Market Outlook | January 18, 2016

“I'm not upset that you lied to me, I'm upset that from now on I can't believe you.” (Friedrich Nietzsche 1844-1900)

Credibility Lost

Yellen's much anticipated interest rate hike last December was symbolic, not driven by substance. Now, investors are not buying the Federal Reserve’s recent upbeat “trickery,” as reality is sinking in quickly.  For close data observers, the bleak picture was evident from corporate earning to retail sales to grim sentiment of business owners.  These factors were somewhat dismissed by the Fed, including low inflation which was screaming that central bank stimulus is ineffective. Theoretical and public-relation driven approach by the Fed has now failed to produce tangible or lively recovery. Instead rage is mounting, and Central Banks are desperate and surely unreliable on the depiction of ground-level reality.

Hardly Surprising

As alluded above, signs of weakness have persisted for a long-while and the recent correction is not a random shock.

First, the global economy has been slowing for several months, which has become clearer in the last 24 months. From China to Brazil, sharp declines in economic growth were clearly evident. BRICS collapsing has been a daily theme for a long while:

“For starters, world trade is growing at an anemic annual rate of 2% [in 2015], compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%” (Bruegel, January 5, 2016).

Not to mention the capital outflow as Emerging Markets investors began to take their money off, reflecting lack of confidence. Of course, that capital outflow was driven by weakness in real economic situations again and again. 

Secondly, the commodity decline in the past few years reflected the soft demand, not only from China, but from other economies as well. In addition to the commodity weakness, EM currencies collapsed, as the US Dollar became the safe haven and heavily sought after currency. As if that wasn't enough, the US real economy got praised given its relative appeal. No question, when EM is burning the US looks "amazing.” However, on an absolute basis, tons of mixed data suggests a conflicting story, which at best can be described as a slow/ sluggish recovery.

Finally, the lack of wage growth was one issue, decline of small business another, and now the terrible policies to boost growth are harshly revealed. By the start of 2016, the murmurs around a flat broad index were highly discussed. Many company’s stocks got crushed beyond energy and China related areas, so to think this was an isolated sell-off appears flawed. To cheerlead Yellen & Co's unjustified rate hike was a reckless acceptance of lies. To ignore the decline of Crude as confirmation of slowing global growth was ‎thoughtless and dangerous, at least for "seasoned" professionals. In other words, plenty of clues suggested a slowing global economy.

Digesting Big Moves

To act surprised about this sell-off is rather naïve or putting too much faith on central banks. Otherwise, it is a deliberate acceptance to be lied to by the central banks' ineffective stimulus. Now, central bank credibility is vanishing, election year uncertainty is brewing, and corporate earnings are confirming weakness with specific data. These factors unsettle those who bought into the status-quo narrative, which was too smooth sailing. The history of cycles train one to be skeptical and cautious, yet the "cautious" bunch were trashed during the Fed-led bull market.

As if the bloody two week period was not quite an awakening, some still doubt the continuation of this synchronized decline across asset classes. Basically, when it, rains it pours, and the current junction defines that.  Short-term or drawn out selling is a key question. Yet, do many see Crude below $20 for sustainable period? Do most see this bleeding continuing or is wishful thinking of a quick turnaround more common? Already, banks are feeling the bad energy loans, and corporations are feeling the slowing Chinese economy. This inter-connected world is too linked to ignore.

The US 10 year yields never surpassed 2.50%, Crude struggled to stay above $40 (of course it is below $30 these days), and stock markets flat-lined in 2015. What did one expect? All of the clues were there and now the confirmation is kicking in.  The panic-like behavior needs to settle at some point. However, flushing-out various worries takes time, as the process is in full gear. 

