Market Outlook | January 4, 2016

“There is nothing as mysterious as something clearly seen.” (Robert Frost, 1874-1963)

Early Perspective

It has not even a month since the Federal Reserve mildly or symbolically hiked US interest rates.  It has not been six month since Crude has traded in the $30’s range. It has not been a year since the escalated feud between Russia and Turkey in Syria.  Not quite a week has passed since the grand tension between Iran and Saudi Arabia. Time will tell as the list of uncertainties build.

Years have passed since the low interest rate policies became the norm from the US to Japan to Europe. It has been several years since commodities along with Emerging Markets began to decline on a consistent basis. Several months have passed since the massive China scare in August 2015, and  the ripple effects have yet to fully materialize. 

The S&P 500 index and Dow Jones index both closed negative last year (first time since 2008 – more on this below), reminding us on average it was a tough year to invest, speculate, or even observe financial markets. The US dollar roared again as a symbol of strength and shelter from the ugliness that persisted everywhere.  With all that brewing, a new calendar year starts; however, importantly focusing on the first quarter is more logical and relatively digestible for investors seeking a road map.

Near-Term Considerations

1.      Crude below $20 in Q1 2016? Iran entering the crude oil market leads to further expansion of the already over-supplied market.  Combined with China’s soft (and softer) demand puts additional pressure on prices; not to mention the recent US entry to the Oil market, which certainly rattled supply, as well.  Here is another supply expansion example:  “Russia’s oil output is poised to reach a post-Soviet record of 10.86 million barrels a day this week as the nation’s producers continue to withstand the slump in prices, according to Energy Ministry data” (Bloomberg, December 31,2015).

This has been a textbook supply-demand set up at a grand level, where the recent prices are fully justified. Thus from $100 to $3o, the change in crude prices is understandable for analysts or causal observers. However, the implication of very cheap crude prices is the big unknown. Fallout of this drives energy investments to go sour, from companies to fixed income impacting overall global growth. How does it impact employment, economies, financial services, wealth creation, and, of course, “distressed” opportunities? The first quarter may settle some nerves, but emotions are seeping back in the market. From credit funds and energy investments that already collapsed there will be more to follow. Perhaps, the energy crisis may remind us of the credit crisis from 2008.

2. Non-commodity themes, such as German and Japanese equities along with NASDAQ, were attractive versus other ideas. Israel and India are in the mix given the innovation based industries, which are less reliant on commodities. Saudi Arabia and Russia appear in trouble economically and soon maybe even militarily. Harsh lessons are discovered about non-diversified economies from South Africa to Nigeria to Venezuela. Hence, more diversified economies, such as US and Germany, look much more appealing.  

One can feel this in the escalation of tensions in foreign policy: from the heated battle between Iran and Saudi Arabia to Syria divided into four as it crumbles over proxy wars. All these are factors, not only for Oil, but for immigration, weapons sales, and next wave of military risks. Certainly, all these issues hit at the heart of international trade as investors are realizing the great impact of commodities, which was underestimated by average analysts. Cash flowing out of these commodity heavy nations is a harsh reality.  Similarly, Brazil is set to be a bigger mess after the Olympics. just like it was a mess after world cup:

“Since its peak growth in 2010, the Brazilian economy has done nothing but decelerate, entering negative territory in 2014. Growth was -2.6%  in the second quarter of 2015, while there are no signs of improvement.” (Bruegel, November 6, 2015)

3. Bureaucratic influences: Election year apathy in Washington means less willingness than usual for bold moves (with very few exceptions). From Fed supported market to uglier real economy realities, key policy responses ahead are greatly awaited. On a whole, as a global growth is not impressive and Fed hike remains questionable, even the relatively appealing US market cannot rely only on relative appeal. Some substance is needed to propel tangible growth.  In an election year, the truth should be revealed quickly as some decisions remain in a standstill. Similarly, in Europe the “Brexit” and victory from the far-right stir a debate between national interests and the union. After the 2011 Greece crisis, this debate and vulnerability of the union has been exposed. Further angst or at least harsh verbal responses can cause some market reactions. Lingering issues that are unsolved can annoy or worry investors, which may translate to sentimental response. 

Seeing It Through

So many pundits expect more volatility or extended equity markets and further crumbling EM/Commodities. That said, if the sluggish growth and choppy trading action persists, then how does one respond when expected events actually materialize? It is easier to call market tops or identify concerns, but the fruitful reward comes from executing ideas that were thought-out well before the panic-like madness. Essentially, there is a three step process to consider before entering ideas:

1.       Identify the riskiest segment of the market.

2.      Opine on possible time-frame and catalysts.

3.      Pinpoint the specific investment to match the thought.

To get all three right is what makes a story. To reach this point every quarter or year is not truly possible given nature of markets (with very few exceptions).

