Market Takers

Market Outlook | January 23, 2012

2012-01-23T03:44:00.000-08:00

“Doubt is uncomfortable, certainty is ridiculous.” - Voltaire (1694-1778)

The Path Less Paved

Doubtful expectations are being measured against the current realities in the market place. Last week reiterated the realization that lesser bad news can produce surprising upside moves. Recent reactions center around key “fearful” topics: the European breakdown might reach a resolution faster than imagined, China's hard-landing may not occur as outlined in many scripts, and bank earnings received a warmer reception than previously stated in headlines. Not to mention, the ongoing improvement of US economic numbers that paint a hopeful picture, yet demand further follow through.

Since Black Friday, November 25, 2011, the S&P 500 Index has rallied over 13%. This can be seen as a beacon of slight optimism shining out from gloom infested levels. Similarly, successful Italian and Spanish bond auctions are reviving investor confidence, while cooling part of the furious worries. Similarly, debt issuance by US banks witnessed further buying ($28.8 billion last week). Meanwhile, the volatility index has crossed below 20, which on a simple level point to a calmness of nerves. At least the indicator declares all hell is not breaking loose, unlike in July 2011. Regardless of ones preconceived notions or biases, the general market feel displays a resurgence attempt of a global recovery in which the appetite for risky assets is slowly increasing.

Risk Expected - Reward Neglected

These positive trends sparked some relief, but may not be a sign of evading the fragile market conditions. For now, a strong start to the year in broad financial indexes still remains unconvincing for conventional observers and pundits. Perhaps some of the audience is less concerned about market performance at this early stage of 2012. Plus, there is an influential crowd engulfed with politics and elections results; until resolved, stay away from making serious investment bets that count. At the same time, the anticipated fear and rush to “safety” assets continues to linger. For example, “The 21 primary dealers that trade directly with the Federal Reserve held a total of $74.7 billion of Treasuries as of Dec. 28, compared with $61.1 billion of company debt” (Bloomberg, January 17, 2012). This suggests the heavy investor positioning towards risk aversion in anticipation of further volatility. This matches the ongoing weary views of practitioners and strategists. Yet this increases the risk and reward for those betting on upside surprise. In other words, high conviction buyers can look for additional chances to find bargains for longer-term investments.

Near-term Mindset

Chart patterns and odd makers point to the increased potential of a near-term pause. With trading volume down, and believers of a recovery shaky, the pending corrections have many on edge. Yet perhaps it is too premature to conclude on impact of this earnings season, as 119 companies in the S&P 500 Index report earnings this week. The takeaway from the fundamental results can produce substantial clues and serve as a confirmation to vital big picture trends.

Fighting the present trend is disturbing the pessimists, while confusing few rational minds. Age-old theories of “don't fight the Fed,” buy and hold, and blue chips investments are textbook sayings that have lost believers in recent years. Applying these views in recent years has been frustrating, given the turbulent markets; however, today one should not dismiss the value of pure and classical fundamental investment approaches. Perhaps, those classical sayings are suited for a market run in a new cycle while stakeholders flush out irresponsible practices from previous bubbles.

Article Quotes:

“Certainly, in a low-yield environment, the prospect of above-average returns from a nimble and savvy hedge fund manager is particularly alluring. And while pension funds – who make up a growing proportion of the hedge fund investment base – aren’t all that happy with the returns they earned (or failed to earn) from hedgies last year, they don’t see that many alternatives out there.…..That said, small startup funds run by former star traders with great pedigrees might be among the best bets out there. The smaller a fund, the more nimble it can be; it’s hard for a behemoth fund to add value, since the number of stocks in which it can take a large enough stake to make a difference to returns is more limited. Pros who spend their working lives winnowing through the array of hedge funds out there – there are more of them, it seems, than Taco Bell outlets – say that a smaller fund that can venture beyond the world of ultra-liquid, ultra-efficient large cap stocks – where it can prove impossible to find an edge that will pay off – stands a better chance of beating an index.” (The Fiscal Times, January 20, 2012)

“The United States has the largest and most technologically powerful economy in the world, a per capita gross domestic product of $47,200 and a gross national purchasing power that equals those of China and Japan. Our national economy is bigger than those of Russia, Britain, Brazil, France and Italy combined.Our huge GDP is no accident. We have a market-oriented economy where most decisions are made independently by individuals and individual businesses….Meanwhile, in China, government still peers over the shoulder of inventors and ordinary Internet users. India still fights a legacy of corruption in too many places, at too many levels. In Europe, red tape has stifled many small businesses. .During a meeting in Mumbai with three dozen business millionaires in their twenties and thirties, I asked a simple question: Which market would you most like to access? Almost unanimously, the answer was the United States. U.S. companies remain world leaders in information technology, bioscience, nanotechnology and aerospace. The evidence is clear not only in the development of products such as the iPad and iPhone but also in new patents. Last year, U.S. firms captured more than 50 percent of all U.S. patents; they received twice as many corporate patents as Japan, which came in second.” (Washington Post, Former U.S. ambassador to India, January 19, 2012)

Levels:

S&P 500 Index [1315.38] – Climbing back to July 2011 levels in a third wave of a recovery process that began in October 2011. Intermediate-term trends are beginning to turn positive.

Crude [$98.46] – Hovering around $100 as the range bound trading continues, although struggling to climb back up to $114.83 May highs.

Gold [$1653.00] – Partially approaching an oversold entry point for buyers. Yet, the present behavior is not showing the similar buyer appetite as witnessed the last few years.

DXY – US Dollar Index [81.51] – A potential for a minor inflection point approaching in the near-term, however, the dollar’s recovery remains intact.

US 10 Year Treasury Yields [2.02%] – Retesting the 2% level which is close to the 50 day moving average of 1.97%. Barley moving as traders awaited catalysts from macro events or policy changes.

Dear Readers:

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

Market Outlook | January 16, 2012

2012-01-16T03:58:00.000-08:00

“Clear thinking requires courage rather than intelligence.” - Thomas Szasz (1920-present)

Accepting the Expected

Much of the weekend’s discussion revisits the belabored concerns related to European downgrades. For the most part, there have been no surprises as some wonder if Germany’s outlook upgrade actually stirs up a positive reaction, versus the negative responses to the inevitable downgrade of France and other nations. Of course, further chatter hovers around the magnitude of potential damages to fragile markets. The debate in the Eurozone will live on and the political twist will take its own course. As for participants, there are a few things to digest and balance amidst the flurry of fearful headlines. As witnessed before, downgrades and downturns do grab headlines, but the overall implications can be easily misunderstood.

Short-term traders will focus on bank exposure to toxic debt and clues from earnings reports, while weighing the potential reawakening of extreme volatility levels. These key discussion points can trigger memories back to the summer of 2011, a period of explosive volatility mixed with sensitive responses to unpleasant debt realities. However, this time around, the shock element does not appear on the same frenzied scale, yet we are approaching a period that will strongly test buyers’ conviction.

Meanwhile, the puzzle of slowing growth in Asia will keep money managers in suspense. The rapidly emerging Chinese economy is poised to slow down a little, while the developed Japanese economy has been struggling. Both cases reaffirm the existing relative strength argument of the US market, given lack of alternatives. Yet, the impact of slowing global growth on earnings of multi-national US companies is a major puzzle for those invested in US equities.

Sentiment Clarity

Longer-term investors are trying to grasp the true and confusing sentiment of recent months, while seeking to identify buy points. One side argues sentiment is picking up steam and pointing toward some confidence restoration. When combining the improving labor numbers and stock market rally, there is a case to be made for a minor reawakening of buyers’ faith. Perhaps, much of the attention toward this improvement is attributed to the AAII Investor Sentiment data, which has stayed to be positive (49% bullish and 17.2% bearish). Similarly, the Volatility Index is much lower than previous months as well. This points to the calmness of the US stock market in recent months

On the other hand, European worries are still closer to the higher end of the range when looking at credit spreads, demonstrating extreme fear in investors’ expectations. Similarly, in the US many analysts and hedge fund managers expect a lot of weakness in their targets. Common examples for weak forecasts include those centering around: a slowing global economy, weak earnings, declines in home prices, and hard-landing in China. These are some of the many lists of concerns crafted by strategists and so-called financial experts in opinion pieces.

As a follow up one should ask, if there are more reasons to sell than buy, then why wouldn't everyone bet on a collapse? This is especially a question that should be asked when the reasons to buy appear to be more akin to wishful thinking than a trend. For now, the glaring reasons to purchase assets are either to bet on surprises in improving numbers or to speculate the global angst is overblown. In any case, the roaring guesswork of the quantitative easing 3 announcement is a wildcard that’s gearing up to spark mixed reactions. Not to mention, the election year plays a bigger role in the timing of stimulus announcements. As the perceived risk continues to escalate there is a reward to capture in specific areas for patient participants.

Currency Feel

Last year, a run up in Gold prices confirmed a vote against most currencies and a form of showcasing displeasure in the action of central banks. This year, investors are expressing a similar opinion by betting against the Euro. Interestingly enough, the CFTC showcased total shorts of $25.9 billion for the Euro. Simply, this highlights the migration toward a strengthening US Dollar. This points to risk-aversion that is looming in nearly all financial markets. Perhaps in due time a collective recognition of excessive risk-aversion can retrace financial markets to a normal patterns.

Article Quotes:

“Mistakes directly leading to the deaths of 200 passengers are a very different beast than mistaken economic forecasts, which (as part of a group of culprits including Wall Street greed, regulator incompetence, and home-buyers' ignorance) indirectly led to a great and devastating recession. But like the pilots, the Fed's failure was not a matter of education or training. These were among our greatest economic thinkers. Quite like the pilots, they trusted the mechanics of a complex system they did not fully understand, especially the connection between the housing and financial markets. Amazingly, in retrospect, they often emphasized inflation concerns over housing concerns and the health of Wall Street. (‘Markets are now so much more developed and sophisticated that maybe it's different this time,’ Dino Kos told Greenspan.)…. It was total systemic failure, from 2006 into 2008, to diagnose a crisis and act to stop it, based partly on overconfidence that, in the economy, we had built an unstallable machine -- that the plane could, quite certainly, fly itself.” (The Atlantic, January 13, 2012).

“Fakery is not dead, of course. In 2009, roughly 30% of mobile phones in the country [China] were thought to be shanzhai—a popular term for clever fakes. The Business Software Alliance, a trade group, claims that nearly four-fifths of the software sold in China in 2010 was pirated. In December the US Trade Representative issued its annual report on the world’s most “notorious” counterfeit markets. Of the 30-odd markets identified, eight were in China. Some, such as Beijing’s Silk Street market, are well-known. The report also points the finger at Taobao, an online marketplace owned by Alibaba, China’s biggest e-commerce firm. That may be unfair. Taobao has clamped down so hard recently that it is enduring protests by angry vendors. Still, as China grows richer, life is growing harder for fakers. A recent study of China’s luxury market by Bain, a consultancy, concludes that “demand for counterfeit products is decreasing fast.” McKinsey, another consultancy, found that the proportion of consumers who said they were willing to buy fake jewellery dropped from 31% in 2008 to 12% last year.” (The Economist, January 14, 2012).

Levels:

S&P 500 Index [1277.81] – Slightly above the fragile state of 1280. Overall, short-term momentum is positive, but bound for a further test from buyers.

Crude [$98.70] – Narrow trading arrange forming between $95-100; a range last seen in the summer months, but a near-term deadlock for buyers and sellers.

Gold [$1635.50] – A four-month decline is attempting to settle around the $1600-1650 range. Recovery attempts will be revisited this week.

DXY – US Dollar Index [81.51] – Multi-month appreciation in the dollar confirms the global strength. Positive momentum has built since the frenzy mode in summer 2011.

US 10 Year Treasury Yields [1.86%] – Continues to head lower near all-time lows, with a further reiteration of risk-aversion. September 2011 lows of 1.67% are a key level to watch in weeks ahead.

Dear Readers:

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

Market Outlook | January 9, 2012

2012-01-09T04:02:00.000-08:00

“Storms make oaks take deeper root.” - George Herbert (1593-1633)

Quarreling with Growth

As usual, plenty of skeptics and experts are cautiously digesting the improving labor numbers. Yet, the Friday job data generated a sense of improvement and enhanced the curiosity of investors’ reactions. Of course at this junction, the labor debate sparks more political fireworks than an increased curiosity on market directional view. Clearly in an election year, data can be misinterpreted or understated to fulfill self-serving political messages, as expected. Therefore the scrutiny will continue, and at times the interpretations of “true” employment data can lead to some confusion. Meanwhile, savvy and seasoned investors are gearing to look past the rhetoric while grasping the impact of economic improvement in the stock market. Grasping the disconnect between the economy and stock market is both a puzzling and rewarding task.

One noticeable trend from the labor data showcases the growth of manufacturing in the US (302,000 out of 2.4 million jobs created since February 2010). This is a growing theme that should be explored for years ahead. The last six months have showcased manufacturing job growth. “The United States is particularly strong in machinery, chemicals and transportation equipment, which together make up nearly half of the exports.” (New York Times January 5, 2011). This can set the stage for 2012, when selecting manufacturing related stocks can be a fruitful investment exercise. In addition, the broad market environment favors stocks, given the low returns in fixed income. As risk tolerance returns to normal levels, the appetite for risk can translate to inflow into stocks. For now, the volatility index (VIX) is showcasing some form of calmness as it trades below its 20 month moving average.

Leftovers

At the start of last decade, observers dwelled on the meaning of bubbles. Last year, plenty of time and energy was spent deciphering the ugly truth, or associated risk, of sovereign debt. A generation of participants is now quite accustomed to bubbles, such as the NASDAQ in 2000 and credit markets in 2008. Therefore, these events are influential in stirring further fear of additional bubbles. For example, during the last three years we have collectively witnessed the bubble discussions transforming to governance risk, and that lingers as a global concern in any given trading day. Basically, the pressure of financial leadership shifted not only to central banks, but to policy makers. Although this fact is hard to swallow for the business community, it ends up being a necessary process in facing up to accumulating debt concerns. Similarly, correcting past mistakes is not a novel or pretty task when confronting the harsh truth.

Entering this year, doubters will continue pounding the table on a few potential bubbles linked to commodities and emerging markets. There are numerous points to address with matters related to peaks in Gold and China. Both themes are on the radar and rank high among bubbles of interest. The concern with China hovers around the peak in residential housing and potential social unrest. However, even though the case for bubble bursting will resurface in daily journals, the timing remains tricky, given that it’s a weak year for emerging markets, and surprises are usually on the menu.

Banking on America

If the relative strength of the US is a reoccurring theme, then the relative attractiveness of US banks should not be easily dismissed. First, US banks appear to be in better shape than European banks, which have to restructure their debt ($1.3 trillion in 2012). Secondly, banks have traded at cheap valuation, to a point where taking the risk is worth an early look. The Financial Index (XLF) is down 64% since peaking in June 2007. For example, a company like Bank of America was battered and bruised in the headlines as it flirted with $5 per share, given the associated risks. Yet for speculators seeking “not so overvalued” ideas, there are not many places to go, and banks are appealing. Clearly, there is no denial that banks are a neglected theme where fear of ongoing bad news clouds the perception of many. However, those betting against the US financial sectors may eventually realize very bad news eventually becomes grossly exhausted.

Article Quotes:

“Thanks to productivity improvements, the U.S. also remains the world’s largest value-add manufacturer, at 24%, versus 15.1% for second-place China and 14.8% for third-place Japan. In a recent and widely disseminated report, Boston Consulting Group argues that with Chinese wage rates continuing to rise, the U.S. will start to see a significant amount of manufacturing activity shifting back to these shores by 2015, as the U.S.-China labor-cost differential narrows. The shift will be especially pronounced, the consulting firm predicts, in seven manufacturing sectors: transportation, electrical equipment and appliances, furniture, plastics and rubber products, machinery, fabricated metal products, and computers/electronics. As companies in those sectors “reshore” manufacturing operations, BCG says, they could create 2 million to 3 million jobs in the U.S. To be sure, many manufacturers will continue to produce goods globally, too, whether to comply with local-content laws, to enable speedy access to global markets, or, where labor costs remain a big component of total costs, to continue to take advantage of low-wage environments. (CFO Magazine, December 1, 2011)

“Since the financial crisis, black swans have been all the rage. Rare is the pundit discussion about the financial order which leaves this rare bird un-cited, or for that matter unsighted. Now everyone is seeing black swans everywhere, suggesting that the cognitive bias might have shifted. Are we on the verge of denying the existence of white swans? Are we in danger of denying the possibility of the existence of normalness? Martin Wolf, of the Financial Times, has coined the term ‘Taleb Distribution’ to describe the fact that the world, as well as the shape of the bell curve distributions we use to graphically represent it, may be wider than we thought. Perhaps, Wolf suggests, the two tails of the alleged bell curve are fatter than we thought. Perhaps there are probability distributions which give the appearance of being normal distributions, but in fact are not. In such a case, treating financial crises as once-in-a-century black swans may not quite capture the whole of the picture. Perhaps swan sightings will occur more often than a random distribution around a mean would suggest. Perhaps problems big enough to shake the entire system are not once-a-century events, but once-a-decade events.” (Forbes, January 5, 2012)

Levels:

S&P 500 Index [1277.81] – Since October 4 lows, the index has appreciated by nearly 19% as the extension of a fourth quarter is visible in the early part of this year. Index is now trading above 200 day moving average, yet buyers and sellers will debate the merits of the index.

Crude [$101.56] – Like stocks, crude has risen since early October. Above $100 is a theme that’s picking up momentum. Meanwhile in the near-term, Crude’s ability to stay above $105 will be watched with heightened curiosity.

Gold [$1616.50] – Several month of decline creates a set up around $1600, where buyers seek to reenter, while sellers point out the declining momentum. Yet the recent message states that investors are not rushing to buy Gold and questions if an appreciating Dollar is inversely impacting the alternative currency.

DXY – US Dollar Index [81.24] – Strengthening Dollar remains a key macro theme. The 11% rise since spring 2011 is not to be taken lightly for trend followers.

US 10 Year Treasury Yields [1.95%] – The five month average stands at 1.98%, which illustrates the ongoing low rate patterns. In addition, an average below 2% is slowly becoming a norm these days.

Dear Readers:

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

Market Outlook | January 3, 2012

2012-01-03T03:49:00.000-08:00

“No river can return to its source, yet all rivers must have a beginning.” - Native American Proverb

Digesting Twelve Months

Taking a directional stock market view was rough given various swings throughout the year. Most sellers found plenty of reasons to sell when uncertainty triggered thoughts and sparked interlinked reactions of a rush to safety. Some buyers tried to pick bottoms here and there, but after all simply holding positions turned out to be as good as trading in and out. 2011 presented a clutter of events that are historical in nature and with glimpse of overreaction in between.

For writers and financial reporters who romanticized the collapse of empires, it certainly created exuberance, or at least a vindication of sorts for long-time bears. For policymakers flooded with endless pressure, the unfolding events simply accelerated the aging process with grief and misleading solutions. Truth seekers were glorified by eventual discoveries and unpleased by politics as usual, while the real truth was more confusing than glaring. For financial students, a few terms such as risk analysis, volatility and money management seemed theoretical in some instances yet too basic at times.

These were challenging and interesting times indeed. When considering the gloomy facts that we confronted in the past six month, the possibility of pent up demand is quietly brewing. Yet upsides moves are not always a declaration of comfort, but a fragile gauge of improving moods.

No Endings and Unclear Beginnings

In any cycle, it is safe to assume that greed and fear will persist as fundamental human traits. An age old discussion continues as these patterns get tiresome but their real merits live on. These days, more than greed, deciphering the justified fears is the challenge. Generally, the attitude toward business, and the government roles in stimulus matters have not been comforting. Plus, heated attitudes create a stalemate for moving ahead in most western countries. Ongoing deadlocks were not quite imaginable at times, but once the label “crisis” is thrown around then it surely turns into politics as usual.

Meanwhile, those evaluating assets, as they did for the last 30 years, will have to make adjustments or face consequences in this era. If we’ve reached an “end of financial services as we knew it” before 2008, then we are in the early innings of a new cycle of a cloudy outlook. At least in the near term, pending US elections, Eurozone resolution, chatter of bubble reform and emerging market momentum is in the minds of participants. While the changing landscape of the labor environment combined with rising commodities rapidly converts financial data into social unrest and further mass awakening.

Gearing Ahead

Yearly predictions are thought provoking, entertaining or noisy for some, but present a new spark of energy, whether good or bad. As stated by few, predictions usually end up being mostly wrong and even surprises turnout to be realities. Lots of time is spent by strategists deciphering the biggest themes and surprises. Clearly, the obvious event of high interest is the day to day coverage and speculation surrounding the US election. 2012 might finally suggest there is a fatigued crowd ready to march on after the electric 2011, which highlighted chatter of policymaking risks and crisis management banter.

In any given year, value seekers buy value like stocks, momentum chasers chase momentum, new money goes wild in new areas and short-sellers seek dismal setups. This largely remains business as usual for the most part. Yet, if politics and financial markets remain closely tied to day to day events, long-term holders will not be fully comforted. And now, in early 2012, the question to ask more than the big year-to-year themes is how to grasp the mindset of longer-term players.

Long-term Clarity

Based on escalating volatility some may argue markets are too short-term natured than usual, especially when policymakers think, or are forced to think, in narrow timeframes. Although this point seems glaringly obvious in certain conditions let us not forget that serious and influential capital finds a way to evaluate ideas from a 3-5 year outlook before deploying capital. That said, for long-term players, taking a few steps back may be as appropriate as making big bets. Examining, tracking and following these three areas can spearhead a framework for 2012:

1. Understanding the traits of the current and dynamic currency markets
2. Grasping the global landscape of capital inflow and outflow, while covering the less know mainstream facts
3. Clarity of the two points above can lead to selective buying in discounted assets or a bet against overvalued areas

Currency Shifts

For over a decade, observers have witnessed a depreciating dollar that peaked in mid 2001. Of course, decline in currency value is not to be confused with a loss of leadership as the dominant currency. Frankly, panicky moments demonstrated the global rush to hold US dollars. Now, a trend reversal is setting up, in which the dollar appreciates versus other major currencies. Any strength in the greenback does not erase the competing alternatives that range from Gold to the Euro to another emerging currency. On the other hand, the gap to overtake the dollar is not narrow; however, this year may jumpstart an era where the dollar strengthens while its dominance is tested from various angles. In addition, the Euro remains in an unsettled condition, but assuming a currency collapse might be premature at this stage.

Emerging Puzzle

The ongoing and heated debate circulates around the sustainability of emerging markets. China’s market is not quite understood and the mystery keeps many on the edge for now. Bubble-like traits in China have persisted since 2007, while by most accounts economic strength is visible, despite questionable reporting. The China 25 Index (FXI) is down 52% from its peak in 2007. Perhaps, those expecting demise should note that a slowdown is not a new trend but a potential continuation of an existing trend. Coming into last year, the inflation and housing worries in China were issues not only for pundits to address, but pointed out by government members as well.

Emerging market growth rates have attracted plenty of capital inflow last decade equaling $70 billion in investments to BRIC countries. (EPFR Global Data) At the same time, finding enthusiastic investors these days is not as easy as before, given the fragile nature of interconnected markets and increasing skepticism. On one hand, the US showcases a relative attractiveness, but that’s mainly for safety. Therefore, growth seekers will eventually continue looking into developing and frontier markets for higher returns. Eventually, the competition within the BRIC countries is bound to increase as much as the ongoing debate of developed versus emerging markets. In the long-term reward awaits for nations with the ability to engineer soft landing while maintain relative stability.

Selective Purchase

For larger money managers, buying “cheap” has been a theme in recent years. Distressed assets especially in Europe are trading at a discount as European banks continue to sell assets. Clearly, there are plenty of desperate sellers forced to meet liquidity needs. Simply, unfolding macro events have created an appealing marketplace for patient and aggressive buyers in a period where risk is less favorable. Buying at current levels may not be too appealing by consensus measures, but opportunistic players are taking note. Similarly, declining valuation in select sectors are known and expected to spark further merger & acquisitions. In fact, these trends are visible in technology and new media space.

Article Quotes:

“If the eurozone does not want to embrace capital controls, it has only two alternatives: make the local printing of money more difficult, or offer investment guarantees in countries that markets view as insecure. The first option is the American way, which also demands that the buyers bear the risks inherent in public or private securities. The taxpayer is not called upon, even in extreme cases, and states can go bankrupt. The second option is the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt. Because all the member states provide one another with free credit guarantees, interest rates for government securities can no longer differ in accordance with creditworthiness or likelihood of repayment. The less sound a country is, the lower its effective expected interest rate. The socialist way follows necessarily from the free access to the printing press that has so far characterized the eurozone. As long as banks – and thus governments, which sell their debt to the banks – can draw cheap credit up to any amount from the European System of Central Banks, Europe will remain volatile. The exodus of capital will continue, and enormous compensation claims of the European core’s central banks, particularly the German Bundesbank and the Dutch central bank, will pile up.” (Project Syndicate, December 29, 2011)

“If Chinese perfidy should shut down the route through the South China Sea, Japanese crude carriers from the Middle East could simply swing south of Sumatra, cross the Lombok Strait, and sail up the east coast of the Philippines. Studies have concluded that the detour would add three days to sailing times and perhaps 13.5% to shipping costs; an annoying inconvenience, perhaps, but also not an energy or economic Armageddon. The bloviating about the vulnerability and critical importance of the South China Sea maritime route can probably be traced to the fact that it is an international waterway and therefore a suitable arena for the United States to flex its "freedom of the seas" muscle. Smaller nations bordering the South China Sea welcome the US as a counterweight to China in their sometimes bloody but low level conflicts over fishing and energy development issues. Any US attempt to lord it over the Lombok Strait in a similar fashion would presumably not be welcomed by Indonesia, which exercises full, unquestioned sovereignty over the waterway.” (Asian Times, December 22, 2011)

Levels:

S&P 500 Index [1257.60] – Staying above 1250 has proved to be difficult for a sustainable period. Near-term is hovering around a 200 day moving average.

Crude [$98.83] – An explosive fourth quarter rally showcases a resurgence in buyers’ demand.

Gold [$1531] – Cooling off from a multi-year run. Early September marked a turning point as the commodity enters a multi-week downtrend.

DXY – US Dollar Index [80.29] – The second half of 2011 saw the dollar bottom and strengthen while setting the stage as a key macro theme for months ahead.

US 10 Year Treasury Yields [1.87%] – Trading at the low end of a three decade decline. The next noticeable range stands at the intra-day lows of September 23rd at 1.67%.

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Dear Readers:

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

Market Outlook | December 19, 2011

2011-12-19T03:58:00.000-08:00

“The courage to imagine the otherwise is our greatest resource, adding color and suspense to all our life.” - Daniel J. Boorstin (1914-2004)

Suspense & Setbacks

Hopes for a recovery in the financial markets find a way to fade away after a few spurts in the day to day action. Marching to the tune of positive economic data has mostly failed to spark a rally. The reality, and perception, driving barometers are at a standstill where trepidation plays a bigger role than confidence restoration. Clearly, over the past three years debt concerns are slowly being understood as the discovery process reveals more complexities than imagined. Yet policymakers might be running out of tools or flexibility. That’s the question plaguing participants who feel the suspense of currencies, interest rates, stocks and elections.

As to the reaction of liquid markets, we can surmise that near-term disappointment explains the majority of the story. Firstly, the realization of the European summit resolution was hardly a declaration of victory which became too clear. Secondly, the desperate expectation of easing by the Federal Reserve did not quite deliver a message of further “medicine,” as desired by most. Perhaps the overreliance on a “fix” or “injection” is a problem in itself, but the short-term solution continues in seeking the cheers of the crowd. The mantra is to simply survive another month while delaying the inevitable crisis that has shaken, but not broken, the system.

Further attempts by leaders to “sweet talk" the markets has so far failed to muster the much publicized year-end rally. Plus, some would point out that a QE2 style stimulus is already priced into the market. Improving labor numbers remains the wildcard to take optimism from a thought to a believable trend. Either way, the stakes are high, as they’ve been elevated for several quarters, and sensitive reactions are bound to continue.

Currency Waves

The anticipated deciphering and speculation of the relationship in key currencies creates unease, which is looming as volatility is increasing, given the chatter over faith in the Euro. In addition, with over 46% of S&P 500 companies’ earnings coming from overseas, the impact of currencies is at center stage for decision makers in equity markets as well. Much focus on the currency markets is attributed to the messy Euro concerns. On the other hand, the Dollar bottomed and continues to appreciate in the second half of the year. The greenback reasserts its strength as the world’s reserve currency, at least for now, given its attractive liquidity and lack of competing options, not to mention the capital flight from euro-zone banks. Furthermore, this invokes existing doubts and mixed feeling for owners of Gold who are looking at the popular commodity as a tool for expressing a currency view.

Basically, Gold is commonly viewed as the alternative to paper assets, and even claimed a safe asset. For chart followers, it is the momentum of trade that captured further fans across key milestones. Generally, the assumed thought process suggested further easing policies by the Federal Reserve were viewed as a damaging blow to paper. In turn, that attracted several gold bulls ranging from retail to institutional investors. Perhaps this is another reason for Gold’s resurgence? The downtrend invites participants who waited for a discount. However, if the stimulus efforts do not come to fruition, others wonder if the selling in Gold will continue given its current downtrend.

Rotating Themes

Courage may pay more than imagined, even if talks of recession and political deadlock continue to reemerge in common conversations. The unknown is what scares and excites participants bracing to map out the first quarter. For a while themes around finding higher yields dominated the herd mindset, given the low rate environment. Then, paying up for safe haven assets became in high demand. The “do nothing” approach works for few, and some wait to buy on discounts based on a favorable valuation phrase thrown by long-term investors. Relying on the influential theme patterns may not answer long-term needs and has proved to be riskier than advertised. Of course, blindly accepting fear driven tools is a costly proposition, in case opportunities are missed. The puzzle continues, but the worst case scenarios have been pondered enough to overly shock observers. Nevertheless, upside surprises are available today on a selective basis, for those patient enough to dig deeper.

Article Quotes:

“I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; ….. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain” (Richard Fisher, Federal Reserve Bank of Dallas speech, December 16, 2011)

“Back in 1951, the Fed minutes record central bankers discussing to what extent they should help the White House fund its growing deficit, what limit to set on long-term interest rates, and how much debt they should monetise. Go back to Greece. It is able to issue bills at such low yields by manipulating the banks – bankrupt without the help of the central bank, they have little choice but to do what it wants – and by ignoring the legal terms of its bonds. Greek bills and bonds should have equal status in the “voluntary” default being negotiated with European banks. But Greece has ruled that bills will not be subject to the losses being discussed for the bonds. The European Central Bank, perhaps the biggest holder of Greek debt, will also be excluded from losses, even as Europe’s commercial banks are pressured by their governments to take part. All of this manipulation amounts to different forms of taxation, often well-hidden. The bill issues are a tax on Greece’s savers, who could have earned far more if their bank bought similar-maturity bonds. Likewise, the Fed’s actions back in 1951 were a tax on bond buyers, who earned less than they would have done without Fed manipulation.” (Financial Times, December 18, 2011)

Levels:

S&P 500 Index [1219.66] – Attempting to hold a familiar 1220 range slightly below the 50 day moving average. If there is failure to hold above this point, technical observers will point to 1160 as the worst case near-term set up.

Crude [$93.53] – In a minor downtrend after failing to hold $100. First peak on November 18 at $103, and a recent on December 5 at $102, showcases the lack of further catalyst for an upside move.
Gold [$1594] – A four month decline remains in place. Buyers’ appetite at $1600 to be tested in the near-term. Any further break will spur doubts of a stalling momentum.

DXY – US Dollar Index [80.29] – The strength in the Dollar is a noticeable trend since last May with the index up around 10%.

US 10 Year Treasury Yields [1.84%] – Below 2% begs the question of the established downtrend combined with a reflection of risk aversion. Since the summer, the inverse relationship between the Dollar is noteworthy, setting the stage for early 2012.

Dear Readers:

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

Market Outlook | December 12, 2011

2011-12-12T03:38:00.000-08:00

“Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.” - Karl Von Clausewitz (1780-1831)

Reflective Period

We are counting down to close out a year that felt like 2008, in which all challenging setups were on the brink of happening. Meanwhile, the perception of a doomsday scenario did not fully materialize as scripted by the most fervent skeptics. The word “crisis” is appropriately used at times, while overused or misunderstood at some junctions. Notably, the July and September collapses this year were not overnight downturns, and the drivers of those shocks seem bound to resurface down the road.

Three years after the bailout of US banks, the historical pattern is glaringly revisited in Europe. This fragile period can be described as persistent global panic. In between, there are more than a few up days creating breathing room from the gloomy suffocation. Perhaps a glimpse of stability will begin to welcome early thoughts of a surprising and promising year in 2012. However, that’s an extreme and unconventional view as most anticipate further recession from Emerging Markets.

Investor’s Angle

An investor cannot afford to be a spectator during crucial inflection points, especially when buying opportunities loom in selective areas. In other words, the noise from political crowds, constant naysayers, and sensational headline creators is known to overstate the fear while understating the power of the unknown. Clearly, the sharp rise and fall of the volatility indexes showcases the disbelief in spurts. Thus, long-term implication risk may not be reflected in broad indexes, and the impact of good or bad policies are not quite measurable. Innovative driven ideas are desperately worth pursuing for those policies.

An edgy and fatigued financial crowd is now watching the S&P 500 index flirting with a positive finish for the year, a noteworthy result for scoreboard watchers. Most nations will struggle to claim a positive stock market return. So far this year, Brazil (EWZ) shows -22%, India (INP) is far worse at -34% and Emerging Markets (EEM) stands at -17%. The fact that the US is ahead of the crowd, and relatively attractive, might be one positive takeaway. Picturing any stability in broad indexes may not have been easy to visualize in early October, especially if thoughts were guided by headlines. However, there is no comfort in expecting the bad news to die down; yet resolutions are bound to be reached just enough to calm the screams of fear. Navigating quickly and dodging major falls is puzzling, and enhance the challenge for those managers measured on a monthly basis.

Governance & Confidence

During the debt ceiling saga, we learned bickering by government officials does not create a favorable market environment. In the summer, Congress’s resolution created a “super committee” which bought more time while failing to tackle the issue, given political constraints. Similar traits were echoed last week towards a resolution for Europe, where real fixing is postponed for now. Delay tactics are becoming business as usual; eventually, anticipating policymakers’ call ends up spooking or calming markets at different times. The debt crisis era provides plenty of reasons to trigger risk-aversion, but awaiting government decisions contribute to headaches for intermediate-term investors. Perhaps it is another reminder that government officials’ interests are too focused in the short-term. Not only that, money managers and the doubts of future consequences do not leave the minds of strategist and long-term investors.

The charged debate of government involvement has intensified and will live on, especially during election cycles. Yet, for any recovery there is a crowd willing to credit the stimulus to actions to the Federal Reserve. Perhaps the end of QE2, in the end of June, illustrated that wounds do not heal fast and “medication” is necessary. The recent operation twist or chatter of further easing contributes to dependence on interventions, whether direct or indirect. Meanwhile, the other camp yells “deception” to address the handling of sovereign debt concerns. Those lacking confidence in the policymakers’ decisions continue to buy into the Gold story. As convenient as it may be, Gold prices have slowed down in recent weeks and resurgence in momentum will be cautiously awaited as a vital macro event.

