Market Outlook | May 9, 2016

“Real valor consists not in being insensible to danger; but in being prompt to confront and disarm it.” (Sir Walter Scott 1771-1832)

Desperate Revival

Some early signs of revival commodities and Emerging Markets has set a new tone early in 2016. These recoveries are after lengthy and collective downside moves in recent years. The commodity and EM bull markets both ended in ugly fashion, especially in the last three years. They spiraled into crisis mode from Crude to Steel to soft commodities.  Importantly, the recent post-demise bounce in EM shares and prices of key commodities reflects an over-due (and natural) recovery from cheap levels rather than a fundamental shift.  Equally, the slowdown in US dollar strength contributed to the current dynamic and remains a key macro factor.  ‎Strengthening of EM currencies in the first quarter stood out as EM currencies came back to life: 

“The ones [EM currencies]  that have risen most in recent weeks are typically those—the trouble, the real and the rand—that had lost most ground since May 2013, when the emerging-market sell-off began in earnest.” (The Economist, May 7, 2016)

A reversal of sorts is either maybe a major shift or a short-term occurrence that masks other brewing problems in EM.  For now, this feels like a short-term response rather than a new trend.

However, desperation by investors for returns is forcing a re-assessment of risk and a willingness to take a shot in "cheap" assets. In a landscape where Nasdaq and other developed market shares appear overly saturated (in-turn offering limited upside), this line of thinking and action is not surprising.  Therefore, this begs critical questions: 1) Is the commodity run sustainable? 2) Will any fundamental change in supply or demand to stir further price increase?  In both cases, odds are less likely, but surprises last longer than imagined.

The oil demise has painfully hurt nations such as Saudi Arabia, Russia, Nigeria and Venezuela. Commodity-rich countries, like Brazil and South Africa, ‎have felt the pain in the country's budget impacting growth and outlook. Demand from China continues to  slow down, which further reflects the inter-connected weakness that's lingering in the global economy. In terms of China, demand is certainly weak, as confirmed by recently data:

“April imports dropped 10.9 percent from a year earlier, falling for the 18th consecutive month, suggesting domestic demand remains weak despite a pickup in infrastructure spending and record credit growth in the first quarter.” (Reuters, May 8, 2016)The EM landscape is hardly on solid footing, just like the fragile global growth climate. All the short-term cheery moves aside, the fundamentals are not pretty and risk may be even higher than most want to realize.

Disconnection Realized (Again)

As for all hopes of economic revival or any basis for rate hike, once again the job numbers confirmed ongoing weakness. The notion that US recovery is strong or even immune from global slowdown makes less sense even for optimists.  Financial shares are battered, tech-related stocks are struggling with sustaining growth and central banks are admitting the lack of basis for hike rates. There is no shortage of weakness in the globe, as the case for crisis-like action is not far-fetched by any means.

Low interest rates have spurred stock market rallies  recently, but now there is a major shift taking place. Japan and Germany are classic examples where stock prices are now much lower despite having lower interest rates. For 2016, Japan's stock index, Nikkei is down 15% and  the German DAX is down 8%. Both are developed markets with lower risk perception, but the slowdown in growth, which battered EM last year, is now seeping into shareholders' minds broadly.  This action in Japan and German is either a prelude to US sluggishness or an over-due correction that’s been postponed. 

Perspective

Notably, the Nasdaq peaked on April 20^th, sending some early clues of slowing US equities. Interestingly, the Nasdaq was immune from commodity related slowdown recently, but the script is changing a bit. Interestingly, on that same day, the VIX (Volatility index) hit annual lows. Perhaps, this can mark a major turn-point as long awaited, despite many prior false alarms. At this stage, participants have a choice to go with the Fed’s narrative or to get cautious based on real live actions.  US job number weakness, slowing Chinese demand, outflow of capital in hedge funds, excessive complacency by most investors and misleading short-term optimism are all real signals.

If the Fed has lost credibility and ran out of ammunition, then a natural correction is not unreasonable. Rate hike possibilities now require a miracle and low-rates have failed to stimulate the real economy. As “Brexit” and election uncertainty loom, much distraction awaits, but the real economy has been weak for a long while. The Fed’s adored script has created a narrative that dismissed the ground-level pain at corporate and consumer levels. Perhaps, an unraveling action at this stage is not overly strange. Money managers have to confront the current data rather than being overly hopeful of unknown pending twists and turns.