Financial markets are overly competitive for those seeking gains, since too much capital is chasing limited ideas. From efficient trading to widespread information to computer generated ideas and execution, the industry has elevated its tools very sharply. At the end, like Crude and Emerging Markets proved, defining for logic for too long is impossible. Eventually, valuations and risk are reassessed and investors do reset their expectations. 

A 7 Year Reflection

Since December 31, 2008, the S&P 500 index increased by 126%, Crude declined by 17%, and the Dollar index increased by 21%. When all is said and done, in the last seven years, placing once capital into US equities via US dollar exposure proved to be a net winner.  Yes, that was also the vividly clear case during the last few years. Interestingly, since the last major crisis, these results reflect the strength of the dollar and ongoing positive influences (i.e buybacks, demise of EM and Eurozone etc)  that contributed to stronger equity markets. The S&P 500 index is not overly rational at times, but the boost from the Fed plays a critical part, as well.  Therefore, if the low rate “crutch” (or boost) nears an end while the energy establishment unravels, then a new cycle is bound to reset. A vicious reset awaits, perhaps.  The unraveling is ugly, the emotional sparks cause further damage, and calling the bottom is a risky exercise. Thus, not only a start to a year, but an end of a presidential, economic, and credit cycle.

Article Quotes

“Central banks and finance ministries in emerging markets have few options once their currencies start plummeting, and often must intervene in exchange markets in what is usually a futile effort to stabilize the rate. Countries such as Argentina, Brazil, Indonesia, Russia, and Thailand depleted their foreign reserves to prop up their currencies and ultimately turned to the IMF to stem the losses. Tapping the fund comes with conditions, and countries must agree to introduce structural changes to their fiscal policies and financial system. The IMF has received much criticism for proposing stringent conditions, known as the "Washington Consensus," on Asian borrowers in 1997–98, which stipulated austerity measures and the removal of capital controls. The IMF has altered its approach over the years and is now more flexible on government budget cuts, but its stabilization policies still spur popular discontent… The policy dilemma that faces central bankers and governments in emerging markets with current account deficits is that supporting currencies by raising interest rates, thus making domestic financial assets more attractive to foreign investors, can also slow the economy.” (Council on Foreign Relations, October 28, 2015)

“Lending to companies and households across the euro zone picked up again in November, recording year-on-year growth of 0.9 percent and 1.4 percent respectively, the European Central Bank said on Wednesday. The development is positive news for the euro zone's economy, which has long struggled with slack credit, and indicates some success for the ECB's money-printing scheme to buy chiefly government bonds.

The ECB also said, however, that the annual growth rate of the M3 measure of money circulating in the euro zone, which is often an indicator of future economic activity, had lost pace. Growth in M3, which includes items such as deposits with a longer maturity, holdings in money market funds and some debt securities, was 5.1 percent in November. This result compares unfavourably with 5.3 percent growth in October and is also lower than analysts polled by Reuters had expected.” (Reuters, December 30, 2015)

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

S&P 500 Index [2,043.94] – For several weeks, the index traded between 2,100 and 2,050. Now it stands at a fragile range where a break below 2,000 can stir further scare. Yet, the neutral state of the index is becoming very common.

Crude (Spot) [$37.04] – Crude traded below $40 for nearly all of December 2015. Gauging a bottoming process is rather difficult and unclear. What is certain is the multi-year deteriorating trend.

Gold [$1,068.25] – The search for bottoms has resulted in ongoing new lows. A break below $1,000 would not be overly surprising, but would mark a new wave of downturns. $1,180 seems like the first range needed to mark a meaningful bottom. 

DXY – US Dollar Index [97.98] – The dollar is strong and poised to get stronger.  The multi-decade data combined with easing policies by other central banks continues to make the case. During the second half of 2015, the index comfortably stayed above 96, confirming the strength.

US 10 Year Treasury Yields [2.24%] – The last several weeks witnessed a tight range (2.20-2.30%). The next direction lacks major conviction. Yet, the lack of upside movement in yields ahead of the Fed confirms one or all of the following:  1) The Fed will raise rates moderately, 2) global growth will continue to be slow, and/or 3) the US Treasuries will still be deemed as safe and appealing.