Article Quotes:

“Unlike the U.S. bubble, a bubble burst in China wouldn’t spell doom for the homeowner – in China, real estate investment is a vehicle for saving, not borrowing, and required down payments are 30 percent to 40 percent, limiting debt levels. Instead, local governments will take the brunt of the slowdown or bubble burst as result of their heavy reliance on real estate revenues. As mentioned, local governments will experience a significant loss of revenue, and not just from a decline in land sales: local governments also rely on income from construction and the production of raw materials that goes into construction. In 1994, fiscal decentralization reformed China’s revenue sharing system, effectively reducing local governments’ share of the central revenue stream while increasing their responsibility for providing social goods…. Though mortgage defaults would be rare, social discontent would likely blossom over lost equity. Social instability would also have political consequences for local governments. As important as growth rates are in promotion calculations, levels of social unrest may play an even bigger role – large and visible protests are a sure way to get demoted in the Chinese political system.” (The Diplomat, December 10, 2011)

“As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent. The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.” (Bloomberg, December 11, 2011)

Levels:

S&P 500 Index [1255.19] – Surpassing 1260, and around the 200 day moving average, serves as a short-term hurdle. The fall rallies have yet to showcase a sustainable breakout which remains a talking point from daily traders.

Crude [$99.41] – $95-100 range has become a familiar place in the past several weeks. It is hard to ignore the developing uptrend.

Gold [$1709] – Attempting to settle down before a potential reacceleration. Currently the commodity is in a 3+ month decline.

DXY – US Dollar Index [78.06] – Current pricing is in line with the 5 and 125 week moving averages, suggesting the lack of a major move despite currency discussions.

US 10 Year Treasury Yields [2.06%] – Barely moving week over week as the 2% range is becoming quite normal.

--
Dear Readers:

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

Market Outlook | December 5, 2011

2011-12-05T03:46:00.000-08:00

“The only limits are, as always, those of vision.” - James Broughton (1913-1999)

Desperate and Desired Actions

Last week resulted in major moves and clever interpretations, leading to a positive twist in global markets. Debatable as it may be, the move by the world’s central bankers to add liquidity has been highly influential on asset prices and temporarily relieves tension. Eventually, growing political and business pressure in Europe should force bold resolutions.

For now, the mindset regarding long-term consequences appears less relevant. Decision makers in powerful positions, and the majority of money managers, are too focused on survival mode or merely capitalizing near-term opportunities. The daunting task for a money manager is not to simply follow the suspense of the real economy or chase ideas as a headline observer. Similarly, the “politics as usual” tactics of leaders adds flavor to the news interpretation. Yet this is not a novel concept, which suggests increasing public frustration may continue and play out on political fronts, given the impending election year. Mystical or practical, a “leadership” move projecting confidence is desperately needed, and a glimpse of faith is usually welcomed by participants. The psychology of markets is quick to accept forces related to perception and quick to dismiss substantive facts. This is mind twisting indeed.

Lingering Residue

The significant one week rally is bound to face few challenges. First, mechanical market practitioners will point out the lack of volume to support the spurts of appreciation. Secondly, those assessing policies claim stimulus efforts are desperate measures by central banks and politicians. Thirdly, the lack of improvement in labor numbers and noteworthy changes in the key fundamentals contribute to the issue. Finally, the angst and loss of confidence are risk elements which are not quite common for the current generation of leaders. In other words, as public sentiment loses hope when applying the familiar psychological game of illusionary numbers, it becomes difficult to spur creativity. Let’s not forget that pessimism among investors has yet to reverse at this point. “Bearish sentiment [according to AAII survey], expectations that stock prices will fall over the next six months, rose 1.1 percentage points to 39.4%. This is the highest level of pessimism since October 6, 2011. This is also the third consecutive week that bearish sentiment has been above its historical average of 30%.” (Forbes, December 2, 2011).

The Art of Facts

Mixed economic numbers, with favorable headline numbers, but with a fragile non-improving US labor market, left the crowd puzzled into the weekend. The post-Thanksgiving week began with trepidation as investors deciphered the consecutive down days from prior weeks. As a start, we were due for a stock market bounce, as a year-end push is up against the clock; while a practical resolution in the real economy cannot turn rosy on an overnight announcement. Regardless of working with illusion or facts, there is no real comfort in being a trend trader. Importantly, turbulence in equity markets has declined since October, despite all the crisis noise. Interestingly, the volatility index is not screaming of agitation and fear, unlike other barometers, as was seen in early July and late August of this year. The calming effect is being noted by outsiders who may look to chase returns while courageous risk-takers are trying to heal wounds.

Leaning on Surprises

The S&P 500 index is now barely positive for the year at 1.1%, as the surprise bet is to picture further upside moves that would extend into early to mid-2012. Presently, few observers wonder if financials and small cap indexes are able to climb into positive territory as well. Perhaps it is too much to ask for now. Of course, safety is scarce (nearly non-existent) as the confirmation of upside causes will be critical in weeks ahead. Actually, if bad news is truly exhausted this will be proven in the few days ahead.

Article Quotes:

“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe….Germany’s ideal, if unstated, goal? A constitutionalization of the EU treaties, which would irreversibly institutionalize the current “correlation of forces,” and allow German hegemony in the 27-member European Union to approximate Prussian hegemony in the 27-member Bismarckian Reich. German elites have become so fixated on this goal that they are now talking about changing the German constitution itself in the event the German Constitutional Court decides to get in the way of the New European Order.” (David Beckworth, Economonitor, December 4, 2011)

“The genesis of the recent funding problems for eurozone banks has come not from the euro markets, but from the dollar markets. In the boom years, these banks greatly increased their dollar assets (in the form of loans and securitised debt instruments), and funded these activities not by increasing bank deposits, but by short term borrowing in the interbank markets and the money markets. This is a vulnerable position, involving both a liquidity mismatch (long dated assets funded by short dated liabilities), and also the need for cross-border or cross-currency borrowing. In recent weeks, the deterioration in the eurozone debt crisis has undermined confidence in the solvency of eurozone banks, and dollar financing for them has dried up… This happened in a similar manner at the end of 2008, and at that time the Fed chose to alleviate the problem of dollar funding for foreign banks by increasing its swap facilities with foreign central banks, especially the ECB. This programme became very large, peaking at $580 billion, which represented about a quarter of the Fed’s total balance sheet at the time.” (The Financial Times, December 2, 2011)

Levels:

S&P 500 Index [1244.28] – Hovering near 1250 as the 200 day moving average stands at 1264.95. Signs of bottoming as the momentum shows early signs of turning.

Crude [$100.96] – Maintaining the uptrend established in early October. Flirting at the much talked about “$100” level, while confronting an infection point.

Gold [$1747.00] – After an autumn breather, the commodity is gearing up for a reacceleration. Climbing back to 1840 will be the next noteworthy point for buyers.

DXY – US Dollar Index [78.06] – Similar to 2008 and 2009, the dollar is attempting to recover. Previously, both periods of appreciation failed to hold. However, the dollar index is slightly positive for the year.

US 10 Year Treasury Yields [2.03%] – No major trend shift. Remains in a 30+ year downtrend while trading near the lows of the range.

Dear Readers:

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

Market Outlook | November 28, 2011

2011-11-28T03:46:00.000-08:00

“The most important American addition to the World Experience was the simple surprising fact of America. We have helped prepare mankind for all its later surprises.” - Daniel J. Boorstin (1914-2004)

The General Feel

Most of the second of half of the year, there have been screams of a further rush to safer assets. This is typical when markets digest the alarming discovery of causes and effects of the credit crisis. Those results have adversely played out in various assets. Inflection points were overly anticipated and discussed by pundits, but the clear message is a global downturn. The selling floodgates that opened in July 2011 persist and stick in the minds of those contemplating investment.

As usual, jittery participants and confused pundits are most likely to blend the European issues with US political deadlocks and other social displeasures. Images can influence collective thoughts, but at some point the existing wounds open up wider, or heal faster, than expected. In fathoming the least visible, the European crisis is somewhat progressing since the harsh reality is being confronted. Eventually pending measures to stop the bleeding are inevitable, as the ECB attempts to provide liquidity. Yet for a buy and hold investor, the cost (based on perception) may seem very hefty when assessed by present behaviors. Perhaps unconventional thought of a recovery will be tested in the next few weeks, starting early this week. After all, further downgrades of sovereign rates, combined with the lowering of growth projections is to be expected. Both are barely a shock or new discovery.

Message Heard

October’s market appreciation was followed up by a mass exodus by previous holders. Simply, sellers dominate the daily market action and news flow is overly focused on the accumulated challenges of the credit crisis. At this junction of the year, the S&P 500 index is down nearly 8% for the year. Along with poor broad index performance, the themes causing disruption have resurfaced in various forms.
Investors have voiced their displeasure:

• Demanding more liquidity: Staying liquid is even more appealing during escalating volatility, and widening European sovereign spreads. All year, observers witnessed a continual rotation to US Dollar and US treasures, especially in periods when “all hell breaks loose” (relatively speaking of course). This relative US edge argument seems mystical at times, but has proven to be real in several panic sessions.

• Favoring liquidity over yield: The recent investor attitude suggests that earning very small gains in cash is better than get burnt by hope. Basically, the average investor’s conclusion is that it’s too blurry for comfort when speculative grade bonds are linked with default fears.

• Hesitancy in illiquid assets. Investors are not at ease with duration risk in long-term assets, given the uncertainty and scarcity in capital. Unless there are deeply discounted prices, larger firms are less willing to navigate value oriented opportunities in less liquid areas. Plus, an increased capital requirement for banks, (i.e., Basil III) allows less flexibility.

Little Room for Surprises

These weak points above are poised for turnout to reverse into upside contrarian play. This dislocated environment has dismissed traditional patterns, while reversals continue to fail. Interestingly, there is an eager crowd willing to buy cheap or desperately looking for catalysts that can capture collective minds.

For one, the talks of quantitative easing 3 (purchase of treasuries or mortgage backed securities) are resurfacing at times. In the months ahead, further stimulus is not off the table. Secondly, value investors who have watched for a better entry point are weighing the bargains after the declining month of November. In addition, the commodity/dollar relationship is displaying early shifts as well. Finally, deadlocks find a way to disentangle. If Eurozone leaders, key members in Congress, or Federal Reserve decision makers reach a bold agreement then the results can seep through financial markets. Yet despite the daily dose of fear projections, it’s in the best interest of powers that be to restore calmness to this inevitable reform. Basically, surprises ahead are easier to visualize than betting on surprises, which is a courageous and highly neglected theme.

Article Quotes:

“The strategic nature of competition between China and the US in the Asia-Pacific will be murky for the time being. However, China has gained more stakes when dealing with the US. It is hard to say whether the US holds more advantages in China's neighboring area. The potential for economic cooperation between China and its neighboring countries is great…. Naval disputes are only a small part of East Asian affairs. The US and other countries seek to defend private interests by taking advantage of them. As long as China increases its input, it will make countries either pay the price for their decision or make them back the doctrine of solving maritime disputes through cooperation…. No one dominant force is wanted. China has more resources to oppose the US ambition of dominating the region than US has to fulfill it. As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security.” (Global Times China, November 18, 2011)

“Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges….European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat…. European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator…The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and dessert.” (Financial Times, November 27, 2011)

Levels:

S&P 500 Index [1158.67] – Several down days in a row showcase a severe selling period this month. The peak of 1277 on November 8, 2011 established a noteworthy downturn.

Crude [$97.41] – An explosive two month run is slowing. Consolidation around the 200 day moving average creates a near-term tug of war between buyers and sellers.

Gold [$1685.50] – It is fair to conclude that the momentum run is facing a mild pause. Buyers seemed interested at $1600, and their appetite to purchase is soon to be tested.

DXY – US Dollar Index [78.06] – Nearly up 10% since the lows of May 2011. An explosive rise in the dollar is noticeable especially in early September,

US 10 Year Treasury Yields [1.96%] – Below 2%, but not quite 1.67% as seen in late September. Trading at deeply oversold levels, suggesting a near-term recovery in yields.

Dear Readers:

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

Market Outlook | November 21, 2011

2011-11-21T04:01:00.000-08:00

“A pessimist is a person who has had to listen to too many optimists.” - Don Marquis (1878-1937)

Buyer’s Fatigue

It was not too long ago, in the summer of 2007, when pessimism or a cautious outlook became too unpopular among general investors. Even in the post 2008 era, previous damages were not quite understood until a few months ago when the glaring European crisis reinforced the fundamental issue of debt management. These days, the majority of buyers appear too fatigued of holding onto shares, while becoming exhausted of “bad” news and frustrated with a lack of genuine good news. Even when buying relatively cheap, the rewards are small and short-lived gains are rapidly erased. The more this happens, participants will become quick to lose patience and willing to sell even faster based on sensitive headlines. Perhaps this not only explains the pattern for the second half of the year but it is also reflected in last week’s events. Simply, less of a willingness to hold assets goes hand in hand with high volatility and the increasing cost of default insurance.

For specific financial insiders, previous fundamental training is not as handy in the current environment. Traditional principles such as valuations, momentum, and assumptions on rates or credit ratings are pointing to abnormal. Clearly, government and social stability is a fragile topic without a manuscript. After all, the European reconstruction period is fully underway with nauseating talks of a Eurozone break up. Perhaps those consequences are hard to quantify, thus the ongoing risk aversion remains the prevailing theme.

Fragile Edge

The US relative edge, versus alternative markets, is still intact, for those willing to see. In some measures US banks appear in better shape, in terms of balance sheet clean up, when compared with European banks. Nonetheless, American banks’ stocks have seen more punishment than reward in the past few months. In a world where there is no escape from broad risk or varying geographic exposure, the frustration inevitably persists as rational thinking takes time to reestablish. Plus, the US bank exposure to European assets is a mystery that’s bound to unfold. Meanwhile, patience is challenged for any risk takers across asset classes. A manic pattern lingers as the recent turbulence echoes July and September lows.

A few breathers here and there have kept US broad indexes from a truly ugly and irrevocable place. We start the short holiday week with the S&P 500 index down only 1.5% for the year. That’s better than the EEM (Emerging Market Index), which is down nearly 19% since January. Interestingly, the daring crowd dwindles fast, but betting against markets after consecutive downside moves does not come with guarantees either. The concept of relative edge faces political risk as managers desperately place their chips for salvaging some hopeful year-end gains.

Surprise Elements

Elements of upside surprises remain scarce at the moment, not only in Europe or the US, but China as well. Basically, it is hard to locate glaring data for better sentiment or changes of current downtrend and deadlocks. This is a tough place to be for those looking to buy at a discount or at attractive prices. Rewriting rules, reforming old behaviors and endlessly walking in uncharted territory is a risk that’s hard to comprehend and accept collectively. Thus the brave must distinguish blind gambling with a favorable risk-reward profile. At the same time, mood swings are too common even when it all seems too bleak.

Article Quotes:

“Indeed, all the gold controlled by the US government, which has by far the world’s largest official reserves, equals just 3 per cent of America’s official debt, which just passed the $15,000bn mark. Even Italy, a particularly large holder of bullion (in third place globally with the 10th largest economy) would be able to retire less than 6 per cent of its enormous sovereign debt if it were to dump its 2,451 tonnes. But while the dollar amounts may be paltry, Mr Bernanke must grasp that the symbolism is anything but. It is a mark of creeping distrust in the unofficial reserve currency, which nervous central bankers see being printed by the trillions even as America’s political leadership shows no sign of dealing with its daunting fiscal challenges. Fiscal worries are even more acute for the number two and three reserve currencies, the euro and the yen. Central bankers are late to the gold party. Private buyers of ETFs alone have accumulated 15 times as much since their advent a decade ago as governments bought last quarter.” (Financial Times, November 17, 2011)

“Local [Chinese] government financing vehicles borrowed heavily to support an infrastructure construction spree under Beijing's four trillion yuan stimulus package introduced at the end of 2008. They are due to pay a total debt of 1 trillion yuan annually from this year until 2013 and an outbreak of defaults could peak during the period, China International Corp warned earlier. The local governments rely heavily on revenue from land sales to pay back their loans. As the property market has slowed under government policy tightening, and as it takes time for government-funded projects to generate returns, there are signs some local governments are finding it difficult to repay their loans. Local governments' 6,576 financing vehicles had debt of 10.72 trillion yuan at the end of 2010, amounting to 26.9% of China's gross domestic product accrued since the global financial crisis in 2008, the National Audit Office reported in its first audit of local government debt in June. Only 54 county governments out of nearly 2,800 in the country had zero debt, it said.” (Asian Times, November 19, 2011)

Levels:

S&P 500 Index [1215.65] – Retracing from 50 day moving average. Ability to stay above 1200 will be tested in next days ahead.

Crude [$97.41] – After a fast paced move to $100, there is early indication of a pause. The two month momentum may need a further catalyst to keep the run sustainable.

Gold [$1719.00] – Struggling to hold above $1750 as evidence of a stalling pattern continues to develop.

DXY – US Dollar Index [78.06] – Continuing its bottoming process since May 2011. The relative strength of the currency remains unharmed despite near-term swings.

US 10 Year Treasury Yields [2.01%] – Interestingly, the lows in 2008 crisis stood at 2.03%. Currently, a struggle to stay above 2.0% is further indication of risk aversion and lack of “safer” alternatives.

Dear Readers:

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

Market Outlook | November 14, 2011

2011-11-14T03:52:00.000-08:00

“Tug on anything at all and you'll find it connected to everything else in the universe.” - John Muir (1838 –1914)

Linked with Differences

There is a general tendency to lump all global market behavior into one pattern. Perhaps it is convenient for pundits and politicians to address the issue in a simplified manner. This is understandable, since chaotic trading days have shown strong downside correlation among international markets and asset classes. Yet these days, the concerns in China are related to the bubble like patterns seen in the US in the mid 2000's. Meanwhile, the noisy European crisis, in a minor way, mirrors the US banking turmoil of 2008. However, it is still not exactly the same, given Europe’s additional complexity in reaching a centralized solution. Another week completed in which more of the usual fear persisted, and quickly evaporated, as the long anticipated European concern rotated to Rome. Italy, with the third largest European economy, is dealing and adjusting to the consequences. Clearly, the Eurozone issue questions the long-term political structure as well as the merits of a unified currency that has failed to provide a sustainable outcome.

In summarizing the global worries one notices escalating inflation in emerging countries, the governance amidst the European crisis, and stimulus driven action by the Federal Reserve and US policymakers. All contribute to sensitive headlines that translate into market moving responses. Importantly, through these uncertainties, the relative strength argument for the United States lives on, despite highly documented debt issues. Indeed, the thought of US relative edge, is blurry or confusing for most. Sources of distraction include a crowd mislead by politics, others relying on nostalgic "hope," and some engulfed in simple denial of the changing global landscape. Frankly, plenty daily discoveries and fear driven impressions can deviate noteworthy facts with sustainable implications. Beyond the sensational headlines these answers are neither boldly visible, nor quite gloomy, and require further digestion. Yet the relative attraction does not necessarily justify blinding buying and holding US assets for 5-10 years, at least for now.

Observer’s Dilemma

For a global trader or observer balancing between conclusive macro statements, while isolating specific problems to specific ideas or narrow investment timeframe; being skillful or lucky, a participant must know when to let some bad news go as a non-event. Yes, very tricky. Some would illustrate today’s market, offering a casino like feel, where investment selection confronts much of a guessing game. The quest for the next key catalyst leaves a tense crowd and turbulent atmosphere. This is far removed from typical trend-following or fundamental investing. Head turning to banking veterans, and frustrating to advisors forced to adjust opaque money management. Again, opportunities might reside in selecting specific companies. For example, in technology these stocks are showcasing momentum and strength: Citrix (CTXS), F5 Networks (FFIV), and SanDisk (SNDK).

Perhaps on each major tick, any causal risk manager is bound to contemplate, is this day to day shift worth all the grief? Should one settle with historic low bank yields? Or is the passive approach of wait and see another angle to navigate? Meanwhile, staying risk-averse might makes sense, especially in a period where capital creation hardly seems easy. Perhaps, it is believed the Federal Reserve’s easing tactics push for holding risky assets. A “sucker’s bet” or a prudent move, that’s debatable as the tug of war plays out on various exchanges. It is rather bold, yet not always wise, to bet against the Federal Reserve. For a more tame approach, others continue to display distrust in paper assets by owning Gold and Crude. The commodity and currency discussion is too unsettled and set to resurface in asset management discussions.

Down the Stretch

The race to year-end begs the question of how broad indexes close out the year. A fatigued crowd from an eventful year might feel compelled to drive markets slightly higher by continuing the bottoming phase established in early October. This week, a few more companies in the S&P 500 are expected to report earnings, while potentially moving the needle of major indexes. Thus far, the third quarter earnings season has resulted in better than expected numbers, as stocks have some room to recover; especially if a self-fulfilling prophecy begins to capture the collective investor mindset.

Article Quotes:

“Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected. More important, several things that you’d expect to see if the deleveraging thesis were correct haven’t happened. Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade. And consumers aren’t saving at an unusually high rate; the savings rate during the recovery has hovered around five per cent, significantly lower than the postwar average. And although consumers did reduce their total amount of non-mortgage debt very slightly in 2009, in the two years since, that number has risen again. By historical standards, then, consumer spending is high, not low.” (The New Yorker, November 14, 2011)

“Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States. While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.” (The Becker-Posner Blog, November 13, 2011)

Levels:

S&P 500 Index [1263.85] – Trading above 1200 sends a healthy signal, relative to July and October lows. The hurdle rates sits around 1280 where the buy momentum will face a test from sellers.

Crude [$98.99] – Climbing back to mid-July levels. Since October 4, the commodity has risen by over 30%. In the summer months, crude failed to hold above $100, a possible retest is setting up in the near-term.

Gold [$1773.00] – Although the pace for upside move has slowed, the uptrend is intact. Surpassing 1800 can showcase further feel for buyers’ appetite.

DXY – US Dollar Index [76.94] – Remains above the September lows and higher than the 200 day moving average. An intermediate-term bottoming process continues to form.

US 10 Year Treasury Yields [2.05%] – Barely holding above 2%, a level that marks the lower end of a 3+ month range. Next notable ranges are at 2.20% and 2.40%.

--

Dear Readers:

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

Market Outlook | November 7, 2011

2011-11-07T03:40:00.000-08:00

“To begin with, our perception of the world is deformed, incomplete. Then our memory is selective. Finally, writing transforms.” - Claude Simon (1913-2005)

The Collective Feel

The back and forth market movements are overly focused on the latest rapid paced events. Meanwhile, the nucleus of these issues stems from the serious and inescapable damage, mostly revealed in the fall of 2008. Another week passed with the usual Eurozone drama, as fear rotates from one nation’s solvency to the next. Basically, for financial or social observers, the message is not only grim, but also fairly exhausting as similar themes keep repeating in a different form. In other words, the last three years illustrate the ongoing discussions on finding a balance between government involvement and potential resolutions, amidst conflicted political constraints.

As for navigating through investment ideas, here and there observers will point to better than expected numbers, which stimulate some momentary or illusionary hope. However, beyond the day to day noise, the consequences for the next three to five years are puzzling and even more humbling for traditional forecasters. Perhaps the bigger surprise might be the lengthy denial by policymakers to make critical and painful decisions. Others feel that pessimism evaporates in due time, but that crowd is becoming harder to find in this marketplace. Frankly, trust in forecasters is diminishing, as finger pointing is the reoccurring theme. Historians contemplate the results of globalization and the realities that have materialized in this “New World.” Yet, the changing perception of the financial system is turning to a political matter which goes beyond the realm of traditional finance. This is unchartered territory for the generations in charge (in US and Europe), who can hardly recall a manual for problem solving in the previous business cycle challenges.

Unshakeable Turbulence

With few exceptions, most trading days since early August witnessed the Volatility Index (VIX) above 30. This reiterates the lack of market stability, even after the strong broad market performance in October. Additionally, this reflects a shaky perception of governance risk and confidence in private business expansion. Interestingly, frenzied periods are not offering clarity, as edgy minds struggle to find reasonable policymaking. The majority of attention in the US is focused on the economic front in light of the jobs issue, which appears to be more talked about than resolved. Emerging markets are not as shiny as pictured in last decade either. For example, China is confronting a domestic credit crisis of some sorts, which may go ignored by some. “An estimated $580-billion in private loans were handed out in the first 10 months of this year, a number almost 10 per cent the size of the Chinese economy…China – rather than being the country that can lead the world out of its debt woes – may be the next one headed for a hard fall.” (The Globe & Mail, November 6, 2011). There is simply no escape in this environment, as other findings are bound to unfold before year-end. Interestingly, human greed, desire for new growth, or the ability to deny harsh reality appears to be one of the very few constants.

Balancing Act

It is easy to be confused, or lost, in this turbulence; one may prefer to sit on the sidelines, which is the choice for most. Currency and commodity market trends remain in limbo. Meanwhile, owning company specific shares might work on a very selective basis, as the focus is on sensitive news flow. Year-end bets have been placed, mostly last month, as optimists await a recovery for a cosmetic and minor moral boost on a positive finish. Clearly, the stakes remain too high for managers executing on investment ideas, as well as central banks implementing policies. Yet, the odds of a substantive recovery might take longer than desired, and remain cloudy to imagine.

Article Quotes:

“First, the lower the interest rate, the higher the interest rate risk. As Calabria notes, in future years, mortgage rates will certainly rise. That will make the relative value of mortgages originated at ultra-low interest rates lower. It could even cause the bank to lose money on the mortgage if its cost of funds rises above the low mortgage interest rate. Second, interest rates help to compensate banks for risk. If banks were getting higher interest rates, then they might be more willing to provide consumers more credit. But at rates like 4%, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives. Very low interest rates are a reason why banks aren't providing many mortgages these days. Banks would prefer if mortgage interest rates were higher. You can see this by their recent efforts to avoid interest risk by adjustable-rate mortgages reemerging. In the first half of 2011, they accounted for 13.4% of all originations, up from just 6.3% in 2009.” (The Atlantic, November 2011)

“Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital. We can argue over details, but the necessary formula – if they wish to save EMU -- undoubtedly entails some form of eurobonds, debt-pooling, fiscal transfers, and of course the constitutional revolution that goes with all of this. That would at least buy them time, though I doubt that even fiscal union can ever bridge the North-South gap. Italy’s travails have little to do with the parallel drama in Greece. This is not contagion in any meaningful sense. The country is suddenly under fire for the very simple reason that its economy is plunging back into deep recession, the predicable outcome of the EU’s 1930s fiscal and monetary contraction policies. The implications of a eurozone double-dip are dreadful for Italy, already grappling with a chronic loss of 40pc in labor competitiveness against Germany and a 70pc collapse in foreign direct investment since 2007.” (The Telegraph, November 6, 2011)

Levels:

S&P 500 Index [1253.23] – Holding above 1250 and facing a mild inflection point between now and year-end.

Crude [$94.26] – Facing resistance at the 200 day moving average ($94.84), as surpassing $95 is the next challenge for buyers.

Gold [$1749.00] – A tamed re-acceleration process at this point. Early fall highs above 1850 aspire buyers.

DXY – US Dollar Index [76.96] – Restoring some stability after sharp declines. It remains too early to declare a trend, given the ensuing macro events.

US 10 Year Treasury Yields [2.03%] – The 50 day average stands at 2.05% while the 5 day average equals 2.03%. Both emphasize the range bound trading in the past few days, while the big macro picture is less affected.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | October 31, 2011

2011-10-31T03:36:00.000-07:00

“Free will is an illusion. People always choose the perceived path of greatest pleasure.” - Scott Adams (1954 - Present)

Connecting Puzzles

Last week, lots of attention revolved around the temporary European deal. However, the recipe for increased risk tolerance and market uplift has been in the making, apparent when looking at recent trading days. Hints of an improving October go back to earlier in the month. October 4 presented a noteworthy minor trend which may extend into a larger intermediate-term trend. On that day, the Volatility (VIX) peaked from high turbulence, S&P 500 Index set a bottom after harsh September sell-offs, strength of the dollar broke to the usual downtrend, and finally the commodity index (CRB) rose from its lows. All these patterns accelerated to shiny headlines, illustrating a very strong month by historical measures. Ironically, this run is highlighted by the combination of a deprecating dollar and higher asset prices, which ends up revisiting the all too familiar theme of last decade. Puzzling indeed, if lessons from past cycles have yet to be fully learned in favor of near term pleasures.

As usual, the interrelation of macro indicators is driving the prevailing theme. Much of the month end discussion circles around the explosive stock market run, as the series of events are tilted to paint a positive picture. Quantitative Easing 3 discussion points may surface around the corner, and serving as recent momentum they can set the stage. Not to mention, an improving third quarter growth in consumer spending brought some relief as well. Market "catalysts" vary from cycle to cycle, but this type of recovery pattern and policymaking is typical. Specifically, the overly negative sentiment became quite at a rapid pace. The curiosity of observers will shift to impact on interest rates and inflation. Clearly, sentiment or market patterns are shifting at a rapid pace.

Grasping and Digesting

Taking a breather for a second, it is fair to rationalize that few issues contributed to the uncertainty. In a glaring way, the S&P 500 Index mirrored the Euro for several weeks. That reflected emphasis on the power of sentiment, rather than trading on fundamentals. “The 50 stocks that were down the most from July 7th through October 3rd are up an average of 35.3% since then! Conversely, the 50 stocks that held up the best during the summer correction are only up an average of 6.9% during the current rally, which is severe underperformance.” (Bespoke Investment Group, October 28, 2011) Similarly, the connection between the currency and stock markets feels more like a sentiment poll, as much as an index. Eventually, worn out money managers are caught in the usual state of confusion. Surprises seem uncommon, but who would've thought the S&P 500 would flirt with 1300? Perhaps some did but not many, especially not in the dark days of July or September’s worrisome lows. Again, fathoming the unfathomable is yet again the reoccurring lesson. Clearly, social debates or political quarrels dominate airwaves, but are not always reflected in broad index performance. These concepts are hard to grasp when applying logic while disregarding psychology. In fact, casual observers are confused by the discrepancy of downgrade implication, sluggish economic factors, bubble talks in China and political power shifts in key geographic areas. These issues remain mostly unresolved from a practical angle, but shrewd observes have acknowledged long ago it is a game of perception.

Deliberation

Finishing out the year on a positive note is commonly desired and witnessed. In fact, it appears to be in the minds of most, and can be easily converted into a self-fulfilling prophecy. Fatigue of bad news is only natural, but temporary urges may not cover up the existing pain. Within a few hours after the European solution, several skeptical opinions circulated stating that sustaining “comfort” will be daunting. Interestingly this week, the Federal Reserve will host a press conference at a time its members internally disagree on methods of fueling the economy through monetary policy. Balancing investment performance with reality is the internal dilemma that haunts long-term participants. An illusionary backdrop persists for fund managers to showcase net gains or to further cut into losses. Discomfort continues in formulating a thesis, but the mystery is in visualizing the magnitude of accumulated damages yet to play out.

Article Quotes:

“Since July, real disposable incomes have been declining. Although the decline in September was modest, it still helps to explain why consumers are so gloomy: their disposable incomes have been falling over the past three months. Really, they had been virtually stagnant all year leading up to July too. The income growth we saw from late-2009 through mid-2010 sort of just stopped. Now it has reversed. The September value was the lowest since April 2010. Prior to the recession, disposable income per capita hit and blew past its September 2011 level in September 2006. In other words, over the past five years Americans, on average, have seen no disposable income growth if you adjust for population and inflation. This also explains why they're spending like it's 2006 -- because they don't have more money to spend. No wonder the recovery continues to feel like a recession: that's an awfully long time to go without a raise.” (The Atlantic, October 2011)

“One of the curious paradoxes of population growth is that the more able people are to sustain large families, because they become wealthier, the less inclined they are to actually have more children. So, while greater affluence is often blamed for increasing the strains on the world's finite resources, it is possible that a richer world may be a more sustainable one because it will cause a natural leveling off in population growth. That is some way off, however. In the short term the number of people will continue to rise and this has a number of implications for investors. Three of the more important are related to food, urbanization and growth in consumption. It is estimated that food production will need to rise by 50pc by 2030… The solution cannot simply be to bring more land into cultivation because the most productive has already been used and industrialization and urbanization are eating into what is already under the plough.” (The Telegraph, October 29, 2011)

Levels:

S&P 500 Index [1285.09] – Notably breakout of the multi-month sluggish range. Next, key target sits at July’s peaks between 1300-1350.

Crude [$93.32] – Further reacceleration as the commodity nearly approaches the 200 day moving average of $94.76.

Gold [$1741.00] – Recovering from a short-lived pause in which 1600 showcased strong buyer enthusiasm.

DXY – US Dollar Index [75.06] – Dropped nearly 6% for the month so far. Resorting back to the well-known range $74-76 range which was seen in spring and summer months.

US 10 Year Treasury Yields [2.31%] – The trade away from risk aversion drove yields higher from historic lows. Ability to hold to surpass, and hold above 2.40%/2.50%, will be a key test in upcoming days.

Dear Readers:

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

Market Outlook | October 24, 2011

2011-10-24T03:15:00.000-07:00

“Sentiment is the poetry of the imagination.” - Alphonse de Lamartine (1790-1869)

Inescapable

Key market forces cannot vanish or evaporate fast enough to revive a healthy uptrend. Eurozone suspense fails to create comfort for those betting on politicians reaching a resolution. Basically, “hope” is a risk that’s hard to quantify in a period of rapid sentiment shifts. Importantly, debt issues continue to prove that positive public messages are not sufficient. Meanwhile, the ongoing trend of downgrades by credit agencies is now a common persistent theme within the gloomy side of an inevitable cycle. As to the actual shock factor of further downgrades that's to be seen, and remains difficult for currency or bond market observers to gauge. In any case, participants have accepted the increased lack of uncertainty that is beyond the traditional asset management of recent generations. Clearly, the much discussed volatility index has remained in abnormal territory for longer than desired. Frankly, frantic patterns cause one to question the overall faith of the banking system as well as the readjustment in currency values.

Glimpse of Liveliness

In the past three weeks, a growing camp of optimists continues to emphasize “recovery,” especially in anticipation of quantitative easing. This is a puzzle in itself, since an operation twist is being digested in the recent Federal Reserve decision. The element of interventions finds a way to spark reversals, while skeptics view it as a plague to overall confidence. Yet, it is hard to deny the noticeable and mild resilience for scoreboard observers. Perhaps some will argue that a pause in the selling pressure leads to cosmetically appreciating global indexes. For example, the S&P 500 Index showcases adamant buyer interest between 1100 and 1150 levels. In some ways overall positive earnings, improving technical indicators and the presence of bargain hunters contributes to this psychological bottoming process. The market is betting on near/intermediate term mood swings rather than any long term clarity on fundamentals. Pursuing and executing profitable ideas on short-term biases are intriguing to some, frustrating to others and increasingly disinteresting to the rest. However, remaining open to surprises has proved to be valuable in making vital calls.

