Market Outlook | June 27, 2016

“Surprises are foolish things. The pleasure is not enhanced, and the inconvenience is often considerable.” (Jane Austen 1775-1817)

Digesting Surprises

To the surprise of many, Brexit materialized and markets reacted. In short, results were historic. The element of surprise is not pretty, especially when the stakes are much higher. Hence, Friday’s (June 24) swings and demonstrative reactions across key markets.

“The $2.08 trillion wiped off global equity markets on Friday after Britain voted to leave the European Union was the biggest daily loss ever, trumping the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor's Dow Jones Indices.” (Reuters, June 26, 2016)

Brexit is not the cause of a multi-year decline in global growth. Rather the effect of a weak European Union, frustration over lack of real economy vibrancy, reflection of poor Western pool leadership (on local and global basis) and a reality check for overly-inflated markets. What has inflated select markets can be attributed to the "disconnect" that's been persistently in developed equity markets ‎and select real estate investments.

Several basic questions need to be asked about the formation of the European Union in 1993. If European countries were in a position of strength in the first place, why form a union? If the Economy was strong then, why would “Brexit” be such a big deal? If the Union was so great, why did Brexit materialize?  In answering all these questions, one must grasp the biases and agendas of this storytellers. All that said, there is no denying that the union is weak, just like the Eurozone economies.

Early Conclusions

The last four years have showcased three grand themes:

• The US and other nations failed to stimulate real and vibrant growth that sustains the middle class and small-mid size businesses.
• The loss of Central Bank’s creditability, who have kept rates low while failing to admit the minimal impact on stimulating economies. Now with more desperation, Central Banks will look to provide liquidity while orchestrating “crisis management”     
• The lack of future faith in globalization since the flow of goods, capital and people has not translated to wealth creation across local economies.

One critical perspective to keep in mind: The interest rate hike discussion in the US is looking more and more off the table, regardless of Brexit. Perhaps, now Yellen may have found an excuse or an "out" to claim that a rate-hike is not feasible due to the current uncertainly. However, prior rate hikes were unjustified, the Fed’s narrative was misleading (albeit not fully recognized), and the economic reality in being confronted in a harsh manner has set in. Central Banks from Japan to England to ECB are forced to adjust to current conditions, but most of this is caused by self-inflicted wounds. The complete dismissal of the truth by financial leaders has postponed the inevitable correction, which is way overdue.   

Days Ahead

As reactions and over-reactions are being understood and executed, the broader question relates to market behavior over the next six months. Digesting the news quickly is more vital than being consumed with the theatrics of volatility and media obsession.

Exploring the Next 6 Months:

1)     A US Interest Rate hike is very unlikely in 2016.

In a world already consumed with negative rates, that theme is not bound to change. US 10 Year Yields already hinted at further decline months before, and bond markets are unimpressed with US economic data. Thus, unless there is a miraculous real economy revival, further economic weakness may trigger discussions of rate cuts rather than rate hikes. Perhaps, that’s the surprise of all surprises ahead.

2)     Volatility in public markets to continue.    

                                           

      Turbulence is a function of two issues. First, the surprise element leads to shock-like responses, which turn into violent short-term moves. Basically, emotion-driven responses. Second, the unknown will be even more mysterious than usual. Thus, timing the end of the turbulence is extremely difficult, which makes more investors seek “safer” assets for shelter.

3)    Brexit can trigger new themes and opportunities.

In the last five years, both commodities and Emerging Markets (assets and currencies) witnessed massive price corrections. Gold is attracting new momentum, while other commodities still appear cheap relative to last decade prices. Meanwhile, EM themes that were in desperate conditions may look relatively appealing as the Eurozone mess is exposed once again. Plus, in a world of low interest rates, further risk taking may be welcomed in less overvalued areas. From Argentina to China, bargain hunters may seek ideas as developed markets wrestle with ongoing volatility.

Bottom-line: In the weeks ahead, the market is gearing to rotate from digesting a surprise to grasping the new landscape. However, this rotation may materialize much faster than the consensus expects. Capitalizing on quick changes early might be where the big reward lies. 