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 | December 28, 2015

“Don't tell people how to do things. Tell them what to do and let them surprise you with their results.” (General George S. Patton)

Summary

The first wave of global weakness is being recognized as uncertainty looms even greater than in years prior. The market and participants have observed and reacted already. The disconnect between the investor world vs. the real economy cannot be sustainable for too long. Thus, a second wave of discovery and responses awaits for this cycle as we head into an election year. That said, there are a few thoughts and themes to ponder for early 2016.

Slow Economic Growth Escalates Global Tension.

The demise of EM and drawn-out negative cycle for Commodities come with major consequences beyond investors. There is a critical Foreign policy element to this cycle slowdown where wealth creation has dissipated. Clearly, Russia has felt the pain from oil decline as much as Saudi Arabia and other oil producing nations. The Turkish economic slowdown has led to a regime focused on arrogance, nationalism and anti-secular behaviors. All these impact the business world. The proxy war in Syria reflects the sharp escalation in desperation; and leaders build nationalism, since glorifying poor economic growth is not an option. Iran entering the Oil market not only impacts supply, already filled with glut, but also creates more tension with rival neighbors in sectarian wars (Saudi Arabia). Brazil's abysmal performance has failed to revive creating more capital outflow, as social tensions have been brewing a long while; and shattered investors’ confidence of all kinds has yet to be flushed out.

The impact on oil-heavy economies is huge. It is being felt and will continue to be felt. The fall out is ugly and uglier as exhibited in Nigeria recently:

“Nigeria is running against strong economic headwinds right now with oil prices below $40 and foreign reserves below $30 billion—enough to pay for maybe six months of imports at most. The Central Bank governor, Godwin Emefiele, has introduced ‘demand management’ in response to the challenges he’s faced with.” (Quartz, December 24, 2015)

Clearly, the weak eurozone has triggered political changes (via vibrant responses) from immigration to "Brexit" to varying resolutions to the Greece collapse, which is still playing out. ‎The far-right is gaining a voice in Europe as nationalism appears like a substitute to the failed "globalization" model. In other words, a nostalgic approach by politicians is gaining traction rather than the ambitious wealth creation hopes of the past. This is due to the sluggish, "barely above-zero" growth rates that have created frustration rather than optimism. Of course, the low interest rate policies can actually lift stocks, so investors might take a closer look. For example, the German stock market has had a positive 2015. Perhaps, momentum chasers look to double down in Europe by betting on some help from ECB and the relative attractiveness given the limited options. This would be hardly surprising.

‎Varying Central Bank Policies Create Opportunities and Volatility

The uniform approach by central banks to maintain low interest rates has been a common and overly-familiar ‎approach in recent years. With US raising rates, albeit symbolically rather than meaningfully, it sets the stage for further suspense. Is the Bank of England going to raise rates? And is the ECB going to maintain low rate policy? Further divergence in interest rates creates a new dynamic to markets as the risk-reward paradigm begins to shift. In other words, global equities may not dance in tandem; some moves can turn out more pronounced than others and set the stage for a new era/ cycle. Not to mention, the merits of interest rate hikes are still questionable. The set up of slow growth and vastly declining commodity prices do not present a convincing story for a rate hike. If a strong US economy fails to materialize then markets might respond in a nasty manner to any surprises.

Further Revelations Await

As the US approaches an election year, the odds of major policy changes are very slim. Plus, the unraveling of the energy sector is being discovered globally from Texas to the Middle East. Thus, along with the credit market implosion (i.e. junk bonds) and Emerging market weakness, one can expect further revelation of risk in riskier assets. Basically, the concept of risk-reward will be reset and adjusted to a new cycle. For now, assessing potential/pending damage is the task for investors from retail to distressed energy opportunities, which should occupy the minds of risk takers. Relying on central banks for the description of ground level economic activity is seemingly less potent these days.

Meanwhile, Chinese data points scared market participants in the summer of 2015, which served as a reminder of what was greatly feared before: Unsustainable growth rate. The Chinese slowdown has now converted to major government reforms. Yet, reforms do not occur overnight and the growth of the middle class consumer market is still being digested early-on. Markets are bound to be extra sensitive in digesting Chinese news. Good or bad news should get tons of attention and influence sentiment.
Non-commodity related themes from Germany to Japan to Nasdaq may be appealing at first sight. However, the commodity demise has created (and continues to create) appealing risk-reward set ups. Thus, 2016 will force investors to decide between going with proven winners versus searching deep value in less favorable areas. One of these two is going to win big. The answer for what will work is simply mysterious because the risk is still being understood.