Untangling

The Federal Reserve’s active involvement continues to entertain buying further securities in a stimulus attempt. This leads to furious policy debates when mixing low historic rates along with the pending election year and weak economy. At the same time, short-term memory reminds us that when QE2 ended abruptly, it opened the doors for heavy sell-offs. It is fair to assume the stakes are high for stability, but clarity is hard to reach when a series of inflection points continue to accumulate. Among pundits, inflation is not viewed as a short-term concern in the US, but high inflation down the road cannot be dismissed. Similarly, an emerging market slowdown has arrived, but the magnitude of declines is not fully understood. Meanwhile, commodities have taken a breather in the past several weeks, yet now reappear set to retest buyers’ appetite. All points state that comfort zones of all sorts are indeed challenged, and risk takers can patiently begin to map out the current maze.

Article Quotes:

“In Europe, banks and investors advanced credit to countries lacking even a pulse. By this I mean that their population was known to be rapidly aging, that some were mired in black markets, had a happy-go-lucky preference for leisure and "apres-moi-le-deluge" mentality, and were subsidized by a legacy of entitlements based on the assumption that the demographic pyramid would have an expanding young base forever - never mind the demographic realities. What blinded Europe's politicians and bankers? Decades of easy living weakened many of the institutions that once built up Europeans' "character". Unfortunately, no financial engineering can offer short- or medium-range solutions to restore "character". It can take a generation or more. The uniqueness of the dozen Western type democracies after World War II and until 1990 permitted the continuous misallocation of capital and the destruction of character. The capital and talent flocking to their shores from the rest of the world, escaping dictatorship of one kind or another, helped cover the compounding mistakes.” (Asian Times, October 22, 2011)

“China’s government will be reluctant to ease monetary or fiscal policy while inflation remains high. That limits its scope to respond to a sharp slowdown in exports, if Europe and America continue to falter. But weakness in foreign sales will itself ease inflationary pressure, reducing the competition for men and materials. After exports fell off a cliff in 2008, Chinese prices began to drop. Thus the more the economy needs looser macroeconomic policy, the more scope the authorities will have to provide it. What about the bad debts left behind by past excesses? Although some homebuilders are heavily indebted, households are not. Even if the price of their home falls below what they paid for it, it will be worth more than the mortgage they took out on it. Since the central government’s explicit debt is low (about 20% of GDP) it can afford to bail out lower tiers of government and the banks they borrowed from. Because the banks have ample deposits, and savers have few other options, banks can also earn their way out of a hole by underpaying their depositors. And since the banking system is still dominated by the government, the banks will not refuse to offer new loans, even if old loans sour.” (The Economist, October 22, 2011)

Levels:

S&P 500 Index [1238.25] – Closed at the higher end of the recent range. A pending test to retest overall buyer appetite closer to 1250, followed by the 200 day moving average of 1274.70.

Crude [$87.40] – Several attempts to surpass $90 failed few times in the last two months. A third attempt is looming given the recent short-lived run.

Gold [$1642.50] – Following the correction from last month, the commodity has establish a vicarious range around 1620-1680.

DXY – US Dollar Index [76.39] – Further deterioration despite September’s appreciation. Setting up for a minor near-term recovery.

US 10 Year Treasury Yields [2.21%] – Trading above the 50 day moving average with no major change since last week.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | October 17, 2011

2011-10-17T03:57:00.000-07:00

“We are a people who do not want to keep much of the past in our heads. It is considered unhealthy in America to remember mistakes, neurotic to think about them, psychotic to dwell on them.” - Lillian Hellman (1905-1984)

Simple Concept - Complex Reality

Taking out large bank loans, deciding to bail out institutions, covering up and delaying previous losses, betting on complex products, or blindly investing in misunderstood instruments, leads to some sort of ugly outcome. Similarly, when governments borrow a lot the same principle holds true. Those are simply the basics, however, most fail to agree to accept or focus on mistakes. Plus, simple concepts are not so easy when considering complex political systems and agendas. Clearly the Eurozone is stuck debating the postmortem of failures, and deadlocked Washington illustrates this point further when short-term reelection efforts overshadow reasoning. Even the Federal Reserve is split on interest rate policies. Awkwardly enough, politicians are trying to reform the role of the central bank in a period where the government’s role in business is a contentious topic. Somehow the simple concept of borrowing and repayment leads to chaotic responses of all kinds. Perhaps it takes time to realize, accept and make sense of bitter facts.

At this point, we should mostly go beyond the ‘recognition’ phase, as a collective acceptance of mistakes is not as easy as it seems. Greedy and reckless practices are evenly spread across policymakers, regulators, investors, and consumers alike. After all, any seasoned money manager knows to contemplate mistakes rather than boast about two or three amazing trades. As markets teach us, one or two themes end up being cycle winners over the long-term (i.e. owning Apple shares, betting on declining rates and going long on Gold). Catching waves, like any simple concept, appears very difficult to time and execute.

In contemplating excess debt issues, some would argue that risky bet troubles are abated by issuing warning labels. Perhaps the words “risk management” are overused and grossly misunderstood or applied. Typically in bull markets, basic common sense appears blurry and is clearly a reoccurring human trait. The unfolding drama of a collapsing market ends up being a valuable lesson on “risk,” especially for those building new economies and gearing up for new cycles or financial systems. After all, the last three years provided basic lessons on the use of leverage, understanding inefficiencies in rules and systems, fragility of financial institutions and importantly how intervention is unavoidable.

Early Hints

The message from active markets today is to risk moderately trading at a discount, while fear is not as pricey as before. It is hard to visualize it this way, but if the playing field is not disrupted and financial institutions do not collapse then cycles would seek bargains through purchases of shares at cheap prices. The results from the current earnings season can refute or confirm the much discussed hazy macro environment. This upcoming week 1/3 of S&P 500 companies will showcase where they stood last quarter versus expectations. After several irrational trading levels and patterns this summer, quarterly results can provide a better read on market pricing. Thus, it is not an accident in the last two weeks, where participants repositioned investment ideas ahead of a long-awaited sentiment shift. In fact, October 4th marked a peak for volatility which has declined gradually. Similarly, that same day marked a bottom for US 10 Year Treasuries at 1.71%, which showcases a mild shift away from safer instruments.

The Search for Good

Typically markets find a way to constantly seek "good news" while remaining at times overly sensitive to bad news. Now, the hopeful are waiting for the European resolution combined with the jobs bill as well as bigger initiatives by the Federal Reserve. All this reflects anticipation of results or causes that spark good outcomes. While typically the argument of historical charts state that US equity markets end up higher. The common thought has been severely challenged in the ‘lost’ decade and potential system breakdown. Buying cheap is a familiar point that has backfired in previous months as the usual buyer revisits their luck.

On valuation basis, fundamentals appear favorable for buyers; for example, when looking at earnings yield. “The S&P 500’s earnings yield is 7.5 percent, close to the highest level since 2009.” (Bloomberg, October 17, 2011). Relative to other asset classes, buying stocks is not as bad when considering the low rate environment. That may work if earnings actually moderate and showcase some stability. In terms of inflation and interest rates, both are expected to stay low based on the recent Federal Reserve message. Now, looking into 3-5 year projections, this might change while surprising us with high inflation; but, most are focused on trying to survive the next few weeks.

The S&P 500 index turned slightly positive for the year as this feeds into the growing appetite for a year-end rally. Interestingly, the Nasdaq 100 is few percentages away from making 10 year highs. Two major sell-offs in spring and summer, reflected weakness of all sorts but indexes have an illusory feel to them. The buyer appetite is looming as early evidence of momentum picks up. “77% of S&P 500 stocks are now above their 50-day moving averages, which is the highest level seen since the April highs. Bulls have been waiting for a nice expansion in underlying breadth for confirmation of a rally, and now they seem to have it.” (Bespoke Investments, October 14, 2011). Yet many wonder if bad news is fully digested or merely tiresome. For example, Spain’s credit rating downgrade did not affect the market that much since it was the third occurrence in the past three years. The optimist will argue that we’ve been battle tested and bruised at this point. Rehashing false optimism is not that surprising, rather the duration of mild cheerfulness is the rewarding mystery.

Article Quotes:

“The Government Debt rose over $5.5 trillion since 2008, but the Private Debt declined by close to $5 trillion during the same period of time. This is the first time since the Great Depression that private debt declined at all-even a dime. A significant part of Private Debt came from Consumer Debt where the revolving and credit market debt declined about $140 billion (from $2.6 tn. to $2.45 tn. ) and the total household debt declined from $14 tn. to $13.3 tn. ……We find it incredible that there was not one quarterly decline in household debt since 1952 (as far back as we could find data) until the third quarter of 2008 from where we've had 12 consecutive quarterly declines. We didn't even have one quarter of decline during the worst recessions since the Great Depression (up until the recent Financial Crises in 2008) in 1973-74 and 1981-82-- NOT ONE!! During the period from the year 2000 to 2008 household debt rose from 68% of GDP to 100% of GDP. But, since the 3rd quarter of 2008 we had 12 consecutive quarterly declines as total household debt declined by almost $1 tn.” (Comstock Partners, Inc October 13, 2011)

“Qu Hongbin, chief economist for China at HSBC, said in a research note that the debt crises in the US and the eurozone had dampened global consumer confidence for Chinese goods, leading to a slower expansion of the nation's exports. In the first half, exports contributed nearly zero to the growth of China's economy, while gross domestic product (GDP) rose 9.7% in the period. GDP may grow by 8.5% to 9% this year, and stay at that level over the next few years, Qu estimated. This compares with 9.5% growth in this year's second quarter compared with a year earlier, 9.7% in the first three months and last year's 10.4%. Chinese exports grew 24% year-on-year to US$874.3 billion in the first half, compared with 35.2% growth during the same period of 2010, according to the General Administration of Customs. Year-on-year export growth has been declining month-by-month during the first half, dropping to 17.9% in June from 37.7% in January.” (Asian Times, October 14, 2011)

Levels:
S&P 500 Index [1224.58] – Trading at the higher end of recent consolidation range between 1100 and 1200

Crude [$86.80] – Bottoming phase builds mildly. Next key resistance level stands at $90.

Gold [$1678.00] – Early signs of re-acceleration after holding at $1650 range. Collective buyer showed interest around $1600 and mostly sold at $1800. A breakout or breakdown can spark a noteworthy trend for momentum traders.

DXY – US Dollar Index [76.63] – Struggling to sustain last months’ strength in US dollar. Perhaps this reinforces that the strengthened dollar theme has yet to develop.

US 10 Year Treasury Yields [2.24%] – Last few weeks are witnessing a rise in yields from annual lows. The current move appears stretched as confirmation is desperately required.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | October 10, 2011

2011-10-10T03:43:00.000-07:00

“Truth can be stated in a thousand different ways, yet each one can be true.” - Swami Vivekananda (1863-1902)

Collective Confusion

Equal discomfort among buyers and sellers is becoming clearer in global stock and bond markets. This appears to make more sense since there are no major new bubbles to burst as we're still unbundling the remains of the 2008 crisis. Meanwhile, there are no significant booms or rallies to "die for" since March 2009. Even two years ago, the rally was a matter of an inevitable bounce, rather than a sustainable fundamental improvement. This is simply a directional deadlock combined with unsolved, yet well-known, worrisome topics.

Sanity Search

The last fifteen day moving average for the Volatility Index (VIX) sits at nearly 39. Basically, volatility is trading toward the higher end of the historical trend; although not quite at 2008 levels, it is still very high. Suspense builds as overall sentiment remains negative, without taking into account the growing political and social uprisings. Broad stock market indexes may consolidate around recent lows, but sideways patterns are not to be confused with a glaring shift in true growth. Even so, any minor move in labor data can be translated into a signal of hope at any given time. In addition, the much debated interventions and government plans are eagerly awaited as a catalyst for growth. Yet, the unwinding and de-risking era is felt from the consumer to the investor.

Meanwhile, consumers are bound to adjust for wage changes and other new spending realities which may resurface in this imbalanced global economy. One can observe and conclude the waning US consumption is seen in lower prices for crude, and eventually, along with a low rate environment. In practical terms, crude demand appears to decline, while mortgage rates are at historic lows. Frankly, this impacts long-term consumer and investor behavior, as the implications of weak economic conditions are obvious to spot. For now, sensitive day to day moves are too turbulent to make a calmer assessment or to project conclusions.

Mislabeling?

Perhaps the one bubble left to burst, or yet forming, is the recent shift to "safe assets.” US Treasuries may seem attractive for panic days but at some point foreign investors will have to reconsider alternatives. Commodities are retreating and Gold is taking a breather. Perhaps when the dust settles managers will reassess the meaning of safety. Importantly, the currency wars are alive and well, as the race to devalue currencies is the rapid fashionable statement facing countries’ leaders. Thus, the faith of emerging markets as a reliable growth story is too unclear, while inflation is the bigger discussion point. Through this temporary and mild chaos, the dollar recovery is the key mystery, especially to Gold owners. Last month served as an early wake-up call given the fragile relative strength of the dollar, which doesn’t provide strong enough of a statement for years ahead.

Desperate Calling

There are further downgrades of nations and banks, a quantitative easing announcement from the Bank of England and more short-selling bans in France. These obvious attempts to restore faith, while emphasizing the confirmation of weakness, are reminders that we’ve heard it all at this point. Panic alerts have been felt numerous times, and like it or not, the pressure is handed off to politicians. Even central bankers are suggesting that the solution is in the hands of policymakers. Unprecedented as it may be, that’s shocking and hard to accept for “pure capitalism.” Perhaps a positive perception can be created to stimulate the real economy, which takes a while. One fact is clear, problems do not go away overnight and economic growth requires more than posturing, especially when in unchartered territory.

Article Quotes:

“My impression is that the scare-mongering of self-serving financial "experts" on Wall Street is shortly about to become deafening. It would be catastrophe, utter catastrophe, no, Armageddon, to let the global financial system collapse - collapse! - because the world as we know it will indeed collapse, as day follows night, if bondholders, who knowingly and voluntarily take risk and invest at a spread, are actually allowed to lose anything! We cannot, in a thinking society, allow losses to befall risk-takers who make reckless loans and bad investments. We must, must at all costs, divert money away from health, education, and welfare, in order to save these companies from failure, because neither health, nor education, nor welfare are even possible unless we save the financial system from unthinkable meltdown. We have no choice. No choice at all. They are too big to fail, and we cannot hesitate - they must be saved, for the sake of our children, for our children's children, for our freedom, for the flag, and to honor the legacy of our forefathers, so that these Champions of Disfigured Capitalism can continue to do their vital work with impunity, unbound by any of the incentives or consequences that actually allow capitalism to work in practice.” (John Hussman, October 3, 2011)

“We have just had 30 years in which the ideology of the free market has been dominant. And yet, during that time, what has happened to the percentage of the British economy controlled by the Government? It has remained static, at around 45 per cent – or, by some calculations, increased slightly. The state, that is, has been able to increase its control even when there has been almost unanimous agreement that it would be far better if it were to control a much smaller slice of our collective wealth. What, then, is likely to happen now that free markets are going out of fashion, and state supervision is becoming an intellectually respectable alternative? The short answer is: a rapid increase in the portion of the economy controlled by the state. The process has its own momentum. It never stops of its own accord. Everyone should know what it will mean: permanent economic stasis, if not contraction; a lack of innovation and development; a diminution of opportunity for everyone; and an enormous increase in bureaucracy, waste and inefficiency. That has been the long-term legacy of state control everywhere it has been tried.” (The Telegraph, October 10, 2011)

Levels:

S&P 500 Index [1155.46] – Growing evidence of buyer interest around 1120 in the last few weeks. Interestingly, the 15 day average stands at 1153.85 as the consolidation phase continues to materialize.

Crude [$82.98] – Buyers appear to find value around $80 within the existing downtrend.

Gold [$1652.00] – Bottoming process between 1600 and 1650 as optimists seek price re-acceleration.

DXY – US Dollar Index [78.55] – Last month presented a glimpse of a recovery, yet the real test will be on the currency’s ability to surpass 80.

US 10 Year Treasury Yields [2.07%] – Back to 2% range after hitting multi-year lows of 1.67% on September 23, 2011.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | October 3, 2011

2011-10-03T02:11:00.000-07:00

“We must embrace pain and burn it as fuel for our journey.” - Kenji Miyazawa (1896-1933)

Realignment and Realities

At this point of the cycle, the question is whether or not we have endured enough pain. Following a lost decade, triggered by the peak in 2000, the longer-term cycle supports a few ugly years ahead for traditional assets. It’s quite evident we are in a period of deleveraging, with a reassessment of sovereign risk and a makeover of financial systems. Through this cycle, Europe reminds us of the consequences of a fragile banking system and the interlinked nature of the debt crisis. For strategists, this fails to restore confidence in previous models designed to forecast the next five to ten years. There will indeed be reshuffling in sectors where unraveling constrains the pace of a recovery.

Beyond the political noise and radical financial resolutions, the markets themselves demonstratively showcase the lack of confidence coinciding with the failure of stimulus efforts. As usual, reacting to the truth is unfortunately more painful than the artful process plaguing fund managers. Of course, weak periods spark further emotional responses as frustration echoes in participants and even politicians. Usually an election year in the US has some relevance on market behavior; notably, the third year of a presidential cycle typically generates some optimism for a turnaround. However, this time the impact on the business cycle may be unlike previous years, given the growing list of financial and economic worries. The robust status of the developed world, or capitalism, is not too comforting for a global investor. This is entering unchartered territory for private and public decision makers and risk managers of this generation. The stakes are higher, while the experience to deal with crisis is rarely taught in business schools or banking training programs.

Essentially, more time is needed to accept the new realities before sparking a tangible change. Common bullish clichés have been nearly used up since February 2011. Examples include: valuations are cheap, faith in pending intervention, “Don’t fight the Fed,” and historical evidence of markets ending up higher. Those applying these concepts have noticed the market forces are too entrenched in lingering debt and economic issues. Therefore, when making timely trades one should stay cautious, so as to not lose the essence of this backdrop. Basically, denial was the mistake leading to and from the events of 2008. Thus, maybe now enough observers, consumers, and policymakers are begrudgingly adjusting overall expectations in line with truth. Before being washed up with growing negative sentiments, one should not forget that in its current state the US offers relative attractiveness, even in this secular bear market.

Safe for Now

Accumulating shocks forced investors to scramble for liquidity or safety. After all, when in crisis human nature dictates self-preservation behavior. It is simply a collective response to cling to basic investment approaches while deleveraging. Gold, Treasuries and the US dollar remind us that a “reset” of new realities translates into inflow toward the liquid assets which are perceived to be safe. In looking ahead, assuming that “safe” assets are immune to underperformance may be equally troublesome once the dust settles. In due time, tracking movement away from liquid instruments can provide some clues as to shifts in risk appetite. For now, shelter is in high demand while other benchmarks are not putting up a relative fight to attract risky capital.

Navigating Year-End

Entering a new season, and a new quarter, brings some hopeful thoughts for those with the ability to quickly erase memories. Last quarter damaged most equity and commodity managers. It was a historic July to September period, when considering annual lows in stock markets, very low yields, currency adjustments and interventions, low bond offerings and tense government deliberations. Interestingly, last month witnessed the Dollar higher, while Gold showed its first major dent in a while. Now, the S&P 500 and the commodity index (CRB) are down over 10% for the year. Managers are faced with either doubling down to play catch up before year-end or throwing in the towel with desperate macro conditions. Surely, both positions are discomforting in a period of liquidity, obsession and increased sensitivity. Therefore, in the near-term, closely watching the impact of currency adjustments, actual results of the European resolution and Federal Reserve action can serve as indicators for potential catalysts within this downturn.

Article Quotes:

“Why should we have any confidence that a deal can be done this year, given how badly the Greek support package has been handled? Since most of the public thinks a default has already taken place, would there really be that much of a shock from a ‘hard default’, as distinct from a negotiated exchange offer? Yes. It’s not the write-offs of Greek state debt as such that would be the problem, but the possible consequences to the stability of the euro area payments system. If the Greek government does not have the cash to pay for essential services as well as debt service, say in December, then it might have to resort to its powers under Article 65 of the latest version of the European treaty. Those allow for limits on the otherwise free movement of capital for the purposes of taxation, or ‘supervision of financial institutions’, as well as “public policy or public security.” (Financial Times, October 2, 2011)

“From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.” (Michael Lewis, Vanity Fair, November, 2011)

Levels:

S&P 500 Index [1131.42] – Flirting near annual lows and few points removed from 15 day moving average of 1171. Meanwhile, the glaring lows are being closely watched and sit at 1101.54.

Crude [$79.20] – Buyers in the past few weeks found $80 attractive after heavy selling at $92 and $100. Buyers’ patience is tested as the commodity continues its five month decline.

Gold [$1622.30] – Back to early August’s pre-frantic ranges, between 1600 and 1650. From September 6 peak to September 26, the commodity declined over 15%. The ultimate test will come in weeks ahead while the uptrend and positive annual return remains intact.

DXY – US Dollar Index [78.55] – Maintaining an uptrend that sparked last month, however the follow through is not fully convincing. Next key and previously familiar level stands around 80.

US 10 Year Treasury Yields [1.91%] – No major signs of a recovery while trading at the lower range of recent lows.

Dear Readers:

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

Market Outlook | September 26, 2011

2011-09-26T03:24:00.000-07:00

“Considering how dangerous everything is, nothing is really very frightening.” - Gertrude Stein (1874-1946)

When weakening economic realities are mirrored in financial markets, then there is not much debate as to the current conditions. In other words, previous stimulus efforts may have held up equity markets while failing to inspire tangible growth. The low rate policy and other stimulus efforts are not deceiving those involved, as the truth is slowly being discovered. In short, when reality harshly confronts subjective perception the outcome is profound. That’s the daunting downtrend in nearly all asset classes and developed economies. Importantly, the financial system is less welcoming for those mapping out plans from six months to three years. Price declines tend to flush out existing fears and “deflate” prior hopeful estimates. Of course, this is an ugly but necessary process that’s taking place as the S&P 500 Index attempts to hold 1120, while other international indexes sit at annual lows.

Fragile Banking

Through this puzzle, the central banks are trying to restore confidence against an less forgiving crowd. When Quantitative Easing 2 ended in June of this year, a dose of uncertainty was already looming, and clearly contributed to July’s explosive negative market response. Perhaps, medication creates more side effects, and the rest is more about clinging to survival. This theory will be tested especially after the disappointing result of QE2, which has augmented the number of skeptical observers. Thus, participants will digest the pending results of further low rates, along with the potential Quantitative Easing part 3. Let’s not forget, three Federal Reserve officials dissented last week, showcasing lack of agreement. It remains a tense period in which the central bank can hardly afford to lose credibility from participants or political establishments. However, the verdict of recent Fed actions remains too early to judge.

Simply put, it’s hard to dismiss bank downgrades (US and Europe), and ongoing legal and balance sheet pressures persisting daily. Interestingly, Bank Index (BKX) peaked on February 18, 2011 a few months ahead of the rest of the broad and emerging markets. Thus, this negative sentiment in place has been noticed by insiders. Clearly, the environment is beyond bubble bursting, or reshuffling of risk appetite by investors. Basically, the current banking environment remains too tricky to deal with and fragile.

Directional Discomfort

There is enough discomfort to go around for buyers and sellers of various asset classes. As a start, Gold owners feel slightly shaken by the recent pause within the well-defined upside momentum. Plus, fund redemptions are forcing mangers to sell winners, with Gold being one of the few winners in recent months. Thus, selling pressure in the commodity (i.e., quasi currency) is triggering some questions for future trends. At the same time, the US dollar uptick is now a mild trend that is slowly making a strong macro statement against other currencies, as well as the “inverse Gold” trade.

In terms of global equities, heavy betters against emerging markets or US stocks fear a potential sharp recovery heading into year-end. There is not much comfort in doubling down on downtrend moves after the Emerging Market index (EEM) has already dropped nearly 30 percent since May 2, 2011. Although it has been a profitable trade to go against markets, reversals are inevitable which can test even the strongest convictions. This seems comforting to those who envision a sustainable downside move that would take us back to 2008 ranges. However, this remains a rather aggressive point to claim, even with a battered sentiment.

On the other side, buyers looking for “cheap” value are contemplating the realities behind improving fundamentals. The pace of M&A deals has slowed, and hesitancy has increased in business decisions. Therefore, sticking to previous estimates leads to mismatched expectations. Value seekers sway between deciding if prices are cheap enough and exercising further patience. Waiting for confirmations seems like the easier path, but with year-end approaching risk takers may look to jump in ahead of the fourth quarter. To add further spice, a slowing China, increasing volatility and an unresolved Europe can drive many more to the sidelines or hunting for “safe” assets. Yet, cash does not pay much with low rates, equities have not paid due to weak performance and momentum themes such as commodities are slowing. Thus, pent up demands for new investments are bound to light up soon enough.

Types of Sellers

1. Profit takers on previous positions
2. Unenthused by fundamentals and earning potentials
3. Forced to sell based on fund redemptions or liquidation
4. Reducing overall exposure due to a lack of faith in the financial system

For any participant, understanding the nature of sellers in each asset might provide the next clue for when to buy, or the magnitude of the selling pressure. During jittery periods, investment models will have to adjust to these dynamics, as emotional responses are leading decisions. Most can agree that comfort is a scarce commodity, discomfort appears relatively normal, and fear is in abundance.

Article Quotes:

“The biggest emerging markets, with their huge foreign-exchange reserves, appear to be almost crisis-proof (at least outside eastern Europe) in contrast to the seemingly crisis-prone rich world. But setbacks in making the shift from poor to rich are inevitable. Indeed a lesson of recent economic history is that countries and regions that ride out a crisis well are all the more vulnerable to the next one. Hubris leads to policy mistakes, as the developed world has proved so devastatingly. So thick is the gloom pervading the rich world that the once-regular emerging-market crises have almost been forgotten. But this makes it even likelier that they will one day return. … A less frantic rate of growth in the developing world would also slow the relative decline of the West and allow it to cling on to some of its privileges for longer. The dollar and the euro could maintain a reserve-currency duopoly for longer; commodity-price pressures on businesses and consumers would ease; and the impact of developing economies on relative wages and jobs turnover might be less jarring.” (The Economist, September 24, 2011)

“Although China may look like a rising economic and political competitor today, that situation could quickly reverse. The wildly erroneous predictions of "Japan as Number 1" three decades ago should warn the outside world not to over-react to the "China threat". Punitive US measures in response to China's mercantilist trade and currency policies and disregard for intellectual property rights, however justifiable on the merits, could create the impression in China that the US has created, or at least hastened and deepened, its economic stagnation. The United States should avoid providing the CPC regime any excuse to claim the United States is the cause of China's woes. If the Chinese people as a whole ever adopt that view, US-China relations could be poisoned for decades… The United States and the international community should also recognize that, as China's economy deteriorates, any confrontational military maneuvers are likely to be met with escalation rather than compromise. (Asia Times, September 15, 2011)

Levels:

S&P 500 Index [1136.43] – Barely holding above early August lows, while attempting to bottom out above 1120. It closed at the lower end of the recent range.

Crude [$80] – Along with global equities, the commodity topped out in early spring. Currently the challenge is to stay above $80.

Gold [$1689] – Previously, 1750 marked a key level for buyers to reenter. Yet, the selling pressure is mounting in the near-term, as it remains above its 200 day moving average of 1520.

DXY – US Dollar Index [78.50] – April to August provided a dull and neutral period. There has since been an explosive upside move of 7% as of August 29.

US 10 Year Treasury Yields [1.83%] – Multi-generational lows. 1.67% marks the intraday lows reached on September 23.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | September 19, 2011

2011-09-19T03:18:00.000-07:00

“Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgment, repeated every day.” - Jim Rohn (1930-2009)

Much attention is consumed on the “failure” of various systems, plans and policies. The European banking system is in shambles, and the residues of the sovereign debt crisis have not fully played out. These are tiresome topics desperately needing resolution, as the era of postponement is no longer viable. The pain felt from the real economy contributes to a lack of patience in the audience.

In the near term, the Federal Reserve is already providing dollar liquidity to European banks. In a sensitive environment bad news is magnified (downgrades or weak growth), while infecting or at least influencing other economies at a rapid pace. There is no escape from this matter, even for the strongest economy in Europe. “Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital” (Reuters, September 18, 2011). This is a historic period where the Eurozone is being redefined, with desperate times leading to ugly and unimaginable results.

Harsh Landscape

Overnight scrambles, quick solutions and projection of confidence are required by European leaders during this “reconstruction” period. Plus, the details of the current banking procedures, along with consequences of alternative solutions, are sensitive just as much as complex. In other words, the pressing problems are too cumbersome for any political slogans in Europe or the US. Obviously, the nature of governing and conducting markets inevitably includes political and stimulus constraints. This theme merely sums up most of this year, especially in Europe when dealing with various nations. Interestingly, the bailout debate (similar to the US banks in 2008) is not erasable from near term memories, and heated debates are only normal at this point.

Relative Realities

Despite the backdrop of worries, the downtrend message took a brief breather in broad index performance. The S&P 500 index appreciated, by more than 5% last week. Major indexes are climbing back in an attempt to break even for the year. Albeit, it’s a slow and “temporary” recovery process, after the severe August demise. The relative argument of the US is on the radar for investment managers. Clearly, a significant shift to treasuries, as well as the Dollar, in recent months reiterates that message loudly. Select investors can afford to be choosy in purchasing as majority managers flirt with safer positions.

After the entire saga, the relative argument reminds us that the leadership in financial markets is in the US, at least for now. Growth seekers are not too impressed in this setup, as much as distressed, along with value asset buyers who can find opportune ideas. Further clues lie in the next few days, as to the faith of quantitative easing, and intermediate term interest rate policy. Curious minds have wondered if central bank tools are overly exhausted, especially with low historic rates. Others wonder if the summer sell-offs created such a deeply beaten up sentiment, in which a bottoming process formed in mid to late autumn. Continued stabilization in pricing, along with declining volatility, can provide an upside surprise in the fourth quarter.

Finally, emerging markets have not distinguished themselves in terms of absorbing the stock market in recent risk aversion. Brazilian Index (EWZ) is down 24% and the Chinese index (FXI) dropped by 20.4% since April 8. 2011. Interestingly, both countries are cooling off from multi-decade run, especially in housing. Meanwhile, during the same period, the S&P 500 Index lost 8.4%. That said, Brazil and China’s influential role for upcoming years is a vital macro mystery. However, the investor response showcases that many are not piling capital to developed markets. Instead, capital allocators are glued in on the survival tactics of the developed world.

Article Quotes:

“In the seven years from 2001-2007 (inclusive), not only did the middle class get at least its fair share of overall income growth, the income gap between the rich and the middle class actually got smaller. In an apparent paradox, the same Census Bureau database that told us that median household income was essentially unchanged in 2007 versus 2000 also tells us that the middle class enjoyed a higher income growth rate than did either the overall economy or the rich—and therefore that their income gap versus the rich had actually decreased… The key lies in the difference between the “median household” versus the “middle class.” The median household is a single theoretical household exactly in the middle of the entire income-ranked list of U.S. households. Conversely, the “middle class” has no official definition, but it is certainly tens of millions of households in size and presumably centered around the median household.” (The Journal of American Enterprise Institute, September 16, 2011)

“Local [Chinese] governments have created more than 6,000 arms-length companies to circumvent restrictions on bond issuance, creating a huge patronage machine for party bosses that has largely escaped central control. The audit office said the loans have reached $1.7 trillion (£1 trillion). While some of the money has been used to finance much-needed investments in water systems and roads, a large part has fuelled unbridled construction with a dubious rate of return. Mr Cheng said China is entering a "very tough period" as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice. ‘The inflation rate and the growth rate are conflicting with each other: it is very troubling,’ he said, describing what is known to economists as the Phillips Curve dilemma. (The Telegraph, September 17, 2011)

Levels:

S&P 500 Index [1216.01] – Climbing back to 1200 within a new define range of 1160-1220. A consolidation period following the sharp and recent sell-offs.

Crude [$87.96] – Hardly any changes from last week, as the commodity remains fragile below the $90 range.

Gold [$1794] – Early phase of consolidation, as 1750 is the next worthwhile point to test investors’ buying appetite. For now, there are no signs of alteration to the long-term uptrend.

DXY – US Dollar Index [76.59] – The follow through to the recent rally is not yet fully determined. Uptrend is intact, as the index is above its 200 day moving average.

US 10 Year Treasury Yields [2.04%] – Slight breather from risk aversion has yields back up to 2%. The 15 day moving average stands at 2.06%.

Dear Readers:

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

Market Outlook | September 12, 2011

2011-09-12T03:52:00.000-07:00

“Courage is the art of being the only one who knows you're scared to death.” - Harold Wilson (1916 - 1995)

The rules of engagement, these days, are being redefined for investors, consumers, borrowers and lenders. For one, the turbulent conditions of the developing world are beyond finding growth and more related to establishing stability in the system. This weekend, the fear of a Greece bankruptcy looms; which is not a surprise to anyone. Rather, past denials and delays are catching up rapidly in this bitter but well known matter. Meanwhile, chatter of the downgrade of French banks serves as another addition to the “fear” menu. Similarly, money market mangers continue to adjust overall risk exposure, which contributes further to an abnormal period in financial systems. Secondly, through this unstable sentiment, the emerging market growth rate is being questioned by investors who piled on with high return expectations from recent years. Inflation worries might be overblown, but remain a topic of high interest. When combining the preceding interlinked issues, it becomes quite inevitable to foresee heavy government involvement in currency usage, demand for problem solving and coverage of ongoing stimulus efforts.

The gigantic challenges misinterpreted by most and dramatized by others, for a recovery, are not easy when adding political constraints and a depleted investor sentiment. Clearly, the confluence of macro issues paints the chaotic landscape of major stock price swings that are biased to the downside. A synchronized global resolution that appeases all key economies is not practical. That’s the harsh reality facing global markets and stakeholders. Therefore, the consequence of select compromises and future pain can fuel conflicts in international rulemaking. It is a very edgy environment in which negotiations are tense, especially in the Eurozone. It is quite clear there are more questions at hand that hint to the magnitude of pending declines. After all, for years human behaviors have showcased big capital favors momentum, along with a sense of calmness to reestablish a new wave of growth ideas. Unlike 2008, we are not correcting from a new bubble, but rather confronting the residues of over-borrowing. There is a cost to ignoring and delaying, and that’s where we stand these days.

Rush for Hideouts

The highly trending behavior is focused on perceived safe instruments. The pace of rotation into US treasuries, Gold and other safe currencies has picked up investor demand. Basically, seeking a temporary shelter does not necessarily translate to long-term growth prospects. This era can be rewritten as the great rush for hideouts, which has been fruitful from a return perspective.

The US dollar recovery is receiving some attention after a noticeable breakout in its chart pattern. The dollar index (DXY) is witnessing a revival, given this recent one month run which is moderately newsworthy. One of the few big themes to see is trend reversals which trigger a sense of excitement, for good or bad. Of course, spurts of upside runs in the greenback have been seen before; however, the multi-year decline is the real story when looking at the full picture. Now, a rising dollar is anticipated to inversely impact crude prices and make a competitive appeal versus other currencies (e.g. Franc and Yen). This should have eager currency traders intensely awaiting a follow through in the days and weeks ahead. Glaringly, this rotation to the dollar is a further emphasis of present safety concerns, which matches the overarching theme that is too dominant.

Digest and React

Hedge fund’s August returns demonstrated that investment models were not quite equipped for the turbulent summer months. Especially when considering the year to date numbers in which the small cap index is down 14%, and the Morgan Stanley cyclical index has declined by 21%. That is a significant dent that leaves an impact for momentum chasers and casual purchasers. In addition, the recent selling in financials is caused by adjustment to risk management, while others sold on all out panic.