Article Quotes:

“China responded to a surge in the dollar by weakening its currency fixing by the most since the aftermath of August’s devaluation. The People’s Bank of China set the reference rate 0.9 percent weaker at 6.6375 a dollar. A gauge of the greenback’s strength climbed 1.8 percent on Friday, the most since 2011 as the U.K.’s vote to exit the European Union ignited turmoil in global financial markets. The victory for Brexit pummeled the pound and high-yielding assets as more than $2.5 trillion was wiped from global equity values. China shared $598 billion in trade with the EU last year, second only to the U.S., and slowing growth and capital outflows make the nation vulnerable to the effects of the Brexit vote, according to Bloomberg Intelligence economists Fielding Chen and Tom Orlik. If Brexit does trigger a significant adverse impact on European demand and global investor sentiment, China could be among the Asian economies least well-placed to respond, they say.” (Bloomberg, June 16, 2016)

“The UK makes up just 1.6 per cent of world oil demand, so crude should not be too affected by a Brexit vote, many traders think. But some analysts think the market is being blasé. The oil market, while primarily driven long term by supply and demand, can be heavily influenced in the short term by currency moves and traders’ risk appetite. In the event of a Brexit the US dollar is expected to strengthen sharply, weighing across dollar-denominated commodities as they become more expensive for holders of other currencies. There may also be a flight to safety — in such a sell-off oil tends to get dumped by the fast-money in favour of assets like gold. The Greece crisis in 2012 helped trigger a near 30 per cent drop in the oil price, albeit from a level well above its current price of $50 a barrel. Demand is also not entirely removed from the equation. While the UK’s 64m people consume only 1.6m barrels a day — compared to 19.6m b/d in the US, the world’s largest oil consumer — the total EU bloc covers more than 500m people and accounts for almost 15 per cent of global oil demand (12.5m b/d). A Brexit is expected to be followed by greater uncertainty across the EU, probably hampering growth in an area where oil demand was already declining for much of the past decade.” (Financial Times, June 23, 2016)

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

S&P 500 Index [2,037.41] – Failed at 2,100 in April and again in June. In the near-term stabilization around 2,050 will be watched closely. However, based on the recent moves in the 2+ years, a move to $1,900 appears like the next target.  

  

Crude (Spot) [$47.64] – The commodity is trading within a set range of $46-50 at a  50-day moving average of $46.79, which will be tracked closely by technical observers.

Gold [$1,315.50] – A break above $1,280 marks a new, positive momentum. Staying above $1,300 seems feasible if the shift toward safe assets continues to emerge. Even before Brexit, stabilization was forming.   

DXY – US Dollar Index [95.44] – A massive one-day move. Before the Brexit commotion, the currency index was slightly dull in a range bound trade.

US 10 Year Treasury Yields [1.60%] –   The break below 1.80% earlier this month showcased the weak global economy and lower chances of a rate-hike. Meanwhile, the post-Brexit response was very pronounced, hitting the extreme range of 1.40% at one point during Friday.

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 | June 20, 2016

“The more you are willing to accept responsibility for your actions, the more credibility you will have.” (Brian Koslow)

One Message, Several Angles

For a long-while, the narrative of the Federal Reserve was being severely questioned by some. Now, a broader audience within the financial services is beginning to question the creditability of central banks, especially the Federal Reserve, which, now, has been caught with inconsistency. Last week may have triggered further discomfort with the Fed’s message. Frankly, pundits and observers are realizing how the Central Bank is not  firm and overly wishy-washy. Finally? In other words, the prior “misleading” realities by the Fed are now highly exposed (to those that still had faith in the Fed’s plan).

From the fuming anger in the current political climates of Western countries, to ever so growing rumblings of nationalism, to ongoing fragility in Emerging Market, clearly,  “global growth”  is convincingly weak. From a sentiment perspective, nervy mindsets are plaguing the investor base from “Brexit”, to earnings, to bank stocks that swing on rate hike anticipation. Absurdly, the sentiment never reaches a new high, but even the creative Fed had to calm the tone regarding growth. Confronting the truth is the only path for survival for those exposed to some market related risks.  Amazingly, stock indexes were reaching psychological hurdles, as showcased when the S&P 500 Index peaked at 2,100, yet again. Similarly,  US 10 year Treasury yields failed to hold 1.90% a few times and now is closer to 1.50% than 2%. Basically, the bond markets are stating that there is no noteworthy growth and a rate-hike is not feasible, as it lacks basis.  This reinforces that public markets are not budging to the “misleading” narrative that the Fed spewed for so many months before.