Article Quotes

"In 2011, China became Russia’s largest trading partner. In 2014 alone, China’s investment in Russia grew by 80 percent—and the trend toward more investment remains strong. To get a sense of the growth in economic ties, consider that in the early 1990s, annual bilateral trade between China and Russia amounted to around $5 billion; by 2014, it came close to $100 billion. That year, Beijing and Moscow signed a landmark agreement to construct a pipeline that, by 2018, will bring as much as 38 billion cubic meters of Russian natural gas to China every year. The two countries are also planning significant deals involving nuclear power generation, aerospace manufacturing, high-speed rail, and infrastructure development. Furthermore, they are cooperating on new multinational financial institutions, such as the Asian Infrastructure Investment Bank, the New Development Bank BRICS, and the BRICS foreign exchange reserve pool. Meanwhile, security ties have improved as well. China has become one of the largest importers of Russian arms, and the two countries are discussing a number of joint arms research-and-development projects." (Foreign Affairs, January 2016 Issue)

“No country has ever devalued its way to prosperity. If it were possible to achieve economic growth by printing money, buying bonds or setting interest rates at negative rates, then many countries would be rich. The reverse is true: Weak currencies lead to slower growth, as we have observed from recent experiences in the Western world and Latin America. Negative rates disadvantage particular groups within the economy. Savers, retirees, pension funds and insurance companies are all harmed by negative and zero interest rates. Thrift, which means putting aside money today in case of a rainy day tomorrow, makes no sense with negative rates. There is no reason to delay current spending to save for tomorrow's capital stock. Negative rates drive people on fixed incomes into risky assets. Some, including senior citizens, need income from their savings. They are driven into risky assets such as equities and junk bonds in order to get the 5 percent return that they would normally receive from savings accounts. They are forced to take on more risk than they prefer.” (Manhattan Institute, December 17, 2015)

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


S&P 500 Index [2,060.99] – A severe resistance has maintained at 2,100 for several months. Interestingly, the index hovered around 2,100 during the summer months, ahead of the August sell-offs. A similar pattern continues to form.

Crude (Spot) [$38.10] – An eagerly awaited bottoming shape appears to be forming, but not yet fully convincing. Staying around $40 for a sustainable period seems to be the major test. Yet, the downturn remains intact.

Gold [$1,068.25] – Previously, Gold failed at $1,180. Now, it appears to fail at $1,080. The multi-year decline remains in place despite some signs of a bottoming revival.

DXY – US Dollar Index [97.98] – Trading around familiar range. Dollar strength remains intact despite a very mild pause. Recent action suggests high probabilities of the Dollar index staying above 94, baring major shifts.

US 10 Year Treasury Yields [2.24%] – The 50-day moving average is 2.20%, which tells the story about the dull, sideways action. Basically, no major change has occurred as yields remain trading near the low end of the 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 | December 21, 2015

“A smooth sea never made a skilled mariner.” (English Proverb)

Cosmetic vs. Pragmatic

The cosmetic world is the more verbose and intellectually misleading world, where the central banks make public statements for massive investment crowds. The practical world is where credit investments and commodity-linked companies go bankrupt and confidence is shattered. They did it, Yellen & Co raised interest rates, at last. The symbolic rate hike move, the actual event came after much hype, and went into the sunset as year-end approaches. Basically, through the crafty technique of gauging the market reactions and attempting to minimizing any surprises, the Fed accomplished its public relations and diplomatic efforts. Massive questions remain in the practical world as to what this means. To hike or not to hike is an endless debate that’s been going on for a while, but the true state of affairs is not necessarily overly rosy.

A negative year is more than possible with S&P 500 index down nearly 3% and the Dow Jones average losing almost 4% for 2015. Certainly, energy related shares are weighing down on broad US indexes, as stock markets feel the commodity cycle impact. The Nasdaq being up 5% this year showcases how innovative themes in Technology and Healthcare maintain an edge, which has been the case in recent years. The relative appeal is generally felt. Nonetheless, there are plenty of “innovative” themes that have struggled and this theme of “innovation” will be in question for years ahead.