Yet, there is some value to decipher in US markets, while a sense of urgency is not required to reinvest in the same old models. Instead, enterprising leaders will have to adjust to new business models and valuation methodology. Similarly, at some point portfolio managers will have to dive in to some buy ideas while managing the new era expectations. Interestingly, sell-orders continue to come in from Japan to Europe which delays the bottoming process. Awareness of hold ups and the extension of irrational behavior may be prized for cycle winners. Courageous moves are discouraged for now, due to high volatility, but rebuilding portfolios today while seeing beyond the temporary madness is the bigger reward for next decade.

Article Quotes:

“In theory, making the state into a purely financial investor rather than an operating partner…should be beneficial: entrepreneurs, not bureaucrats, run the business. Practice is rarely so neat. Cities back companies that provide local jobs. That affects acquisitions and disposals, where factories are built and where research takes place. Worse, China’s private-equity industry has become another lucrative billet for the children of powerful officials. It is also troubling that little is disclosed about the operations and returns of these public funds. Many may be managed cleverly and provide money for municipalities and jobs for their citizens; others, though, may turn out to be financial black holes. Equally troubling, they receive favourable attention from local governments, to the disadvantage of China’s most dynamic sector, its truly private companies. ..Taken collectively, these iterations of state engagement reflect how China’s government has not only held on to economic control but found subtle ways to extend it. (The Economist, September 3, 2011)

“One significant concern is that, unlike Japan in the 1990s, the US is struggling at a time when growth expectations across much of the world are slowing. China is tightening policy and no one really knows the extent of contagion that may erupt from the denouement of the eurozone debt crisis, safe haven buying is pulling Treasury yields lower. While there are similarities between Japan and the US, there are crucial differences and 10-year yields below 2 per cent should be placed in context. For starters, the US does not face deflation at this juncture and also has a central bank that has been very proactive given its dual mandate of seeking stable prices and maximum employment. The US policy response since 2008 has been far faster than what occurred in Japan during the 1990s. Therein resides the hope for investors that the process of repairing financial and consumer household balance sheets will conclude well before the end of the decade.” (Financial Times, September 9, 2011)

Levels:

S&P 500 Index [1154.23] – Over the last 20 days the index averaged around the 1175-1177 range. Yet, it was not long ago when the S&P 500 traded around 1300. Thus, it is a fragile state indeed, where a move below 1120 can open flood gates for further panic.

Crude [$87.40] – There is a recent struggle to reach above $90. The 50 day moving average stands at 91.10, and serves as a near-term hurdle for buyers.

Gold [$1851.00] – Flirted with 1900, while uptrend is intact. Buyer interest remains around 1750 in the recent reacceleration.

DXY – US Dollar Index [77.19] – Up by 5.10% since August 29, 2011. A break above 76 signals a positive technical signal.

US 10 Year Treasury Yields [1.91%] – Closed at annual lows. Well below the 15 month moving average of 2.88%. Investor mindset is adjusting to a new range below 2%.

http://markettakers.blogspot.com

Dear Readers:

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

Market Outlook | September 6, 2011

2011-09-06T03:22:00.000-07:00

“There is nothing so strong or safe in an emergency of life as the simple truth.” - Charles Dickens (1812-1870)

At the start of the summer, very few ideas presented an excitement of innovation or growth. That did not change much throughout the season. The majority of the summer focused on the game of survival for investment managers. As August drew to an end it marked some relief for observers, after a month of discussions surrounding debt ceiling, downgrades, very sharp down days, escalated fears, system breakdown and rapid movement toward “safe havens.” The scramble away from risk is the glaring theme, and visible in lower treasury yields, for further shelter in Gold and rotation into the Swiss Franc. This shift is nauseating for the day to day news follower, but the currency, bond and commodity markets continue to point to the same message of seeking safety. Rather dull for those searching for growth ideas. Dreadfully, investors are adjusting to new realities and expectations.

The start of a new month and season does not erase all those fierce summer memories right away, or reignite confidence restoration at a desired pace. In fact, some are wondering if “safe” assets are forming a new bubble. Perhaps it is premature to declare that the obsession with risk-aversion is hitting extreme ranges. Importantly, traditional assets such as stocks and fixed income are failing to meet risk and return parameters. “In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.” (Reuters, September 5, 2011). Clearly, this is a period where the appetite for risk is declining and kneejerk recovery thoughts are taking longer than expected. More so, the change in behavior by fund managers alters some patterns, while opening up few alternative opportunities, due to pending legal or mandate shifts.

The inverse relationship between stock prices and volatility appears to set the framework between now and year-end. In terms of judging sentiment, a break below 1120 for the S&P 500 would spark worrisome selling pressure, at least from a chart observer’s perspective. At the same time, the volatility index (VIX) is hovering above 30 range, which is less inviting for buy and hold managers. This makes it even less stable for businesses leaders to plan ahead with any clarity. Clearly, this creates a troublesome environment for policymakers, who must stay nimble in their messaging. In other words, it is vital to avoid adding fuel to the fire. Similarly, staying idle is merely not an option when facing the pressure of election year.

Naturally, the thought stimulus (i.e. QE3), which comes up at times as skepticism, remains too high along with lower cooperation. The growing “annoyance” theme is picking up momentum when considering recent discussions of bailouts, currency wars, taxes, and other trends in international business. Thus, sideline observers sense no rush to buy traditional assets while having the convenience of waiting for even cheaper prices in the future.

Two sensitive themes that can spark early hints for any imminent recovery:

1) Fragile Banking Status

In Europe the sovereign debt crisis is affecting banks greatly. As usual, Financials lead on the way up or down. Over two years of Euro-zone troubles, combined with bailouts and interventions, contribute to the selling pressure. The frenzy and panic is in full force as crisis resolution continues to play out.
For a few trading days investors realized that the euro zone problem is not quite the same as that faced by American banks. Despite US banks’ clean-up efforts of 2008, the ongoing worries are hard to shake off. Large US banks feel the residue of greed and neglect driven practices that continue to persist through headline risk. This is highlighted by Bank of America's heavy stock price correction, and other recent legal risks, that deflate any confidence in an already depleted macro climate. Regardless of the low borrowing rate, the sentiment is too beaten up. Calmer minds point out that banks were profitable in the second quarter, and value investors will flirt with entry points.

2) Economic Enigma

On one hand, the job discussion is, as usual, back at the social and political forefront. Meanwhile, the US GDP growth (or lack thereof) is in the minds of economic projectors, influencers and decision makers. Various observers are struggling to “spin” a good story as to the job’s report, which continues to restate previously known information.

For a decade, much emphasis in emerging market growth kept earnings of larger companies intact. These days, the much anticipated global indicator is closely tied to China’s growth. Recently, a bank reduced the Chinese GDP estimates to 8.2% from 8.5%, sparking some early concerns. Inflation worries have lingered, but any slowdown here is cautiously tracked, given the tense global market. Any upside surprise element in this data can spark a hint of recovery. Otherwise, reemphasis of the weakening trend is all too common these days.

Article Quotes:

“The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro. That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime. Today, the logic of that strategy has become even more compelling. The benefits of euro membership are also clear to many other small economies. Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors…. The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.” (Project Syndicate, September 5, 2011)

“Economies usually need around $4 dollars of capital to produce $1 of output. On this basis, China needed to invest 40 per cent of its GDP to create the capital required for its 10 per cent growth. To increase the ratio of capital to output (which is part of the convergence story), China's investment had to grow even faster – which it did. …China's huge saving reflects the high retained profits of state-owned enterprises, giving room to absorb the bad debts within the overall government sector. Thus it's possible to map-out a set of adjustments which would keep China on a high-growth track. …But China's policy challenges (reducing savings, getting consumption up and the current account surplus down) seem infinitely easier than the challenges faced by America, which has to narrow the huge budget deficit by raising taxes and rein in the external deficit by expanding exports.” (Business Spectator, September 5, 2011)

Levels:

Prices based as of September 2, 2011.

S&P 500 Index [1173.97] – New range between 1150-1200. No major changes since last week. Heavy resistance around 1200, while breaking below 1120 can spark further selling.

Crude [$86.45] – After failing to hold $100, the commodity is trading between $85-90 as a long-term trend is fuzzy.

Gold [$1875.25] – Brief pause followed by an acceleration nearly testing the August 22 highs of 1877.

DXY – US Dollar Index [74.75] – Four month average continues to hover within the current tight range, around 74.

US 10 Year Treasury Yields [1.98%] – Closing at annual lows as breaking below 2.00%, significant yet another decline in trends. Previously, the lows of December 2008 stood at 2.03%.

http://markettakers.blogspot.com

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 | August 29, 2011

2011-08-29T03:27:00.000-07:00

“Courage is not the absence of fear, but rather the judgment that something else is more important than fear.” Ambrose Redmoon (1933–1996)

A minor breather to the summer turmoil, as the market held from hitting another new low. Overall, there transpired a desperately needed relief, with a near 5% weekly rally in the S&P 500 Index. Again, this upside move is part of a short-lived bounce, and not necessarily reflective of improving fundamentals. The long-term picture is too fuzzy for policymakers who are consumed with handling damage control. Crisis management includes European debt crisis that affects the Euro banking system while adjusting the currency imbalances. Speculating might be thrilling for some, or very costly for others, while investing requires no major rush.

The current realities still showcase fragile sentiment and waning trust in US and European policymakers. That’s difficult (but possible) to shake off with lack of visible growth, which makes owning shares not vastly appealing for less involved and longer-term participants. Increasing sensitivity, in the response to data points, can be frustrating especially with overall bias favoring declines. Surely, the downside risks maybe overhyped at times, or unknown, as an all-out panic continues to linger since late July. Of course, sentiment is hard to change overnight but known to sway in due time. At least for now, the focus is on “repairing” as much as “building;” a painful process that requires patience for growth seekers.

Even the optimist cannot deny the challenges of business cycle growth and policymaking constraints to reach a trending setup. When removing sensationalism and pending elections (at least for a second), the economic numbers paint a grim perspective. An estimate around 1% GDP growth in the US can trigger rude confirmation or surprises. Basically, the odds and definition of a recession are bound to be thrown around. These days, reigniting quick cheers by central bankers is not as easy, and political limits are less inviting for creativity as well. At some point, accumulating bad news becomes overly exhausted, yet it may take longer than envisioned.

Investment themes appear limited, given extreme behaviors in gold prices, yields, volatility, stocks, and sentiment. If the big picture is murky for the majority, and fear is priced at a premium, then an opportunity lingers for big risk takers. For now, three themes are worth watching between now and year-end.

I. Emerging Market Discomfort - For the last several months, inflation worries in China and Brazil have been a dominant, popular and pragmatic discussion points. More recently, long-term investors are reexamining the projected growth rate expectations, especially in China. If there are disappointments, then the relative argument is bound to benefit US markets to some degree. Clearly, it is not simple to overweigh one country versus another, given an interlinked global stock market. Many wonder if the slowness is already priced in, and a bottoming process is due. Again, the macro indicators will have a bigger influence in shaping the bias of this theme.

II. Currency and Commodity Patterns - The sustainability of Gold prices are on the list of suspenseful matters, after other commodities began their correction since the Spring. Minor pullbacks were witnessed last week in Gold. As usual, any decline in the metal begs many to ask “is this the top?” Premature as it might be, there will be lots of chatter on Gold’s ability to hold above $1800, versus achieving the next psychological landmark of $2000. Inversely, a recovering Dollar can readjust the mindset of stale consensus belief. Recent rotation into Swiss Franc needs to calm down, as well as concerns in the Yen. The macro clues can become clearer once the scrambling for a “safe haven” is fully established. For now, it remains too speculative with no trend reversal, as interest rates will play a role in this puzzle.

III. Bargain Hunting - In terms of picking up value, it may take time for ideas to materialize, as the pressure mounts to identify the right companies and catalysts. On the other hand, few trading ideas present themselves for the active participant. Banks recuperating from irrational sell-offs and some consumer based sectors (i.e. retailers) are poised to follow. This stems from overly depressed expectations of consumer driven areas. The Bank Index (BKX), at one point, traded 41% below its winter 2011 highs. Early signs of a recovery took place, as value oriented buyers debated the merits of the early recovery.

At this junction, if one is to take a bullish outlook for the rest of the year, then a very selective approach is required, along with close monitoring. Let’s say the conservative best case scenario is to make up the summer loses, then the broad indexes are about 6%-10 removed (1250-1300 on S&P 500 index). Of course, the odds for an upside surprise increases if volatility peaks at current levels. That can provide an extra boost for a much higher move. Therefore, it may be wise (from a reward perspective) to find unique ideas, as opposed to blindly betting on broad markets to capitalize on the limited opportunities.

Article Quotes:

“One of my inspirations for ‘Debt: The First 5,000 Years’ was Keith Hart’s essay ‘Two Sides of the Coin’. In that essay Hart points out that not only do different schools of economics have different theories on the nature of money, but there is also reason to believe that both are right. Money has, for most of its history, been a strange hybrid entity that takes on aspects of both commodity (object) and credit (social relation.) What I think I’ve managed to add to that is the historical realization that while money has always been both, it swings back and forth – there are periods where credit is primary, and everyone adopts more or less Chartalist theories of money and others where cash tends to predominate and commodity theories of money instead come to the fore. We tend to forget that in, say, the Middle Ages, from France to China, Chartalism was just common sense: money was just a social convention; in practice, it was whatever the king was willing to accept in taxes.” (Interview with David Graeber, August 26, 2011)

“From America's perspective, what may be the most important distinction between Japan then and China now is that Japan was a lever against which global pressure could be exerted on the Soviet Union as an ideological and economic opposite. This same rationale, that China could be leverage against the Soviet Union in the midst of the Cold War, was very much what initially motivated Henry Kissinger and Nixon to begin their dialogue with China. But now China's economic growth alone has made it the closest near-peer competitor to the US, and its ongoing embrace of authoritarian politics make it an easy proxy for the role of ideological foe which the Soviet Union long held. A country once used as leverage by the United States is now the country against which the United States most needs leverage.” (Asian Times, August 27, 2011)

Levels:

S&P 500 Index [1176.80] – Early pattern of stabilization developing between 1150-1200. Any significant move below 1120 can reignite a new wave of panic selling.

Crude [$85.37] – Revisiting ranges from late February around $85. Further evidence needed for the downtrend to slow down.

Gold [$1788.00] – Establishing a new mark around $1740-1800. This run appears extended in the near-term and due for some correction. On Friday, it closed 9% above the 50 day moving average.

DXY – US Dollar Index [73.81] – Around 74 marks a multi-month trading range. Barely any noteworthy activity for trend followers.

US 10 Year Treasury Yields [2.18%] – At the low end of its historic pattern. The yields today were last seen during the shock of 2008 and 1949-50 eras.

http://markettakers.blogspot.com

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 | August 22, 2011

2011-08-22T03:28:00.000-07:00

“If everyone is thinking alike, then somebody isn't thinking.” - George S. Patton (1885-1945)

As the last days of summer approach, they may provide a breather to participants from the ongoing negative sentiment. There aren’t many magical descriptions to summarize the sharply fallen markets, which continue to witness a frenzy like behavior. The S&P 500 is nearly down 11% for the year. This somewhat reflects the slowdown in global economy, along with waning investor expectations of future earnings. As usual on price declines, the correlation between various sectors is high in a period where volatility increases. That's simply a textbook setup, and reiterated the obvious, in which irrational behaviors are quite vibrant. As Birinyi Associates reminds us, that stock correlations are at all-time highs. “The average 50-day correlation of S&P 500 members to the index has risen to the highest levels since the market bottomed in 1987.” (August 19, 2011).

Navigating the Mess

Unfortunately, it is only natural to lump all bad news into one big “fire.” Specifically, when political matters are blended into market behaviors, it can be confusing and lost in translation. Similarly, grasping the ongoing finger pointing of economic decisions should not be confused with a nostalgic reflection of past economic policies. The subsequent kneejerk response fails to address the richness of the current multilayered mess. Frankly, debating the merits of the recent correction is not a fruitful practice for an investor, given that we’ve already established weakness from all angles (at times nauseating). At this point, blindly picking broad market bottoms is rather bold even for the seasoned observer. Yet, stashing away cash or over reliance on “safe assets” should present worries itself to those feeling too comfortable.

Importantly, isolating the magnitude of each worrisome item shall be the artful skill needed for weeks ahead. Staying firm and not making definitive statements is the challenge for any participant. Distinguishing labor weakness from European bank risks, to visionary long-term growth stories, is vital. Of course, all themes have their own place, and each carry a varying risk and reward. For example, US banks are underestimated for the cleaner balance sheet, as compared to 2008. Yet, the European bank noise makes it blurry, and leading some companies to trade cheaply. For example, the US Bank index (BKX) is down over 36% since February 2011, as the declines are at a much more rapid pace than any other sector. “At the moment, the Financial sector has the lowest trailing 12-month P/E of the ten sectors at 10.62” (Bespoke Investments, August 19, 2011). In due time, rational drivers can overtake emotional responses. Today, that is not visible in the trading patterns, and further fear can linger through the fall.

Digging Through the Maze

In extreme periods, such as the current market state, it becomes easy to conclude or muddle along with consensus. As volatility declines and perception normalizes, the hunt for fundamental ideas is bound to resurface. Even in the heart of this turmoil there are selective companies that held in on a relative basis. For example, retailers such as BJ Wholesale (BJ) have demonstrated increased revenue in their grocery stores and specialty services. Similarly, the pharmaceutical researcher, Pharmaceutical Product (PPDI), showcased solid fundamentals last quarter while a potential takeover is being discussed. Thus, few companies, from Consumer Staples to Utilities, can offer dividends and longer-term appreciations for those who are patient and slightly imaginative.

Clearly, picking “growth stories” is very spotty and frustrating. Yet, given the limitation of investment ideas, it helps to prepare purchasing ideas to fully benefit from pending momentum. To reach that point, broad indexes would need to showcase price stabilization. For now, the attention on stimulus plans by the Federal Reserve, and slowdown rate in emerging markets, will serve center stage.

Article Quotes:

“One of the most striking aspects of the eurozone crisis is that bond markets have not discriminated between causes of excessive debt. Greece was denied credit and had to go begging to Brussels for a bailout, not because it had taken part in the real estate bubble but because it had abused entry to the eurozone to enjoy a public borrowing spree. Ireland was denied credit because, even though its public finances were in solid shape, it had allowed its banks to overwhelm them. Italy is perhaps the most remarkable case of all. It is now threatened with loss of credit, not because of any post-euro borrowing, nor because of its current budget deficit (which is not much higher than Germany's). Rather, it is being punished for sins committed in the 1980s and early 1990s when it built up its public debt to levels that the markets have suddenly decided are unsustainable. What we are seeing, in other words, is a wholesale revision of the rules about debt that have held true for decades.” (Foreign Policy, August 18, 2011)

“The only quantitative evidence offered for this is that stock market turnover is now 150%, which, after a quick piece of mental arithmetic, implies that investors are holding stocks for an average period of only 8 months. So over the last ten years there seems to have been no discernible move to shorter holding periods – indeed the numbers are if anything a little higher at the end of the decade than at the beginning. And where turnover does increase this is unsurprisingly during the highly turbulent times of the dot.com crash from 2001 to 2003, and the credit crunch in 2008 and 2009. That apart, holding periods are pretty steady at around 3-4 years. And that of course doesn’t mean that managers only stay invested in companies for that length of time: a lot of turnover is because of investors coming in and out of the fund, or decisions by the manager to increase or reduce holdings, rather than to sell up and walk away. (Fundweb, August 5, 2011)

Levels:

S&P 500 Index [1123.53] – Trying to hold 1120 while approaching intra-day lows of August 6 at 1101.54.

Crude [$82.26] – Since May 2, the commodity has decreased by 28%. Failing below $85 signifies a new era of weakness.

Gold [$1848.00] – Since January 25, Gold has risen by nearly 40%. Uptrend intact as a shelter against paper assets.

DXY – US Dollar Index [74.24] – Barely above annual lows reached on May 6, 2011 at 72.96. Interestingly, since that period the Dollar has mostly hovered around 74 as the 50 day moving average stands at 74.71.

US 10 Year Treasury Yields [2.06%] – The intra-day lows of 1.97% on August 11 were a few points below the 2008 mark of 2.o3%. An illustration of the rush to treasuries as yields has declined from annual highs of 3.76% in February 2011. Basically, from a historical perspective this is an unchartered territory.

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 | August 15, 2011

2011-08-15T05:23:00.000-07:00

"Courage is fire, and bullying is smoke" - Benjamin Disraeli (1804-1881)

Volatility like fire burns the fearful dangerously or feeds the daring sizably. The outcome depends on the participants’ firm stance especially in periods where rational thinking has taken a major backseat. These panic driven periods have been shown to favor the cool headed, who’ve adequately geared up for looming surprises. Officially, we've moved from a bombardment of bad news to all out frenzy, resulting in an undue responsiveness to the headline noise. Beyond policy makers, gimmicks, snap back rallies, and a lack of feasible alternatives, it is awfully hard to find a positive substantive argument. Moreover, last week provided wild swings as desperate observers awaited market stabilization. As usual, executing on the unthinkable might be the most rewarding as one extreme follows an opposite extreme (rising stock prices) while understanding that some extremes last longer than imagined.

Throughout history, autumn has produced memorable hysterias, notably in 1929, 1987 and 2008. Despite this history, many speculate the summer turmoil collectively captured the majority of this year’s grief. On the other hand, the S&P 500 index declined 18% from July 21 to August 9. That is a dramatic move in and of itself relative to past performance, which may prove a simple and effective catalyst to tempt buyers. Value seekers argue for "cheap" timely entry into areas of fundamental strength, including selected technology and banking stocks. Meanwhile, cycle examiners remind us that shareholders may benefit during the run-up to the U.S. presidential election. Importantly, the current state of safety and risk are consciously being reassessed. Yet, it remains a tricky period to evaluate risk, and safer investment options remain in U.S. debt and Gold which continue to experience inflow.

More Politics than Usual:

It’s quite convenient to draw direct links between market behavior and political sentiment. Typically, the largest market fluctuations tend to stir up popular conversation. Of course, the U.S. sovereign debt downgrade raised questions of political leadership. Consequently, the U.S. “political risk” is higher than usual, reflecting the underlying bitterness and stalemate. To be fair, this was equally reflected in the rise of volatility and poor sentiment. Similarly, when leaders attempt to calm markets it backfired, especially during trading hours. This was especially apparent when examining the remarks by the President and Fed chairman last week. Thus, there are some financial professionals requesting less government involvement in U.S. and European markets. Unfortunately, that's mostly wishful thinking, and makes for better political rhetoric than confidence restoration. Practically, the political constraints are a growing risk for asset managers. Navigating shrewdly is the only option for risk allocators.

Further Disruptions

A series of interventions has added further suspense to the ongoing turbulence. First, the ban on short selling by various global regulators revisits the knee jerk reaction of U.S. equities in 2008 (SEC ban of shorting financials). The countries, among others enacting this practice, include South Korea, Turkey and Greece. Although, disallowing investors from betting on declines does not necessary translate to stopping price declines. It leads to less liquid markets, while asset managers scramble for near-term solutions. Secondly, the more substantial intervention is related to currency depreciation, encapsulated in the larger “currency wars”. The U.S. Dollar Index has stayed above annual lows since May 4, 2011, and for macro observers this is a noteworthy inflection point as the much feared demise of the greenback has not materialized. However, the plot has thickened, as central bankers used their influence to weaken the Yen and Franc. At the same time, significant correction in Gold prices may contribute to further instability in the currency markets. This may not be enough to claim a 6-9 month trend, but it certainly underscores a potentially developing macro shift.

Finally, the much heated debate of quantitative easing is bound to resurface. The mixed message from the Federal Reserve of targeting lower rates is being contemplated, but skepticism of pending plans is growing rapidly. Generally, the saying goes “Don’t fight the Fed!” However, with the lack of trust in intervening parties and the failure of QE2, a daunting task lies ahead for all involved parties. For now, the observer is left to speculate on outcomes, as policy makers dig to find a positive spin in various data releases. It certainly makes for a sensitive and tense period.

Article Quotes:

“Our main finding is that outward spillovers from Germany’s growth to other countries have been low and have remained modest in recent years. In contrast, spillovers, especially from the US, followed by the UK as a distant second, have been larger and have increased over time, even after controlling for the effect of outsized spillovers during the crisis. Based on full sample estimates including a crisis dummy, the effect of a 1% growth shock in Germany measured by the peak cumulative response of other countries is about 0.1%, the lowest of all the large countries. Moreover, spillovers from Germany have decreased in recent years, halving to only 0.05%. Japan’s impact on the rest of the world has similarly decreased. The analysis suggests that countries reliant on external rather than domestic sources of growth generate smaller spillovers. This is the case with Germany, whose growth is powered by global growth, which implies that inward spillovers are large but the outward spillovers are small.” (VOX Centre for Economic Policy Research, August 15, 2011)

“Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said that they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries. But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at an astonishing 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%. Such consumption growth is unlikely because powerful structural factors work against it. The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates.” (The Carnegie Asia Program, August 12, 2011)

Levels:

S&P 500 Index [1178.81] – Attempting to stabilize at 1150-1200. It was deeply oversold, and remains in a fragile zone.

Crude [$85.38] – The commodity peaked on May 2, 2011 around a period where the Dollar bottomed. Once again, the $85-90 range can define a new trending range.

Gold [$1742.60] – Taking a breather after sharper moves towards historic highs. In the near-term, the narrow range resides somewhere between $1740 and 1780, while maintaining a well defined uptrend.

DXY – US Dollar Index [74.59] – A bottoming process developing around $74 in the past three months.

US 10 Year Treasury Yields [2.25%] – Rush to safety has driven yields to levels last seen around December 2008. For now, gains hold slightly above the lowest point of the year at 2.03%.

http://markettakers.blogspot.com

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 | August 8, 2011

2011-08-08T03:33:00.000-07:00

Market Outlook | August 8, 2011

“Anything you build on a large scale or with intense passion invites chaos.” - Francis Ford Coppola (1939-present)

Tension Released

Selling has unleashed in matter of a few days, because of the overdue debt ceiling resolution, currency adjustment by central bankers, depreciating Yen and Franc, and the ongoing Eurozone debt crisis, leading to the eventual S&P downgrade of the US credit rating. Digesting recent events over a month alone would have been too much to ask. Well, now we know what happens when the “bad news” events combust in a synchronized manner at a pace faster than expected. In an interlinked global equities market, shockwaves are felt uniformly.

Ironically, these same worrisome issues were indentified and causally debated in the first part of 2011. Of course, the magnitude of the sell-off was the great unknown, even for the most bearish managers who have lost faith in many assets, outside of hard assets. Meanwhile, bullish managers are quite surprised at the pace of deceleration, as the unraveling has yet to settle. Extreme results are followed up by extremes and surprises, so the suspense will live on for a little while. The unleashing of “fear” turned into quick liquidation as participants ran for safety in an absolute panic. As a quick reminder, the Volatility Index (VIX) jumped by 159% from its July 1st level. Yes, fear is trading at a premium for those opportunistic observers. In other words, this paints the magnitude of broad index reactions. For reference purposes, in 2008, the VIX spiked 380% from August to October. Nonetheless, this time around, calculating and understanding a risk-free return will puzzle models of all sorts, as emotions are the key driving force. Now the anxious question revolves around the end of the bleeding and the beginning of the post mortem to this cycle, as we settle in into new realities.

Scrambling for Substance

Reliance on policymakers’ resolutions in Europe or the US has failed to produce a recovery in the past year. As a start, the debt ceiling deal seems such a long while ago and still failed to produce a cheerful reaction. Clearly, quantitative easing II did not get a warm ovation, while failing to ignite some confidence. Nonetheless, the chatter of further stimulus (for QE3) is slowly picking up volume and support. Secondly, within the desperate weekend hours, the European Central Bank concluded a decision to purchase Italian and Spanish bonds as part of a rapid response. Perhaps, another attempt to restore further faith as good news is hard to find, and it seems further than one’s imagination.

In all fairness, S&P’s rating downgrade confirms the decade old struggle of fueling growth in US business, while attempting to address the debt issue. The rating serves as a confirmation on the known rather than as an awakening to investor perception. Some savvy veterans (including the secretary of treasury and former fed chairman) may argue the calculation methodology of the downgrade and overall creditability of the rating agencies. However, that’s a moot point for all to move along in the near-term. Arguing the rating now is as noisy and less effective as the political posturing and finger pointing witnessed over the past two weeks. Hence, the reality check that is long overdue. Surely, the impact of a series of harsh realizations will be reexamined and will naturally reach equilibrium.

Calmer Digestion

The relative attractiveness of the US has not vanished over a week, as endless coverage would have you believe. That said, a few bruises take some time to heal. Importantly, a downgrade is not to be confused as a default, and in due time, this obvious point will be factored in the thoughts of capital allocators. Interestingly, there are not many alternatives to US treasuries, which remain relatively liquid so far. Of course, many have stormed into Gold, which is hardly new and bound to even extend its all-time high movement. Similarly, Yen and Franc as safe havens have witnessed inflows. However, intervention impact is worth watching for weeks to come. As to the US Dollar, here is one view:

“ ‘In [the] global economic turmoil the world is going through, what other alternative do we have at the moment but to stick with the US government instruments?’ asked a senior Oman government official” (Reuters, August 7, 2011).

Rational minds can calmly stay the course even during chaos. The built-up fear and further excuse to sell is part of human nature. Even Friday’s better than expected jobs numbers only caused a positive response for less than an hour. Plus, emerging market inflation is on the radar and remains a critical aspect of the macro picture. For most managers, deciphering China’s slowdown was on the radar before the recent plunge. Thus, fundamental catalysts were building slowly. Perhaps, all the pent up “weakness stories” are being all flushed out, as old and new realities are confronted. Soon enough, all the sideline cash will need to be put to work. As risk is redefined, history suggests that sobered minds will notice that some value (long-term investments) is worth considering. The mind games between fear and greed will reinvent itself in a new cycle. Until then, timing will remain tricky. Clear thinking is required more than usual, and visionary thoughts will be challenged by general sentiment.

Article Quotes:

“It is undeniable that the mass printing of “virtual money”, so-called quantitative easing, amounts to a deliberate debasement of the dollar, the euro and the pound. QE not only rescues banks that are bust but politically connected. As our central banks churn out cyber-credits, using them to buy our own government bonds, we’re also imposing losses on our creditors at home and abroad. The truth, largely unspoken, is that inflation and currency debasement are at the heart of the West’s strategy for tackling our massive debts. Domestic ‘monetary stimulus,’ in addition, causes money to flee our shores, so the currencies of other nations rise, making their exports less competitive. That’s why Brazil has imposed a tax on holdings of the real, trying to make it unattractive. Japan is intervening to lower the yen. Even Switzerland, the ultimate neutralist, is now engaged in ‘currency war’ – with Berne complaining loudly about Western policies causing the Swiss franc to spiral.” (The Telegraph, August 6, 2011)

“As for the downgrade itself, it may just be an expression of the obvious, not unlike the shellacking the stock market took last week. The underlying logic—of both downgrade and downturn—has been plain to see for a while. Our economy is a mess—in the long term because we’ve spent too much, and in the short term, perhaps, because we won’t spend enough. The political and ideological arguments that arise out of this contradiction make for a dismal spectacle….We’re a little like a gambler deep in the hole. The only way out of the hole is to bet more. The problem is, the guys around the table aren’t as keen as they used to be to stake us the cash to stay in. Do we walk away broke, or sell our snakeskin boots for a shot at another hand? Either way, we’re facing ruin. But it’s the doing nothing—the dithering—that might just get us shot.” (The New Yorker, August 6, 2011)

Levels:

S&P 500 Index [1199.38] – Down 7.19% last week, following a very extreme move. The break below 1280 is noteworthy, as 1200 marks a fragile but new stabilization point.

Crude [$86.88] – Closed Friday above $85 range—a level last witnessed near the start of the year.

Gold [$1628.50] – Although slightly up for the week, the commodity did not make new highs, as seen several times in the past few years. Nonetheless, 1679 intra-day highs from August 4th, as uptrend remains intact.

DXY – US Dollar Index [74.59] – Held above annual lows and turned a positive weekly return. Implication of downgrade, currency adjustments and safe haven rotation will have a lot to say. However, for over four months, a bottoming and stabilizing pattern is visible.

US 10 Year Treasury Yields [2.55%] – Further decline in yields begs questions for key target rates. In the late 2008 era and in late fall 2010, yields stabilized around 2.40. Now, few percentage points removed from that level as the recent lows stand at 2.33%.

http://markettakers.blogspot.com

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 | August 1, 2011

2011-08-01T02:53:00.000-07:00

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

Sorting Out Messes

After a circus of a week, least to the surprise of most insiders’ expectation, congress has nearly reached a debt agreement. Perhaps, soon enough, we can resume back to issues related to job creation, weakening European condition, and rising skepticism by various participating parties. Now, with suspense cooling off, the market drivers can return to earnings season and currency reactions and patterns. Of course, the potential debt rating downgrade chatter is hovering as a political and risk management discussion.

It’s quite evident that a shortage of good news is a summer theme, just as much as a shortage of sustainable ideas. Perhaps, a shortage of common sense and brevity can be thrown in the mix as well—not to mention the overstated theme of a shortage in investable ideas. These are the thoughts that persisted last week, where volatility (measured by VIX) reached the second highest level this year, along with all-time highs in Gold prices last week. The previous highs in volatility were reached in mid-June and two weeks ago as an illustration of a turbulent summer. Meanwhile, the Gold story is too obvious, and it is sold as the “safety” barometer among casual and financial onlookers. Regardless of political messaging delays and disarray, these were minor clues from key indicators. Now, the level of panic might not have been as dramatic as desired by some political leaders in the debt ceiling crisis. Still, the question this week remains whether or not “risk” is trading at a premium, as hope is priced very “cheaply.” That is where visionaries can reexamine opportunities.

Truthful Imagination

For those plainly looking ahead, on the surface it is hard to envision improving growth numbers in earnings or economic numbers. Similarly, foreseeing a series of events to change the “beaten up” sentiment is quite challenging beyond a day or two. Simply, imagination is deeply required to see a recovery. For many weeks, the question has been: Is it bad news or is it stimulus tools that are deeply exhausted? Fatigue of hearing the message takes its toll, even if a dosage of truth is reiterated. At this point, one has to ask or seek the surprise element for upside gains, as previous crisis modes would suggest. The reward is in visualizing aggressive bets for the next 6-9 months, where markets get back to the usual illustration of perception.

Asset managers are forced to reflect to trends of the post 2008 crisis era. As a start, the lack of success in quantitative easing showcases that a stimulus package or comforting plan is not enough. At the same time, the inflationary pressures have led to rate hikes as few wonder about the promising outlook of emerging markets. This has Asian currencies rising to 14-year highs. For larger US firms, overseas earnings continue to play a bigger role. Therefore, the magnitude of Brazilian and Chinese slowdown is too interrelated, and it will have a big say in this second half.