Uncharted Territory, Again

The suspense continues regarding Britain staying or leaving the European Union. Yet, regardless of the decision in this key macro event, there are key fundamental changes since 2008 that need to be acknowledged. The global growth weakness has been long apparent and slowdown is well recognized. Eurozone troubles are quite evident, especially when looking back at the 2011 crisis. And China being a mess affects both Western and emerging market economies. Thus, the anger in Western nations over weak economies is leading to a further demand for nationalism. At this point, hardly a shock, but the business world is scrambling with the unknown. How are profits going to be impacted? What happens to trade agreements? How do investors respond to all this? Questions that were not covered in many risk management meetings a decade ago are being asked.  

In some ways, Central banks “numbed” the investor community with indirect messaging and enhanced trickery. However in 2016, the undercurrent realities of weakness are now coming to the forefront on both political and economic discussions. Blaming “Brexit” for market demise is not an accurate description, as the symptoms have been long-brewing for those courageous enough to explore the truth.  Importantly, we’ve entered a post-globalization era where the inter-connected world is not as fruitful as before. The future of globalization is facing its darkest hours filled with debates, as new paths are being ferociously explored.  At the same time, democracies are struggling with leadership, cultural vision, long-term goals and demographic realities. 

Managing  Expectations

Rate hikes appear less likely in the US given the less than compelling economic numbers. The rush to safety is on as risk-averse assets continue to gain some traction, while yields are much lower. In some minds, fear has been “overblown” in recent years in which the market showed resilience in overcoming various concerns. Others may claim that Commodities and Emerging Markets felt the pain recently and that’s enough of a correction. Recently, the US stocks volatility index revived from a deep sleep, signaling increasing worries, but still tame relative to 2011 and, of course, 2008.  The short-term challenges are plenty, but visualizing how the dust settles is the wildcard and a rewarding event.

Underestimating risk is more dangerous than overestimating crisis-like possibilities when managing money. This cautious stand maybe laughed at during bull markets, but when reaching a cycle of plenty of unknowns, it is good to admit that markets are known to humble the overly confident as much as punishing the overly bearish crowds. The narrative needs a “reset”, truth needs to be confronted and a few shocks need to be absorbed. Until then, suspense will linger, and that’s toxic for long-term planners who’ll sit on cash or wait before taking more risk (i.e. deploying capital for R&D, innovation or general growth). Corporations have been mostly buying back their own shares or overpaying to acquire new companies rather than develop from within. To restore confidence, a genuine reset of risk/reward and valuation is urgently needed. Perhaps, these suspenseful summer months can produce a reality check which provides further direction for longer-term planners.

Article Quotes:

From 1992, prediction on how the Eurozone will fail:

“What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfills a redistributive role. As was clearly recognised in the MacDougall Report which was published in 1977, there has to be a quid pro quo for giving up the devaluation option in the form of fiscal redistribution. Some writers (such as Samuel Brittan and Sir Douglas Hague) have seriously suggested that EMU, by abolishing the balance of payments problem in its present form, would indeed abolish the problem, where it exists, of persistent failure to compete successfully in world markets. But as Professor Martin Feldstein pointed out in a major article in the Economist (13 June), this argument is very dangerously mistaken. If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.” (London Review of Books, Wynee Godley October 8, 1992)

“China is renegotiating billions of dollars of loans to Venezuela and has met with the country’s political opposition, marking a shift in its approach to a nation it once viewed as a US counterweight in the Americas. Venezuela is facing one of the worst crises of its 200-year history, with a collapsing economy and political deadlock stoked by the oil price slump. China, which is Caracas’s biggest creditor and has loaned the country $65bn since 2005, has already extended the repayment schedules for debts backed by oil sales. Beijing has also sent unofficial envoys to hold talks with Venezuela’s opposition, in the hope that if President Nicolás Maduro falls his successors will honour Chinese debts, sources on both sides of the negotiations told the Financial Times. Its recognition of Mr Maduro’s fragile position and the rising clout of the opposition, led by Henrique Capriles, is another sign that the diplomatic noose is tightening around Caracas’s socialist government.” (Financial Times, June 19, 2016)

Key Levels: (Prices as of Close: June 17, 2016)

S&P 500 Index [2,071.22] –  After failing to hold above 2,100 in April and June, the index continues to consolidate. There is critical resistance that’s plaguing the index at this junction.

Crude (Spot) [$47.98] –   Staying above $50 remains a near-term challenge. A minor pause appears at this junction and it is too early to determine if the recent run has lost its momentum.

Gold [$1,290.70] –  Hovering around $1,300, gold follows a strong run this month, mainly driven by the rush to safety. Interestingly, gold failed to hold at current levels in summer 2014 and January 2015. This is a major test for goldbugs at this particular point.