Article Quotes

“Banks have remained relatively lenient with cash-strapped energy companies rather than set tougher lending constraints that could make their survival harder. But losses and reserves, which come out of earnings, are starting to tick up in a number of banks’ energy portfolios. Pittsburgh-based PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio… Beyond the big banks, isolated energy problems also swayed earnings at smaller lenders in the fourth quarter. Regions Financial Corp., Birmingham, Ala., said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter. BOK Financial Corp., Tulsa, Okla., said Wednesday that its fourth-quarter earnings would miss analysts’ expectations in part because its loan-loss provisions would be higher than expected, also because of a single unidentified energy-industry borrower.” (Wall Street Journal, January 15, 2016)

“China’s biggest military shake-up in a generation began with a deliberate echo of Mao Zedong. Late in 2014 President Xi Jinping went to Gutian, a small town in the south where, 85 years before, Mao had first laid down the doctrine that the People’s Liberation Army (PLA) is the armed force not of the government or the country but of the Communist Party. Mr Xi stressed the same law to the assembled brass: the PLA is still the party’s army; it must uphold its “revolutionary traditions” and maintain absolute loyalty to its political masters. His words were a prelude to sweeping reforms in the PLA that have unfolded in the past month, touching almost every military institution. The aim of these changes is twofold—to strengthen Mr Xi’s grip on the 2.3m-strong armed forces, which are embarrassingly corrupt at the highest level, and to make the PLA a more effective fighting force, with a leadership structure capable of breaking down the barriers between rival commands that have long hampered its modernisation efforts. It has taken a long time since the meeting in Gutian for these reforms to unfold; but that reflects both their importance and their difficulty.” (The Economist, January 16, 2016)

Key Levels: (Prices as of Close: January 15, 2016)

S&P 500 Index [1,922.03] – The index sank below August 2015 lows, which showcases the severity of a sell-off.  Being close to 1,880 signaled a bottom in August and October last year. Some may anticipate the same; however, the current meltdown may deter previous buyers. 

Crude (Spot) [$29.42] – Below $30 marks the fear of over-supply and dreadful demand. A bottoming process has not formed, yet, suggesting the price pressure remains intact.  

Gold [$1,093.75] – Sell-off pressure has eased in the near-term, suggesting a possible bottoming between $1,060-$1,080.

DXY – US Dollar Index [98.95] – Strength remains intact. Further re-acceleration appears plausible, as the Emerging Market currency debacle persists. For several months, the dollar index has stayed above 96.

US 10 Year Treasury Yields [2.03%] – Lower and lower. Yields sharply declined after failing to hold 2.30%. A combination of lack of economic growth and a rush to own safer assets has helped push yields lower to 2% or so. 

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 | January 11, 2016

“In the middle of the road of my life I awoke in the dark wood where the true way was wholly lost.” (Dante Alighieri 1265-1321)

Truth Uncovered

The accumulated angst that was felt last week is a reflection of suppressed, negative sentiments. The broad indexes were wobbly in fourth quarter and now that fragility is center-stage. Interestingly, August 2015 warnings regarding China came and went, and then last week were ferociously revisited.  The truth cannot be deferred, and upbeat interpretations are proving to be inaccurate again and again.

Now that the first week has produced some known drama and some vicious responses, investors are asking, “What now? What next?” When one sees the S&P 500 index down 6% in any week, it is rather stunning. To judge a year by one week is a bit premature and reactionary. However, a frantic start in the first week of a year stirs even more reactions, but keeping the seven -year perspective in mind is very critical.

Some may allude to one of the worst starts to the years as sign of urgent caution. But more than that, the synchronized sinking across asset classes stands out as a vicious response. This is front page material even for casual observers. From equities to commodities and from fixed income to currencies, the action-packed market responses are strongly felt.

Thinking Ahead

The question is not only about the uncertainly in China, but what other areas are also vulnerable?

To only isolate market concerning matters to China is not only a convenient narrative, but is also a misleading narrative. It fails to tell the full story. It highlights an area that's been hurting severely for months, as growth rate expectations have come down.

The NASDAQ 100 index last week felt the bleeding (down 7%) like other areas; even big known winners, such as Apple & Google, showed some weakness. Momentum ‎stocks (previous winners) that went up when commodities and Emerging Markets are showing some weakness. Investors that felt insulated by investing in Tech/biotech or developed markets (e.g. Germany, Japan etc.)  were equally rattled.  Inter-connected markets who responded in a similar worrisome way raised turbulence. The Volatility Index (VIX), which has stayed below 20 for a while, finished trading last week at 27. In recent years, turbulence has been short-lived and shrugged off, and the consensus view seemed to be based on the near-term history. Nonetheless, the confidence of those holding on to the “status-quo” mindset are bound to be tested.