Article Quotes:

“MetLife Inc., the largest U.S. life insurer, said it’s seeking to exit most of its hedge-fund portfolio after a slump in the investments. The insurer is seeking to redeem $1.2 billion of the $1.8 billion in holdings … MetLife, which has an investment portfolio of more than $520 billion, has been looking in recent years for alternatives to bonds because interest rates are so low. While results from private equity have been satisfactory, hedge funds have been more volatile, Goulart said. Chief Executive Officer Steve Kandarian is seeking to increase the portion of earnings that can be returned to shareholders. That focus on free cash flow factored into the decision to cut the hedge-fund investments, Goulart said. Competitor American International Group Inc. is also shifting allocations after posting three straight unprofitable quarters. The company said Tuesday that it has submitted notices of redemption for $4.1 billion of hedge-fund holdings through March 31. Average invested assets in hedge funds at AIG were $10.1 billion for the first quarter. (Bloomberg, May 5, 2016)

“This golden era has now ended. A new McKinsey Global Institute (MGI) report, Diminishing returns: Why investors may need to lower their expectations, finds that the forces that have driven exceptional returns are weakening, and in some cases reversing. The big decline in interest rates and inflation is reaching its limits, global GDP growth will be lower as populations in the developed world and China age, and the outlook for corporate profits is cloudier. While digitization and disruptive technologies could boost margins for some companies, the big North American and Western European firms that took the largest share of the global profit pool in the past 30 years face new competitive pressures from emerging-market companies, technology giants, and digital platform-enabled smaller rivals. These forces may curtail margins going forward. MGI’s detailed analytical framework linking investment returns to the real economy finds that returns on equities and fixed-income investments in the United States and Western Europe over the next two decades could be considerably lower than they have been in the past 30 years. The report, written in collaboration with McKinsey’s Strategy and Corporate Finance Practice, estimates that for equities in both regions, average annual returns could be anywhere from approximately 150 to 400 basis points lower, or 1.5 to 4.0 percentage points. For fixed-income, the gap could be even larger, with average annual returns between 300 to 500 basis points lower (3 to 5 percentage points), and in some cases even lower than that.” (McKinsey Insights, April 2016)

Key Levels: (Prices as of Close: May 6, 2016)

S&P 500 Index [2,057.14] – As 2015 showcases, a major resistance around 2,100 remains a crucial hurdle for buyers to overcome.   Previously, the index peaked in July 2015 (2132.82) and November 2015 (2116.48). April highs of 2011.05 failed to hold, hinting at another potential peak. 

Crude (Spot) [$44.66] – Signs of price stabilization appear around $38. From a big picture point of view, prices are still fragile after the heavy sell-off earlier in the year.

Gold [$1,289.00] –  A lengthy bottoming process has been occurring for over 3 years. The next target of $1,300 is on the radar. Some lively momentum is visible within the bottoming process.

DXY – US Dollar Index [93.88] – Since peaking at 100 on December 2, 2015, the dollar has weakened. After being a very crowded trade in 2015, the strength is fizzling a bit.

US 10 Year Treasury Yields [1.77%] – Hardly moving at all recently. The 50-day moving average stands at 1.83% and tells much of the recent story as yields remain low.

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 | April 18, 2016

“Greatness is a road leading towards the unknown.” (Charles de Gaulle 1890-1970)

Hardly Settled

An ongoing wave of calmness resonates in the markets in which US stock volatility is still low, yields on European debt are relatively moderate and an all-out panic in the day-to-day is not quite felt. After all, the S&P 500 index is attempting to revisit all-time highs and Crude is not quite at the desperate lows it witnessed early in the year. A breather of sorts, after a turbulent January, is creating mixed reactions. 

Meanwhile, a the quasi-settled turbulence of the financial market  fails to tell the full story.  There are plenty of unsettled nerves in the intermediate-term, as the global political climate is perceived overly turbulent from Britain to Brazil to Russia to China. Western leadership is being questioned, since the global economy is failing to drive more confidence in the globalized and well-established system. Nationalism is in demand, as witnessed in European elections; and, deciphering the consequences of this trend is the ultimate challenge for money managers. The short-term gains from status-quo preservation via stabilization in financial markets are not answering the long-term concerns. 

Important to note, most of these concerns are not new. Significant capital is seeking risk exposure and desperate for returns. Therefore, the sentiment in stock markets is not quite the same sentiment as ground level discussions. Perhaps, all the unsettling issues do not automatically deter many from deploying capital. That’s the critical factor that may explain the ongoing disconnect between the real economy and financial markets.

Sectors' Duress

Financial services are being attacked from multiple angles, as pressure mounts for operators and investors alike. Hedge Funds have under performed recently, energy loans on banks’ balance sheets are troubling, negative interest rates by central banks are troubling, increasing banks' regulatory pressure is impacting margins, populists' vicious attacks on wall street are accelerating and revenue making opportunities for banks seem rather bleak  in 2016.  These are some of the well-known and documented matters. Mounting pressure on financial services can quickly translate to less faith in capitalism and diminishing global growth. That’s a danger to Western civilization and less appreciated in generic discussions. Ultimately that’s the long-term concern and the great unknown. This is the big picture concern that’s awfully difficult to quantify and remains in the back of the heads of most investors.  Unwarranted blames for political gains aside, the financial sector is facing a challenging period in both practical and ideological debates.    