DXY – US Dollar Index [94.02] – Index is settling in between 94-96. The dollar strength theme continues to showcases muted responses. In the near-term, the dollar is set to have several swings, but well defined ranges are intact.   

US 10 Year Treasury Yields [1.60%] –  Once again, yields failed to hold above 1.80%, especially with a sharp-drop last week as rate-hike chatter slowed down. This is further signal of weak economic climate and a Fed that lacks basis for raising interest 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.

Market Outlook | June 6, 2016

“The truth is not for all men, but only for those who seek it.”  (Ayn Rand, 1905-1982)

Weakness Reconfirmed                                                                                     

The revelation of further weakness in US economic numbers does not come as a surprise. As global growth keeps shrinking, there was this wild optimistic view that US labor was actually improving. Even if May’s monthly data, which turned out to be abysmal and weak, was an outlier, it clearly showcases that growth projections were on shaky grounds. Not to mention, the prettied-up labor numbers of recent years reflected growth in low wage jobs, while dismissing folks that are not counted after giving up. Importantly, the number of people participating in the labor market continues to decline dramatically.  The Fed has to admit failure (the honorable path), admit weakness in the current environment or find yet another creative explanation to drag the audience along. The Fed’s creativity in messaging has entertained many, while the real economy is bleeding severely. Financial markets are feeling the pressure of the ongoing disconnect between reality and the current trading levels seem a bit insane, to put it rather mildly.

The Fed’s Crumbling Thesis

Subscribing to the Fed’s narrative of growth and possible rate hike is a big cinema show, filled with hype and misleading bluffs. The bond and stock market did not buy into the growth story even before  Friday’s weak job numbers. US 10 year yields have not reached 2% in a while, and S&P 500 index wobbling around 2,100 confirms even further uncertainty. The suppressed volatility in US stocks combined with big media’s idolization of Central Banks is the ultimate toxic climate for risk managers of all kinds. In other words, professionals shouldn’t be fooled by the PR work of a government agency (i.e. Federal Reserve); instead, the real economic data show continued flaws. In addition, the violent swings in political issues from elections to referendums shouldn’t be taken lightly in risk assessment.  The increasing danger now is assuming Central Banks know what they’re doing. The reality is they do not beyond deferring any confrontation with reality and by using up air time to calm the markets by confusing observers. The suspense game played by the Fed is insulting to many market observers, as the end result of current economic and market reality is not bound to change overnight.

Suspenseful Macros

A critical inflection point is visible across key macro indicators. In simple words, suspense awaits. The S&P 500 index failed to hold at 2,100 several times in the past few years. Stunningly, last Friday the index closed at 2,099.13, further illustrating the enthralling climate. Crude has roared back around $50, but a mild pause is warranted as OPEC deciphers the next path. The intense rift between Saudi Arabia and Iran is one critical factor in pricing as well as political dynamics:

“Saudi Arabia and its Gulf allies had tried to propose OPEC set a new collective ceiling in an attempt to repair the group's waning importance. But Thursday's meeting ended with no new policy or ceiling amid resistance from Iran. Despite the setback, Saudi Arabia moved to soothe market fears that failure to reach any deal would prompt OPEC's largest producer, already pumping near record highs, to raise production further to punish rivals and gain additional market share.” (Reuters, June 2, 2016)

Meanwhile, the recent rate-hike posturing ended up being a senseless promise without basis. That said, the US 10 year yield is far removed from 2%, even 1.90% seems distant in this climate of lower growth and low inflation. Finally, the US dollar has stalled and its relative edge is taking a break, symbolizing waning momentum. Perhaps, some EM currencies are being revived and reversing a 2-3 year trend. All these factors do not account for, “Brexit”, elections, and other less expected results.

In the days and weeks ahead, traders will have to evaluate their outlook in the Fed’s messaging. Also, those that naively anticipated a rate-hike may have lost further trust in the Fed. In all this, a disruption of the status-quo and increased volatility seems warranted at this state. Buying into illusion is not a sustainable idea and soon market participants are bound to react resoundingly.