Gearing Up

Pressure has mounted as to the feasibility of capitalism, which has entered a territory of too many unknowns this year (more than usual). Plus, one should not deny the new regulatory framework of the Dodd-Frank Act, which is still being digested and expected to revamp the asset management world. Yet, through all this, the US democratic system, although highly manipulated at times, continues to work, and it remains a welcoming system for debates (as witnessed again this weekend). That is perhaps a relative argument, which cannot be understated, despite a fragile state for America’s economy. In due time, when confidence is restored, this point can be viewed not as a bold statement but rather a sobering observation. As to the consequences of recent policies, that remains to be seen.

Wills are tested at periods of economic slowdown. Conviction on buy ideas is mostly low. Thus, it’s a good time to isolate the political negation tactics from the natural economic slowdown—a worthwhile exercise for the upcoming weeks. As a reminder, it was last July when stocks bottomed after a turbulent spring 2010. History rarely repeats itself exactly, but a quick look back addresses that fact. Importantly, an inflection point is deeply awaited in terms of commodity reversal and US dollar recovery. Similarly, near-term traders will have to isolate knee-jerk reactions from headline news versus sustainable runs backed by fundamentals. Let’s not forget that the S&P 500 Index was down 3.92% and that Crude declined by 4.12% coming into this week. Thus, a short-lived bounce is merely inevitable, especially at the start of a new month.

Article Quotes:

“The Chinese approach to development is to build the infrastructure in the expectation that the demand and economic activity will naturally follow in its wake. Yet in its impatience for economic advancement, China has ignored the dangers and cut corners…As everyone knows, progress never proceeds in a straight line, yet when it comes to China, many have managed to deceive themselves that it can and will. No one is more guilty of this delusion than the Chinese themselves. The swagger and arrogance of Chinese officialdom has all the hallmarks of pride before the fall…. China is on a treadmill of unsustainable development which it knows not how to get off without damaging growth and thereby provoking political and social instability. Residential and commercial property development in China is such a big component of overall growth that anything that damages the property market threatens to upset the entire apple cart.” (The Telegraph, July 28, 2011)

“The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts. But, so far, that gamble isn’t working as well or as rapidly as hoped. Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans. But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction. Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary. Banking systems need more capital. The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment. But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.” (Project Syndicate July 29, 2011)

Levels:

S&P 500 Index [1292.28] – Stalled at 1340, where sellers stepped in. The next noteworthy buy level is around 1280, where technical indicators would argue for a buy point. That’s near the 200-day moving average of 1284—a target worth a closer look.

Crude [$95.75] – In the well defined range between $95-100. A break below $94 can trigger further selling pressure.

Gold [$1628.50] – The reacceleration since July 1st has led to a nearly 10% appreciation. Established uptrend is making new highs.

DXY – US Dollar Index [73.89] – Barely holding above annual lows after the deceleration in recent weeks.

US 10 Year Treasury Yields [2.79%] – Unlike the dollar, yields have failed to stay above previous lows, as the below 3% trend lives on.

http://markettakers.blogspot.com

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 | July 25, 2011

2011-07-25T02:48:00.000-07:00

“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” - Friedrich Nietzsche (1844-1900)

Theatrical Deal Sealing

Obsession and anticipation over deal making is a theme that keeps the summer lively, given this unavoidable topic. At face value, it is easy to say negotiations are ugly as the political spice makes it even uglier. One big weekend deal (or lack of) attempt does not seal other long-term issues. Generally, when a politician talks like a trader by warning of market behavior or when a trader speaks like a government official, then both are equally dangerous. Veterans and shrewd observers would attest to that. In fact, some are calling this debt ceiling event “a manufactured crisis” or simply “artificial,” or other Washingtonian insiders call it a “gimmick.” Bottom-line, running a deficit is nothing new that dates back to World War II, and the Treasury Secretary can steer clear of a default, if needed. The National Center of Policy Analysis reminds us of the following:

“There are approximately $2.6 trillion dollars in the Social Security Trust Fund; those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit…. The Treasury Department could also make cash available from the trust fund by "disinvesting" some of the money used to buy government bonds” (NCPA, July 20, 2011).

Posturing methods and threat of a market collapse should be neutrally watched by market observers. In other words, the gloom-and-doom consequences are well laid out (especially with nauseating Eurozone discussions); therefore, a mellow approach is heavily required.

Sensationalism makes for good entertainment and not for a solid money management. Outside the tick-by-tick and day-by-day response to chatter, placing money with high convictions in the next 6 months is the objective and challenge on hand. After all this back and forth, one should seek the actionable ideas while prioritizing noteworthy global indicators beyond the current headline matter.

A Glaring Shine

Gold perceived as a “safer” instrument continues to attract votes via buyers, as showcased by shiny past and present performance. It was July 23, 1999, when Gold bottomed at $252.80. Of course, that was a period where America was infatuated with the tech boom. The 12-year anniversary of Gold’s bottom marks a different world today, with all-time highs at the end of last week at $1602. Importantly, soon after, at the turn of the millennium, interest rates and the dollar started multi-year declines. Clearly, that’s contributed to keeping the Gold party alive and well. Yet, at some point, Gold owners must ask, is this a safe asset to own against, anticipating the dollar collapse, stock market fragility, or alternation in capitalism. Or does it have a historical appeal and can be physically felt? Bringing up these doubts sounds rather unpopular today. For now, the defined reasoning behind the ongoing run is less of a discussion, and that’s too common when momentum is in full gear Nonetheless, few biases and facts need closer evaluation, especially for the next 6-12 months. In other words, safety was one of the catalysts to own Gold, but logic eventually catches up to a frenzy of patterns.

Borderless Index

As known to all by now, borderless-driven competition has redefined the way of evaluating an index. Recently, a report confirmed that companies in the S&P 500 received 46.3% of revenues outside the United States. Notably, US technology companies had the most exposure (56.3%) to foreign sales (S&P Indices, July 2011). These trends seem rather simple and obvious, but they paint one solid picture of today’s realities.

This certainly illustrates a look back into the weakening US growth rate, which by now, doesn’t require advanced quant models to figure out. Importantly, we can point out with confidence that the S&P 500 Index is not a reflection of US economy and clearly not an economic barometer (as stated many times before). At the same time, this reflects the much talked about emerging markets expansion as well as the interlinked nature of financial markets.

Then, there is the domestic social, but really political, matter. Multi-national companies, for the most part, don’t have an allegiance to borders in a globalized world. Rightly or wrongly, this becomes a vexing topic for some patriots, but it becomes a practically stifling issue for American leaders. Not to mention, these company-specific dynamics are powerful enough to alter the behavior of a money manager when it comes to capital allocation. Finally, non US revenue trend touches on key topics related to corporate taxes (to be paid in the US), flow of investment capital, and factors affecting growth rates.

Seeking Answers

For companies with exposure to China, some near-term suspense is warranted. This has many scrambling to decipher soft vs. hard landing matters to the Chinese economy. Inflationary matters have swept the emerging markets, and this certainly is a daily discussion topic for policymakers and investors alike.

Real estate “bubbles” are resurfacing again in China as well as Brazil. The real impact of the housing slowdown is not quite understood, and at times, it is unfairly compared to the US collapse. As for now, it is evident that emerging markets have some turbulence (or skepticism) to overcome in the next few months. Interestingly, the magnitude of any slowdown can provide guidance on two major questions:

1. What will be the impact of further slowdown on earnings of multi-national companies? 2. Will investors rotate to US markets on a relative basis, given increase in the sovereign debt crisis elsewhere?

For now, both are intriguing questions, and they are worth deciphering before placing aggressive bets.

Article Quotes:

“It has been argued that banks do not need to get funds from each other, since they are now awash in reserves; but these reserves are not equally distributed. The 25 largest US banks account for over half of aggregate reserves, with 21% of reserves held by just three banks; and the largest banks have cut back on small business lending by over 50%. Large Wall Street banks have more lucrative things to do with the very cheap credit made available by the Fed than to lend it to businesses and consumers, which has become a risky and expensive business with the imposition of higher capital requirements and tighter regulations…. Fourteen states have now initiated bills to establish state-owned banks or to study their feasibility. Besides serving local lending needs, state-owned banks can provide cash-strapped states with new revenues, obviating the need to raise taxes, slash services or sell off public assets.” (Asian Times, July 21, 2011)

“People on both sides of financing French banks say the cost of debt has not changed substantially, but rather, the availability has diminished and money market funds preferring to lend overnight. Money market lending to Spanish and Italian banks has virtually ceased in the past month as sovereign debt worries have spread to Europe’s larger economies, reported the head of one money market business. At the end of June, banks in the two countries had accounted for 0.8 percent of the $1,570bn assets in prime money market funds, calculates Fitch, down from 6.1 per cent in late 2009.The 10 largest US prime money market funds reduced their total exposure to European banks by 8.7 percent on a dollar basis in June, according to the rating agency. Owners of the money market funds, chastened by a rush of withdrawals during the financial crisis in 2008, have adopted an abundance of caution.” (Financial Times, July 24, 2011)

Levels:

S&P 500 Index [1345.02] – Breaking and staying above around 1340, which has been difficult, as witnessed in February, April, and earlier this month.

Crude [$99.87] – A trend reversal established on June 27 has triggered a recovery back to the $100 level. Doubters are questioning if elevation above $100 is sustainable. Earlier this year, buying severely stalled at $105 and $110.

Gold [$1602] – A 21% rally since the lows of late January registers yet another all-time high—the most profound and well-defined positive trend this year. Since the 2008 crisis in October (24), the commodity has rallied by 124.84%—clearly a declaration of negative sentiment for paper assets. Bubble-like pattern is hard to identify for now.

DXY – US Dollar Index [74.20] – Resumption of downtrend pattern and few points from annual lows, which is critical to watch at 7269. Last four months have showcased moderate stabilization, but conjuring an uptrend is hardly visible.

US 10 Year Treasury Yields [2.96%] – Attempting to break above 3% while staying above 2.80%. A step back further illustrates the established downtrend, which has been in full gear since peaking at 6.82% in 2ooo.

http://markettakers.blogspot.com

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 | July 18, 2011

2011-07-18T03:18:00.000-07:00

“Wisdom is knowing what to do next, skill is knowing how to do it, and virtue is doing it.” -David Starr Jordan (1851-1931)

Collective Mystification

The past week has been a suspenseful one, in which global risk became ever harder to define, understand, and estimate—simply, an honest observation, which most should admit by now (if they have not already). Downtrends, downgrades, and pure “downers” stem from old wounds and mostly sum up the summer trading days. Importantly, healing methods via reactionary policies are too short-term oriented, and at some point, further misdiagnoses take its toll on fragile markets. Financial books will have to reassess previous teachings on the “true” safety of Treasuries and various sovereign debts. The textbook assumptions are severely challenged today, especially since a problem-solution manual is not available or agreeable. Therefore, we’re all forced to stay patient in this unwinding process.

The Federal Reserve chairman, as usual, attempted to calm participants. Unfortunately, the witty, sharp, and skeptical audience had heard this message before. Thus, this time, the cheerleading was toned down. The revival and stimulus efforts are nauseating (and recognized by Chairman Bernanke) for a crowd that is seeking fresh ideas. In other words, the initial reaction was for traders to expect more of the same: a declining dollar, rise in gold prices, and lower interest rate policies. Optimism (or further denial) is much needed as confidence creation is vital. However, identifying the substance behind the salesmanship is a demanded skill for investment officers. Thus, this leads one to ask this question: how many times can you cheer for a fundamentally flawed system? That’s a question circulating in the minds of causal or obsessed observers. In fact, the Federal Reserve of Dallas stated: “We've exhausted our ammunition, in my view, and expanding the Fed's balance sheet from about $2.7 trillion to more than $3 trillion 'might spook the marketplace’” (Bloomberg, July 14, 2011).

As for alternatives, China’s growth is noticeably (expectedly) slowing down, and the same applies for other emerging markets. After a decade of growth in developing countries, inflation monitoring haunts policymakers. As for the magnitude of this slowdown, that is for buyers and sellers to speculate. Yet, the long-term picture seems net positive for emerging nations as investor appetite seeks higher growth rates—a thought to keep in mind, even if near-term corrections can blur the vision of investors.

Deadlocks, Deadweights, and Dead Minds

Theatrical deliberation on mission critical issues is merely a common theme for Eurozone and congress leaders. Negotiations that are filled with deadlocks about saving dead weights, during an age-old political banter, produces some dead “minds.” Political posturing in the debt ceiling matter, combined with contemplation of rating changes by agencies, enhance the buzz (or scare). Perhaps, it’s a negotiation tactic, but it fails to add jobs or the perception of confidence. How can business run as usual without the clear guidance of major talks and hopes of a deal? The well-documented economic slowdown is a forefront political and social issue. Sadly, these restructuring topics are mostly backward looking, and they hardly create organic growth at a desired pace.

Mapping a Plan

Guts and some guesswork will be required by money managers in looking ahead for the next six months. For example, the guidelines to operate as a bank have adjusted significantly in which projecting earnings growth for the next three years is hard to predict. Similarly, the obvious deleveraging cycle in consumer markets makes housing and retail rather difficult in most markets. Near or long-term investment ideas are hard to bring back and, once identified, even harder to execute. Plus, the macro events are bound to tack on volatility, which has stayed relatively calm in the first half of the year. All this adds up for a synchronized hesitancy and occasional shocks in the weeks ahead.

Article Quotes:

“Dupont appears to be adapting nimbly to new 21st century strategies, by following a couple of key themes: global markets and agricultural industries. With its focus on emerging countries like China, Brazil and India, it projects a 10% compound increase in sales in those markets over the next five years. On the agricultural side, the company has identified the megatrend of expanding populations who demand increased food and other basic commodities, as well as the importance of genetically modified seeds and more efficient farming, to yield higher crops. This May, Dupont completed a tender offer for Danisco, a Danish maker of food and bioproducts. At the same time, the company preserves Pierre’s culture and legacy of scientific innovation. Out of about 60,000 employees, over 5,000 are scientists and engineers… It’s some comfort to remember that an industrial backbone can still drive the American economy, not just social networking enterprises that look like bubbles.” (Vanessa Drucker, Fundweb July 12, 2011)

“Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4pc, yet the one-year deposit rate is just 3.5pc. India's central bank is far behind the curve… China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small…China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54bn. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.” (The Telegraph, July 18, 2011)

Levels:

S&P 500 Index [1316. 14] – Slightly above its 50-day moving average, as near-term consolidation continues.

Crude [$97.24] – Multi-month range is between $95-100 and becoming well defined. Attempting to revisit early spring levels of trading above $100.

Gold [$1587 ] – After several previous attempts, the commodity broke above $1550 while establishing all-time highs. Momentum is intact along with it.

DXY – US Dollar Index [75.12] – Similar to Crude, trading in a tight range the last two months. Maintaining a few points above annul lows.

US 10 Year Treasury Yields [2.90%] – July 12 marked the lowest point of the year at 2.81% as a reflection of jittery broad markets. Yet, the next move appears to revisit and stall around 3%.

http://markettakers.blogspot.com

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 | July 11, 2011

2011-07-11T03:45:00.000-07:00

"Sometimes only a change of viewpoint is needed to convert a tiresome duty into an interesting opportunity.” - Alberta Flanders

Tiresome Matters

Negative news becomes tiresome even when concerns are legitimate and unwaveringly glaring from all directions. Somehow or another, market participation (via retirement or growth driven capital) is nearly inevitable and needed to keep the global engine running. For US market observers, nostalgic feelings of better days may get in the way of actually realizing the relative attractiveness of US equities, mainly in technology and healthcare. However, that is a tough argument to sell these days after a Friday’s weak job results along with weekend discussions of “debt limit.” At this point, we’re reaching uncharted territory of chatter related to potential US debt downgrade as a serious possibility. Some are even now calling for the third episode of quantitative easing. Perhaps, recent behaviors suggest that bailouts and stimulus plans are becoming a form of addiction.

As usual, distinguishing between fear mongering and blind hope is vital as the truth falls somewhere in the middle. Yet, America’s developed (not perfected) financial system and refined legal structure provide some edge in a more turbulent junction of the global economy. For how long or short would this relative strength last? No one knows, but most financial systems will be tested, especially in upcoming months. Debates are bound to roar; markets are poised to swing; and opportunistic political party leaders will craft a profitable spin. Yet, judging from implied volatility, investors seem to have accounted for some of this turbulence, as anxiety has been mostly contained. Perhaps, negative expectations are already accounted for:

“Our net earnings revisions ratio [for companies in the S&P 1500] has now decreased for 10 consecutive weeks. Going back to the end of 2007, this is the longest such streak of declining analyst sentiment that we have seen, even surpassing the nine week streak that we saw in the aftermath of the Lehman bankruptcy.” (Bespoke Investment Group, July 8, 2011)

No Escape

Through this maze of bad news, one has to look around to grasp the relative attractiveness of US markets, at least in the intermediate-term. Clearly, the Euro-zone matters are hard to shake out and simply cannot vanish quickly. Case in point: Italy and Spain as the nations’ looming troubles are next on the menu for European policymakers. Meanwhile, the higher growth oriented China, as usual, is on the radar, but now emphasis is shifting from growth to the magnitude of the slowdown. Any global investor in China is closely contemplating the results of another interest rate hike as inflation level marks a three-year high. When glancing at Latin America, Brazil screams of credit worries issues as the cycle is cooling. Australia’s economy is contracting, along with weak retail sales and housing data. Importantly, any decline in emerging markets is usually closely tied to commodity prices and currency policies, which are worth monitoring. When considering these points, the alternatives are limited, while anxiety is known to increase, but much of this slowdown is not a major surprise. Simply, the “big blow” has yet to be seen in emerging markets; thus, it increases the skeptical suspense.

The Delicate Balance

Analysts are now becoming cautious by downgrading emerging markets and slashing US corporate earnings estimate as part of ongoing headline agitation. For one thing, layoffs in banks are a noticeable theme; thus, the mental anguish of fear seeps through professionals who have been bombarded with less promising facts in the last six months. As the earnings season is upon us, the bet is whether estimates are higher than expected. Solving this question is the opportunity presented for fundamental traders.

The macro climate points for more of the same: a fragile trading environment where capital preservation is the perceived “safe” way to operate. However, for those looking beyond 3-5 weeks, there are moments and ideas that should offer entry points in periods. In all this, managing the turbulence is art blended with skill, in which luck is needed to overcome an eventful calendar.

Article Quotes:

“Ultra-low interest rates in the west continue to flood faster-growing markets such as Brazil’s with capital, pushing their currencies higher. Allow for inflation and the trade-weighted Brazilian real is 40 percent more expensive now than in 2006. Since then, Brazilian imports have almost doubled. Export volumes have meanwhile grown just 5 percent. The only reason Brazil’s current account deficit has not exploded is thanks to high commodity prices. But that boom may not last forever. Abundant liquidity has also helped boost domestic credit. Yet Brazilian consumers now look over-stretched: households spend about a quarter of disposable income servicing their debts. That is more than pre-credit crunch levels in the US, so it is also probably a ceiling. Brazilian credit growth can only continue if real incomes continue to rise too.” (Financial Times, July 7 2011)

“The most commonly accepted way to value a company is to estimate its future cash flow, then discount it back to the present day based on expected inflation rates. That necessarily involves a lot of guesswork. But today's hot tech companies—Facebook, Twitter, Groupon, Zynga, and LinkedIn, to name a few—at least give investors some good reasons to make optimistic guesses. All of them have tens of millions of customers, positive cash flow, and fast growth. In contrast, the end of the dot-com bubble was characterized by bets on companies that had no fundamentals at all—no profit, no revenue, no customers, no cash flow. Just projections. By the end of the 1990s, there were about 360 million people on the Internet. Most of them were in the United States and other developed countries. … The promise of 15 years ago—that ‘the Internet changes everything’—is actually kind of true now.” (The New Republic, July 9, 2011)

Levels:

S&P 500 Index [1343.80] – Slightly extended in the near-term with 1340 signaling a technical selling point. However, buyers on pullbacks would look to accumulate closer to 1300 than 1280, which depends on the magnitude of the declines.

Crude [$96.20] – Ultimate test in the near-term is to revisit and potentially break $100. For now, positive trend is supported by prices stabilizing and staying over $90.00.

Gold [$1483] – Barely removed from all-times high ($1552 on June 22). A reacceleration process is building up as buyers’ demand is relatively healthy at this point.

DXY – US Dollar Index [75.66] – Stabilizing at current range as the pace of depreciation has slowed. A noteworthy macro event as the Dollar attempts to recover.

US 10 Year Treasury Yields [3.02%] – The last week of June sparked a spike in yields to propel a move above 3%. The explosive run is cooling off, and the downtrend is in effect.

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 | July 5, 2011

2011-07-05T02:22:00.000-07:00

“Faith begins where Reason sinks exhausted.” - Albert Pike (1809-1891)

Endings and Beginnings

A series of endings and new starts is a fitting description over a reflective holiday weekend. For one thing, the first half of the year reached closure with the S&P 500 Index up 6.52% for the year, following an impressive 5.6% run last week. Yet, since midwinter, we've seen suspenseful events of lingering debt issues and gut-wrenching realities of the global system filled with minor down hours and negative days.

Secondly, Quantitative Easing 2 (QE2) ended last Friday. Of course, that's the government stimulus program designed to spark a recovery (avoid further disaster) by mainly keeping interest rates lower after the 2008 crisis. Skeptics in the early stages warned of eventual inflation and dollar devaluation. Either way, it’s too early to judge, as inflation is reported not too high and the dollar has declined but not collapsed. However, that stimulus plan has expired, and investor reaction is eagerly awaited. In the meantime, the end of QE2 naturally raises questions on consequences of ungluing a sense of stability. The debate centers around intervention versus facing painful short-term measures. Yes! This is all too familiar to the financial and political world—yet again. Now, money managers ponder if the ending of the Fed policy will propel the beginning of rising interest rates and the strengthened dollar (anticipated incorrectly for many years now). Basically, a trend reversal in these two key macro indicators may not only impact the currency markets, but it also questions if this ends the momentum in Gold prices.

Finally, last week marked a minor closure or temporary relief to the Greece matter—a much needed pause to the glaring suspense and intense debate. For policymakers, the resolution gives much needed breathing room from a topic to be revisited and scrutinized in months ahead. Interestingly, the US Treasury Secretary appears ready for an exit while June marked the beginning of a new IMF chief—not to mention, the retirement of the Secretary of Defense, Robert Gates. These events are happening as we approach the early stages of the US elections. Clearly, much of the day-to-day news can shape perceived policy changes and sensitive response to near-term sentiment. Similarly, Europe’s mood for bailouts is bound to change, due to increasing political pressure, given recent decisions. How this plays out in Germany and other nations will have a say in regards to global financial stability.

Bad News Exhausted

By this point, the fatigued and battered investment crowd is into recreating some positive mental tune. Savvy front line money movers visualized a pent up upside move about a week ago, as June 17 marked a recovery point in which volatility reversed, while broad indexes found bottom. There is a difference between accumulating bad news and a sharp collapse.

Like a kid punished until he is remorseful for his bad behaviors, markets go through a correction and a taste of harsh reality. Then, shamelessly, we're temporarily back to humming the same tune driven by human nature, capital chasing growth, and paying up at debatable prices. The clouded directional view does not fully stop opportunistic players from making bets or having guts. Thus, a pure argument for logic may fail to explain the rationale in which systemic problems (i.e. sovereign debt) suddenly vanish, as outraged pundits are quickly silenced. Importantly, surviving this wobbly landscape requires one to quickly connect dots while accepting and playing the cards dealt. For now, economic and corporate earnings might not deliver an uplifting message, but selective opportunities are worth scrambling for, given scarcity in quality ideas.

Within this fragile macro climate, there is a boom in technology venture-backed IPOs— somewhat herding in Gold investments and an eagerness to restock into risky assets. This signals that few found robust ideas in the first half. Importantly, in planning forward, one can begin to selectively pick entry points to attractively valued themes.

Irrational Logic

At this point, it’s only normal to ask this question: how can these not-so-logical patterns re-occur? Some wonder if financial markets are a venue where the participant comes in saying, “I have money to burn!” Basically, this suggests that speculation is borderline entertainment on real events or alternative to traditional saving schemes. If this is too blunt of a description, then there is another approach. A buyer goes through a self convincing process in which he or she cleverly justifies actions in the name of long-term wealth creation. Others are limited by investor mandate or knowledge, and they prefer to stick to traditional investment patterns.

At least veterans know (or should know) that there is a tragic ending to too much hopefulness if not monitored correctly. Again, these greed-driven stories are glaringly obvious and easier to comprehend in the post mortem analysis of hyped investments—yet rarely are the mistakes not repeated. If the majority of account holders did not have clever self-justification processes, then surely the market dynamics would be drastically different than we know it. Therefore, savvy or lucky money managers have accounted and adjusted for the constraints of available ideas while emphasizing the human psychological response—a note worth applying to the quarter ahead.

Article Quotes:

“We have seen how "inflation hedger" investors aiming to avoid inflation have actually caused the very inflation they sought to avoid. The game-changing intervention by the IEA increases the supply of oil relative to the dollar, and therefore, it can be expected to deflate the price, at least temporarily. The most potent effect of what might be termed "quantitative greasing" with oil was—and was intended to—to deter speculators, and hedge funds are already licking their wounds and adjusting their strategy. But this action will also in all probability act to limit the inflationary expectations of the billions of dollars of "inflation hedge" investment also in the market, and will in all probability lead to a market collapse… So perhaps the dysfunctional and increasingly sociopathic oil market may at last be open to a new collaborative and transparent settlement, involving new market architecture; and new market instruments.” (Asian Times, July 1, 2011)

“Six years ago, when I first started writing about the credit markets, I often heard US financiers praise America’s capital markets as the most developed system of free market finance in the world. Indeed, techniques such as securitization were presented as a natural outcome of American enthusiasm for free market ideals. ..But the dirty secret behind this rhetoric was that government-backed institutions such as Fannie and Freddie were playing an important role in the modern financial system, even before the credit crisis erupted. And what is remarkable now, given that the role of Fannie and Freddie has swelled, is just how little debate this patter continues to generate. After all, with the US remaining wedded to free market ideals, it is uncomfortable to admit that “capital markets in the US have become reliant on government guarantees,” says Viral Acharya, an economist and co-author of a thought-provoking book.” (Financial Times, June 30, 2011)

Levels:

S&P 500 Index [1339.67] – An accelerated rally from 1260 level, which showcased a heavy buy-interest near the 200-day moving average. Meanwhile, 1320-1340 serves as a near-term range for a pause.

Crude [$94.94] – In late 2010, the $90 range has served as an attractive buying point. Similarly, the commodity bottomed on June 27, 2011 at $89.61. Attempting to break above $95 as investors debate the appropriate pricing and pending fundamental factors.

Gold [$1483] – Failed below 1500 after prices hit new highs of $1552 on June 22—the third time in the past few months where Gold struggled to stay above $1540 as a point where buyers’ momentum fades.

DXY – US Dollar Index [75.66] – Several days of trading don’t showcase a major trend shift. Avoiding new lows since May 6 but the follow through is not that explosive. Interestingly, the 50-day and 200-day moving average sit at or around 78.

US 10 Year Treasury Yields [3.18%] – Sharp spike above 3% caught the attention of near-term traders, given the downtrend established in early February 2011. A follow through is awaited, and the technical pattern suggests a rise in yields.

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 27, 2011

2011-06-27T03:52:00.000-07:00

“There is no rule more invariable than that we are paid for our suspicions by finding what we suspect.” - Henry David Thoreau (1817-1862)

Simple and Obvious?

One would think that the purpose of business or investing is to enter with the objective of winning as measured by profits. As simple as that sounds, there is losing in asset depreciation, defaults, and bankruptcy, as recently witnessed. Most can agree that a loss exists, and as to the type of loss, well, that’s where legal expertise can sort out the distinction and details.

The rules of engagement state that an investment manager makes a long-term bet to win, while not being blinded to potential losses. In that process, an investor deciphers the risk, and regulators set the parameters for a fair game, while not overly tilting to any particular side. In between, you have rule breakers and deceivers, but veteran participants know that's the additional risk of being a speculator. Unfortunately, this logic is not necessarily all thought out prior to the date of purchase. In addition, those burned in the last bull market have to comfort the harsh outcome, while not deviating from the basic concept of competition and consequences. For some generations, “losing big” used to sound conceptual rather than real. The last four years emphasize that asset value erosion is part of the game, and it happens despite marketing slogans, hopeful mind games, feelings of entitlement, or historically driven bravado.

Eluding Defeat

In any game, no one likes a sore loser (we'd like to think), as it’s not an admirable quality to deny a fair defeat—a lesson hopefully learned early on in the competitive field or middle school playgrounds rather than larger stakes in financial markets. After all, markets are a collective reflection of human emotion. Surely, we all have our own biases on accepting losses. Clearly, these dynamics are illustrated in the European Central Bank and other regulatory debates over the sovereign debt crisis.

Specifically, saving bondholders for the sake of financial systems at the cost of the common people (via future taxes) puts a dent on all of the above mentioned points. In fact, this conceptually echoes the US banks in 2008, when the bailout debates surged with outrage, filled with little shame and eventual concession of "too big to fail." Obviously, the pros and cons of letting Greece default are well documented. Either way, these are desperate conditions. These hints of system breakdowns remind us that there are a different set of rules for select groups versus the casual investor. That said, confronting the truth, such as default, may hurt in the short term, but the long-term outcome might be surprising:

“But while countries that default do find themselves locked out of markets for some time, any growth penalty from a default tends to be short-lived. Argentina saw its GDP decline by 10.9% in the year after its December 2001 default. But its economy bounced back smartly in the years that followed” (Economist, June 20, 2011).

Murky Definitions

When winning or losing is distorted by complexity or neglected, then major trouble arises, and undoubtedly, whining increases from all sides. The lack of value placed on accountability bruises investor confidence and mindset. If losing is not enforced in special situations, then the lack of punishment encourages further irresponsibility. Not to mention, if policymakers postpone losing, then it’s known for bubbles to form and form again, as witnessed many times in the past.

Meanwhile, political spin (a natural human behavior) shifts to blame businesses for competitive political points, yet most small to mid-sized US businesses rather play to win within defined rules. The large and privileged companies, or select countries, have developed crafty negotiation skills to delay results of their mismanagement. If this spectacle of putting out the next fire (Spain or Italy) continues, then “trust” in markets becomes a lost art, and eventually leads to further risk aversion. This theme is visible and loudly stated, when viewing Gold prices, as paper assets (bonds, stocks, currencies, etc.) are being restructured and redefined. Clearly, this showcases a growing number of hesitant participants left to own an appreciating commodity, while not enticed at the alternatives. This thought asks if capitalism needs to be redefined and repacked, but in practical terms, this is not easy to reform. Bottom-line, the murky definition of wins and losses deflates the spirit of competition, and sourness disseminates rapidly.

Near-Term Attitude

Transactional participants would rather apply a short-term memory for bad news, and most have little patience to dissect these “nauseating” philosophical debates, especially in the summer months. Instead, allocators of larger capital are desperate for ideas, and they will seek to buy recognizable companies shares at cheap prices. As mid-year approaches, various money managers would look to salvage annual returns, while ramping up on riskier assets as the pressure mounts.

Noise and confusion pile up at perceived inflection points, but most buy demands are likely to focus on relative opportunity in US and some emerging market equities. Volatility has risen in the last few weeks, but not as high as mid March 2011. Recently, buy conviction in liquid markets has failed to follow through as up-days were short-lived. Perhaps, the wise approach is to balance the mindless day-to-day chatter while being cognizant of the mind-numbing theatrics.

Article Quotes:

“During the1995-2005 period, when China fixed the yuan-U.S. dollar exchange rate at 8.28, China’s overall inflation rate mirrored that of the U.S. and was relatively “low.” Once China caved in to misguided pressure – notably from the U.S., France and international institutions, like the International Monetary Fund – and allowed the yuan-U.S. dollar exchange rate to wobble around, problems arose. The money supply growth rate surged in the wake of the Panic of 2008-09. And as night follows day, inflation has raised its ugly head in China. The monetary authorities are scrambling to cool down the inflationary pressures by slowing monetary growth – from almost 30% per annum to 15%.” (Globe Asia, July 2011)

“In a series of ongoing experiments, Montague has studied what happens when people compete against each other in an investment game. While the subjects are making decisions about the stock market, Montague monitors their brain activity in two different fMRI machines. The first thing Montague discovered is that making more money than someone else is extremely pleasurable. When subjects “win” the investment game, Montague observes a large increase in activity in the striatum, a brain area typically associated with the processing of pleasurable rewards. (Montague refers to this as “cocaine brain,” as the striatum is also associated with the euphoric high of illicit drugs.) Unfortunately, this same urge to outperform others can also lead people to take reckless risks.” (Wired , June 16, 2011)

Levels:

S&P 500 Index [1268.45] – Slightly holding above a much watched 200-day moving average. The established downtrend is attempting and nearing a bottom.

Crude [$91.16] – In a correction phase, especially after breaking the $100 mark. Downside momentum seems legitimate since the spring correction.

Gold [$1514.75] – Since July 30, 2010, the commodity is up nearly 36%. Further evidence of buyer interest and no signs of selling in the near-term.

DXY – US Dollar Index [75.66] – Remains above annual lows of 72.69 yet a strengthening dollar is a frail argument now based on recent evidence.

US 10-Year Treasury Yields [2.86%] – A well defined downtrend as the next key level is around 2.60%-2.80%.

http://markettakers.blogspot.com

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, 2011

2011-06-19T19:10:00.000-07:00

“Crisis and deadlocks when they occur have at least this advantage: that they force us to think.” - Jawaharlal Nehru (1889-1964)

Illusionary Comfort

For several months, the fragile credit conditions were occasionally forgotten or dismissed on some participants’ agenda. A rising or stable performance in global indexes created some illusionary comfort, until May came around the corner for a quick gut check. Today, the “peace of mind” in financial markets is under severe questioning, in which emotional responses are too charged up. This worrisome credit pattern is all too familiar and simply nauseating to address for government officials faced with restructuring loans. Wishful thinking of Greece not defaulting may signal a denial or postponement of the harsh reality.

The bail-out and bubble prevention debate is resurfacing, in which risk is infectious for inter-linked markets. At times, it has investors wondering about this philosophical or political debate for European leaders. Clearly, bail-out and bubble prevention boldly hint at a deviation from normal business conduct. Importantly, in practical terms, this European resolution attempt translates to flimsy investor confidence, while the social unrest adds to jittery headlines. The rugged and witty investors will attempt to decipher a long-term opportunity from this mess. However, this Greece case is a daunting task (measured by high risk) ahead for the visionary looking to bet on turnarounds.

Reminders

Conceivably, we’re in an era where bad news carries lesser weight than prior years. These credit concerns are bound to profoundly persist and cannot easily vanish for both the Euro Zone and US. In an awkward manner, the credit markets disturbance in Europe is mirroring the US investment bank collapse of 2008. The definition of “safer assets” most likely requires some adjustment for years ahead. Those engrained with the thought that safe instruments include CD’s, US treasury bonds, or government bonds will have to rewire that thought process. In fact, claiming emerging markets as a riskier asset might be a misleading statement as well, given the changing global landscape. The unknowns are plenty, but most can agree that a transitory period in financial systems is in full effect.

Near-term Matters

The S&P 500 closed the week slightly up and barely positive for this year (up 1.1%). Of course, we are only around the midway point of 2011, but the last few weeks have produced a clear negative message in investor confidence. The volatility index (a panic barometer) has nearly doubled since April 28th in conjunction with the early May sell-offs.