Lively Movements

Emerging Markets (EM) have shown some recovery at least in terms of stock and currency movement. After an abysmal recent run in commodities and EM, the first quarter reminded us that stability is mildly possible:

“The best rally in emerging-market stocks and bonds in seven years is sending bears back into hibernation…Traders added more than $1 billion to U.S.-traded emerging-market stock and bond ETFs this month through April 15.” (Bloomberg, April 17, 2016)

Yet, skepticism is plenty, especially since the fallout in China is not understood. From stimulus efforts in China to tensions in the pacific to demand for Nationalism in the West that can lead to adverse trade relations, misunderstandings abound. Nonetheless, the rift between China and the West is not to be downplayed and the impact is mostly unknown. China is strengthening her ties with EM, especially Russia. At the same time, political tensions with Japan will continue to linger, and, at some point, that can convert into a financial risk.  Western leaders haven’t found a stable answer for China and corporations are realizing new challenges to navigate in China, as well.  Despite the short-term rally in EM, the long-term picture is murky. However, investors are not bothering about the long-term and are willing to live only in the present, for now.

Article Quotes:

“Speaking to the FT during a trip to Beijing, Alexei Moiseev said Russia expected to sign a deal this year that would link China’s national electronic payment network into its own soon-to-be-launched credit card system as part of measures aimed at reducing reliance on the west. ….Amid several rounds of negotiations over financial integration, many see Russia’s primary aim as access to China’s debt markets. Western sanctions mean many of Russia’s largest banks and corporations are unable to raise finance in dollars. Historically low oil prices have also hurt Russia’s economy and led to an increase in financing needs. Meanwhile, China is easing international access to its onshore bond market, estimated at some $6tr — the third largest in the world. Several western banks and corporates, including HSBC and Daimler, as well as South Korea, have over the past year issued so-called 'panda bonds'.” (Financial Times, April 17, 2016)

“For equity investors across the developed world, large chunks of the past year and a half have been miserable. But for different reasons. The International Monetary Fund, in an analysis, looked at the stock-price declines in Europe, the U.S. and Japan from the beginning of 2015 to the market bottom in mid-February of this year. (The U.S. and Europe have since recovered.) For Europe, the analysis tells a particularly dismal story: Corporate earnings play a bigger role in stock slumps in Europe than elsewhere–and corporate profits don’t look good. The IMF breaks the change in prices down into three parts: the risk -free rate of interest, the equity risk premium and the change in current and expected earnings…. The bottom line is that the decline in earnings explains a much bigger share of the decline in stock prices in Europe than it does in Japan or the U.S, and the outlook on that front is considerably more miserable.” (Wall Street Journal, April 15, 2016)

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

S&P 500 Index [2,080.73] – There has been a major upside move since February 11^th lows. Nearly a 15% increase since then. The ever so familiar range between 1,900-2,100 is being revisited. The May 2015 high of 2,134.72 is the next critical point.

Crude (Spot) [$40.36] –From $26.05 to above $40 showcased a sharp recovery that coincided with the equity markets in recent weeks. Now, there is an attempted stabilization around $40.

Gold [$1,227.10] – March 4^th  highs of $1,277.50 remain a key level in the near-term. Breaking above $1,250 has been a challenge last year and early this year.

DXY – US Dollar Index [94.69] – The Dollar weakness remains a big theme thus far in 2016.  The pullback from 100 to 94 in the near-term defines the current trend.

US 10 Year Treasury Yields [1.75%] – Yields remain closer to annual lows of 1.68%. It further confirms the weakness in the economy as it is perceived by bond markets. Climbing back to 2% seems possible in the near-term.

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 | April 11, 2016

“Life does not proceed by the association and addition of elements, but by dissociation and division.” (Henri Bergson 1859-1941)

The Rampant Disconnect

On one end, the volatility index for US stocks is signaling calmness, as the turbulence and fear have eased a bit. That’s for folks that actually believe that financial markets are telling the truth about the real economy. However, the real economy is not so robust by several measures. How could US 10 year yields remain this low? How can anger drive the election cycle? How can small business feel embittered if there was real growth?  Basic questions. To preserve capital, difficult questions must be asked and beyond the illusionary headlines a reality check is constantly needed.

Amazingly, early in 2016 the Turkish and Brazilian stock markets appear relatively attractive, as the indexes are up 16% and 15%, respectively. Of course, both stock indexes are rising from deeply discounted levels after taking major nosedives. Appealing to the average investor's eyes at first glance, but a deeper look ignites a deeper discussion. Here is the disconnect in which the stock market fails to tell the real story. Both nations are facing the ongoing risks of weakening economic climate, a bitter voter class, lack of investor confidence and sheer political instability. Yet, stocks, which tend to look ahead, tell a message that ground level observers cannot imagine. Thus, the massive disconnects between reality and financial markets are not limited to these two emerging economies. It is a phenomenon of our modern time, and these disconnects prolong harsh truth discoveries.

