prior decades. Perhaps, this divergence (two worlds) is mind-boggling for some, puzzling for others, and disregarded even. However, this disconnect can't be a healthy or truthful description. An illusionary prescription by policymakers creates rude surprises later, and the hints typically play-out in financial markets before a mainstream uproar.

Tangible Concepts

Where is this disconnect reflected? First, there is mixed economic data that has the Fed dancing and posturing about rate hikes. Secondly, low rate policies have failed to stimulate sustainable economic growth in developed markets. Debatable as it may be, there are unsolved matters in reviving global growth. Thirdly, the demise of commodities has hurt various economies and businesses as much as it has helped spur consumer growth. All those points considered, the glorious S‎&P 500 index fails to tell the whole story. The puzzle is not for the Fed to solve, but that burden falls on the risk-takers, who chose to speculate on these grand shifts and ideas.


Article Quotes

“To move away from their dependence on oil, then, Arab societies need to develop a new political settlement that forces elites to cede ground to the private sector. That, however, raises a difficult question: if a closed, resource-dependent economy benefits elites, what could possibly persuade those elites to allow for diversification? The answer likely lies in policies that compensate elites for the losses they suffer from a leveling of the economic field. China provides an illustrative example of this process: by incorporating business leaders into the Communist Party structure, Beijing managed to align economic reform with the interests of political elites. Or consider the case of Ethiopia, now among the world’s ten fastest-growing economies, which has set up party-owned enterprises supported by specialized endowments to promote investment in underdeveloped regions. Such models of party capitalism raise tough questions about market competition. But they nonetheless demonstrate that elites tend to favor an expansion of the economic pie when they stand as its lead beneficiaries. Low oil prices offer Gulf states an opportunity for similarly creative institutional reform. Many states in the region have looked to the financial sector as a principal avenue for diversification; so far, however, they have hesitated to implement the legal and regulatory policies that would put that sector onto a sound footing, and regional secondary markets for debt remain underdeveloped.” (Council on Foreign Relations, November 5, 2015)

“U.S. companies are for the first time the biggest borrowers of euro-denominated corporate bonds, issuing a record 87.7 billion euros ($93.49 billion) of debt, according to data compiled by Bloomberg. Companies from Apple Inc. to McDonald’s Corp. have made up a fifth of total new issuance in the market, more than any European country and up from just 1.5 percent five years ago. Draghi’s easy-money policies are making it cheaper than ever for corporate America to cross the Atlantic to issue debt. That’s because the European Central Bank is pledging to boost stimulus just as Federal Reserve policy makers are prepared to raise interest rates for the first time in a decade. The difference between borrowing costs in the U.S. and Europe has widened to the most ever, and few see the gap closing anytime soon.” (Bloomberg, November 18, 2015)

Key Levels: (Prices as of Close: November 20, 2015)

S&P 500 Index [2,089.17] – Approaches annual highs of 2,116.48 (November 3, 2015). The run since mid-October remains strong, suggesting a bullish bias. However, surpassing 2,100 has proven to be difficult several times in the past.

Crude (Spot) [$41.90] – Failed to hold above $45 and $50 after multiple tests. Again, weakness is confirmed as a multi-year demise in Crude prices becomes clearly visible.

Gold [$1,081.50] – Over the last five weeks, a near $100 drop reaffirms the known cyclical downturn. Clearly, Gold trades more like a commodity than a currency. A long awaited bottoming remains unclear at present. Many thought $1,200, but now even $1,100 is not a clear bottom.

DXY – US Dollar Index [99.56] – Since May 2011, the dollar strength has been a stunning and clear-cut macro trend. Its strength is in-tact. March 2015 highs of 100 are not far removed. With Europe applying more QE and Emerging Market's weakness unfolding, the dollar remains strong.

US 10 Year Treasury Yields [2.26%] – Not much has changed week by week. Despite all rate hike chatters, there has been no major shift. We’ve been in a range between 2.0-2.5% for an extended period.


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 16, 2015

“Passion is a positive obsession. Obsession is a negative passion.” (Paul Carvel)

Summary

A collective meltdown across various markets like the one seen this August is potentially looming. At least, the hints are mounting a bit as showcased in last week's trading pattern. Or at least a short-lived correction is mildly underway. The onslaught of commodity prices and sluggish global economy is painful to ignore.

‎Investors are struggling between postponing the inevitable sell-off and confronting the not so pleasant reality. Basically this is playing out in a tug of war between buyers and sellers. This is surely felt in the chart of the S&P 500 index where the action is range bound and lacks directional conviction. The August lows and the May highs serve as the benchmark. However, justifying the elevated share price levels has become harder and harder for the bullish camp. Thus, uncertainly is storming back into the daily market action.

Unhealthy Conditions

If US equity appears overpriced and the global economy continues to slowdown, then a synchronized sinking in asset prices should follow suite. For one, the commodity plunge becomes sharp and sharper for any neutral observer. Not to mention, the Emerging Market debacle is such a mess that each bad news ends up strengthening the dollar. Therefore, the dollar strength stands out once again on a relative basis. Central bank and election chatter cannot improve sentiment overnight. Terrible developments in foreign policy (from Syria, Ukraine, etc) have foreshadowed a lot of the turmoil and slowdown. That said, seeking shelter in an all-time highs stock market is not enough as a long-term solution. At some point, the risk of over piling capital in perceived “safe” assets can shift suddenly. This was tangibly felt in the rise of the volatility index (VIX) in the last two weeks. Nervousness is back.