  

Article Quotes:

China’s industrial landscape:

“Guangdong for three decades created one of those rare periods in industrial development where everything came together in the same place at the same time—capital, cheap labor, infrastructure and relative freedom from controls. The world’s biggest ships, carrying up to 19,000 containers, could dock in Shenzhen and fill up with goods for all over the world, none of which was made more than 100 miles away. By moving elsewhere in China, factories may be able to trim wage bills or gain access to cheaper land, but they lose the concentration of suppliers, logistics and services that Guangdong has built up over 30 years. Gao Dapeng, CEO of Desay SV Automotive Co., which makes car navigation systems in Huizhou, said the overall cost saving of moving to an inland province like Chongqing is only about 10 percent, and it would mean the plant would be hundreds of miles from its suppliers. He said the company is not sure if the relocation is worth that. Yet factories in the province continue to close, stirring discontent. The number of strikes and protests in China doubled last year, according to the China Labour Bulletin. Among the 886 incidents recorded in manufacturing, 267 were in Guangdong, three times as many as the next highest province.” (Bloomberg, June 5, 2016)

“Widely followed figures from EPFR Global, a Massachusetts-based data purveyor, suggest that foreign investors have dumped Asia ex-Japan equities at an alarming rate so far this year. Yet data from the Washington, DC-based Institute of International Finance suggest that foreign investors’ appetite for emerging Asian equities has  remained strong this year, hitting 30-month highs in March. EPFR’s findings are illustrated in the twin charts below. Its data suggest that investors have withdrawn a net $10bn from Asia ex-Japan equity funds so far this year, equivalent to more than 3 per cent of assets under management. This is in contrast to Latin American equities, where the return of Brazil and Argentina to foreign investors’ wish lists has helped spur net inflows equivalent to more than 5 per cent of AUM." (Financial Times, May 27, 2016)

Key Levels: (Prices as of Close: June 3, 2016)

S&P 500 Index [2,099.13] – Unchanged from last week. It is very fitting that the index failed at 2,100, yet again. It is fair to say, a massive inflection point awaits. 

Crude (Spot) [$48.62] –  After the massive move from $26 in February and until nearing the 50’s range recently, there are signs of a pause. It appears like a selling match between buyers and sellers is happening at the $48-50 range.

Gold [$1,216.25] –  Stabilizing between $1,200-$1,250. This illustrates an extended bottoming process after a multi-decade decline.  Although the upside moves are hard to predict or calculate, the recent moves have confirmed a new/redefined pricing range.

DXY – US Dollar Index [94.02] –  Sharp drop last Friday after the weak job numbers and low odds of a rate hike. Since late January, the dollar strength has paused.

US 10 Year Treasury Yields [1.70%] –   Once again, yields failed to hold above 1.80%, especially with a sharp-drop last week, as rate-hike chatter is slowing down. This is further signal of weak economic climate and that the Fed lacks basis for raising interest 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.

Market Outlook | May 31, 2016

“I would rather live in a world where my life is surrounded by mystery than live in a world so small that my mind could comprehend it.” (Harry Emerson Fosdick 1878-1969)

Confusingly Mysterious

The reasons behind why stocks move up and down draws multiple commentaries filled with guesses of all kinds. They pollute the airwaves with pundits that guess.  Truly, who knows the day to day market moves? No one, really. It is a speculative game involving many groups of people, many small unknown events and fascinating results. Some participants try to reduce their risk and others look to take their chances based on high conviction observations.  Hence, the fascination and the constant urges to speculate are driven by mystery as much as the desire to create wealth.

Sometimes, the market narrative feels like a “quasi-casino,” where the thrill of opportunity chasing over-takes common sense. That’s quite contrary to the more common approach in which professionals view the financial markets as a tool for wealth creation. For others, it is understanding and managing the risks, like a pilot flying a plane safely.  Meanwhile, there is the public service element of markets in which pension funds and retirees rely heavily on financial markets for income, but grasping the nuances and catalysts is still a mysterious act for them and those managing their money. Risk is never out of the equation – that’s as clear-cut as it gets.  In other words, participating in markets is being part of the “mystery” and humbly acknowledging the unknown.

Not to mention, the mostly revered Central Banks pump out endless speeches, press releases and theoretical based reports of their reality.  Keep in mind, Central Banks, are a division of government which end up interfering in the so called “free-markets”.  Yet, to simplify the matters, we all observe that interest rates have been and continue to be low.  That’s the bottom-line when all the noise settles.  Low rates are such a common policy across nations, it has dampened the faith of those seeking less intervention and less “artificial” like traits. As highly documented as it gets, hedge funds are struggling in this new environment as some adjustment is desperately needed. Meanwhile, key financial media obsession with the Central Banks has made the markets even more illusionary and day to day behaviors less-grounded with reality. Of course, “irrational” behaviors, driven by emotions, were always part of the market, but now suppressed emotions create even more of a deception of reality. This still occurs despite the technological advancement of speedy trades and incredible tools for digesting information rapidly.  Perhaps, that’s why there is disconnect between the real fundamentals of countries and companies versus the financial tools that grapple with Central Bank narratives.