Misleading Optimism

Perhaps, the example above fits the bigger picture where Central Bank-led markets have projected optimism beyond what is justified. That’s the criticism of the Fed in US markets and has been the case for a while. US financial markets have served as a shelter for those escaping the collapse of Emerging Markets and commodities. Sure, rotating capital into US assets is a  relative argument, which justifies some of the asset appreciation in the US (not only stocks but real estate in key markets) over recent years. Figuring out the justification for optimism in Brazil and Turkey only signals that investors are desperate to place capital in distressed areas. On an absolute basis, global growth is slow and sometimes it is as simple as that.

We’ve reaching a point where the stock market as a measure of sentiment is completely out of whack. That’s felt primarily in low interest rates, which do not signal strength but rather desperation. Basically, elevated stock markets are covering up the painful real economy. Even the leader of “optimism”, aka the Federal Reserve, is confronting this disconnect after years and years. Last week the following was re-discovered:

“The minutes showed committee members considered a number of distinct risks, with a softening outlook for global growth and the ensuing volatility in financial markets chief among them.” (Bloomberg, April 6, 2016)

In the next 3-6 months, shocks seem inevitable and not overly surprising. Yet, mapping out the script and timing seems overly rewarding at this stage.

Reality Confronted

Japan exemplifies an advanced market that has seen constant low rate policies. The capital flow in recent years was positive, but now the narrative is changing:

“Overseas investors, which account for about 70 percent of the value traded in Tokyo shares, bought a net 18.5 trillion yen between 2012 and 2015. Global fund managers, which were negative on Japanese shares for almost all of the five years before Abe came to power, have been overweight every month since, according to a Bank of America Corp. Merrill Lynch survey… Now that bullishness is dissipating… They’ve [Investors]  sold a net 5 trillion yen since the second week of January, the longest stretch since 16 weeks.” (Bloomberg, April 10, 2016)

Is the recent reaction in Japan a prelude to US and European markets? Again, Central Bank fueled stock market rallies had a short-term fix. Basically, it aroused positive sentiment and created an interesting investment opportunity, but the disconnect is laughable at this point. Perhaps, the Japanese capital outflow and negative returns this year confirms the shaky status of the Central Bank narrative. At some point, the optimistic storytelling is merely deception that can create further consequences. Credit to the Federal Reserve attempts to lower expectations. Yet, the rate hike from December 2015 lacks basis.

The puzzle that lays ahead for investors is to decipher what reality is untold. What’s the disconnect that’s not recognized? Perhaps, confronting the (political, economic and social factors) truth  enables one to pinpoint the required correction to adjust to reasonable ranges. For now, the sideways markets are confused. Buyers and sellers are not showcasing conviction and capital is desperately seeking a “growth” idea. A messy climate, indeed. Patience might be the most valuable asset when evaluating assets.

Article Quotes:

“Six countries lay overlapping claims to the East and South China Seas, an area that is rich in hydrocarbons and natural gas and through which trillions of dollars of global trade flow. As it seeks to expand its maritime presence, China has been met by growing assertiveness from regional claimants like Japan, Vietnam, and the Philippines. The increasingly frequent standoffs span from the Diaoyu/Senkaku Islands, on China’s eastern flank, to the long stretch of archipelagos in the South China Sea that comprise hundreds of islets. The U.S. pivot to Asia, involving renewed diplomatic activity and military redeployment, could signal Washington’s heightened role in the disputes, which, if not managed wisely, could turn part of Asia’s maritime regions from thriving trade channels into arenas of conflict…. Thousands of vessels, from fishing boats to coastal patrols and naval ships, ply the East and South China Sea waters. Increased use of the contested waters by China and its neighbors heighten the risk that miscalculations by sea captains or political leaders could trigger an armed conflict, which the United States could be drawn into through its military commitments to allies Japan and the Philippines. Policy experts believe that a crisis management system for the region is crucial.” (Council of Foreign Relations, April 2016)

“The first question is which outcome Europeans would and should prefer. Some have already written off the United Kingdom, claiming that a partner that would consider leaving is not the kind of partner they want, anyway. Whether or not one shares this opinion, the point is worth studying. Indeed, it would be naive not to ask whether retaining a member that is challenging the very principle of European integration would really be in the EU’s best interests. The reality is that the British public debate on sovereignty will not end when the votes are counted. After all, even if the majority says “yes” to the EU, a share of the population – a substantial one, according to the polls – will remain convinced that Brexit would have been much better for the UK. Given this, debates and negotiations involving the UK and its European partners will continue to feature deep disagreements over the restrictions and conditions that accompany membership in the EU. For years to come, the British will demand a constant drumbeat of reaffirmation that they made the right choice. This is an important consideration that should not be dismissed out of hand. But it should not lead the rest of Europe to favor Brexit. Indeed, if the majority of British voters decided to abandon the EU, everyone would suffer the consequences.” (Project Syndicate, March 21, 2016)

Key Levels: (Prices as of Close: April 8, 2016)

S&P 500 Index [2,047.60] – In recent months, the 2,050-2,100 range has proven to be a challenging range for bulls to reinvigorate more momentum within. In the near-term, surpassing 2,050 will be critical.