Demise Revisited

From a global point of view, oil is collapsing due to supply expansion and demand contraction. This is the simple part to grasp. The implication of low oil prices on foreign policy is the complex part, but markets are not dissecting that at this moment. The massive finding on how the commodities are and a clear-cut downturn is alarming to some, but the statement is not quite debatable at this stage:

“Surplus oil inventories are at the highest level in at least a decade because of increased global production, according to the Organization of Petroleum Exporting Countries. Stockpiles in developed economies are 210 million barrels higher than their five-year average, exceeding the glut that accumulated in early 2009 after the financial crisis, the organization said in a report.” (Bloomberg, November 12,2015).

The commodity market has essentially signaled the brutally weak global real economy, where banks, energy companies, and jobs in the energy sector all suffer. The knee-jerk reaction of low oil leading to positive consumer result is a half-truth, which dismisses the full picture. The consequences of weak commodity prices are now being understood and the findings are not thrilling.

The Noisy Mystery

So much attention on the Fed’s next move and so much debate about economic data via flawed and opaque data collection; however, there has not been much debate about the state of key global economies and how it should impact corporate earnings and sentiment. Secondly, the regulatory burden (post 2008 crisis) on companies of all sizes ends up hurting small businesses the most. How can one deny this? Capital seekers and preservers of entrepreneurship have lost confidence in the current landscape.

That said, the symbolic Fed decision appears less relevant despite the headline obsession in business circles. Without pro-growth policies and emerging economies on the brink of collapse, the Fed’s decision is not as massive as it has been made out to be. Certainly, central banks create a lot of noise, but their low rate policies are hardly mysterious. Perhaps, sentiment and attitude towards growth will drive perception as much as the Fed’s policy.

Article Quotes:


“The GDP figure for the eurozone as a whole followed the release earlier on Friday of a mixed set of readings from the currency area’s three largest economies. Growth in the largest economy, Germany, slowed between the second and third quarters on the back of weaker foreign trade, expanding 0.3 per cent — in line with expectations but down from 0.4 per cent in the previous three months. Italy’s economy, the bloc’s third largest, grew 0.2 per cent, down from 0.3 per cent in the second quarter and falling short of forecasts. Istat, the national statistics agency, said stronger domestic demand had compensated for poor export figures. A brighter spot was France where growth took off, moving up to 0.3 per cent after grinding to a halt in the second quarter. The growth, boosted by domestic demand and industrial production, was slightly better than earlier official forecasts. France’s return to growth means it is on course to achieve its target of at least 1 per cent growth this year. That would end three years of stagnation in the eurozone’s second-largest economy. But growth still looks set to fall short of the 1.5 per cent target that economists believe is needed to lower the country’s 10 per cent unemployment rate.” (Financial Times, November 13, 2015)

“The credit boom in emerging markets was in large part a response to the credit bust in the rich world. Fearing a depression in its richest export markets, the authorities in China brought about a massive increase in credit in 2009. Meanwhile a flood of capital escaping the paltry yields on offer in developed economies pushed interest rates lower in developing ones. This search for yield by rich-world investors took them to ever more exotic places. A dollar-denominated government bond issued in 2012 by Zambia, a copper-rich country with an average GDP per person of $1,700 a year, offered just 5.4% interest; even so, it was 24 times oversubscribed as rich-world investors clamoured to buy. The following year a state-backed tuna-fishing venture in Mozambique, a country even poorer than Zambia, was able to raise $850m at an interest rate of 8.5%.In contrast to the credit booms in America and Europe, where households were the main borrowers, three-quarters of the private debt burden in emerging markets is shouldered by businesses: corporate debt has ballooned from less than 50% of GDP in 2008 to almost 75% by 2014. Much of the lending was done in Asia, notably in China. But Turkey, Brazil and Chile also saw substantial increases in the ratio of company debt to GDP (see chart 2). Construction firms (notably in China and Latin America) increased their leverage a great deal. The oil and gas industry was a big player, too, according to the IMF’s latest Global Financial Stability Report.” (The Economist, November 14, 2015).


Key Levels: (Prices as of Close: November 13, 2015)

S&P 500 Index [2,023.04] – Once again the index failed to reach 2,100, showcasing the important technical level where buyers lose momentum. After making a strong run since August 24th lows (1867.01), early signs of fading optimism.

Crude (Spot) [$40.74] – The ferocious sell-off continues as crude drops back to $40. Clearly, the multiple pressures that mounted forced the additional downside move. More supply of oil with less demand is surely playing out in prices.

Gold [$1,081.50] – Very close to August 2015 lows of $1,080.80, as a recent sell-off wiped out any upside momentum. In big picture terms, gold is less eventful as the commodity cycles remain in a multi-year downturn.

DXY – US Dollar Index [98.99] – Dollar strength remains intact and reflects further weakness in other currencies. Certainly, an asset that’s valued more during anuncertain period, which has been illustrated by the actions of the last two weeks.

US 10 Year Treasury Yields [2.26%] – Failed to hold above 2.35%, as the recent rise in yields is being debated. The behavior from the last two weeks needs confirmation that yields are going much lower.





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 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.