Thus, yield generating assets are hard to find, especially those that are reliable and more predictable. Within this context last week, Qatar issued bonds that surprised observers:

“Qatar sold $9 billion of Eurobonds, marking the biggest-ever bond issue from the Middle East where governments are tapping international investors to fill budget holes left by declining oil and gas revenues.” (Bloomberg, May 25, 2016)

There is no shortage of desperation for yield generating assets, which means more risk-taking and a further dive into the mysterious climate.

Inflection Point Revisited

The S&P 500 index is nearing and facing a major resistance at 2,100 - a level that's been seen before. In the past, buyers shied away from doubling down into stocks at this level. In recent occasions going back to last summer and late autumn, the S&P 500 index faded as sellers gained some momentum at this familiar level. A re-test of this highly tracked level for US stocks awaits, while the murmurs of rate-hikes pollute the airwaves of financial circles. Similarly, the US 10 year Treasury yields showed signs of peaking this year around 2%. This is seen in the recent peaks in March (1.99%), April (1.93%) and possibly again in May (1.88%). Therefore, both the stock and bond markets are not quite convinced that there is a robust economy to justify upside moves. Thus it is fair to ask: Is there a basis for the rate-hike? Is there inflation or noteworthy growth? When is the Fed going to capitulate to the ugly truth?

Justification for the recent upside move varies from one observer to the next, but the broad indexes have mildly re-accelerated. Being bearish is not distinct or contrarian at this stage. That's due to the well-known fact that the global economy is slow; even without a G7 meeting, observers are quite familiar with this harsh reality. Anemic growth is not a short-term event, but concerns loom. This is going to take a long while to boost global growth, collectively.

The US stock rally since mid-February appears a bit fatigued and technical levels confirm that, as stated above. The bargain hunting in commodities already took its course and entry points now are less attractive than before. (Simple risk-reward observation). After all, Goldman Sachs commodities index is up nearly 20% for 2016. Similar trends are visible in EM, as well, where sharp-recoveries have persisted following the multi-year declines. 

Confused and Battered

Economic data signaling improvements is hardly convincing; a lot of sideways / neutral results is the new norm. Many days of "mixed data" without any vigor or insight are nauseating. Stock volatility is suppressed, since there is numbness to bad news and bad news is not "news" anymore. ‎Sadly, that's been the case for a long while. China's struggles are even more mysterious than shocking these days. The global deferral of future problems and the acceptance of Central bankers as the solution provider is the most scary premise of all. Disengaging or staying idle from the current narrative has been costly to money managers who need to catch-up to their peers in terms of performance.  Relying on intuition about the real economy has been penalized, as well. Thus, to survive (via staying in line with broad indexes) in financial markets has forced professional managers to stomach the widely accepted illusion since the alternative appears hopeless or brutal. In other words, gloom and doom has been laughed at and cash earns nearly zero, and status-quo is too intertwined with bureaucratic forces.

Thus, "Denial" becomes comforting, especially when crisis-like modes have not become a tangible reality. This is the "mental game" that benefits the central banks who know the psyche of investors and asset managers.  As long as interest rates are low, the Fed has leverage to force investors into risky assets (riskier by the day and riskier with each upward tick) or face abysmally low returns in cash. But for those emphasizing "survival" and those willing to see beyond "denial", equity markets are becoming more of a "casino-like" show rather than a sentiment of financial/economic reality. It takes courage to walk-away from a multi-year bull market run, and it takes even more courage to sit-out while not participating in what's perceived as "growth". Critically, fund managers have to invest to maintain their job, while independent individuals can apply discretion, freely. And to this, the outflows have been expanding. At some point, distrust of the central bank will materialize; all the signs are there already. It is a choice between accepting the illusion and facing the reality. The warnings are here and have been there, but turning a blind-eye is massively promoted at the cost of hard earned capital that circulates in financial markets. 