As usual, the crowds seeking buying opportunities will reexamine purchasing US stocks, which still have some relative appeal (perception based) for now. Similarly, chart observers are bound to point out the favorable odds for diving in based on discounted pricing. Frankly, the “buy” crowd would strongly argue that interest rates continue to decline along with the dollar; thus, the macro picture has not changed dramatically from the “steady up days.”

Yet, a confirmation is needed to claim that the recent blending has fully played out. Meanwhile, a trend reversal in US rates or dollar, combined with fearful mindset, can create a painful buyer scenario.

Article Quotes:

“Some argue that both the US Dodd-Frank Act and Basel III capital requirements have now ended US bail-outs. But these efforts do not solve the fundamental flaw in the system: there are highly complex and opaque banking organizations engaged in a variety of non-core, high-risk activities while backed by a public safety net. The problem is not that banks take risk, but that some are too complex for anyone to assess and control that risk...These new regulatory changes actually extend, or make more complicated, what we have tried to do before. For example, Dodd-Frank requires enhanced prudential supervision and regulation that increases incrementally with the systemic risk of the largest financial companies. Yet that design simply cannot be effective if the risk cannot be monitored or assessed.” (Federal Reserve Bank of Kansas City, Financial Times, June 16, 2011)

“First, we were asked, ‘How would you describe the US economic and financial positions relative to the rest of the world?’ The (rounded) responses came back: Getting Better (16%), Stable (26%), Getting Worse (47%) and In Permanent Decline (11%) – yikes! Those reactions seemed unduly pessimistic. America may be struggling, but compared to what? Look around. The European periphery is teetering; Japan is reeling from a nuclear meltdown; China appears to be slowing; and the Middle East is in turmoil…. The BRICs are hardly a well-kept secret any longer. They are battling inflation and have proved vulnerable to market volatility. Does valuation count for nothing? Over five years, emerging markets are up 12.2% versus the S&P, which has gained just 2.73%. Mean reversion and contrarian sentiment would suggest it is time to consider buying those American stocks!” (Fundweb, June 14, 2011)

Levels:

S&P 500 Index [1271.50] – Attempting to bounce back after briefly touching the 200-day moving average (around 1258).

Crude [$93.01] – Steep decline continues and, like equities, approaching a key technical range around $92.

Gold [$1537.50] – Unlike other commodities, the uptrend is in tact. Flirting and not far removed from all-time highs of 1549.

DXY – US Dollar Index [74.98] – The May recovery is not convincing of dollar sustainability for now. Follow through is desperately awaited.

US 10-Year Treasury Yields [2.94%] – In the near-term, holding at current levels while defining annual lows.

http://markettakers.blogspot.com

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 13, 2011

2011-06-12T19:11:00.000-07:00

“No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.” (Isaac Asimov 1920-1992)

The puzzling market inflection point offers a touch for the hopeful, the skeptic, the bold, and the balanced. As a start, we can attempt to elaborate at each participant’s perspective. The merit of this exercise is to ask who is closer to the truth ? This serves as the intriguing global question for investors, regulators, business owners, and other stakeholders. Most likely, decision makers must understand the varying views to navigate in this landscape.

The Hopeful

Hopeful buyers will cling and claim that recent down moves are merely a sign of under pricing (oversold) and that we’re nearing bargain points. Usually, "it’s cheap" is the age-old, but simple, argument to reenter this market. After all, many banks have year-end targets higher than today’s levels. For example, the strategists of big banks have an average target of 1402 for the S&P 500 Index (Goldman Sachs 1450 and JP Morgan 1475). In some cases, much of the buy impulse is driven through eagerness to capture previously missed ideas, such as jackpots in some tech IPOs, partaking in potential M&A deals, and accumulating well-recognized larger cap companies. The danger here is to assume that markets continue to climb in the long term while underestimating the risk of complacency.

The Skeptic

Skeptics have said and written plenty in regards to questioning the effectiveness of stimulus efforts, even as markets hit multi-year highs just few months ago. Thus, the scare in municipal bond default, weakening European economies, high unemployment rate, and weak real estate data all fail to be categorized as breaking news.

After all, daily market trading is sensitive and responsive to headlines. However, bureaucratic decisions are known to drag. During that deliberation period, the skeptic was dumfounded on how long it takes facts to significantly seep into market performance. For now, the VIX (Volatility Index) remains relatively calm, despite recent pullbacks with the growing list of bad news—a fuzzy picture that has short-sellers wondering if “fear” is in full effect. In this case, confirmation of worrisome trends is required.

The Bold

The daring seek extremes of neglected ideas, while examining the consensus view. On one end, you can wait to observe the magnitude of recent correction and look to buy smaller cap (higher volatility stocks). On the other hand, a bolder move is to create exposure to new growing markets, such as Turkey, Eastern Europe, and select parts of Africa. The idea here is to look beyond the BRICs while adjusting to differing rules of engagement.

Perhaps, the least imaginable and bold bet is to ignore inflation worries and not assume of rising rates, while accumulating cheap (toxic) US real estate related investments. Similarly, betting big on a recovering US Dollar strongly qualifies as contrarian when compared to consensus.

The Balanced

Calmer minds are focused on specific opportunities and look to grasp the fragmented parts of the market. A balanced view is reached by not neglecting the available facts and not dismissing a wide range of outcomes for years to come. The residue from the credit crisis takes up tons of pages to explain and numerous hours to digest. Opportunity, however, is found in niche areas within a limited timeframe—a cliché, but valuable, concept in a period of increased competition. Pragmatic observers will note that debt-structuring issues plague government lawmakers in Europe and the US. The mess of the last two decades is unresolved in credit markets, and recent regulation mostly adds layers of complexity. Thus, innovators will have to model a plan of staying compliant and profitable in this globally competitive climate. Identifying that handful of public companies can generate a fruitful, long-term return.

Looking Ahead

A verdict is equally needed in interest rates, which occupies central bankers’ daily tasks as members continue to feel pressure with increasing scrutiny in the mission of crisis avoidance. Both management of crisis and interest rate are interrelated issues, yet the actual impact is not fully assessable or reflected in the recent six-week decline.

Article Quotes:

“As I see it, the two [political] sides in the current disputes have each got hold of one half of the truth, which they proclaim to be the whole truth. It was the hard right that took the initiative by arguing that the government is the cause of all our difficulties, and the so-called left, in so far as it exists, has been forced to defend the need for regulating the private sector and providing government services…. I readily recognize that the other side is half right in claiming that the government is wasteful and inefficient and ought to function better. But I also continue to cling to the other half of the truth, namely that financial markets are inherently unstable and need to be regulated. Above all, I am profoundly worried that those who proclaim half truths as the whole truth, whether they are from the left or the right, are endangering our open society.” (George Soros, April 28, 2011 The Cato Institute event)

“The fact that private banks own considerable shares in European government bonds and risk a major share of their equity in this market makes a restructuring more difficult than otherwise. We understand why, under current conditions, banks have an interest in investing their assets in government bonds. Under current regulation, they need less equity to finance such investments than if they hand out loans to medium-size enterprises. This clearly is like a subsidy by which the governments distort banking decisions, making banks more inclined to finance government debt than engage in their core business.... But from the perspective of economy-wide efficiency, we do not see a convincing reason why banks should use (or should even be stimulated to use) their own funds to invest it in government bonds. They should leave this business to insurance companies, pension funds and small private investors and should turn to their core business as it is outlined in the textbooks about banking business.” (VOX Centre for Economic Policy Research, June 10, 2011)

Levels:

S&P 500 Index [1270.98] – Breaking 1300 (a minor milestone) and approaching 1253, which is the 200-day moving average.

Crude [$99.29] – Trading narrowly and very near the $100. Further clues needed to declare a trend.

Gold [$1540] – Slightly retracing from all-time highs. The ability to hold above $1500 should challenge and attract near-term traders.

DXY – US Dollar Index [74.79] – Showing very early signs of a recovery after a six-month erosion in the value of the Dollar.

US 10-Year Treasury Yields [2.96%] – Staying below 3.00% for another week. Approaching the lower end of a multi-year trend as the 2.80% is the next noteworthy point.

http://markettakers.blogspot.com

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, 2011

2011-06-06T03:43:00.000-07:00

“The hopes of the Republic cannot forever tolerate either undeserved poverty or self-serving wealth.” -Franklin D. Roosevelt (1882-1945)

A New Month

Plenty of questions were raised in May and unclear answers will be found in June. For starters, both stocks and Crude peaked on May 2, 2011. As usual, this is a directional issue, making observers wonder if broad indexes are pausing or gearing for significant decline. A debate resurfaces, given the upcoming puzzle to the established uptrend, especially with the weakening economy. However, the major macro themes are hard to shake, and it’s even harder to know when things will change. In fact, the last few weeks have witnessed further deterioration in interest rates . This showcases more of the same, as the US 10 Year Treasury Yield is lower than it was at the start of the year, while breaking below 3%.

Self-serving Traits

Human behavior in market pattern should not be underestimated, despite rapid advancement in information technology, logic-based models and fast-paced trading platforms. Yet, the “human element” has a lot of say in shaping market trends. Beyond chatter, the reality points to an opaque approach to policymaking; this is far removed from being fully reformed. As usual, self-serving models persist and dominate the timing of a market trend or policy shift as well as news releases. These topics are magnified, especially during a well-documented election year.

Similarly, preserving the status quo benefits traditional money managers promoting buy-and-hold strategies and other larger firms aligned with the current revenue sharing plans. In other words, turbulence can easily tilt the existing fee model and revenue structure. Changing the existing market and political dynamics is a battle that takes an exorbitant amount of time.

For some media outlets, disappointing economic numbers are worth highlighting to stir up further fear (which is usually handy for the non-incumbent party). At the same time, emphasis on fund managers wrongdoings and European debt problems produce headlines at a rapid pace. In turn, sifting through key events can be misleading. Financial leaders and regulators are spending time on rebuilding previous mistakes rather than on encouraging new business activities. Yet, less publicized events related to the entrepreneurial spirit might have a bigger future impact on overall economic health, but they barely get equal attention unless a handful of new media based initial public offerings (i.e., LinkedIn and Groupon) address them.

Meanwhile, the Federal Reserve at certain points is forced to save face, build investor confidence, and show allegiance to the current administration. Skepticism alone can help discern some hype, but it can hurt the confidence-building exercise, especially in a fragile economic condition. Financial regulators are bombarded with a lot of cases from crisis fall outs and new complex rules to implement and ponder for years ahead. In all this, legal counseling is at a premium just as much as a solid public relation manager.

Basically, the motives of each participant are deeply interlinked. Therefore, investors will be tested on their ability to categorize each event. The real reward is in tracking meaningful events to eventually connecting the dots on big picture movements—perhaps, a valuable approach to a sideways market for the weeks ahead.

Article Quotes:

“Banks, it is true, need entrepreneurs to provide the most dynamic links to the real economy in the real world. Banks could sit in front of computer screens creating electronic money all day and all night if they liked (and they do like. They did exactly this during the last "boom"). But without a solid outlet into transactional reality (such as an invention, or the discovery of a natural asset, or even, for a time, an unsolid one, such as a housing bubble), their electronic money is worthless, figures on a flickering screen, no more meaningful than if you or I opened a text file, typed in some gargantuan number, shoved a pound-sign in front of it, and said: "This is mine." The velveteen rabbit, in the eponymous children's story by Margery Williams, needs love to make it "real." In a similar sort of way, the banks need borrowers to make their money ‘real’.” (The Guardian, June 2 2011).

“No other country is now rising to challenge China's manufacturing power. Hence, it can pass cost increases to global consumers through higher prices. This gives China time to deal with the inflation problem. If exports were falling due to rising prices, China would be forced into pushing inflation down quickly, which would make a hard landing more likely. The slowdown may accelerate in the third quarter as local governments and developers give up hope that the central government may loosen policy again. They'll have to accept lower liquidity levels and cut expenditures accordingly. When that occurs, electricity consumption may drop below the 10 percent growth rate, possibly falling back to below 8 percent.” (Caixin, May 24, 2011)

Levels:

S&P 500 Index [1300.16] – In a corrective mood since May 2, 2011. Next noteworthy level is at 1280 followed by 1260. That’s where buyers would look to reconsider buying based on charts.

Crude [$100.22] – Sitting tight around the $100 range—a glaring trend in the last few weeks.

Gold [$1540] – Resurging after a pause in early May, now revisiting, and near all-time highs.

DXY – US Dollar Index [73.78] – Quite evident that the recent recovery is very short-term and not producing a major follow through.

US 10 Year Treasury Yields [2.98%] – Broke below 3% level, reemphasizing that the low rate environment is not shaken. The peak in February 2011 was a prelude to a four month decline.

http://markettakers.blogspot.com

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, 2011

2011-05-31T02:37:00.000-07:00

“I believe in the imagination. What I cannot see is infinitely more important than what I can see.” -Duane Michals

Flow and Rhythm

After a minor pause in commodities and stocks, there are early signs of further acceleration in both indicators. The established trend is uniform and appears to be comforting for trend followers. Each minor sell-off seems short-lived and the buyers’ momentum grows stronger, especially for larger cap companies. The lighter volume around the holiday weekend has not distorted much of the message from the first message in 2011. The obvious, but important, election season will have its influences either in market movement or shaping the outcome of the election—an intertwined phenomenon indeed. Thus, the market behavior will be watched attentively by forecasters as much as political pundits. Either the bad news is bound to be postponed for future years or a reality check can sneak up quickly.

The ‘Supply Shortage’ Theme

Supply shortage is a common theme in several areas of the marketplace. For example, investment options leave many with a lack of high growth ideas for the risks taken. Others leaning toward fixed income may not be quite pleased with lower yields of bonds or traditional CDs—thus, the movement into riskier assets, such as junk bonds. In the commodity world, much of the discussion revolves around scarcity of food, not to mention the long term constraint argument of Crude as reflected in several reports arguing for further appreciation ahead. In fact, Goldman’s and Morgan Stanley’s Crude upgrade contributed to a lift in pricing last week.

In terms of currency, the US Dollar continues to erode in value, but a lack of alternatives keeps the Dollar vibrant for international circulation. In Europe, the smaller economies are restructuring to recover from crisis mode, leaving few places such as Germany or France. The premise of limited availability may be a near-term matter in most cases. However, consensus has accepted and mostly agreed with these above points in making decisions. When these dynamics begin to change, then one can declare an attitude shift while preparing for the consequences.

The element of surprise is the suspenseful part of a lethargic period of a cycle. The last few weeks have slightly questioned the logic and merits of ongoing price appreciation. If there are mood swings, one should watch the fragile areas of the market: emerging markets, small caps, and interest rate sensitive groups. This synchronized upside move is partially fatiguing, yet, timing turbulence can be a costly task in a low rate environment fueled by policymakers.

Specific Ideas

SPTN (Spartan Stores): This grocery distributor offers favorable fundamentals as it raised its dividends by 30% as profitability remains healthy. Improvement in sales and economic recovery, especially in the Midwest, can further contribute to stock appreciation. Meanwhile, the technicals illustrate a bottoming process in stock price as it breaks above 200-day moving average.

HST (Host Hotels & Resorts, Inc): A real estate investment trust with exposure to high-end hotels continues to demonstrate profitability and further growth in its outlook. The company reinvested in several renovation projects while maintaining a steady room booking pace. First quarter earnings were net positive. The recent private placement transactions along with slight increase in dividends contribute to further investment interest.

ATVI ( Activision Blizzard): Relatively quiet and stagnant the last few weeks. In looking ahead, appealing entry point based on charts, especially ahead of the new game release in November 2011. Meanwhile, the recent quarterly earnings were mostly positive and set to beat expectation. Majority of the capital in the video gaming space has chased ERTS (Electronic Arts) in recent weeks, but a rotation back to ATVI (Activision) is appealing in the next 3-6 months.

Article Quotes:

“Another, and potentially more important in the long run, is the reduction in China’s competitive advantage over the U.S. real wages have been more or less stagnant in America, and several manufacturers are emerging from the recession with sharply increased productivity. Leading American companies are taking their next round of expansion at home rather than risk having their intellectual property filched by the Chinese, for which there is no redress; face the regime’s demand that they turn over technology in order to have access to the Chinese market; lose markets because of buy-China policies by government agencies; and cope with unusually severe energy shortages resulting from the government’s fear of allowing electricity prices to keep pace with mounting coal prices. So much for one of the dollar’s potential competitors.” (The Weekly Standard, May 28, 2011)

“Finance seems to be a polytheistic rather than a monotheistic faith. The objects of veneration change on a regular basis from emerging markets through internet companies to commodities. These enthusiasms often have a cult-like quality with adherents inclined to pour scorn on unbelievers who “just don’t get it.” It is striking that the cults often involve asset classes that do not deliver much in the way of immediate cashflow. Dividends will be paid far into the future, long after the likely holding period of the average investor. It is a little bit like the promise of an afterlife.” (The Economist, May 26, 2011)

Levels:

S&P 500 Index [1331.10] – Odds are setting up for near-term recovery while pausing between the 1300 and1340 range the past few weeks.

Crude [$100.59] – Attempting to re-accelerate after stalling in the past few weeks. Next key target stands at 50-day moving average of $105.

Gold [$1533] – Climbing back while approaching May 4th high of 1541. Overall, positive momentum is in full force.

DXY – US Dollar Index [74.95] – After a short-lived Dollar appreciation, the momentum is becoming stuck.

US 10 Year Treasury Yields [3.07%] – A four month decline is establishing a downtrend in yields. It’s trading at the 200-day moving average. The magnitude of further declines serves as a key macro indicator.

http://markettakers.blogspot.com

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 23, 2011

2011-05-23T03:51:00.000-07:00

“There are things known and there are things unknown, and in between are the doors of perception.” - Aldous Huxley (1894-1963)

Picking Spots

Analyzing markets or specific ideas in broad terms are too tricky these days. For the most part, the first half in the US can be described as positive and favoring a recovery. When reverting to multi-month charts of broad indexes, one can quickly get the feeling of the market being too synchronized. However, select pockets of the economic sectors are more attractive than others. For example, “According to the Goldman Sachs study, some 47% of the aggregate equity assets of the hedge funds is invested in stocks with market capitalizations of more than $10 billion as of the first quarter of this year” (Forbes, May 20, 2011). Clearly, this points to a bias towards big cap and does not necessarily tell the full story.

Perhaps, making this adjustment is the challenge ahead. As the summer season is upon us, it might be easy to forget that the S&P 500 has declined for three consecutive weeks. On the surface, there are milder excitements building similar to the tech rally of 1999, and the welcoming of risk mirrors the 2007 era. Most notably, short-term profits appear feasible in recent private placement and public offerings in technology, as well as ongoing momentum in commodity related investments. As usual, the spin on the current climate can be simply applied by headline makers or politics alike. The trouble lies in trying to ignore the noise and map out a 6 -12 month plan, especially for those judged by the performance game. Sustainable ideas and themes are becoming scarce, which makes the next few weeks rather eventful. Meanwhile, piling on to winning ideas seems to serve as a short-term cure for those fearful of not participating in recent winners. It is only human nature to favor the working sectors, as contrarians have to take a brave angle to go against the trend.

Driving Forces

Most financial decision makers have (correctly so far) aligned with the central bank induced rally. Money managers have increased their risk appetite, and that has paid off. In addition, the crowd is relatively infatuated with Gold, which appears to make more sense in the fragile currency environment. Basically, it is hard to ignore the low rate environment that has propelled investors to move towards stock and junk bonds. The congruent message of global central banks has impacted investor behavior and remains the most prevailing theme impacting interest rates and the perception of risk. Simply, looking at the volatility index once can strongly argue that money managers are humming to the same tune of higher stock prices and low turbulence. Of course, surprises lie ahead, but the question is on the magnitude of any pending correction that may alter short-term behavior.

Article Quotes:

“The International Monetary Fund recently estimated that Iraq’s gross domestic product grew 2.6 percent last year — nearly as much as the struggling American economy did — and it projected astonishing increases, exceeding 11 percent this year and next. Some say Iraq’s economy — estimated at roughly $80 billion today — could expand six or seven times in the next decade as it increases oil production to a level rivaling Saudi Arabia’s….Today, in the new Iraq, the Shamara Holding Company builds power stations and steel mills. It is expanding into pipelines, refineries, and other services for the various multinational corporations that in 2009 won the first contracts to exploit Iraq’s oil and natural gas, in what was one of the single biggest energy auctions in history.” (New York Times, May 18, 2011)

“Adjusted for inflation, prices are close to their long-term trend after the bubble years of the 1990s and the first years of the 2000s….Vacancies for apartments tumbled in the first quarter of the year and are now at a three-year low. Rents have been rising, and analysts expect them to increase by over 4% this year and next. Rent rises typically support house prices by making home-ownership more attractive. The credit markets are healing. Mortgage borrowing actually rose in the first quarter, according to the Federal Reserve Bank of New York. New foreclosures were 17.7% lower in the first quarter than they had been at the end of 2010, and household delinquency improved for a fifth consecutive quarter. Mortgage rates have fallen back to historic lows, tracking declines in yields on American government bonds.” (The Economist, May 19, 2011)

Levels:

S&P 500 Index [1333.27] – Pausing between 1300 and 1340 range. This slight breather begs the question of an acceleration versus a further sideway pattern.

Crude [$99.49] – Stabilizing around $99 in the past few weeks. The early May correction has served as a significant blow to reignite buyer interest.

Gold [$1490.75] – Taking a breather after rising 16% from late January until early May 2011. Long awaited reacceleration will be tested.

DXY – US Dollar Index [75.43] – Slowly hinting at a recovery but failing to show significant movement from last week.

US 10 Year Treasury Yields [3.14%] – Continuing its downtrend from the early year peak of 3.76%. Approaching the 50-day moving average of 3.07%

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, 2011

2011-05-16T03:42:00.000-07:00

“Delay is the deadliest form of denial.” - Cyril Northcote Parkinson (1909-1993)

The quote above comes from Cyril Northcote Parkinson, a naval historian and author who wrote several books on bureaucracy, especially during a period where the British Empire began to lose its power. Generally, the denial of harsh truth is applicable for irresponsible behaviors and decisions. Interestingly enough, this witty statement applies to the current market behavior. For astute participants, delaying the inevitable might have its consequences heading into the second half of the year.

An observer notes, “Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity” (May 13, 2011, Minyanville). That said, the marketplace is not necessarily acknowledging this point.

Revisiting Old Lessons

In a mindboggling manner, history finds a way to reoccur in a different form. We are learning that one does not need to go back hundreds of years for previous lessons. It was only a few years ago in 2007 when the pending credit meltdown was fairly visible (to put it mildly) for insiders such as real estate executives, risk managers at banks, and manufactures of short-term products. The final result of the 2008 crisis left a major dent in the existing system for consumer activity and perception of paper assets.

These days, postponing reality is an art painted by policymakers in charge of the debt issues. Equally, key and large investment managers regurgitate this story to their investors—a risky proposition for those with long-term stake. However, transactional based players view this as means of paying short-term bills while capitalizing on certain incentives or fees. Clearly, politics are known to get in the way of logic and eventually lead to plenty of room for pitfalls. It is no accident that an election year is ahead of us, and the “going with the flow” market can produce positive year-to-date numbers for causal watchers. On the other hand, panicking and fear mongering is the opposing thought. If you read publications, fear of collapse is well documented and, at times, overblown. Perhaps, that’s a message with its own agenda as well. Yet again, the savvy investor has to carefully build a swift process. Ultimately, the market performance has the final say.

Fragile State of Mind

An early inflection point is quietly building some suspense on the actual magnitude. This month has seen a small recovery in US Dollar and stabilization in Yields which may trigger a macro change in investor mindset. Of course, the steep commodity declines sent a few shockwaves last week. For most, buying on weakness (stocks and commodities) has worked in the 2009-2011 cycle as comfort is setting in place. Clearly, an inflationary pressure persists globally, given food and energy prices—a topic that is hard to shy away from for central banks. At this point, the Federal Reserve might have injected enough stimuli into the system through quantitative easing (QE2). Refueling further confidence might be asking too much, but surprises are part of the game.

Article Quotes:

“What I want to say, then, is that trading equity derivatives is like playing a game written by programmers who got every mechanic exactly right. You might balk: "Of course they 'got it right' -- trading feels real because it is real!" But when you think about the bizarre circumstances of these electronic trades -- how they're simultaneously rooted in significant human commerce and yet so far abstracted from it -- and when you see your friend drag and drop real fortunes the way I might crop a Facebook photo, you come to believe that working on a modern trading desk is more like playing an excellent flight simulator than actually flying a plane…. Think of Predator missions in Iraq being controlled by joysticks in Southern California, or oil reserves being fractured and drilled by remote control.” (James Somers, The Atlantic May 9, 2011)

“The broader point made by critics of "shadow banking"-- that hedge fund managers are part of a vast, unregulated sector that threatens the stability of global financial markets -- is wrong too. Hedge funds do not inhabit the regulatory equivalent of the shadows. All the major jurisdictions where they operate -- whether in North America, Europe or Asia-Pacific -- regulate the industry rigorously. The only big jurisdiction that did not require managers to register with their regulator, the US, has now rectified that. Already significant levels of regulation are being further increased by legislation introduced since the financial crisis.” (Financial Times, May 15, 2011)

Levels:

S&P 500 Index [1377.77] – The recent hurdle is visible around the 1320 range, as the index continues to slightly stay above that mark. On a similar note, the 50-day moving average stands at 1323.20.

Crude [$99.65] – Turbulent movements in the past four months. For now, the majority of buyers seem willing to purchase, especially close to $95. If buyers lose steam at the $95 range, then further vulnerability ahead.

Gold [$1505.75] – Unshaken long-term momentum with no visible weakness at this junction. Further investor demand can elevate the commodity back to all-time highs of 1541 (May 4, 2011).

DXY – US Dollar Index [75.75] – Amidst a short-term recovery, sparked by a May 4th trend reversal. To claim the Dollar is recovering is a tiring story that many won’t buy into, especially after sharp declines. Slightly above the 50-day moving average, but not convincing yet.

US 10 Year Treasury Yields [3.17%] – An intriguing junction as Yields seem to bottom around 3.12%- 3.20%. A follow through in raising Yields can trigger macro shifts for a turbulent summer.

http://markettakers.blogspot.com

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 8, 2011

2011-05-07T21:18:00.000-07:00

“Fiction reveals truths that reality obscures.” - Jessamyn West (1902-1984)

The curiosity continues to build as many wonder if the recent upside run is fully justified. As usual with any mild correction, the thoughts and concerns of a trend shift begin to resurface. Last week’s action emphasized a potential trend reversal, especially with some bottoming in US Dollar, and sharp commodity declines. At this junction, it only takes a few minor knocks to get heads turning towards a cautious state. The suspense is already brewing after the lackadaisical Volatility Index (VIX) got a wake-up call last week. The “turbulence” indicator witnessed its calmest point of 14.27 on April 28, 2011. Since that point, the Volatility Index ended the week at 18.40, following a noteworthy spike. Therefore, it is worth asking this question: Can a herd-like mentality of trend following sustain itself in the weeks ahead?

As a start, the momentum buying in the past few months can be categorized by the following three key themes:

1. Shift Towards Hard Assets

As witnessed for several years, there is an increased rotation to Gold and Silver while reducing exposure to paper assets in the developed world.

2. Demand for Higher Yields

Investors that are fed up with low interest rates are desperately searching for an alternative. Therefore, managers are forced to step up risk exposure with the hopes of the attainment of desired returns.

3. Search for Growth

Longer-term participants project higher growth potential in emerging markets.

These well-documented trends are interrelated and soon to be challenged. Interestingly, the low rates that are influenced by central bankers greatly contribute to the themes above. Similarly, these policy driven actions explain the synchronized pattern among asset classes. In addition, inflation worries are becoming a popular global discussion, and it is nearly inevitable for that to turn into a political matter. As central bankers begin to address the inflation issues, these dominant themes may fail to satisfy the consensus expectation. Basically, this current condition showcases that the pace of the market’s appreciation is not in-line with the economic recovery. For now, timing is the tricky part, but staying alert for a series of catalysts is essential for a risk manager. Meanwhile, value oriented investors may find that entering here is less enticing when reviewing the pricing of specific ideas. Perhaps, an 8-12% broad market correction can make the playing field more attractive to those looking to accumulate US stocks at reasonable to low prices.

Specific Ideas:

AWR (Amer States Water): Having stayed mostly idle in the recent 2009-2011 recovery, the stock price of this water company are far from being overpriced, at least on a relative basis. This conservatively managed company has paid dividends for 57 years while being in a less glossy industry. Growth-like returns may not be visible in the near-term, but bargain hunters are likely to take a closer look.

UMPQ (Umpqua Holdings): Technical indicators would argue for an attractive intermediate-term outlook for shareholders of this Portland, Oregon, based bank. UMPQ’s longer-term core business is appealing on a fundamental basis despite the fragile conditions of the financial service sector. Recovery in lending (desperately needed for business managers) bodes well for a company that’s cleaned up its balance sheet, while in the past few quarters.

ROCK (Gibraltar Industries): A profitable first quarter is barely hitting the radar of many observers. Owners of this stock gain exposure to a manufacturer of buildings as part of an infrastructure play. Cost reduction efforts contributed to a recent 12% (1st quarter) increase in sales growth. Any pending weakness around $11 per share offers an early look at a buying opportunity.

Article Quotes:

“As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise. But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.” (Project Syndicate, May 5, 2011)

“I take strong exception with Bernanke's framework. His analytical focus rests upon the policy response to a crisis, while the lessons of history point rather directly to uncontrolled credit expansion and attendant speculative excess as the root cause of major financial crises. It is crucial to have a framework—a doctrine of clearly defined "rules of the game"—that protects the integrity of the system against the type of excesses that risk a crisis of confidence and systemic collapse (such as massive federal deficits and a ballooning central bank balance sheet). This is foreign to current Federal Reserve doctrine…. We're in need of some rules. We need rules that would ensure that the Fed never again accommodates a doubling of mortgage credit in about six years. We need rules that ensure that the Fed is not complicit in double-digit-to-GDP federal deficits and a doubling of federal debt in less than four years.” (Asian Times, Doug Noland, May 3, 2011)

Levels:

S&P 500 Index [1340.20] – Charts point out early signs of vulnerability, especially above 1340. Day-to-day action should determine the magnitude of a pending pause. Yet, the overall trend is positive from longer-term indicators.

Crude [$97.18] – A sharp and ‘bubble’-like decline as the commodity fell from $110 to $97. The 3-month run is under pressure as the confirmation of recent moves is eagerly awaited in upcoming trading days.

Gold [$1486.50] – Indication of pausing while the uptrend is setting up for a correction. Next noteworthy target is the 50-day moving average of $1454. A major move below $1400 may trigger worries of this run.

DXY – US Dollar Index [72.93] – The bleeding appears to have paused moderately. After making annual lows on May 4th, the week ended with a sharp spike.

US 10 Year Treasury Yields [3.28%] – Nearly a 3 month decline in yields is beginning to dampen the recovery above 3% that began in fall 2010.

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 2, 2011

2011-05-02T03:44:00.000-07:00

“The two most powerful warriors are patience and time.” - Leo Nikolaevich Tolstoy

Playing Field

Some point out the disconnect between economic health and stock behavior. This discrepancy is not easily visible as perception presents a positive story. A similar disconnect might exist between recent earnings optimism and current market pricing. Interestingly, a short-term oriented mindset is known to favor “momentum” and, in turn, reflect a lower volatility. Meanwhile, investors waiting for a better buy point will be required to exhibit patience and inquire on the influential themes. Similarly, those seeking to take profits from recent gains will have to show grit and fight greedy urges. At this junction, speculating on either side of the direction is not comforting for decision makers. Instead, most money managers are inclined to accept the trend while getting more clues from earnings chatter and monthly economic data.

Too Familiar Pattern

The acceleration of stock indexes mirrors commodity prices, which questions if risk aversion truly exists in this cycle. Instead, ‘fear’ has slowly subsided with each upside movement since March 2009. The skeptics fear that either a distorted message is transmitted or we’re entering a fragile state in this cycle. Yet, the S&P 500 Index is setting up to revisit the 1400 range as the next target. Perhaps, then can we measure the conviction of new buyers as it may serve as a vote of confidence.

The glaring aspect of this run is not the actual upside move but the continuation of an established and synchronized trend. Interestingly, the themes from most of the 2000’s remain dominant these days. The energy related run is reflected in Crude prices as well as the Oil Service index. On the same note, Gold is making new all-time highs in a well-documented explosive move. Finally, the US Dollar weakness is decelerating, and US interest rates are not moving significantly—a macro combination that is too familiar for experts as well as casual observers.

The Challenge

Finding distinct ideas in liquid markets is not easy, especially for bargain hunters. There is a risk of overpaying in a market (S&P 500 Index) that has risen by nearly 35% since July 1, 2010. Being a contrarian alone does not provide a full answer, especially for those seeking growth-like returns. Being selective in specific ideas is an approach worth considering, especially from a longer-term view. Importantly, traditional indicators may suggest overbought/overvalued conditions, while irrational behavior can persist longer than imagined. Thus, balancing the logical reality from the perceived reality is the challenge in weeks ahead.

Specific Ideas:

PSEC (Prospect Capital): A private equity firm that offers a small cap exposure in financial services. In this business cycle, the company is geared to capture opportunities related to venture capital, lending, and capital raising. The stock price is not stretched and removed from all-time highs of $18.97 in 2006.

VIVO (Meridian Bioscience): A profitable company in the diagnostic test kits for respiratory and gastrointestinal diseases. This is a small cap healthcare firm that pays out dividends and is run by highly rated management. A projected 16% growth rate appeals to long-term investors as any weakness closer to $22 offers an attractive entry point.

HWAY (Healthways, Inc.): After a sluggish 2 + years, early signs of a recovery were stirred in recent earnings announcement by increasing contracts from traditional health plans and employer markets. The short-term optimism is a sign of confidence in healthcare reform. In addition, pure fundamentals, such as the price/cash flow, are below industry average.

Article Quotes:

“Given the extraordinary fiscal and monetary indulgence that has been heaped upon the economy in recent years, it is tempting to believe that the world has changed in ways that make structured, historical, value-based analysis inappropriate. But in my view, this gives far too much long-term credit to short-term phenomena. It's certainly true that we ought to adapt to the possibility that valuation "norms" will be higher (and long-term return expectations will be lower) in the face of persistent policy efforts to elevate asset prices and foment bubbles. Still, our estimates of expected market returns have remained very accurate even in the most recent decade, so the lesson is not that valuations don't matter, or that 2+2 no longer equals 4 (our long-term return estimates are essentially basic algebra), but rather that policy makers may engender higher valuations and lower long-term return prospects more frequently in the years ahead than they have in the past.” (John P. Hussman, Ph.D, May 2, 2011)

“Meanwhile, the biggest dangers lie in an area that politicians barely mention: the labour market. The recent decline in the jobless rate has been misleading, the result of a surprisingly small growth in the workforce (as discouraged workers drop out) as much as fast job creation. A stubborn 46% of America’s jobless, some 6m people, have been out of work for more than six months. The weakness of the recovery is mostly to blame, but there are signs that America may be developing a distinctly European disease: structural unemployment. Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men.” (The Economist, April 28, 2011)

Levels:

S&P 500 Index [1363.61] – Ongoing multi-year recovery by making new highs. Breaking above 1350 to reaffirm further strength.

