Monthly Archives: January 2012

Monday Markets 30 January 2012

This week is very important for the market, as we have reached some challenging technical levels on many asset classes, and there will be a lot of important news and data flowing.

The issue of Greek debt restructuring remains a problem, as it is not resolved and the latest (17th) Euro Crisis Summit is convening. Greece needs an agreement to refinance before early March. To get that agreement, it needs to make concessions to Europe (such as on privatisation), but it is politically impossible for Greece to make further concessions until it receives something back (debt restructuring). The pressure will remain on the debt negotiations as a result. However, it is perhaps more important that this lack of agreement will prevent the European Summit from focussing on growth, the theme that many investors now want to see at the forefront as the European recession bites.

In general, I am inclined to see the European Summit as a slight negative for the markets until the Greek debt restructuring is resolved.

In the US too, there is a lot going on. Many companies will report their earnings this week, importantly including Amazon (on Tuesday). But, more important than this, there is a massive flow of economic data from the US. Key to watch are:
– House Price Index (Tuesday)
– Consumer Confidence (Tuesday)
– Construction Spending (Wednesday)
– ISM Manufacturing (Wednesday)
– Non-Farm Payrolls (Friday)
– Unemployment (Friday)
– ISM Non-Manufacturing (Friday)

We would also note that the first data of the week (personal income and spending) was fairly neutral today.

What to expect of the week? It is entirely dependent on the data. Good news on Greece, and/or positive data flow from the US will drive markets through the technical resistance they now face. But, disappointments on either front will cause some selling.

In short, we are 100% dependent on news that will flow over the next days. We believe that this rally will continue to last, but there is a healthy chance it is beginning consolidation or a mild sell-off in the near term.

Market Comment (late) 25 January 2012

Markets improved last night, after several days of low activity caused by ongoing uncertainty about when Greek debt will be written down. The driver that moved markets was the interest rate setting meeting of the US Federal Reserve. At it’s meeting, the Fed did not change interest rates, but it did expand its promise to keep interest rates low for a long time. This move is stimulatory to the US and global economy, and so to risky assets (primarily equities).

Importantly, yesterday’s announcement by the Fed combines with the December liquidity program of the European Central Bank, and the likely February boost to Quantitative Easing in the UK. The developed world’s central banks are fully engaged in stimulating growth, which greatly increases the probability that equity markets will continue to inflate over the coming months.

This is not 2009, prices will not rally so much, nor so easily. We should recall that the Fed’s announcement to keep rates low until late 2014 was already essentially priced into bond markets. That being the case, the immediate impact on all risky assets is less than we might otherwise have witnessed (the dollar weakened but only slightly).

Other US news that we have been watching this week has been corporate earnings, and at the end of the week we will see the US 4Q11 GDP number. That statistic is likely to be disappointing, given how aggressively the Fed has acted today. Earnings have been mixed, less companies have impressed us than usual so far this earnings season. However, Apple’s amazing results, issued on Tuesday, should be a support for the whole technology sector.

Over in Europe, the news on the crucial Greek debt restructuring is slow, the two sides continue to edge toward an agreement, but the process is painfully slow and each day it takes causes more nervousness. We expect negotiations to end in the next week or two, when they do, equity markets will move quickly higher around the world. But before this happens, many investors remain cautious, and failure to reach agreement will cause a sharp sell-off.

It would do all investors well to remember the difficulty they feel about deciding on investments today. Equities are not at their lows, the US market is even near its recent highs. Given the dangers going on – European crisis, weak growth in the US, etc. – the risks investors face are high. If markets continue to rise, as we currently expect them to, then we will look back at this period and talk about what an easy opportunity it was. Making the decision to invest today is less easy.

Ways to invest with controlled risk include: selling put options, which pay bonuses instead of giving automatic equity market exposure; buying dividend paying stocks, which may rally less than highly cyclical companies, but offer less downside risk and pay impressive yields; using stop-losses. In these kinds of markets, it is important to be ready to change your investment stance quickly.