Article Quotes:

Re: The Russian Economy:

“Oil prices fell to below $30 per barrel and a budget deficit of at least 5 percent seemed inevitable. But now Russia's political elite is breathing a sigh of relief. Oil is up to more than $40 per barrel and experts are predicting that prices are more likely to continue climbing than to collapse, as they did in winter. Of course, oil price trends cannot be forecast with any certainty. But financial officials recently stated that if oil remains between $40 and $50 per barrel, the economy will enter a ‘new reality.’ What does that mean? It refers to a course toward moderate belt-tightening — higher taxes and stricter collection of them, as well as limiting imports through protectionist measures. Government propaganda must be stepped up to convince the Russian people that scheming foreigners are the cause of their problems, not their leaders' failed economic policy. This is simply ‘milking the economy.’ Oil and gas revenues will fall. They totaled 7.43 trillion rubles in 2014, dropped to 5.86 trillion rubles in 2015 and could fall to 4.5 trillion rubles in 2016. Therefore, authorities will have to cut project investment, reduce funding to the regions and scale back financial incentives for state employees. That will lead to further decline in an economy kept afloat by government investment and purchases. Import volumes have dropped to half of their 2014 level, which means a decline in VAT revenues from the sale of those goods.” (Moscow Times, May 20, 2016)

China Is Not Quite Advanced:

“In developed markets, the ultimate refuge for investors in asset-backed securities is that they can always take possession of the underlying assets. That's small comfort in China. Even if … another buyer managed to get a hold of the loan rights -- a daunting task in the Chinese judicial system -- they'd be hard-pressed to collect. After a successful hostile takeover, Shanshui competitor China Tianrui was unable for several months to remove the former owners from the company's offices in Shandong, the site of its most important operations. By the time they took control, the official seals had vanished, making it difficult for the company to officially pay its debt (in China, nothing is official without the chops). Lawyers say that without support from a well connected state-owned company, collecting dues in China is near-impossible for foreigners. Buying soured loans may look like a great potential investment, in a U.S.-style legal environment. That's not China.” (Bloomberg, May 26, 2016)

Key Levels: (Prices as of Close: May 27, 2016)

S&P 500 Index [2,099.06] – Re-testing at a critical 2,100 range.  Previously the index failed to hold above this level in the summer and fall of 2015. Meanwhile, this year, April 20^th highs of 2,111.05 are on the radar for short-term traders. Can it rise above? Or is the selling pressure too vast at that psychological range? Answers await.

Crude (Spot) [$49.33] –   The commodity has nearly doubled since the lows of February 11, 2016 ($26.05). There is a strong run-up where the narrative is unclear if crude is being driven by supply or demand.  

Gold [$1,216.25] –   After peaking on May 3^rd, Gold has lost some traction. However, buyer’s conviction is being tested now around $1,220. The current range is between $1150-1300,  where is seems to be stuck.

DXY – US Dollar Index [95.52] – Stabilization has occurred in the last three months. The Dollar is in a steady range between 94-95. This reflects the sideways pattern that’s persisting across macro indicators.

US 10 Year Treasury Yields [1.85%] – Approaching an inflection point like the S&P 500 index. Behavior near and around 2% will have great implication of sentiment and is pending the Fed’s action.  There is set-up for a possible defining move. 

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 | May 16, 2016

“Organization can never be a substitute for initiative and for judgment.” (Louis D. Brandeis)

Warning Clues

Momentum is fading among equity holders, as witnessed by action in broad US stock indexes. Sentiment is shifting towards bearishness and cheery attitudes are calming down. The list of prior neglected worries is slowly being confronted. Interestingly, the bond markets are not buying the strong economy story, yet again. Simply, the economic strength that the Fed over-promised is not to be seen. To be fair, the US 10 year yield has showcased for a long-while that economic strength lacks substance and confirmation. The passive approach by the average investors will be tested. Collectively, investors, by accepting the status-quo and doubling down on the Fed’s script, are now facing the risk of reality. In other words, the financial markets have glued all worries into a mostly smooth-sailing upside move.

The August 2015 sell-offs and early 2016 sharp downside moves were noteworthy, by all means. On April 20^th, the Nasdaq peaked and the VIX (Volatility Index) slightly bottomed. Nasdaq, as the face of innovative areas with limited exposure to commodities, began to show fragility on April 20^th, as well (led by Apple's weakness a few days before). Central Banks of all kinds are dealing with a reality that’s been long deferred. But timing the ultimate “judgment” day is the frustrating challenge for participants. The status-quo that’s been prolonged is still favored even though alarm bells are mildly and loudly ringing.  One notable theme is how EM and Commodities are digging themselves out of the grave after being battered during the last few years. Rotation into “beaten-up” names reflects how developed markets are a bit saturated. (i.e Japan, Germany etc).