Crude [$113.93] – A surging run as the commodity is up 35% since late February 2011. Charts suggest that prices are stretched in the near-term.

Gold [$1535.50] – New all-time highs, yet again, for another week. Currently, the index is 14% removed from its 200-day moving average.

DXY – US Dollar Index [72.93] – Making new lows for the year as weakness persists at a faster pace than multi-year downtrend.

US 10 Year Treasury Yields [3.28%] – In 2011, yields have stayed within a range of 3.20-3.40%a sideways pattern that keeps fixed income investors in suspense.

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 25, 2011

2011-04-25T03:49:00.000-07:00

“I am not afraid of storms, for I am learning how to sail my ship.” - Louisa May Alcott

When evaluating simple numbers, it somewhat feels like 2007 all over again, given the current cheerful market performance. The similarity between now and then are visible in several areas: low volatility, surging stock market, new highs in commodity prices, weakness in the US Dollar, and lower interest rates. The spring and summer of 2007 reflected this picture despite early hints of a soon-to-follow credit crisis. Today, similar patterns of optimism are showcased despite the worrisome topics discussed by headline makers and political members. For the non-emotional observer, it is evident that there is lack of alternatives for the following existing trends:

1. A competing currency to the US Dollar is not fully developed.

2. Stock market exposure remains attractive as liquid assets are in higher demand, especially with low rates.

3. Commodities are favored by new entrants, while previously invested participants have not relinquished winning stakes—a forceful momentum driven trend that has been in place for over a decade.

4. Policymakers have fueled the financial system by reigniting growth-like activity.

5. On a relative basis, the US economy is strong, and risk of default is highly publicized but easily overblown and misinterpreted.

For the casual or even frequent observer, it can be quite astonishing that short-term memory (the 2008 shock) can be erased so quickly. Intriguing financial stories for the last three years have focused on lingering credit issues, mismanagement of capital, European worries, and a fragile economic recovery. However, there is a vast disconnect between daily “cheap talk” and the perception drive reality known as markets. As stated many times, the market is not a barometer for social or economic health. Thus, it marches to its own beat—a point that is often forgotten by a wide range of participants. Importantly, the drivers of market behaviors are rarely headline writers or analysts. Instead, each cycle focuses on key macro issue(s), which inherently creates discrepancy in perception. That said, a tipping point cannot be dismissed, and a temporary breather is not necessarily a crisis. For now, a near-term correction would hardly serve as a surprise. As usual, tops occur in an unexpected fashion. Today, the comfort level is rising; thus, observing is more appealing than betting aggressively. Until then, the markets will march to the same rhythm.

Specific Ideas:

TUR (Turkey Index Fund) offers an attractive exposure beyond the established emerging markets. Turkey has a productive labor force, especially given the expanding middle class. The 17th largest economy can build on recent momentum while being less correlated to Western markets. The fund peaked on November 2010 and has moderately corrected. This presents a relatively attractive pricing as an early turnaround is visible in recent weeks.

BX (The Blackstone Group) is the asset management firm that has established positive momentum since the summer of 2010. The fundamental strength is driven by recovery in real estate related investments . In looking ahead, successful capital raising efforts can bolster further private equity investments. Finally, the stock price closed at $19.10, which remains quite removed from its IPO price of $38—a mark that serves us the next vital benchmark.

PDLI (PDL Biopharma Inc) shares have declined significantly for the last 10 years. For bargain hunters, this biotech firm is worth a look as a long-term investment, given its attractive dividend yield. In addition, PDLI owns patents and receives royalties. Further declines at current prices ($6.28) can trigger buying opportunities.

Article Quotes:

“The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies. So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt? The truth is that these prices are “made” by herd behavior. John Maynard Keynes pointed out the reason many years ago: “The extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” When you don’t know what to do, you do what the next person does… The tension between democracy and finance is at the root of today’s rising discontent in Europe. Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.” (Project Syndicate, April 21, 2011)

“A Fed rule of thumb is that buying an extra $200bn of assets is the same as taking 25 basis points off the funds rate. That means current interest rates are, in effect, about minus 2 percent. The question is when they need to move higher. In making that judgment, the basic guideline for most officials will be some kind of policy rule that links interest rates to the amount of spare capacity in the economy and how far inflation is off target. Much depends on circumstances, and policy rules come in many different flavours, but simple examples used by the Fed suggest a need to tighten policy by the time the unemployment rate reaches 8 percent and core inflation hits 1.5 percent—and probably somewhat sooner. Many differences between policymakers rest on how soon they think the economy will reach this point (Financial Times, April 19, 2011)

Levels:

S&P 500 Index [1337.38] – Recent trend suggests that a trend is forming between 1300 -1320. Interestingly, in February, the 1344 range proved to be a top. That said, the next wave of moves will showcase if buyers are interested to accumulate above 1300.

Crude [$112.29] – Mid-February 2011 marked an explosive run as buyers jumped in the $85-90 range. The momentum is picking up strength and awaiting a catalyst for a noteworthy move.

Gold [$1504] – Directly up without major bumps as the commodity has appreciated nearly 5x’s since July 1999.

DXY – US Dollar Index [73.99] – Finished the week at a 3 year low as below 76 marks a new territory.

US 10 Year Treasury Yields [3.39%] – Trading in between the 50-day (3.45%) and 5-day (3.38%) moving averages.

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, 2011

2011-04-18T02:39:00.000-07:00

“A lie gets halfway around the world before the truth has a chance to get its pants on.” - Winston Churchill

As usual, at an early glance, US markets are up for the year; interest rates are low; commodities are higher; and the economy is mixed (open to interpretation). The dominant themes above are recreating an established trend in which the fundamentals or perceptions are accepted as truth. There is plenty of skepticism among pundits, but capital is buying into risk. In other words, the current stimulus driven market finds a way to go higher, while demand from resource based groups is not declining. This is understandable, since parking money at the bank through traditional means does not yield much. Thus, the appeal of investing in risky assets is an easily sellable point, and by nature, ‘growth’ ideas are favored as long as they’ve been working. Perhaps, this is one explanation to why the Small Cap Index (Russell 2000) made new highs earlier this month. On a similar point, volatility is pointing to a calmer state, while nearing comfortable levels last seen before the 2008 crisis. The final piece to this puzzle looks ahead to the nearing presidential election, which is known to find ways of prolonging an optimistic trend or cleverly highlighting convenient data points. In fact, monetary reform can become a bigger political slogan than previously witnessed in recent elections

At a deeper stare, this positive set up invites contrarians to look in and question the accuracy of the picture reflected. The dollar weakness is well documented, like the debt issues of Western economies. The word “bubble” is commonly used by writers and editorial contributors. Perhaps, the phrase is losing some authenticity from the casual observer. For example, the bubble related issues are discussed relating to commodities, Chinese real estate, and even higher education. For money managers, having a suspicious view is not as important as being on the right side of a self-fulfilling prophecy. After all, most managers are measured by performance, especially in a period of higher investor demands and increased competition for asset management. Thus, staying focused between perception and truth is vital but even harder these days. Near-term breathers should not be confused with cycle downturns—a lesson that was clear last decade as correction can be short-lived. Nonetheless, the message from skeptics is worth tracking and questioning.

A few back up plans may be required for participants. If this “smooth sailing” current trend changes its course, then one should look at not the images that are currently presented but adjusting for what’s ahead. Mainly, most liquid assets remain mostly correlated and vulnerable. Holding cash alone seems less favorable when evaluating risk-return models. Importantly, tax policies, along with regulatory outcome, take a while to seep through the system. Equally, improvements or changes in inflation continue to vary based on interpretation. Given increased government investigations and deliberation, it may be wise to hold on to high conviction bets. That said, a major shift in attitude has yet to take place. Interestingly enough, liquid markets have resorted back to pre-crisis-like behavior, despite all the chatter of reform. Therefore, seeking investments in alternative asset classes and frontier markets appear to make sense. At least, that is one back-up plan.

Article Quotes:

“For a start, many analysts over-estimate Germany’s economic dynamism. Although it has enjoyed strong recent performance in economic growth and exports, its longer-term record is unimpressive. Germany has a strong export sector, but its domestic economy has performed poorly in the two decades since reunification. A related problem is that in effect Germany has subsidised purchases of goods by the weaker countries. Low interest rates made it cheaper for peripheral nations to buy German exports, while the existence of the eurozone helped them to tap the capital markets. In effect, there was a vendor financing relationship between the core of the eurozone and much of its periphery (Ireland was different from the others). …At the root of the problem were the difficulties that the whole region was suffering, to a greater or lesser extent, in generating new rounds of growth. (Fundweb, April 11, 2011)

“Permanent jobs are created by the private sector. Businesses, large and small, publicly or privately held, have a duty to earn a return on investment for their shareholders. In a globalized, cyber-ized world, they need not invest or expand their payrolls in the United States; they are free to go practically anywhere on the planet. This is the result of one of our greatest accomplishments as a nation: We won the Cold War. Before the demise of the Soviet Union and the death of Mao, we lived in a world of mutually assured destruction; today, we live in a world of mutually assured competition. This is what we spent an entire generation of blood and national treasure to achieve. Now, those with the power to levy taxes and direct spending must get with it and adjust to the new world as they seek to incentivize job creation through businesses that, thanks to monetary policy, now have the financial means to put Americans back to work right here at home.” (Federal Reserve of Dallas, April 8, 2011)

Levels:

S&P 500 Index [1319.68] – Hovering around the 50-day moving average. In the short-term, the index is setting up to challenge the 1300 range.

Crude [$109.66] – Recent behavior suggests growing buyers’ interest at $105 as momentum remains intact.

Gold [$1476.00] – After holding at $1420, another explosive run showcasing the herd-like following and lack of sellers, even at escalated levels.

DXY – US Dollar Index [74.61] – Further weakness in recent weeks, highlighted by breaking below 76. This recent downtrend wave is a continuation of a decline that began in the summer of 2010.

US 10 Year Treasury Yields [3.40%] – Showing shades of stabilization, as evidenced by the 50-day moving average of 3.47%.

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, 2011

2011-04-04T03:41:00.000-07:00

“Facts do not cease to exist because they are ignored.” - Aldous Huxley (1894 - 1963)

Understanding the Cycle

Following the late winter breather, we’re nearing the same dilemma as witnessed in mid February. Investors were faced with the question of whether to jump on the existing trend or to be wary of trending patterns. Similarly, the interest rate conditions are lingering with moderate suspense. Meanwhile, overall economic improvement is somewhat evident when presented through government reports. Now, the broad indexes are re-drumming to an upbeat tune. As a result, complacency is in full gear after a short-lived hiccup. The Volatility Index (VIX) spiked to 31 on March 16th and now stands at 17.40. That sends a loud message as to how fear vanished at a rapid pace. Basically, the less than 4-week correction period was much needed.

This can hint at scarcity of quality, investable ideas as managers seem to redeploy capital to known themes in liquid asset classes, such as stocks. A reversion to a herd-like mentality is seen as most managers don’t look to fight the trend. In hammering this point home, we can see how “safety” is easily translated to chasing winners, such as Gold and Oil. Simply, this argument is rationalized by a quick glance at charts, a browse of headlines, or even a read through of a long-term strategy from a research house. Once again, doubting the actual substance of the fundamentals and duration are bluntly deemphasized during trending markets. Interestingly, the Russell 2000 Index is near its 2007 all-time highs, which can paint misleading optimism. Of course, let us not forget that the third year of a presidential cycle is generally known to produce favorable returns for buyers. This is mostly due to a biased maneuvering towards political points being in full gear. However, this ‘maneuvering’ may be difficult this year when the market is already operating through a few injections as the existing wounds attempt to heal. For now, the stock market performance can be manipulated as a selling point to drive in more capital info.

Tracking Clues

To differentiate oneself, a participant is forced to find a disconnect between consensus thoughts and actual results from market performance and investor rationalization. In other words, the discrepancy in varying views can create an illusion that can last for a while. Some can suggest that managing one’s timing and conviction levels is a market filled with mixed feelings. These days, pundits are not fully ignoring the glaring concerns of economic sustainability and unclear growth drivers. In a media driven world, the management of public relation plays an even bigger role in directional pattern. For this evidence, we don’t need to go further than the Federal Reserve’s announcement of a press conference on a quarterly basis. This further emphasizes the short-term nature of markets, especially with enhanced technology and abundance of hedging tools currently offered for investors. Finally, skeptics point out that these frequent press conferences are a way to artificially cheerlead gloomy facts. In due time, the truth with unravel.

Article Quotes:

“Whether Beijing succeeds or not in reining in informal fund flows is important, since the fate of these restrictions provides clues to the future direction of China’s economy. If credit growth became too great, China would face more inflation in the short term and possible excess capacity in the longer term. That could lead to a resumption of the profitless growth that China is trying to leave behind. If inflation remained high, social unrest would become increasingly likely. If, conversely, China slammed the monetary brakes on too hard, it would have a big contractionary impact both at home and abroad, given that Chinese imports have become an important source of global growth. Monetary policy matters more in China than it does in most developed markets, because the ability to allocate capital remains largely the preserve of the state. It is where financial power and political power intersect.” (Financial Times, March 31, 2011)

“We then turn to our main investigation of what happens to the portfolio of men and women, respectively, after moving together or apart. We find that women who get married on average choose to hold a higher fraction of financial wealth in stocks after the marriage, compared to those women who do not get married. After divorce, women on average reduce the fraction held in stocks, compared to women who do not get divorced. For men, it is the other way around: single men reduce the fraction of wealth in stocks after they get married, whereas they increase this fraction after divorce. Hence, marriage acts as a financial risk-reducer for men, whereas it acts as financial risk-increaser for women.” (Christiansen, Joensen and Rangvidz, September 1, 2010)

Levels:

S&P 500 Index [1332.41] – Revisiting February highs as 1340 presents a retest of strength and positive momentum.

Crude [$107.94] – Early confirmation of strength above $105, showcasing further traction with buyers.

Gold [$1418.00] – Interestingly, another struggle at 1420 range, which suggests a positive long-term but shaky near-term confidence.

DXY – US Dollar Index [75.83] – Noticeable decline for the quarter. It remains at a fragile range.

US 10 Year Treasury Yields [3.44%] – Closing in line with the 50-day moving average of 3.44%. Currently, trading in line with the four-month pattern.

Please note: There will be no weekly Market Takers next week due to travel schedule.

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, 2011

2011-03-28T03:34:00.000-07:00

“A weak man has doubts before a decision; a strong man has them afterwards.” - Karl Kraus (1874 - 1936)

Barely Surprising

Plenty of topics are floating as headline issues, but that is hardly news these days. Interestingly, Japan was facing de-leveraging matters for several months prior to the tragic events. Similarly, the European Union has struggled to reach a resolution since last summer. Whether US broad indexes go up or down is merely a reflection of select companies and not a barometer for business health. In this context, the stock market rise should not be confused with positive economic feel or job expansion. Importantly, when trying to assess the next 2-3 years, managers are asking where to find quality ideas, given scarcity in innovation, pending regulations in an era of overreliance in policymakers. Investors have focused on finding liquid based investments and sticking with working ideas. Perhaps, both contribute to further upside momentum, mainly when bad news is not necessarily breaking news. Clearly, the much needed breather took place, but buyers were eager to step back in. Is this impulse buying or bargain hunting? This is a question that traders will ponder in seeking timely entry points.

Evaluating Success

For the casual observer, an up day can paint an even more confusing picture while reiterating the disconnect between the market and real economy. That said, the stimulus efforts through low interest rates were designed to serve as a temporary solution. We are approaching a period in which the Federal Reserve efforts can be questioned if economic growth is less evident. In other words, the success of these measures to rekindle the efforts will be judged. In addition, a glaring disagreement among officials on interest rate views can stir additional concern. For others, a third year of a presidential cycle makes a strong buying case based on historical data. This plays into the mindsets of investors, and the net effect can play a bigger role in the second half of 2011.

Near-term Factors

The recent and minor correction symbolizes the first phase of a price adjustment. As usual, down days are followed up by sharp recovery in risky assets while coinciding with a sudden decline in volatility. This sudden shift was felt last week as the S&P 500 Index rose +2.70% while the Volatility Index declined 26.72%. This back and forth is not convincing of stable footing. For some, it might be too premature to declare the end of a natural correction. In the days ahead, the suspense will play out, given job data. Meanwhile, commodity prices are flirting with an inflection point, and this is bound to test conviction levels.

Article Quotes:

“As for finance, China’s objectives must be: first, to create a domestic system capable of supporting its own economic development; second, to help promote a global system that supports a tolerably stable world economy; and, third, to protect the former from the excesses of the latter. In achieving this difficult reconciliation China’s policies should be guided by the understanding that, in the long run, its financial system will be the hub of global finance. Yet the transition to full integration will be not only lengthy but also complex and fraught, with full integration of banking particularly dangerous….One aim should be to ensure that commodity-exporting countries – particularly poor ones, with limited capacity for governance – benefit from foreign investment and exports of natural resources. China will be a central player in securing such agreements.” (Financial Times, March 22, 2011)

“In 2000, the Federal Reserve migrated from the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics to a re-jiggered PCE index. The BLS, the official American government agency, had already been tinkering - quite candidly - with its methodologies. The move gathered steam in the early 1990s, when politicians determined to reduce the CPI inflation rate, as a gimmick to lower CPI-linked payments to Social Security pensioners. They argued that substitutions in goods, as well as hedonic improvements (benefits derived from new technologies like safety features) justified an overhaul of the index of about 80,000 goods. Switching from an arithmetic to a geometric weighting lowered the year-over-year CPI by about 2.7%, and the effects have compounded ever since.” (Fundweb, March 21, 2011)

Levels:

S&P 500 Index [1313.80] – Recovering from recent correction and facing a near-term hurdle at 1320. The behavior between 1300 and 1320 can signal some directional conviction this week.

Crude [$105.40] – Attempting to revisit March 7th highs of $106.95. The jolting upside run appears to stall for now, but the uptrend is well established at these levels

Gold [$1436] – Broke above key $1420 level. Yet, it’s early to claim that a re-acceleration is taking place.

DXY – US Dollar Index [76.21] – Barely holding on after making new lows around 76. Interestingly, that was a bottoming point in late fall/early winter.

US 10 Year Treasury Yields [3.43%] – Generally, stabilizing around 3.45% especially in the past two months.

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, 2011

2011-03-21T03:26:00.000-07:00

“Unthinking respect for authority is the greatest enemy of truth.” - Albert Einstein

Digesting Thoughts

The natural and inevitable market correction took place at a rapid pace last week. Seasonal changes once again find a way to alter existing trends while shifting the moods of investors. The ability to navigate through this turbulence is what distinguishes a money manager in finding or protecting solid returns. Short-term memory can influence linking earthquakes and global unrest as the major drivers of this downtrend. However, it helps to acknowledge that internal financial issues were brewing even before the external worries. Even after this mild correction, it is not too comforting to place heavy directional bets. Importantly, we are recovering from the panic of 2008 in which several intervention and relief programs were needed for stabilization. Last decade’s bubbles have hardly evaporated and still linger in the fundamentals. That simply explains the low rates desperately needed to fuel the economy and ongoing hesitancy for risk among money managers.

Days Ahead

The intervention by finance ministers can fuel markets for a limited period of time, but the question is in its sustainability. Generally, during inflection points, the biggest down days of a cycle are followed up by significant up days. That’s the nature of market movement. In addition, these fallouts can be short-lived, while attractive, for volatility traders, especially given the spike and share moves in the past few days. Now that the rosy picture has been tested, the economic and corporate health will focus back to some data points. A little skepticism serves as a reality check and resets the playing field.

Unavoidable Trends

The following are prevailing themes that are worth noting for upcoming years:

• Aging population in developed countries
• Shift in some wealth towards emerging economies
• Increased regulatory climates in Western nations

These are well-documented social and political issues. These trends are relatively tangible when compared to other financial market estimates. Demographics and regulation cannot be easily dismissed as it eventually shapes the mindset of investors. For instance, “By 2030, the number of people older than 65 is expected to increase to almost 20%, up from about 12.4% in 2003” (SF Gate, March 19, 2011). Therefore, long-term investors have to stay cognizant of how demographics and regulation impact the balance sheets of companies at a faster or slower pace than previously imagined.

The less tangible issues are centered on interest rates and currencies. After all, both are highly impacted by perception and confidence. However, in upcoming quarters, interest rate behavior will provide a vital clue, while influencing risk and investment patterns. Japan, as the third holder of US treasuries, will be on the radar. Central banks will get a chance to respond under severe pressure. Importantly, let’s not forget that interest rates were on the radar at the start of this year.

Article Quotes:

“Businesses, like any other economic actor, will respond to immediate tax and regulatory incentives. But to make long-term investment decisions that create permanent, remunerative jobs, they must have confidence in the long-term prospects of where they invest. In my judgment, it will be hard to secure that needed comfort until Congress makes clear it will refrain from the errant fiscal ways of the past, changes the way it taxes and spends and regulates, and places the nation demonstrably, and unalterably, on a path of fiscal rectitude…. A large and growing government debt inevitably places pressure on the Federal Reserve to hold interest rates too low for too long, making it more difficult for the Fed to fulfill its dual mandate of price stability and full employment.” (Federal Reserve of Dallas, March 7, 2011)

“Fortunately for the world's poor, the speculative dynamic that has created a massive surge in commodity prices appears very close to running its course, as we see very similar "microdynamics" in agricultural commodities as we saw with oil in 2008. That's not to say that we have a good idea of precisely how high prices will move over the short term. The blowoff phase of a bubble tends to be steep, but so short-lived that it affords little opportunity to exit. As prices advance in an uncorrected parabola, the one-sided nature of the speculation typically gives way to a frantic effort of speculators to exit simultaneously. Crashes are always a reflection of illiquidity in two-sided trading - the inability of sellers to find eager buyers at nearby prices” (John P. Hussman, March 14, 2011)

Levels:

S&P 500 Index [1304.28] – A short-term hurdle closer to 1300 on a pending recovery bounce.

Crude [$101.07] – Pre-global political unrest, crude established a basing level between $85-90. In the past 20 trading sessions, the average is around $100. The near-term spike is unclear if justified by fundamentals; however, the violent swings have yet to subside.

Gold [$1420] – Interestingly, the commodity is reaching a critical level of 1420—a point that has been hard to break above for several months. For now, the all-time highs stand at 1437, which is not too far away. This set up suggests a critical turning point and a chance to read investors’ true feel.

DXY – US Dollar Index [75.71] – Broke below 76 and now entering a fragile point that reiterates further weakness.

US 10 Year Treasury Yields [3.26%] – Since early February, rates have declined significantly. Interestingly, the 200-day average sits at 3%--a key psychological level.

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 14, 2011

2011-03-14T03:47:00.000-07:00

“Acting is illusion, as much illusion as magic is, and not so much a matter of being real.” - Laurence Olivier

Beyond Events

The global markets were poised for minor corrections before external political or natural events. In the shuffle of events, these points are easy to forget. The appetite for risk-aversion changes at a rapid pace, and thus, observers will stay plugged in to the day-to-day news. Yet another reminder, it was only two years ago when key US indexes bottomed and reignited the post crisis recovery. Heading into this spring, the set up has quietly warned of a natural market breather. After all, the S&P 500 is up 95% since the lows of March 2009. Of course, this does not necessarily suggest a major downside move as seen in the late 2008 crisis. However, this leaves us pondering the magnitude of near-term moves and the required next steps for risk adjustment.

Technical indicators are mildly stretched, and there are fewer positive surprises—both create short-term hurdles in continuing this run. Some will argue the uptrend is shaken and not broken. That view is valid for now, since fundamentals are not overleveraged or as deeply overvalued as they were in 2007. In fact, the worry of being reckless is less applied to the private sectors these days. Instead, the attention is centered on new financial regulation and government officials’ abilities to manage policies. The current political climate sets the tone on taxes and attitude towards business. These factors are not as easy to identify, but the details are being examined by longer-term investors.

Looking Ahead

Most analysts would point to interest rate behavior along with the Federal Reserves’ policy as the next major catalysts. It is evident that business models are changing in the current cycle, and revenue expectations are difficult to gauge. Meanwhile, fund managers are searching for innovative ideas for growth, while investors are desperate for higher yielding instruments. From a decision maker’s perspective, the challenge is finding quality ideas, which appear scarce at the moment. This task is challenging especially in isolating the noise from the existing macroeconomic chatter. Clearly, the Bank of Japan’s attempt to stimulate the economy along with euro zone’s solution for debt crisis can spark noticeable trends. Importantly, this will raise questions about the sustainability of a stimulus driven market. This can change the market feel towards fear based responses as we all eagerly await.

Article Quotes:

“Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons, I think local governments will resist ferociously any further corporate governance reform. …The most obvious major countries in the region that can help the process of RMB internationalization—Japan, Russia, India, Korea and to a lesser extent Vietnam and at least one or two others—have a deep mistrust of China and are unlikely to assist the process beyond some minimum level. Remember that one of the reasons sterling never achieved the dominance that the dollar has today is that the French and the Germans, not to mention some other European powers, actively undermined its role in favor of their own currencies. I don’t see why this won’t happen again.” (CreditWritedown.com, March 12, 2011)

“The attractive home price and mortgage rate situation has not resulted in the typical improvement of housing market conditions largely due to a worrisome employment situation. The gains in hiring recorded in February raise expectations of a near term improvement in the housing market. But, other reports from the housing market raise the level of concern. According to CoreLogic, 11.1 million homes or 23.1% of residential mortgages outstanding had negative equity in the fourth quarter of 2010, up slightly from the third quarter. This problematic situation combined with the existence of numerous foreclosed residential properties makes a strong case for the Fed to maintain the current easy monetary policy stance in the months ahead.” (Northern Trust, March 9, 2011)

Levels:

S&P 500 Index [1304.28] – Declined for the week by 1.29%. It’s barely holding its 50-day moving average as near-term investors watch the resilience around 1300.

Crude [$101.16] – After a speculative event driven explosion, a retracement to rational levels is taking place. Betting that this sharp uptrend continues might not be sustainable. The March 7, 2011, intra-day high of $106.95 is the new high. Meanwhile, the 50-day moving average is at $92.

Gold [$1411] – Once again, maintaining a trend above 1400 seems to be a difficult challenge.

DXY – US Dollar Index [76.40] – It stands at a fragile state as a move below 76 signals a deteriorating dollar.

US 10 Year Treasury Yields [3.40%] – Revisiting 3.40% highlights a key inflection point. Interestingly, the 5 and 50-day moving averages are at 3.45%.

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 7, 2011

2011-03-07T03:49:00.000-08:00

“Courage is the discovery that you may not win, and trying when you know you can lose.” - Tom Krause

Not as Good as Advertised

A simple glance at traditional measurements of US economic health and corporate earnings translate to an overall positive message. This message is echoed by performance numbers and headline titles. However, when consensus leans towards comfort, then questions arise as to the legitimacy of this optimism. In fact, seasonal changes can spark inflection points more. Simply, the argument to purchase at current ranges is not too appealing without taking a pause and revaluating the fundamentals. Now, reading sentiment is an art itself, but the low volatility strongly demonstrates the growing complacency. Aside from the global turmoil, the vulnerable condition of European markets and overheating Asian economies should not be easily dismissed.

Early Spring Hints

The last decade showcased market declines in the period between February and March. Generally, a correction in late winter to early spring is not uncommon. For example, in 2007, the S&P 500 declined sharply from 1460 to 1380. In the same way, March triggered a selling point in 2004, 2002 and, of course, 2000 (the well-documented tech bubble). As we enter the new month, navigating through this downside move is worth pondering, especially for speculators and those looking to manage their risk. At the same time, bargain hunters can use this period to pick up value at a discount. In other words, the sell-off window offers fruitful entry point in indentifying specific opportunities. As usual, it is tricky to grasp the current dynamics fully. Timing is the least controllable variable and keeps participants either curious or frustrated. However, some hints invite daring actions more than others. The weeks ahead will test the courage of those aggressively betting on declining prices. Equally, this process can be nerve racking to those owning shares.

When the Dust Settles

Interest rates are a key macro driver that will force a reaction in currencies and risky assets . Central banks’ policies in US and Europe are setting up to strongly influence investor mindset and behavior. Interestingly, internal disagreement within the Federal Reserve is worth monitoring as well. The low interest rate environment has fueled the recent recovery, while reducing the borrowing cost for large corporations. There is plenty of posturing and political factors ahead, but the markets will be sensitive to any clues of rate hikes.

Article Quotes:

“If investors don't understand that this is, how QE2 is "working," they are likely to be as blindsided by the coming decade of weak investment returns as they've been over the past decade. It's notable that the weak returns achieved by the S&P 500 over the past decade were predictable, and our estimates of projected total returns have remained quite accurate in recent years. It bears repeating that our difficulty in 2009 was not that we viewed stocks as overvalued, but that we were forced to contemplate data from periods other than the post-war period, which had generally required much more stringent criteria for accepting market risk. At the 2009 lows, stocks were priced to achieve 10-year total returns in excess of 10% annually by our estimates. The problem is that similar expected returns were not sufficient to end prior declines during much lesser crises even in post-war data.” (John Hussman, February 28, 2011)

“Although Beijing has tightened monetary conditions to dampen inflation, which has been running near a two-year high, the construction projects already launched by local governments will require vast amounts of funding in coming years just to be seen through to completion. This will prevent China from implementing the more aggressive monetary tightening many analysts think is needed to truly stamp out inflation. And the investment does not come for free, even if it sometimes seems like that in China. Local governments have turned to banks to fund their largesse. Banks, owned by the state, have unsurprisingly answered their master's call—just the sort of non-commercial decision that can lead to loan defaults.” (Reuters, March 3, 2011)

Levels

S&P 500 Index [1321.15] – A few points removed from annual highs of 1344.97. It is in a minor consolidation phase while maintaining the uptrend.

Crude [$104.42] – Recent breakout is mostly event driven by emotionally based response. Following the reactionary response, a natural pullback to $100 to $95 is possible as part of a reality.

Gold [$1427] – Reignited strength is developing in Gold prices—a reiteration of the established strength and momentum driven run. It remains closer to the higher end.

DXY – US Dollar Index [76.40] – Over the last three years, the 76 mark has been noteworthy. The weeks ahead, can provide a directional swing, given this familiar territory.

US 10 Year Treasury Yields [3.49%] – In the near-term, holding above 3.40% suggests a sign of stability.

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 | February 28, 2011

2011-02-28T03:38:00.000-08:00

“The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is.” - Winston Churchill

For longer-term investors, the action last week might not create enough unease to change course in 2011 plans. The consensus view mostly indicates strength in company earnings, favorable presidential cycle data, and increased merger and acquisitions. These highly polished and occasionally motivational points have some merits. In fact, these are key selling points as to why participants bought into this concept, especially towards the end of last summer. In other words, the upside market momentum is driven on the notion of an inevitable cycle recovery. This thought propelled the stock markets to rise at a significant pace in the last few months.

In the short-term, there are plenty of excuses and reasons to lean towards risk aversion. For one thing, European concerns have been in place, and further turbulence is hardly a surprise. Secondly, resurfacing inflation worries plague emerging markets as currently discussed in Asian economies. Meanwhile, US stock market offers a less timely entry point as a mere breather is much needed. Interestingly, some quarterly earnings results may reflect the upbeat rhythm painted by general market feel. However, on a relative basis, US markets are attractive and may lure in foreign capital. That said, managing surprises and expectation is the challenge ahead for investment decision makers.

At this junction, most technical observers are hesitant to declare the last few days as "the top.” As usual, it is well known that it takes few catalysts to shake the smooth sailing markets. Veteran observers are keenly aware that downside moves can be short lived sell-offs occurring at a rapid pace. For the day-to-day trader, it feels like every hour is filled with some highly charged headline material. Topics such as government shutdown, developing unrest, and Wal-Mart’s declining US sales spark enough volatility to create trading opportunities. The skill is in isolating noise from early signs of a sustainable decline for a frontline participant.

Within this fear-driven period, the attention seems too diverted away from the next big issues linked to interest rates and currencies. When the near-term dust settles, mapping out interest rate matters among central bankers can shape a better grasp of risk. Of course, the reactionary pattern in commodity prices should be factored in the Federal Reserves’ evaluation. Beyond the explosive run in Crude, there are other overlooked and existing hints of vulnerability. These cumbersome clues might be difficult to shake off as we all eagerly wait.

Article Quotes:

“The period between the War of 1812 and the Civil War is commonly called the “free banking era.” It is also called the era of “wildcat banks” because many banks were poorly capitalized, poorly if not fraudulently managed, and prone to failure. Conventional wisdom says that this era demonstrates conclusively the need for strict government regulation of money and banking. Like other free-market institutions, free banking rests on the sanctity of property rights, with no government involvement other than prosecution of theft or fraud. But there was substantial government involvement all along, so the “free banking” label is only accurate in relative terms.” (The Freeman Ideas on Liberty, March edition 2011)

“China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Concerns that a deterioration of lenders’ asset quality could derail the world’s fastest-growing major economy surfaced after credit expansion surged to a record 96 percent in 2009, prompting the banking regulator to tighten capital rules.” (Bloomberg, February 21, 2011)

Levels:

S&P 500 Index [1319.88] – Despite a weekly decline, the index is holding above 1300 and trading near its 15-day moving average of 1323.69.

Crude [$97.88] – A noticeable and well-noted explosive run. The peak of $103.41 on February 24, 2010, marks a multi-month top. Revisiting this range can trigger ongoing debates and speculation.

Gold [$1402.50] – Since November 2010, the commodity has failed at 1400. Yet again, this level is being tested and short-term history would suggest further pause ahead. The week ahead can provide a better clue on buyer’s interest.

DXY – US Dollar Index [77.27] – Relatively quiet and trading slightly below its 50-day moving average of 78.92. Basically, it has been mostly quiet since the peak in late 2010.

US 10 Year Treasury Yields [3.41%] – Establishing a near-term downtrend pattern since February 9, 2011. A dominate theme recently showcases a pattern between 3.30-3.50%. A trading range within these points suggests a normalization process at least in the short-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 | February 22, 2011

2011-02-22T02:53:00.000-08:00

“It must be admitted that there is a degree of instability which is inconsistent with civilization. But, on the whole, the great ages have been unstable ones.” - Alfred North Whitehead (1861-1947)

When observing US based indexes, one would notice the recovery in US markets continues as it recoups losses from 2007-08 crisis while restoring some confidence and reinforcing the power of perception. Perhaps, this provides a sense of fragile confidence, based on large company earnings, perceived value, and favorable reactions by key participants. The synchronized rise in the US stock market is helping the S&P 500 Index approach the 1400 level along with a quiet volatility. Rising markets are known to serve a marketing purpose in which sideline observers are enticed to step in or at least explore. A 30% appreciation in the S&P 500, since August 27, 2010, might dampen the voices of outspoken pundits, who highlight longer-term concerns. However, for those not relying on broader indexes as a barometer of well being, the above discussions of comfort might feel like a mere illusion. The growing disconnect between the market picture and the real economy sparks sensitive reaction as hinted at during the last two US elections. Similarly, odd makers would hardly claim today as a timely entry point to purchase stocks, given this extended market.