Crude (Spot) [$39.72] – The growing evidence of support around $36 confirms additional buyers' interest. The stabilization continues.

Gold [$1,213.60] – Very sluggish and lengthy bottoming process continues. It is mostly centered around $1,200, as finding additional momentum has been a struggle.  

DXY – US Dollar Index [94.23] – Slightly down week after week. For several months, the dollar strength theme has slowed down, but 94 still seems like a reasonable bottom.

US 10 Year Treasury Yields [1.71%] – Yields have failed to stay above 2%. February lows of 1.52% are a crucial near-term benchmark. This is further confirmation of bond markets not being convinced of the economic data.   

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 | April 4, 2016

“We could never learn to be brave and patient, if there were only joy in the world.” (Hellen Keller 1880-1968)

Fruitless Games

Public markets appear to be suppressing pain, volatility ‎and further uncertainty by trading within a range. The Fed-obsessed culture that's searching for the next trick, clue or message must be getting old and lacking basis. Central Banks' tiresome  messaging without conviction does not help participants.  The already less convincing data confuses investors month over month, as justification for growth is hard to prove.

Here is one example:

“The details showed that some people entering the labor force were only able to find part-time employment. The number of Americans working part-time for economic reasons rose by 135,000 to 6.12 million, the most since August.” (Bloomberg, April 1, 2016)

Add politics to the mix of the less than convincing data; then surely, the environment is a bit tricky and quite misleading on the interpretation of well-being. This includes managing the Greece/Eurozone ongoing crisis as well as potential Brexit, which is a less imagined but bigger risk. Government officials now have to manage a raging voter base in the US and Europe at a time where global growth is very weak. This creates a  stunning set-up for policymakers, a partially entertaining event for observes and an emotionally exhausting ordeal for operators in the financial services industry.

Limited Powers

The return expectations for public markets (i.e. S&P 500 index) showcase the suppression of expectations.  Returns have been too low for too long with yields, as faith in public markets is being questioned by pensions as well as individuals.  ‎Are markets a misleading sentiment indicator? That's been the case for over 24 months, as the bullish cycle continues to pause. The over-reliance in Fed statements or monthly job numbers is not providing enough clues, but leave the investor base rather clueless on the next move or decision. At the end of the day, the US 10 year yields are below 2%, suggesting the economy is not that vibrant after all.  Pundits may hype the speculative game of “to hike or not to hike.” However, finding a basis to hike rates has been difficult and bond markets are not buying the “strong” recovery story. The global slowdown from China to commodities is one clear issue. Yet, Western leaders have not resolved the issue of re-generating growth via policies and pro-business priorities. Thus, the Central Banks have reached their limited powers and giving them too much attention is a near worthless exercise for those seeking fruitful returns.

Pondering Ahead

The macro climate has remained about the same without major changes. The US dollar, yields (in developed markets) and equity prices are in trading in familiar areas without marking new trends and ranges. A deadlock in broad indexes leads to further unease and anxiousness, despite the so called calmness in volatility. More capital is seeking shelter, so the relative appeal of investor demand favors US and liquid assets. Chasing less impressive returns before unresolved issues play out seems risky. Of course, the magnitude of the risk is not fully known. 

The optimist might think that the upside is intact and worth adding to; however, even in a period where the Volatility index (VIX) is near annual lows, to feel comfortable with the current environment will be difficult for most. The daring bunch may chase returns here, as the risk-reward seem appealing. Others may look at Emerging Markets and commodities, where bargain hunting is quite alive and well. Themes that are discounted from the recent China and commodity demise may offer an appealing entry point, but even that’s a bit riskier than the average investor may desire.  Simply, overpaying for “safe assets” versus relatively underpaying for cheap asses is the quest for glory for fund managers ahead.  Reaching a high conviction level is the challenge for both types of risk-seekers. Waiting for the Fed, however, is not a way to build conviction, as conventional wisdom may strongly suggest.

Article Quotes:

“Greece and its EU/IMF lenders will resume talks on the country's fiscal and reform progress this week aiming to bridge differences and conclude a key bailout review, which will pave the way for negotiations on long-desired debt relief. The review has been adjourned twice since February, mainly due to a rift among the lenders over the estimated size of Greece's fiscal gap by 2018, as well as disagreements with Athens on pension reforms and the management of bad loans. Inspectors from the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund interrupted the review last month, taking a break for Catholic Easter, government officials said. Talks are expected to resume on Monday and Athens hopes for a compromise before April 22, when euro zone finance ministers are expected to assess its progress.” (Reuters, April 3, 2016).