Liquidity Concerns

At the height of any crisis, there is one issue that comes-up: Liquidity. At this stage, investors have heard enough warnings to re-balance portfolios and make adjustments to current risk exposure. Earnings have been weak, “Brexit” is an ultimate unknown risk, the US election is still a wild card , China is hardly stable and EM tied to commodities are still licking their wounds. That’s the big picture and common concern. By digging a step or two into the mechanics of financial markets, one will find ongoing liquidity concerns. Even in areas that appear “liquid” such as bonds, the liquidity risk is severely misunderstood. The post 2008 era brought tons of regulatory changes along with Banks reshuffling their business models. Both factors present less liquidity, which creates further risk than previously imagined. Here is one example:

“Dealers are cutting back while the junk bond market swells. There are $2.2 trillion of high yield bonds outstanding, up from $741 billion 10 years ago, the Bank of America Merrill Lynch Global High Yield Index shows. Even if banks were holding the same inventories they had before, they would still own a smaller percentage of the market. With revenue from bond trading having plunged, banks including Morgan Stanley, Credit Suisse Group AG and Nomura Holdings have been shrinking trading staff.” (Bloomberg, May 12, 2016)

Beyond Drama

As most Hedge Funds struggle to make money, investors must wonder about the market dynamics and concept of risk-taking. There is this disturbing feeling of over-reliance on the Fed, which has lost credibility. Globalization is being challenged in Europe and in other circles. And policymakers have failed to uplift the business spirit for the most part, as global growth is anemic. Thus, investors have enough reasons to be reluctant and seek shelter or tax related strategies at this junction. Suppressed and very low yields have forced further risk-taking into risky assets (as stated above i.e. junk bonds).  A reset is desperately needed, and, at this stage, the atmosphere is not overly optimistic.  Perhaps, more downside moves will turn the sentiment toward panic as things remain mostly calm.

Article Quotes:

Regarding China: “After March data suggested that economic activity was finally picking up after a long slowdown, April figures released at the weekend suggested otherwise. Overall investment, factory output and retail sales all grew more slowly than expected. Private-sector investment for January to April grew just 5.2 percent, its weakest pace since the National Bureau of Statistics (NBS) started recording the data in 2012. More worrying, private-sector investment is decelerating sharply from rates near 25 percent in 2013, to just 10 percent last year and now just over 5 percent.

The reason policymakers are so concerned is that private-sector fixed-asset investment, which includes land, equipment and buildings, accounted for more than 60 percent of overall investment in January to April. The sector provides a third of all jobs in China and creates 90 percent of new urban jobs, state media have reported.” (Reuters, May 15, 2016)

“The history of the German economy since its labour market reforms of the early 2000s demonstrates that “structural reform” is most unlikely to solve this problem. The most important macroeconomic fact about the country is that it is unable to absorb almost a third of its domestic savings at home, despite ultra-low interest rates. In 2000, before the reforms — which cut labour costs and workers’ incomes — German corporations invested substantially more than their retained earnings. The opposite is now true. With households in surplus and the government in balance, a vast external surplus has duly emerged.  Why should others be able to make productive use of savings Germans cannot apparently use? Why should structural reforms elsewhere, as advocated by Germany, generate the investment surge lacking at home? Why, not least, should one expect indebtedness to have fallen when demand and overall growth is so weak in the eurozone as a whole? ‎What has happened, instead, is the conversion of the eurozone into a weaker Germany. (Financial Times, May 10, 2016)

Key Levels: (Prices as of Close: May 13, 2016)

S&P 500 Index [2,057.14] – Failed yet again to move above 2,100. Again, that signals fading buyers’ momentum. Interestingly, the index fell below 2,050, which sets the stage for a critical period in weeks ahead. Massive pressure is building on the downside.

Crude (Spot) [$44.66] – Visible signs of stability arise between $40-46. Staying above 

$42 will confirm the validity of the recent rally.

Gold [$1,271.00] – Peaked at $1,295.00 on January 2015 and, again, stalled at $1,294.00 on May 6^th. This signals fading momentum.

DXY – US Dollar Index [93.88] –  After dollar weakness for several months, there are signs of a very mild revival.  Perhaps, a re-strengthening of the dollar is setting-up at this stage.

US 10 Year Treasury Yields [1.70%] – Since the April 26, 2016 (1.93%) peak and until last Friday, there has been a significant turn around in yields, which coincides with the lack of economic confidence. 

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.