If you're a casual global news observer, you might be surprised and/or confused at the rapid widespread of global unrest. The escalating demand for power shift is a trend in itself with plenty of details to grasp as foreign policy experts map out future implications. Libya and Morocco are now added to this growing list of countries that look to reexamine their power structure. Then, it is fitting even for a casual observer to wonder the impact on sentiment, natural resources, and political risks. All factors become instantly relevant in a closely connected world. Clearly, this Monday (Presidents Day) witnessed a sharp rise in Crude and Gold, at least, as a short-term response to these events. Of course, the well-documented rise in agricultural commodities is tied to food riots. Perhaps, this provides a logical explanation to global frustration, which eventually will transform into a political matter. Where is the next turbulence going to come from? That is a natural question, but it is too early to ask without having fully grasped events that transpired.

If you've followed the Eurozone activities, you'll most likely wonder about the future result of German elections and the handling of persistent economic concerns facing southern European nations. It was only last spring that sovereign default worries triggered market sell-offs and ongoing bailout debates. Perhaps, a foreign exchange observer is too plugged in to gauge the Euro’s short-term behavior. Investment managers will have to dissect and scramble to figure out the relatively attractive place in Europe to capture economic growth for the next 5-10 years. In the near-term, stability is the question facing policymakers and investors alike for the weeks ahead.

If you're an emerging market investor, then assessing inflation and managing short-term risk is a lingering, but even more, puzzling question. A decade old theme is intriguing, and those familiar with China and Brazil are seeking the next cycle winner and reconsidering adding to winning positions. Interestingly, FXI (China 25 Fund) and EWZ (MSCI Brazil Fund) are not trading at multi-month highs. This is a noticeable contrast to the US indexes, and inquiring minds are pointing out that emerging market themes are becoming fatigued. Perhaps, inflation is one factor not to underestimate, and previous growth projection might have been too optimistic. Meanwhile, the global landscape remains highly tied to the faith of the US Dollar. This is not only a symbolic but also a practical manner in emerging market trends. Series of events can trigger mood swings in attitude of the US Dollar. At this point, the Dollar is accepted as a dominant currency as emerging economies continue to build a stronger financial infrastructure.

Connecting the Dots

Confluence of events can cause powerful reactions at a faster pace in an interlinked world. Sociopolitical matters have been brewing for a long while, but predicting inflection points in human (or market) behavior is too difficult. Interestingly, the fragility of financial systems in developed nations can trigger doubts for a short period. Yet, those doubts can be quickly forgotten until revisited at the next inflection point. Similarly, global markets have a way of exaggerating or underestimating a nations’ well-being, while painting a misleading perception for an extended period. In short, mean-reversion is necessary to get closer to the truth, but it is a painful process along the way.

Article Quotes

“While there are parallels with the US there are also unique features in Brazil. Risk management infrastructure has largely been missing in Brazil’s credit build up, with a “positive” credit bureau still not yet approved owing to consumer protection issues (a positive credit bureau shares credit history of all customers whereas negative bureau shares information for customers only in default, typically this information comes too late). This has enabled borrowers to build multiple lines of credit without the lenders’ knowledge, especially as most loans are “unsecured” and there is no collateral involved. Brazil is in this spot from a financial standpoint due to inefficiencies in the financial system. The operating expense to assets ratio of the Brazilian banking system is a staggering 4.2 per cent compared with 1.1 per cent and 1.6 per cent for Chinese and Indian banks respectively, and this large expense base keeps the cost of credit abnormally high.” (Financial Times, February 21, 2011)

“Although policymakers in the emerging markets clearly face important challenges, such concerns should be put into perspective. First, these capital flows have been driven by many factors, including expectations of more-rapid growth and thus higher investment returns in the emerging market economies than in the advanced economies. … Second, as I noted earlier, emerging market economies have a strong interest in a continued economic recovery in the advanced economies, which accommodative monetary policies in the advanced economies are intended to promote. Third, policymakers in the emerging markets have a range of powerful–although admittedly imperfect–tools that they can use to manage their economies and prevent overheating, including exchange rate adjustment, monetary and fiscal policies, and macroprudential measures. (Chairman Ben S. Bernanke, February 18, 2011)

Levels

S&P 500 Index [1343.01] – Multi-month highs are in place. The next question is in regards to the index’s ability to reach 1400. That is a level last reached and surpassed in 2000 and 2007. Interestingly, in both cases S&P 500 Index stayed above 1400 for short-lived period and eventually topped. However, the current trends point to the index being extended.

Crude [$86.20] – It has held above $84 and is attempting to breakout from a sideways pattern. The current news flow can provide near-term acceleration.

Gold [$1383.50] – For a few weeks, the commodity has remained in a calmer state in a narrow range of 1350-1400. Next discussion will circulate on Gold’s ability to revisit all-time highs of $1421 reached on November 9, 2010.

DXY – US Dollar Index [77.66] – Once again, the index pattern is not convincing of a strengthening dollar at this point.

US 10 Year Treasury Yields [3.57%] – Mildly pulling back after reaching 3.76%. In the weeks ahead, the magnitude of this decline is noteworthy for those tracking key macro shifts.

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 | February 14, 2011

2011-02-14T03:33:00.000-08:00

“Technology is similarly just a catalyst at times for fundamental forces already present.” - Scott Cook

Within the current uptrend, volatility has stayed low, as illustrated by various exchange data points. A reduction in turbulence might help long-term investors who occasionally look to make investment adjustments. However, the lower volatility is creating limited day-to-day opportunities for active traders. This impacts exchanges and money managers whose revenue is strongly tied to volatility based trading. Interestingly, policymakers are evaluating the expansion of derivative products, and the competition for exchange based products is heating up as well. These points above illustrate the significant influence of trading mechanics that lead to a changing market dynamic.

These days, one can track the profit’s key exchanges, since they became public a few years ago. Of course, the financial headlines this weekend highlight merger discussions, which can change overall trading behaviors while presenting further regulatory challenges. This recent trend is partially attributed to innovative electronic exchanges, which have reduced overall pricing and in turn increased competition. “Brokers who owned the NYSE 10 years ago earned 6.25 cents or more when buying and selling 100 shares. Now, the spread is a penny for the most heavily traded stocks” (Bloomberg, February 10, 2011). That said, money managers are reevaluating strategies in seeking yields and implementing growth driven models while attempting to establish expertise for the current landscape. In other words, advancement in technological and informational speed is forcing adjustments in traditional financial services. Perhaps, forward-looking managers will look to alternative assets classes or sharpening existing systems to create an edge.

Within the altering technical matters in place, much of the attention, as usual, is centered on the macro climate. Although, extraordinary behaviors are not too visible in Gold or Crude, as both key commodities are pausing. Similarly, long-term yields have somewhat stabilized despite the chatter of sudden spikes. Meanwhile, the Dollar is too quiet for now at this early junction of the year. This relative period of silence makes some nervous in anticipation of a trend shift. Pundits highlight the political instability that is brewing, while others emphasize higher food prices. Yet, the S&P 500 Index (up 5.7% year to date) paints a cheerful picture of corporate profit stability, improving economic growth, and reacceleration from the 2008 crisis. These optimistic arguments are as hard to deny as they are to accept, especially when digging deeper. Perhaps, this sets the stage for a gut check in early spring as various catalysts continue to build.

Article Quotes:

“The booming piracy industry is a neat metaphor for our globalised economy. Just about everything you need to know about how money is made and lost is encapsulated in the daily battles between cargo captains and the pirate skiffs in the Somali basin. For starters, know your customer. One of the keys to understanding the modern multinational is to realise it hates embarrassment. Bear in mind that when faced with any challenge, whether from a lobby group, government or nerdy teenager on Twitter, its instinctive response is to crumple. Then imagine what it will do when confronted with poor people with guns: give in without a fight. Sure enough, most shipping companies don’t even allow their guards to bear weapons. It is not the kind of thing Human Resources wants to get involved in. All the pirates have to do is take a ship, steer it to harbour, and then ask for a few million dollars for its return.” (Financial Times, February 10, 2011)

“The Federal Reserve has held short-term interest rates to nil. We have expanded our balance sheet to unprecedented levels, with the effect of holding down mortgage rates and the rate of interest paid on Treasuries and the myriad financial instruments that are priced off of Treasuries, including corporate debt. After much debate―which included strong concern expressed by one member with a formal vote and others, like me, who did not have voting rights in 2010―the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. …The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: ‘Monetary policy responsibility cannot substitute for government irresponsibility’.” (Speech by Federal Reserve of Dallas, February 8, 2011)

Levels:

S&P 500 Index [1329.15] – Up nearly 28% since bottoming in August 27, 2010. Establishing multi-year highs as the ongoing uptrend is intact.

Crude [$85.58] – Momentum stalled at the $90 range and sparked a near-term decline. Odds for a bounce at current levels would seem favorable. A sharper drop below $85 can signal further selling, given the noteworthy decline this month.

Gold [$1364. 00] – Once again, 1350 is a key base in the recent consolidation. Most optimistic investors are looking at the current range as a reentry, with hopes of revisiting 1400.

DXY – US Dollar Index [78.46] – Not showcasing any significant directional move. Potentially, investors are waiting for further data and adjustment in Federal Reserve plan for the next key movement.

US 10 Year Treasury Yields [3.62%] – In a multi-month uptrend and early signs of pausing. The week ahead will demonstrate the sustainability of the 3.60% after economic and inflation related 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 | February 7, 2011

2011-02-07T03:28:00.000-08:00

“Safety is something that happens between your ears, not something you hold in your hands.” – Jeff Cooper (1920-2006)

The Beat Goes On

The rising upside move last week serves as another example, where markets drum to their own beat and worries can be ignored or at least postponed. In fact, the broad US indexes have found a way to pay less attention to long or near-term issues related to global unrest. Instead, much of the ongoing appreciation is caused by positive quarterly reports from US large corporations. Major headlines continue to credit and outline the “better than expected” sales forecast that has been met. Veterans will consistently reiterate that markets are an expectation game. This might console participants who are confused between the daily economic truth and the health of electronic driven markets. On the other hand, optimists attribute this current run as an early indication of the attractiveness of US investments compared to overheating emerging markets.

Adjusting Lenses

Meanwhile, few are taking notes and a little caution in anticipation of early spring, where the pressures of slow economic growth and the elevated commodity prices begin to seep through into balance sheets of mid to small cap companies. In other words, the S&P 500 companies might not be an accurate reflection of US businesses, and one should remain cautious in using this index as a barometer of safety. Yet, portfolio managers will remind us that they’re paid to outperform, and success is closely tracked on a monthly basis. That requires staying shrewd and identifying momentum regardless of implications beyond the existing quarter. Rightly or wrongly, that is the mindset of an average money manager.

In the meantime, day-to-day followers struggle to identify the right period to bet on declining markets as it becomes a less compelling story (until it begins to materialize). Clearly, fighting against the Federal Reserve is a daunting task, and professionals acknowledge that it is a powerful force to defeat. Simply, a rising stock market, along with low interest rate policies, partially contributes to further rise in commodities. Perhaps, that’s a summary of the last decade, and remnants of that theme continue to persist at least in the early days of 2011.

Midwinter Mindset

As we have reached the midway point through this winter, there is plenty of macro driven factors to decipher. On that note, the break out in the US 10 Year Treasury Yields is noteworthy. Investors are anxiously waiting to see if 4% will be revisited as witnessed in mid 2009 and early 2010. This trend questions if participants accept the fact that the economic recovery is sustainable in the near-future. “The difference between yields on two- and 10-year yields rose to 2.89 percentage points last week, above median of 1.81 percentage points the past decade” (Bloomberg, February 6, 2011). Usually, this is known to support a rising economy among consensus in which money flows away from treasuries and into risky assets, such as junk bonds and stocks. Perhaps, this makes sense to a casual observer, who continues to glance at a rising market, growing risk appetite, and weaker volatility. That said, the art ahead is to go with the flow until figuring out the potential catalyst that can disrupt this overly comfortable status quo.

Article Quotes:

“On this evidence, austerity appears to only redress the competitive and structural divergences at a snail’s pace. With the possible exception of Ireland, the periphery countries have no choice but to enact structural reforms to stimulate innovation and increase competition in product and labour markets. Absent these changes, the divergences between the periphery and core may not close, or may even widen again (European Commission 2010). So far, each country has taken modest steps. Though not yet reflected in competitiveness indicators, Greece appears to be embarking on far-reaching structural reforms as part of its EU-IMF programme (IMF 2010). But across Europe these measures have been insufficient. This should not be too surprising. Reforms such as liberalising the markets for professional services attack powerful interest groups directly – and nearly always require the application of an external force.” (VoxEU.org, February 6, 2011)

“The Treasury argues that many borrowers it thought were eligible for help turned out not to be because they earned too much, their homes were too expensive or were not their primary residence, or because they couldn’t meet documentation requirements. Many who were eligible, it says, got a private modification instead. Still, the lack of progress means foreclosures are likely to be higher this year than last. That will maintain downward pressure on home prices, which have resumed their fall after the expiry of a tax credit last year. The home-ownership rate fell to 66.5% at the end of 2010, its lowest level since 1998, as many former and would-be home-owners rent. Long after the crisis and the recession, the housing bust that caused them lingers on.” (Economist, February 3rd 2011)

Levels:

S&P 500 Index [1310.87] – Multi-year highs as the index continues its uptrend. The index is 13.16% above its 200-day moving average.

Crude [$89.03] – It appears fatigued in the near-term. The commodity has struggled to stay above $90. However, the trend is mostly sideways.

Gold [$1355.50] – Early signs of recovering from a downtrend. It seems to barely hold above 1350 as a point where new buyers might look to add and existing holders might look to sell.

DXY – US Dollar Index [78.04] – Mostly a nonevent as witnessed for several months. A long step back reminds us that this downtrend has been in place for 25 years.

US 10 Year Treasury Yields [3.63%] – Breaking out of a multi-week trading range. This rise in yields bottomed on October 8, 2010 and is accelerating to 9-month highs.

Dear Readers:

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

Market Outlook | January 31, 2011

2011-01-31T03:23:00.000-08:00

“What you perceive, your observations, feelings, interpretations, are all your truth. Your truth is important. Yet it is not The Truth.” - Linda Ellinor

Bigger Picture

For a long while, geopolitical worries have stayed relatively silent for casual headline followers and slightly-impacted invested participants. Yet, the rising food price is one issue that’s been well addressed and potentially a key catalyst for some turbulence-like conditions. Now, in terms of markets, global tension may serve as an excuse to sell. It should be noted that regardless of political instability, this market was setting up for a consolidation or, at least, a much needed breather. In the past year, inflation in emerging markets and weakness in some European economies presented some minor setbacks to the existing asset appreciation. A downtrend here is not much of a surprise. However, the magnitude of declines provides a better read on market feel.

Previous Clues

Technical observers have pointed out the increasing odds of mean reversion, given the extended broad indexes and commodity markets. Interestingly, Gold prices showcased an early hint of a slowing momentum since early December 2010. On the other hand, Crude strengthened in past few weeks as some expect a further rise in periods of unrest. Obviously, each commodity has its own sensitive response to news. Therefore, identifying few trends in turbulent times remains tricky in the weeks ahead. Meanwhile, the spike in VIX (volatility index) from 16 to 20 last Friday can hardly go unnoticed. Perhaps, a key tipping point and how this plays out is of interest to observers and participants alike. Finally, investment managers may shift focus in the search for hedging tools and attempting not to overreact on the near-term unknowns.

A Wider Perspective

From one angle, the general sentiment has relatively improved from an overly fearful state of March 2009. The existing uptrend has been in place for nearly two years. This run is driven by low rates, increasing complacency/low volatility, and optimism in the decisions of policymakers.

Global investors face few options in the current environment:

- Seek higher-yielding instruments

- Add to trending long-term themes (i.e. commodities and China related)

- Selectively pick quality and monitor some stocks specific ideas

- Stay cautious by managing cash and currency shifts

In addition to these above, legislative response to taxes and business related laws are awaited by those looking to put capital to work. Also, the response of policymakers to interest rates, serve as better guidance to the matters stated above. These issues are at the forefront of financial decision makers and affect general participants as well. Points associated with economic improvement and credit expansion are bound to be scrutinized closely, especially if a sour mood begins to resurface. This is a harsh reminder that navigating in the post 2008 crisis requires increased nimbleness and immediate actions. Veteran pundits are noticing that it takes much work these days to protect capital, while dodging periods of sharp sell-offs.

Article Quotes:

“The catalyst for a resumption of periodic crises came with deregulation in banking and capital markets in the 1970s, together with the emergence of wholesale money markets. With ready access to funds, banks embarked on a dash for growth across the developed world. Property-based financial crises ensued in the mid-1970s in the US and UK; in the mid-1980s in America; in the early 1990s in Japan, the Nordic countries and the UK again; then once again in the English-speaking countries along with Spain from 2007. What lies beneath this increasing tendency for property-induced trouble? ‘The most likely explanation,’ says Lord Desai, emeritus professor at the London School of Economics, ‘is that innovation dried up.’ Property, that is, has acted as a sink for excess liquidity when industry’s demand for funds has been weak.” (Financial Times, January 26, 2011)

“If history is any guide, the price of oil will not rise in a straight line, and the secular uptrend will be punctuated by severe economic recessions. After all, the cure for a high oil price is a high oil price! At some point during the course of this business cycle, as the price of oil continues to rise, it will (once again) cause economic pain for the overstretched citizens of the developed world. When that happens, consumption will slow down and we will experience demand destruction in some parts of the world. In our view, the next economic recession will be caused by yet another spike in the price of oil and during the next business slowdown, crude will get whacked again. This is the reason why we will liquidate all our energy related investments prior to the onset of the next economic recession.” (The Daily Reckoning, January 29, 2011)

Levels:

S&P 500 Index [1276.34] – After a range bound trading pattern, the decline last Friday (Jan 29) was noticeable. Breaking below the 15-day moving average of 1284 serves as the first sign of retracement.

Crude [$89.11] – A downtrend appears to develop after peaking on January 3, 2010—mostly in the $88-90 range and struggling to make new highs. The momentum from last year faces some resistance, but it’s too early to call any top.

Gold [$1334.50] – Noticeable break below $1350. Safe to say, the commodity in entering a consolidation period from escalated levels. However, it remains above its 200-day moving average of 1278.75—a move below that level can create a response.

DXY – US Dollar Index [78.13] – Barely holding above 78. No major significant improvement in the dollar as it awaits policymakers’ decision to stir a catalyst.

US 10 Year Treasury Yields [3.32%] – Finding a steady range between 3.30% and 3.45%. The odds of those levels holding is suspenseful for most.

Dear Readers:

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

Market Outlook | January 24, 2011

2011-01-24T03:30:00.000-08:00

“Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.” - John Quincy Adams

The synchronized upside movement in key asset classes is bound to witness some correction in recent months. As highly documented, for a while, the commodity run seems to need a breather along with broad stock market indexes. Gold and other metals are setting an early tone given recent declines. This pattern has some wondering if food related commodities are the next to see some price adjustments. In other words, the ongoing appreciation in agricultural themes is visible from cotton to corn as demands continue to rise. On a similar point, a few volatility indicators suggest that the period of calmness faces some near-term challenges as one should not discount the odds of minor turbulence. In addition, last week, small cap indexes sharply declined at a faster pace than the S&P 500 Index. For strategists, that signals a lesser tolerance for risk. Finally, earnings season presents investors with various data points to digest. However, the attention is most likely to refocus on macro issues rather than the stock specific factors.

During these periods, money managers will have to consider hedging or selling to take actionable steps on the early hints of a directional shift. As usual, surviving key turbulent cycles is applied by preserving quality and seeking to produce consistent return, especially for those measured by annual returns. Now, the decision making process for a portfolio manager is beyond going with the flow (momentum driven), which has been the case since the summer months. Basically, any fear driven sell-offs can present opportunity to buy innovative ideas at cheaper prices. Similarly, there are fundamental arguments that create a case to sell some overvalued assets linked to basic materials and emerging markets. Of course, longer-term investors are not going to easily bail out on short-term pauses in oil prices and vulnerable trends in the Chinese markets. In some cases, investors with a 5-10 year time frame might be less willing to follow the week to week moving parts while requiring further confirmation of a slowdown. Yet, glancing at pending investor reactions is of interest to all.

In conjunction to price driven adjustments, the interest rate environment can provide valuable clues as to the nature of the next move. Clearly, the interlinked nature of markets is a factor that is felt for active traders. For example, the US 10 Year Treasury Yields have risen from 2.33% to 3.40% since October 2010. In the same period, the BKX (Bank Index) has risen 13%. This is a notable trend that is worth watching to evaluate the correlation of rising rates and appreciation of bank stocks. Simply, the rest of the winter months offer a chance to handpick select financials for those looking for higher risk/reward profiles into the spring and summer months. Once again, the value of closely observing at inflection points helps to accumulate ideas for future entry points. However, a confusing landscape creates further doubts, and this can begin to play out in the days ahead.

Article Quotes:

“Unlike in the mortgage crisis, state debt has not generally been repackaged into opaque, complex securities. Furthermore, and contrary to what many pundits suggest, state governments cannot simply declare bankruptcy. Bondholders are also privileged creditors in almost all states. It is thus difficult for states to default: they would generally have to stop paying employees before they stopped making debt payments. At the local level, however, the situation is different. Many US cities can declare bankruptcy – and given their numbers a severe crisis in at least one major city is both feasible and quite possible...But even if the relevant state government decides not to step in, and a city is forced to default, the direct macroeconomic consequences are unlikely to be substantial – unless that default triggers others to follow.” (Financial Times, January 20, 2011)

“Social Security's nonmarketable bonds are merely markers for actual Treasury bonds, which must be sold, and for which interest must be paid. Thus, Social Security is entirely dependent on the Treasury's sale of new bonds for its future solvency. If interest rates spike or global buyers become wary of buying trillions of dollars in U.S. T-bills, costs for that borrowing will skyrocket, crowding out all other federal spending. As a result, U.S. taxpayers are now paying twice for their Social Security benefits: Once through payroll taxes, and again when the Treasury uses their taxes to pay interest on the bonds it sold to fund Social Security.” (Daily Finance, January 20, 2011)

Levels:

S&P 500 Index [1283.35] – Establishing a new range above 1200 while maintaining an uptrend. Friday’s closing price is 11.24% above the 200-day moving average.

Crude [$89.11] – Near-term pause is forming within a tight range between $88-92 in the past two months.

Gold [$1367] – After holding in above $1350 (key support level), Gold prices have witnessed ongoing declines. A break below $1350 potentially creates further selling pressure.

DXY – US Dollar Index [79.16] – Struggled to break above 81 on two occasions and remains in a fragile territory, given the ongoing downtrend.

US 10 Year Treasury Yields [3.40%] – Holding in near multi-month highs as a rise in rates is becoming an accepted trend in recent weeks. The 50-day moving average stands at 3.16%, which demonstrates an early hint of established strength.

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Dear Readers:

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

Market Outlook | January 17, 2011

2011-01-17T03:16:00.000-08:00

“If we would guide by the light of reason, we must let our minds be bold.” - Louis D. Brandeis

At first glance, it seems rosy for those invested in domestic stocks and commodities. The returns of the last seven months (S&P 500 + 27.83%) indicate that going with the flow is a feasible option for now. In the minds of some veterans, a smooth-sailing market behavior has its rewards, but it is prudent to think and stay a step ahead. As usual, facts are needed to justify those worrisome thoughts, especially given the high cost of mistiming momentum. Interestingly, perception mostly tends to dominate financial markets, and facts can become the postmortem exercise. A US economic recovery is painted by leaders and some key data points. Perhaps, this recent pickup is felt in some regions and select industries. Yet, for many, there is a noticeable disparity between the general economy and financial markets that is too big to ignore. Perhaps, this is another age-old lesson that suggests not confusing the market recovery with economic well being.

Now, some ‘savvy’ participants are not cheerleading this glitter-like performance and acknowledging socio-economic factors, such as escalating agricultural prices and increasing regulatory pressures. Of course, money managers are simply asked to produce returns regardless of rhetoric or gloom-and-doom discussions. That being said, the current landscape requires balancing general sentiment while attempting to closely time potential hazards. Interestingly, some are waiting for the ideal entry point as a result of short-term panic. For the stock market, that last major point for a bold buyer was around March 6, 2009. Finding this set up in traditional assets is not an easy task, especially with the volatility index near its lows. Therefore, identifying themes where buyers are rushing to sell is not that obvious. From an opportunity standpoint, innovative ideas with a longer-time horizon are poised to present rewards. In other words, a brave approach in lesser known areas is one alternative to those wanting a better idea for a relatively easier method of chasing momentum.

The threat of inflation is on the radar, and it has become a global discussion from Brazil to South Korea. For the past several months, headlines featured Chinese policymakers taking several measures to cool the ongoing real estate boom. Clearly, the explosive run in emerging markets is hardly new material and heavily discussed in the investment circle. In fact, the FXI (China 25 Index Fund) is not trading all-time highs and is far removed from the October 2007 peak. This displays that investors have taken a closer look, and overall enthusiasm is more tempered than commodity markets. Finally, these above points are highly connected to interest rates and currency imbalances. Therefore, the first quarter should provide some answers in conviction levels and pending catalysts for a change in tone.

Article Quotes:

“Recent data make clear that the risks of a double-dip recession and deflation have ebbed and that economic growth and job creation are beginning to flow. Yet the ships of job-creating investment remain, for the most part, tied to the docks—or worse, choose to sail for foreign ports where tax and regulatory conditions are more favorable, very much in the same way that Ohio, Michigan, New York and California businesses and workers have navigated to Texas. I don’t believe this has much to do with the Fed. None of my business contacts, large or small, publicly held or private, are complaining about the cost of borrowing, the lack of liquidity or the availability of capital. All express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” (Federal Reserve of Dallas, January 12, 2011)

“There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting. One academic said: ‘Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.’…Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become “increasingly disconnected from the fundamentals” but so far has said there is no nationwide bubble.” (The Telegraph, January 16, 2011)

Levels:

S&P 500 Index [1293.24] – Closing at multi-year highs. Clearly, the index is at the highest point since the 2008 crisis.

Crude [$91.54] – The suspense is around the next target of $100 barrel as the momentum is net positive. A very short-term hurdle is at $92.58 set early this year.

Gold [$1367] – Since early November 2010, the commodity has failed to escalate above $1400 on three occasions. It’s in a consolidation mode, and charts suggest higher odds of buyers at $1350.

DXY – US Dollar Index [79.16] – Hovering between $78-80 the last few weeks. In fact, the 50-day moving average stands at $79.54. This illustrates the stagnant behavior in the currency.

US 10 Year Treasury Yields [3.32%] – Holding above 3.30%, a new short-term trend. The recovery since early October 2010 is still in full effect and worth noting as a turning point.

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Dear Readers:

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

Market Outlook | January 10, 2011

2011-01-10T03:38:00.000-08:00

“To treat your facts with imagination is one thing, but to imagine your facts is another.” - John Burroughs (1837-1921)

Participants are slowly getting back to examining and reconfirming data that is sensitive to market movement while attempting to gauge overall sentiment. So far, it is the same story, until this uptrend presents some decline. That is the unknown that is driving up curiosity. Once again, momentum is a powerful force as witnessed in the rise of commodities and stock prices. Inversely, a downside momentum in the US dollar and interest rates is a forceful pattern in global trade. Simply, any shift of these established trends increases the suspense and leads to a noticeable reaction, which is dreaded daily in the opinion pages. Now, global risk appetite is healthy, based on upbeat market sentiment, positive performance data, and inflation in emerging markets.

The interlinked global market will require public and private participants to successfully manage rising food prices and adjust to impactful currency trends and other policies related to business operations. At the same time, policymakers will have to balance worries of sovereign defaults while spurring a perceived recovery. There are socioeconomic factors that persist in the current landscape beyond the usual investment circle challenges. In other words, the investor’s dilemma is closely tied to voter demand, and this can intensify. Perhaps, these macro issues seep into the mindset of lawmakers and consequently lead to a political topic outside the control of financial circles. In the near term, the response to the growing emerging market inflation and “currency wars” should set the overall tone.

At this junction, it is vital for participants to isolate a quarterly bet versus long-term trends when picking ideas. Clearly, the speculative game heavily requires accuracy in timing more than a longer-term investment. Now, traditional money managers define their investment horizon, making it a focused approach, and that has its merits. Therefore, at inflection points, it generally pays to observe and to stay patient versus reshuffling portfolios aggressively. Finally, opportunities in Merger & Acquisitions are catching the attention of dealmakers, given the attractive marketplace, as larger firms look to take advantage. Mega deals are bound to create biases in certain groups and, in turn, influence the buying demand of select stocks.

Specific Ideas

Despite being extended in the short-term, the shares of ARUN (Aruba Networks) offer an attractive exposure in the networking and communication group. The company’s sales grew over 85% in the past 5 years. This demonstrates strength, and it is noticed by shareholders. Broad market declines and price weakness can present a buy point on pullbacks.

MIG (Meadowbrook Insurance Group, Inc.) is worth a look, especially for investors looking for conservative ideas in financial services. The company specializes in property and causality and provides risk management products. After trading at historic lows of $1.02 in November 2002, MIG’s stock has slowly recovered in conjunction with its overall fundamentals. Interestingly, unlike the broad markets, the company’s shares peaked in 1998 and not 2008. Therefore, it appears to offer further room for upside growth, especially after a decade of declines and relative attractiveness.

Article Quotes:

“When an individual purchases a home, far from stimulating productivity, the purchaser instead simply transfers wealth to another individual. More to the point, an investment in property cannot help cure cancer, lead to the creation of efficiency-enhancing software or any capital good that makes us more productive, nor will it open foreign markets. A house is just a house, and not a gateway to other investment opportunities. When capital flows in the direction of property, on the margin, the productive parts of the economy suffer a capital deficit. And since the Fed's balance-sheet expansions boost the demand for mortgage-backed securities, the central bank is explicitly subsidizing increased capital flows in the direction of consumption at the expense of wealth-enhancing production.” (Realclearmarkets.com January 6, 2011)

“Currency appreciation, an improved social safety net, democratisation of credit – all these things if applied in China would no doubt help narrow the Chinese surplus by making exports less competitive and encouraging consumption, but they would be most unlikely to demolish the underlying savings glut, and in any case, social security and credit reform will take years, possibly decades, to implement in a meaningful way. A current account surplus, it should be pointed out, is only the mirror image of a capital surplus. If there is an excess of savings, the consequent excess of goods will be exported.” (The Telegraph, January 7, 2011)
Levels:

S&P 500 Index [1271.50] – Positive momentum remains in place as the run since March 2009 showcases ongoing recovery. The index is 10.67% above a 200-day moving average.

Crude [$88.03] – Maintaining its uptrend that was established in the summer. The commodity’s ability to hold above $88 will provide a better clue early in the 1st quarter.

Gold [$1368.90] – Consolidating in the current trading range between $1350 and $1400. This is a decisive point as buyers wait for discounts and sellers feel like early pullbacks. Yet, the force of this long-term run remains too strong.

DXY – US Dollar Index [81.02] – A 7% appreciation since the lows on November 4th and suggesting an early recovery in the US Dollar. However, this index is far removed from its summer highs of 88.70.

US 10 Year Treasury Yields [3.32%] – Near-term consolidation as yields attempt to hold 3.20%. This reflects a new range after a three months trend of rising rates.

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

Market Outlook| January 3, 2011

2011-01-03T03:17:00.000-08:00

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” - T.S. Eliot

General Feel

In 2010, the winning themes included the decade old commodities and Emerging Markets as well as relatively cheaper and riskier assets. For bargain hunters, there were rewarding bets in the US from small cap growth to corporate bonds. The appreciation in value of “risky” assets is mostly caused by a bounce from highly depressed levels as a result of the 2008 crisis. Perhaps, this puts things in perspective as the majority sold while in a panic mode and then potentially created a rebirth of a new cycle. Yet, the few, daring risk-takers profited on accumulating in the spring of 2009, an era of fierce and mostly justified skepticism. These days, being a buyer of a global asset is hardly classified as a daring move, given that consensus view is not as bearish. At least, pessimism appears relatively tame, based on traditional barometers. The volatility index closed the year towards its lows, suggesting a calmer and less turbulent near-term outlook. Needless to say, this comfort is more of a reflection of the past rather than a hint into the future.

One should acknowledge that making judgment on a little over two-year period can be misleading. Therefore, it begs the following key question: Are recent gains a move towards normalization or an extended run poised for pullbacks? The suspense of answering this question is bound to play out in the day-to-day news flow, and these thoughts should float in the minds of asset managers. The heart of this curious question above is centered on interest rates and currency expectations. Importantly, key decision makers and influential participants can set the general tone. Clearly, policymakers’ recent decisions of low rates have driven corporate bond sales and stimulated additional loan issuance. For example, “Corporate bond sales worldwide topped $3 trillion for a second straight year.” (Bloomberg, December 30, 2010).

Managing Expectations

The anticipation among pundits of rising rates does not quite serve as a surprise in the financial circles. However, the market consequences and participant response is the unknown that can damage unequipped portfolios. The rate and currency speculation is bound to be highly debated and contested among buyers and sellers. At the same time, the explosive run in natural resources and further growth in Emerging Markets is most likely to correspond with currency behaviors. Simply, the synchronized price appreciation of global assets resembles the pattern of 2007. Interestingly, the last six months resemble that unified and uninterrupted movement. That said, any sudden shifts in macro trends, such as a significant rise in the US Dollar, can lead to a sensitive reaction and eventually labeled as a surprise. Therefore, this time around, unlike fearful periods of spring 2009, the opportunities might be presented for those staying patient while keenly observing. In other words, chasing rewards in this smooth sailing uptrend might prove trickier than advertised by marketplace chatter.

Article Quotes:

“The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since). Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, i.e. have mortgages in excess of the current value of the property” (Financial Times, December 30, 2010)

“The rest of Europe is now talking about imposing penalties on private-sector lenders in future rescues. That will turn each crisis into a game of chicken as bondholders sell before they get penalised. And financing packages do not deal with an underlying lack of competitiveness in many European economies. Without the ability to devalue, the restoration of competitiveness requires painful austerity measures and wage restraint. That leads to another potential flashpoint for 2011: the lack of global co-ordination. Gone is the consensus seen at the G20 meeting in April 2009. Europe will be pursuing austerity, China is trying to rein in bank lending but America has opted for another fiscal stimulus. This is a throwback to pre-crisis 2007, with American deficit-financed consumption set against Chinese surplus-creating exports” (The Economist, December 29, 2010)

Levels:

S&P 500 Index [1257.64] – The index finished 2010, up 12.8%. Above 1200 suggests an established uptrend. Minor pullbacks can confirm the magnitude of buyers’ conviction.

Crude [$91.38] – Since late August, the commodity has risen nearly 30%. Recently, buyers’ interest increased around $88 a barrel. Clearly, a move above a psychological $100 range creates further curiosity and contributes to ongoing herding.

Gold [$1405.50] – Since the crisis of fall 2008, the commodity has nearly doubled. This proves the momentum driven behavior which contributes to some fears for those considering selling.

DXY – US Dollar Index [79.02] – In the past few weeks, several short-lived rallies and minor declines that keep the index around a familiar and stagnant territory. Fair to say range bound, yet again.

US 10 Year Treasury Yields [3.29%] – Since late October 2008, Yields rose by nearly 100 basis points. This is a noticeable and highly watched macro trend.

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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.