“Rising risks to the outlook placed Yellen’s legacy in danger. If the first rate hike wasn’t a mistake, certainly follow up hikes would be. And there is no room to run; if you want to “normalize” policy, Yellen needs to ensure that rates rise well above zero before the next recession hits. The incoming data suggests that means the economy needs to run hotter for longer if the Fed wants to leave the zero bound behind. Yellen is getting that message. But perhaps more than anything, the risk of deteriorating inflation expectations – the basis for the Fed’s credibility on its inflation target – signaled to Yellen that rates hike need to be put on hold. Continue to watch those survey-based measures; they could be key for the timing of the next rate hike.” (EconomistView April 1, 2016)

Key Levels: (Prices as of Close: April 1, 2016)

S&P 500 Index [2,072.78] – Since the February lows, the index is showing some strength. Breaking 2,100 can fuel further upside momentum. Last year in the summer and late winter, the index failed to surpass 2,100.

Crude (Spot) [$36.79] – Struggled to stay above or at $40. An unsettled bottoming process occurs as supply-demand dynamics are not clear for participants. Revisiting prior bottoms of $26 is still not out of the question at this stage. 

Gold [$1,213.60] – For several months, the bottom appeared to be in place. Yet, breaking above $1,300 has not been stable.

DXY – US Dollar Index [94.61] – Dollar strength has declined recently. 94 seems to be the ultimate low. Further tests await in terms of dollar strength.

US 10 Year Treasury Yields [1.77%] – Failed to get closer to or above 1.80%. This is a further sign of bond markets not being convinced of rate hikes or actual improving economy.

Dear Readers:

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

Market Outlook | March 28, 2016

“The best thinking has been done in solitude. The worst has been done in turmoil.” (Thomas Alva Edison 1847-1931)

Still Rattled

Officials publicly declaring that the Central Banks have run out of ammunition may cause an all-out panic. Ironically, the truth is more devastating than the cosmetic day-to-day trading action, as seen in the last two years. There is simply no place to hide from the painful lack of global growth, sluggish demand for commodities and overly exhausted low interest rate policies. At the same time, the uncertain status of the European Union, the sour impact of oil-rich nations, the unclear growth picture in China and the shaky stabilization in commodities add on to a list of unknowns. The status-quo or range-bound trading action appears dull and unsustainable.

Fragility Confronted

Risk-taking, these days, is taking on a whole meaning from traditional measures. The Fed-led narrative itself appears more and more like a theoretical exercise rather than a fact-based assessment of financial markets. Basically, confidence is deflating in the concept of “globalization,” as a new generation is questioning the fruitfulness of capitalism.  Seriously, this a new risk measure that was not quite pondered in the textbooks or trading books of the 1990’s. The wild card of all wild cards should worry investors more than the known, general fundamental-based risks.

Globalization being at risk is only a factor when the slowdown is significant, as witnessed in China. Plus, nationalism is a new trend. As a response, the documented slowdown in global growth appears as much as immigration concerns. Effectively, the weakness in China has unraveled the prior faith of recovery, and lack of wage growth in the US has stirred outrage, especially among voters. Perhaps, both factors are clearly out of the hands of the Central Banks, yet investors continue to glorify the powers of the Central Banks—primarily out of desperation. As American voters wrestle with a “socialist” and nationalist candidates, the state owned companies in China, under the influence of communism, are dealing with the current crisis. The Chinese are attempting to explore privatization along with stimulus efforts (more under article quotes).  The ultimate verdict on the magnitude of the Chinese slowdown is still being digested by consumers, investors and corporate leaders. Perhaps, that’s another wild card to ponder. Meanwhile, the relationship between China and the Western world is another factor that can reshape the outlook of globalization.

Grappling with Priorities

While key money managers struggled to make money last year, investors are now more convinced of the difficulty of dealing with the current market environment. On one hand, finding deeply undervalued assets in energy or emerging markets seems relatively appealing. On the other hand, riding the status-quo is a bit unsettling, despite some signs of stabilization. The major challenges involve everything from trying to predict government agencies moves from the Central Banks to “Brexit” to various elections. In terms of sole reliance on corporate profits or company specific trends, this may not be enough in a macro-centric climate. Therefore, identifying priorities is puzzling, but critical. Is it the macro picture that’s important or company (industry) specific trends that will drive the sentiment? The big picture themes are too interconnected and markets have shown strong correlation, particularly between commodities and stocks.  The wait and see game requires patience, but vision is needed to dodge some bullets. Clearly, there is unease that’s occasionally suppressed, but uncharted territories invite further trepidation.  That’s not overly shocking, but it is certainly hard to accept. 