Relative Appeal

Japan and Germany are having a “good” year when measuring the relative performances of their stock market indexes. Both nations, so far, are posting an 8% gain on their indexes (Nikkei and DAX). This displays some relative appeal versus the Emerging Markets, which have been crushed by weakness in commodities. Interestingly, Japan and Germany (along with other European nations) are still in low rate mode. Any theme that avoided exposure to commodity related economies, currencies or companies is getting rewarded. That’s the strong message from Nasdaq, Nikkei and DAX. Or there is another way of viewing it: There is a lack of alternatives in terms of investment, which make even mediocre ideas seem more appealing than usual.
Meanwhile, with Crude now closer to $30 rather than $50, an all-out collapse is playing out, as was hinted for several months and quarters. Nations tied to commodities are seeing accelerated pain from Brazil to Australia to China. The same applies to currencies tied to commodities, and this crisis mode has yet to settle:

“One must wonder how Crude in the $30’s range resets global business and consumer expectations. The stunning issue is if global demand will remain weak especially in emerging markets. Failure of economic revival can lead to more tensions from the Middle East to the Pacific. Therefore, pick up in EM demand is not only an economic issue, but a critical political matter that can shape behaviors ahead.” (Bloomberg, December 17, 2015)

Digestion Continues

The Fed’s actions begs so many questions. The first step was taken, but many unanswered questions remain ahead in an election year. We are entering a period of not only uncertainly, but also a period where the universal application of low interest rates is changing. Now, the Bank of England is next on the radar for pending rate hikes, while the ECB is maintaining low rates. The intense questions are about the real economy, though. The theatrics of the central banks are reaching a point of limitation. Some issues to ponder: How are corporate earnings? How is the job creation market? What is the attitude towards global growth? What about the tense foreign affairs from Syria to Western elections? There are too many questions and not many convincing resolutions for a revival in real economies. Yet, for directional risk takers numerous opportunities await from volatility to deeply under-valued investments. Anyone that thought the Fed answered or guided investors on the conditions of the global economy are gravely mistaken.

Article Quotes

“In a world of largely floating exchange rates, most central banks, particularly those in developed economies, can consider the decision calmly without any immediate need to move. Indeed, the central banks managing the world’s second- and third-most widely traded currencies, the European Central Bank and the Bank of Japan, may find the Fed’s rate rise helpful. Both, facing weak economies and dangerously low inflation, have engaged on programmes of quantitative easing. A widening of interest rate differentials with the US, increasing the chance of further currency depreciation, is likely at the margin to make their task easier. True, the eurozone and Japanese economies are not particularly open to trade, and hence the exchange rate is one of the lesser channels for monetary policy. But nonetheless, with the leadership of both central banks keen to show results for their monetary experiment, the Fed taking off in a different direction is likely to help. The impact is more ambiguous for the Bank of England. Having embarked on its own QE programme earlier than the ECB or BoJ and been rewarded with steady growth, the BoE finds itself in a position closer to the Fed’s, debating the timing of its first rise rather than whether to extend easing.” (December 18, 2015)

“Historically, interest-rate increases from the Federal Reserve have been buy signals for emerging-market assets. This time looks different, even after a selloff that has pushed currencies to record lows and equities down to levels not seen since 2009.Developing-nation stocks advanced 38 percent on average and currencies jumped 11 percent during the two previous Fed tightening cycles starting in 1999 and 2004. Firms including UBS AG and Citigroup Inc. say more pain is in store after the first U.S. interest rate increase in almost a decade because emerging markets haven’t fallen enough to reflect subdued growth. In the past, developing nations benefited from stronger U.S. growth. Now, stagnating global trade, a slowdown in China and a collapse in global commodity prices continue to take their toll. While stock valuations are similar to 2004, earnings have gone from growing 29 percent to falling 21 percent, and debt levels have reached a record high. Adjusted for inflation, 17 of 21 emerging-market currencies are more expensive than they were 11 years ago on a trade-weighted basis.” (Bloomberg, December 17, 2015)

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

S&P 500 Index [2,012.37] – The last few months showcased turbulence, but when all is said and done the 2,000 level remains familiar. Clearly, strong evidence suggests the index failed to climb above 2,100.

Crude (Spot) [$34.74] – Sits at multi-year lows after a massive sell-off during the last few months. A desperate bottoming process is attempting to form, but there is no evidence of stability at this stage.

Gold [$1,081.50] – A four year cycle downturn remains in place. The recent breakdown at $1,200 suggests another wave of selling pressure. There has been over a 40% decline since the peak in 2011, which tells most of the story.

DXY – US Dollar Index [98.70] – For most of 2015, the index has stayed above 94, while topping around 100. During the last five years, the dollar has bottomed and strengthened; the positive momentum remains intact.

US 10 Year Treasury Yields [2.20%] – Closed at a familiar range. Again, yields have been closer to 2.20% all year long. The last several weeks have showcased a narrow band between 2.30% and 2.15%.


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

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.

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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.









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