Credibility Dissected

Reliance on the Fed (and other central banks) is bound to be scrutinized heavily, as that's the most likely  risk factor to trigger more emotional responses— a habit that’s formed in recent years. When all the dust settles with Oil and China's selling-pressure, then the observers are set to shift their attention to the overly idolized Central banks. At the same time, attention is bound to shift to US economic growth and the dangers of the stimulus game that's been played ‎in recent years. The credibility of the Federal Reserve has been shattered for some experts, but not for the mainstream. Was there basis to hike interest rates last year? Was Yellen & Co eager to accomplish their goal rather than accepting the data? Is their narrative wrong and can they admit it? Eagerly, answers are awaited, but until answers are clear, panicking may remain.

The risks that are appearing today are not shocking. Credit risk was unveiled, as few credit hedge funds closed last year; the Chinese and Emerging Market (EM) struggle are well documented, and that caused many to  ponder possibilities; EM currencies crumbling was a theme from 2014; and the central bank bubble that's been brewing is nothing new, either.

The Dollar strength tells a lot of stories: flight out of EM currencies, distrust of asset growth in BRICS, and the edge of the US financial system and lack of "reliable" (at least in perception) currencies and system, for that matter. Fragility of the developing world is widely acknowledged, but the desperate situation is slowly being understood. There is ugliness to be discovered from Russia to Brazil to Saudi Arabia and other nations. Central banks cannot deny the anemic global growth, which stirs further tensions in foreign policy. The drawn-out disconnect between the real economy and financial markets is narrowing as the reality sinks in. Slowly, but finally, the truth discovery will prevail and false narratives will be called out.

Article Quotes

“Regarding China: It seems that a falling stock market sends too transparent a signal of negative sentiment for officials to bear. The fingerprints of the “national team”—a motley crew of state-owned financial institutions—were all over the buy orders that swooped in when the market tumbled. The regulator was supposed to end a ban this week on share sales by big investors. Now it has drafted permanent restrictions, in effect telling investors that they are welcome to buy shares, but not to sell. It would be hard to conceive of a better plan for scaring money away. The poor design of circuit-breakers, trading halts ostensibly designed to calm the market, has added fuel to the fire. The tension between reform and control is also evident in the currency market. The central bank has started to back away from obsessive management of the yuan’s exchange rate. But the more leeway that it creates for trading the currency, the bigger its headache. The central bank judges that the yuan is more or less at fair value; the market disagrees and has pushed it steadily lower. Selling dollars to prop up the yuan so as to make for an orderly depreciation, China has run down its foreign-exchange reserves by some $300 billion over the past half-year. The government still has a plump cushion, but its reserves are not limitless. Accepting more volatility, even if that means a sharper depreciation now, would be better.” (The Economist, January 9, 2016)

“The ultra-defensive stance reflects investors’ skittishness about global economic growth and uncertain prospects for further gains in assets. Pension funds have the added need to cut more checks as Americans retire in greater numbers, while mutual funds want cash to cover the risk that investors spooked by volatile markets will pull out more of their money. Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe Comparison Service, Morningstar Inc. and the federal government. That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007… The movement of longer-term money to the sidelines has left the market increasingly in the hands of investors such as hedge funds, high-speed traders and exchange-traded funds that buy and sell more frequently, potentially leaving it more vulnerable to sharp swings, according to some money managers.” (Wall Street Journal, January 10, 2016)

Key Levels: (Prices as of Close: January 8, 2015)

S&P 500 Index [1,922.03] – In August and September last year, the index dropped below 1,900 briefly before rallying sharply. Now, re-visiting this level creates a suspenseful action ahead for buyers or sellers. Since November 3, 2015 the index has been down around 9%.

Crude (Spot) [$33.16] – Since November 3^rd highs of $48.36, the commodity has drooped over 30%. In the mid 1980’s up to the late 90’s, Crude was mostly around the $20 range.

Gold [$1,101.85] – After a multi-week bottoming process, early signs of recovery in gold prices have appeared. The next upside target appears near $1,180, as seen in mid-October last year.

DXY – US Dollar Index [98.54] – Remains mostly unchanged. Its strength remains intact, as the relative appeal of the dollar as a currency is still a defining theme. 

US 10 Year Treasury Yields [2.11%] – Yields remain low. In recent months, the pattern has been in a tight range between 2.10% and 2.30%. The lower yields reflect the ongoing rush to own treasuries in a period where volatility is accelerating.

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 | 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.