Monday Notes for the Week

Some comments about the markets for the week:

– Markets have started the year very well, and technically the rallies underway ought to be challenged soon, implying a cool off in returns and a possible brief sell-off. We remain bullish expecting the recovery trade to continue; I question its sustainability long-term but it looks strong short-term. If this is the case, any selling is a chance to increase exposure.

– Key events for the week include, the ongoing Greek debt negotiations, the FOMC meeting and the earning season. The European Finance Minister meeting is also of interest.

– Key data include US 4Q11 GDP on Friday, European consumer confidence & PMI, US pending home sales. Much of Asia is closed all week for New Year celebrations.

On Greek debt talks, agreement seems very close, with $200bln worth of bonds to be written down by 70%. This would be a mild positive if it gets approved, as it is enough to sustain hope of a Greek solution, although its long-term durability is unclear. If the deal fails, the markets will turn negative quickly.

The FOMC meeting is the first at which Fed chiefs will announce forecasts of how they expect interest rates to evolve. Our investment team is divided here, but my view is that it will weaken the dollar, at least temporarily. My reasons are that: 1) we know Japan killed its QE driven recoveries by raising rates too early, and 2) there is a lot of fiscal tightening scheduled for 2013 in the US.

For EURUSD, there is a lot of risk ahead of the FOMC news due on Wed. We would definitely consider selling out-of-the-money FX Targets (sell EUR, buy USD) if the rate gets to 1.32, which is the current technical roof. However, if the rate breaks through there, then higher EUR is again possible. Medium- to long-term we are still dollar bulls, but the EUR is still oversold and macro events are likely to dominate implying a wide range of possible outcomes short-term.

There is also a good chance the equity market will be supported if the Fed suggests further delays in rate hikes this week (extending the expected hike date from mid 2013).

The bulk of S&P 500 companies will report this week, watch your favourite names, and the aggregate levels of surprise. Overall, I expect earnings to be neutral for markets. But I am watching Apple and McDonalds with interest this week (both on Tues).

In Europe, the sense that we are getting into a safer zone should continue to support markets, most of the rally of the last week was in financials. If that trend continues through the middle of this week, it may also feed into other sectors that are under-valued. But for now the market continues to worry about recession in the real European economy, which will heal slower than the financial sector.

With the financial markets healing fast, we continue to expect peripheral (ex Greece) bond yields to improve. Mario Monti’s marketing campaign has also been an impressive stimulant of Italian bond demand.

Long-term we are still nervous about the sustainability of the European situation, but short-term there appear to be healthy drivers across the board.

Greek Debt & German Politics

For the third or fourth time, it has become clear that Greece is missing targets. It’s totally understandable, every time they cut back, the economy shrinks, and then even more activity and market presence shrinks in fear of the future.
But, this time, when the economy missed targets, the European ‘Leaders’ baulked at ‘paying’ extra, and appear to have tried to push the costs onto the private sector in the form of an even bigger haircut. Remember, so far Europe is not bailing Greece out, but making money lending to them at a profit!
Shock news: haircuts were already at the logical limit. The private sector is doing its part. Greece, several rounds into a painful internal devaluation, is also doing it’s part.
Who isn’t? Erm, Europe. Why? Erm, because Sarkozy and Merkel face re-election and CHOSE to approach saving Europe this way to try to save their miserable arses.
So, either public lending gets in on the act, allowing an economically logical wrte-down, involving a change of electoral tactics, to reflect reality and really unite Europe. Or, we risk a default that hurts everyone. Germany can finally celebrate getting the chance to treat another country the way the US treated it in the 1930s. Shocking collapse of European values!

Market Comment 12 January 2012

Markets have been relatively stable since our last letter, once again highlighting that economic fundamentals and market prices can diverge substantially.

For much of last year, there was good reason to expect constructive actions on Europe, but equity markets plunged. Then, in December European policy makers announced austerity plans that are at best a substantial long-term drag on growth, highlighting that Europe is locked into a downward cycle, and markets respond positively. What is going on?