Article Quotes:

“Beijing's main tool for reducing excess industrial capacity is the reform of China's giant state-owned enterprises (SOEs), something it has been trying to do since the late 1970s. In the 1980s, Beijing sought to make individual state-owned factories responsible for their financial performance by, for example, moving their accounts out of the state budget and onto separate income statements. In the 1990s, Chinese officials attempted to turn legacy communist production units into modern corporations. And in the first decade of this century, Beijing consolidated its oversight of SOEs by creating so-called state asset management committees, with the State-owned Assets Supervision and Administration Commission at the top of the pyramid. Throughout the course of these reforms, the Chinese state, and the Communist Party in particular, has kept a firm grip on the top management of SOEs. The government uses SOEs to support official policy, even appointing government bureaucrats as company executives (usually with massive increases in pay relative to their previous government salaries). But recently, as SOEs in many sectors have suffered big losses, such control has been less rewarding. In the past, Beijing has sought to address this problem by privatizing or shuttering smaller SOEs and maintaining control over the country's larger, more profitable ones—a practice that the government of Chinese President Jiang Zemin introduced in the 1990s under the slogan of ‘grasping the large and letting go of the small’. Today, Beijing is considering relaxing government control through further privatizations, at least in loss-making sectors such as mining, manufacturing, and other heavy industries.” (Council on Foreign Relations, March 24, 2016)

“The average euro area interest rate on new loans to households for house purchase was 2.27% in January 2016 – close to the 2.20% record low observed in May 2015 and less than half the 5.51% record high of October 2008. Interest rate levels have steadily decreased since the end of 2011 when rates were close to 4%, accompanying the decrease in the ECB main refinancing operations rate. At the same time, monthly volumes of new loans for house purchase have been increasing since the beginning of 2012. In 2015 the monthly average volume of new housing loans was €68.5 billion, the second highest peak of the decade, representing an increase of about 45% compared with the averages for the previous five years. In January 2016 new volumes fell by 15% compared with the 2015 average, a phenomenon that has been consistently observed at the beginning of each calendar year since the launch of these statistics in 2003. Interest rates on new bank loans to corporations have followed a broadly similar path to new loans to households for house purchase, reaching the low level of 1.82% in January 2016. Interest rates on corporate loans, like those on new household loans, have steadily decreased following a local peak of 3.48% in December 2011.” (Euro Area Statistics, March 24, 2016)

Key Levels: (Prices as of Close: March 24, 2016)

S&P 500 Index [2,049.58] –   Early signs of resistance appear around the 2,040-2,050 range. After a more than 10% run since February lows now the index is stalling a bit. Given the four day holiday week with low volume, one should wait to conclude before declaring a near-term top.  Failing to break 2,100 again will reconfirm the range-bound action in equity markets.

Crude (Spot) [$39.44] – Unchanged week over week. This suggests that stabilization is forming near $40 for now. An unsettled picture in the demand/supply dynamics might keep prices stable, as well. 

Gold [$1,252.10] – A lengthy bottoming process continues, considering for over two years the commodity has attempted to hold above $1,200. An upside momentum has not fully set-up.

DXY – US Dollar Index [96.14] – Once again, there is a strong bottoming formation around 95. This illustrates the established strength in the dollar, which is a dominant force in currency markets.

US 10 Year Treasury Yields [1.90%] – The last few trading days suggest positive momentum building above 1.80%. However, in the big picture, these trading ranges do not have a big impact.

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 | March 21, 2016

“Success builds character, failure reveals it.” (Dave Checkett)

Same Ol’ Themes

The status-quo of lower interest rates and higher stock markets remains in place despite signs of turbulence and anemic growth. Basically, no glaring changes to the big picture factors have emerged. ‎The Fed's aggressive tone about improving the economy is fading, as possibilities for interest rate hikes are less believable and hard to visualize. The illusion that stock market stabilization is an economic revival is not only absurd but dangerously misleading.

In a world where returns are limited, sources of capitals are seeking shelter or desperate exposure in riskier assets. The definition of "risky" is being discovered, but for now, piling on Western equities remains appealing. A lack of alternatives leads to decisions that are more survival driven rather than a reflection of optimism. By all means, from Brazil to Eurozone to China to US, a robust economic activity is very difficult to spot. Lowered expectations and relative arguments sometimes make investors lose perspective. After all, the harsh realization of a lack of alternatives combined with lack of growth defines the reality.

Unconvincing Growth

Desperate investors seeking yield versus limited investment options with heightened risk describes the current environment. ‎Stock markets movement is not determined by the profits of public companies or the perception of economic prosperity. Instead, it's the ‎Central Banks' and financial media's tone that determines how to digest and how to perceive risk. For now, the narrative has shifted from rate hike expectations to a Fed that needs more time for clearer decisions.  In other words, there is less eagerness to hike rates at this stage. Amazingly, there seemed to be no basis for the rate hike in late December and justifying "growth" has turned into a difficult PR exercise. Wrongdoings are not admitted by government agencies, but the slumping global economy is not recovering by any measures that's convincing to the average observer.  Not to mention:

“It is clear that the US Federal Reserve is now trapped. The FOMC dares not tighten despite core inflation reaching 2.3pc because it is so worried about tantrums in financial markets and about that other Sword of Damocles - some $11 trillion of offshore debt denominated in dollars, up from $2 trillion in 2000.” (Telegraph March 17, 2016)