Markets seem to be doing well for several reasons:
1. The US economic performance has beaten consensus and shows signs of healthy sustainable expansion. The growth trajectory is less of a surprise for this analyst, and represents the long, slow growth path that we have long expected. But investors have been positively surprised, and the US remains the world’s largest single-nation economy, so its growth makes a global difference.

2. Emerging markets globally are looking more interesting. It is important to look at each country individually, but overall the emerging universe is positioned to more aggressively stimulate growth this year as inflation fighting becomes less of a priority.

3. Europe appears to have moved away from the immediate precipice. During 4Q11, Europe moved into an acute phase of economic decline, as credit markets froze over political inaction. Whilst the political process remains painfully dormant, the ECB’s commitment of unlimited funding has provided healthy support in times of market stress, and eased real economy financing concerns. Meanwhile, there is tentative progress toward a write-down of Greek debt.

If Greece is able to secure a material write-down of its debt, then some corners of the European financial system will face some challenges (think Greek financial institutions). However, at the aggregate level, the news will be of huge significance. It is entirely possible that a Greek debt write-down will lead investors to realise that Italian and Spanish economies are materially different (still fighting liquidity not solvency issues). The resulting wave of confidence may drive asset prices for the medium term. Of course, Europe’s growth problems will remain as a long-term issue, hence we would not rule out that the crisis might return at a later date. And, importantly, such an optimistic outlook assumes that the write-down of debt is sufficient to create a hope of future sustainability.

But, the current movement in the market may be justified, if such a write-down is achieved. After so many disappointments, it would be wrong to trust that Europe is about to get it right, but the case for short-term risks, such as Equity Target products, looks reasonable today.

Best regards,

Market Comment 4 January 2012

The first trading week of the year has started well, with a sharp upward move in equity prices globally. Optimism has been driven by relatively healthy economic data from all three key economic regions (Asia, the US and even Europe) and fuelled by the high level of liquidity released into the financial system late last year.
Start-of-year ebullience is welcome, and we would certainly not recommend contradicting it. Technically at least, the market appears to have some momentum. But, it is important not to get carried away with the enthusiasm.

Looking at economic and geopolitical factors, oil prices are pushing higher, a clear threat to economic momentum. More importantly, the European crisis remains entrenched in a negative economic cycle, especially since the December summit, where the prospects of long-term deleveraging were essentially institutionalised.  The most recent ECB data shows record short-term deposits. Banks are not yet aggressively passing liquidity into the real economy, and it is hard to see Europe having a good year without a determined growth effort, both from the private and public sectors.

Adding to worries, we now have to start watching Hungary more closely, as its government steps up its unconventional policies, to the disapproval of the IMF. One of the drivers for our long-held expectation of a constructive outcome in Europe was the broad-reaching implications of the crisis not being resolved. We are starting to see the contagion, even whilst headline equity indexes are doing well.
Asia looks more hopeful, as Chinese data reminds that its growth story is far from over. And the US has finally won over its sceptics with healthy growth data. Related to this, the Federal Reserve has announced that it will start to provide the market with more guidance about how it forecasts interest rates to evolve. This move to increased transparency will hopefully reduce volatility about market expectations, which have been flipping aggressively between optimistic and pessimistic ever since the 2008 crash. Such volatility in sentiment is damaging to investor confidence and real world economic growth, so this development is welcome.
Fundamentally at this time, 2012 shows many similar threats and parallels to 2011, including the first week of trading, which was also positive a year ago. But, in the few times that the US equity market has had such a flat year as it did in 2011 (despite all that volatility, the S&P 500 ended the year at the same level it began it), it has invariably been followed by a strongly positive year. The fundamentals will change over time, and it is partly with this in mind that we caution fighting against the current trend.
For now, though, we are looking for a range-bound market and caution against long-term expectations. Target levels and stop losses make a lot of sense today.
We continue to like corporate debt – contact us for information about the Moorea 2016 Corporate Opportunity Fund. If markets momentum holds up, then Equity Target products with short maturities are also an attractive solution. Gold Target products may also make sense in this environment. Notwithstanding that gold remains an inconsistent asset, depending on momentum to overcome its negative yield.
May 2012 bring all that you ask of it, and more.