Less Abnormal

The correlation between equities and commodities in the near-term begs critical questions: Are markets becoming more synchronized? If so, is that an early warning sign? Is there a collective demise ahead? Crude prices dancing along stock market indexes may not be a familiar sight, but today many areas seem out of whack. In terms of oil, the OPEC nations jointly need the price of Crude to rise in order to maintain some stability. From Russia to Saudi Arabia to Iran and even the US, rising Crude prices can lessen the blow recently felt. Therefore, it is hardly shocking if there is further supply cuts driven out of desperation. The suspenseful part of this puzzle is grasping the supply glut which is cannot be dismissed. In fact, the players in the oil market are plenty:

“Three months since the U.S. lifted a 40-year ban on oil exports, American crude is flowing to virtually every corner of the market and reshaping the world’s energy map. Overseas sales, which started on Dec. 31 with a small cargo aboard the Theo T tanker, have been picking up speed. Oil companies including Exxon Mobil Corp and China Petroleum and Chemical Corp have joined independent traders such as Vitol Group and Trafigura Pte in exporting American crude.” (Bloomberg, March 18, 2016)

However, these days unfamiliar trends are ever-so-common from negative rates to “Brexit” to outrage against establishment politicians. Basically, the free-market concept has turned into a massive bureaucracy. Instead of betting on prosperity, markets are anticipating man-made decisions by government organizations. The whole concept of speculations has turned into a massive obsession of government agencies and decision makers. In the case of “Brexit” and the US primaries, it is fair to say that a segment of the population is fed up with bureaucratic approaches. No matter what pundits say, the economic weakness is stirring all types of reactions. Perhaps, voters' rumblings globally is a more accurate measure of sentiment rather than the theoretical approach by Central Banks.

Article Quotes

“With the real possibility now emerging that Britain could exit the EU, Chinese investors are getting nervous. One of China’s richest businessmen, Wang Jianlin—founder of real estate and entertainment group Dalian Wanda and owner of a British luxury yachts company, a five-star hotel in London, and a $114 million mansion for himself—warned during a visit to the U.K. in February: ‘Brexit would not be a smart choice for the UK, as it would create more obstacles and challenges for investors, and visa problems for tourists.’ Should Britain exit the European Union, he added, ‘many Chinese companies would consider moving their European headquarters to other countries.’ The clear implication, of course, was that Brexit could bring an investment exodus….With the referendum in Britain now just three months out, Chinese stakeholders are becoming increasingly vocal. In February, the spokesperson for the Chinese Foreign Ministry reiterated Beijing’s position, saying: ‘China has always supported the European integration process, as we would like to see Europe play a greater role in international affairs.’ In a somewhat coordinated action, Wang Jianlin delivered a speech on February 25 at Oxford University, saying: ‘It’s hard to say whether they [the British] would have a better life outside the EU. It’s easy to exit but hard to re-join. There are certainly many disadvantages if Britain exited the EU.'” (The Brooking Institute, March 17, 2016)

“JP Koning writes that the U.S. provides the world with a universal backup monetary system. Removing the $100 would reduce the effectiveness of this backup. The citizens of a dozen or so countries rely on it entirely, many more use it in a partial manner along with their domestic currency. The very real threat of dollarization has made the world a better place. Think of all the would-be Robert Mugabe’s who were prevented from hurting their nations because of the ever present threat that if they did so, their citizens would turn to the dollar. Foreigners who are being subjected to high rates of domestic inflation will find it harder to get U.S dollar shelter if the $100 is killed off. Ashok Rao writes that there is an information trade-off. Imagine if criminals transacted only in $10,000 notes. It would be reasonably easy for intelligence agencies to sneak a traceable note to probe criminal networks. This would be close to impossible with a $20 note (not the least because this is a high velocity note used by normal people). Ashok Rao writes that the demand for criminal service is likely many times more inelastic than supply; especially drugs. A tax would hurt poor consumers, not drug dealers. A more direct method might be to increase the expected penalty of criminal activity.” (Bruegel, March 7, 2016)

Key Levels: (Prices as of Close: March 18, 2016)

S&P 500 Index [2,049.58] –   After double bottoms in January (1812.29) and February (1810.10), the index continues to recover. Major upside hurdles remains around 2,100.

Crude (Spot) [$39.44] – Like in equities, a double bottom formed in January and February this year, which has led to price stabilization.

Gold [$1,252.10] – A recent rally from the $1,049.40-1250 range showcases some recovery. The next critical challenge is breaking about $1,300.

DXY – US Dollar Index [95.08] – Since early December, the dollar strength has slowed. October 15, 2015 lows of $93.80 serve as a near-term benchmark. However, the $95-100 range is so familiar at this point and it is too early to call a major trend shift.

US 10 Year Treasury Yields [1.87%] – A well-defined range has formed between 1.80% and 2.20%. The bond markets are not convinced of rising rates. 

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.