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Start of A Stock Market Rally Into Spring 2013?

26 Nov

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

The US Election Is Over, Now What Happens?

12 Nov

After months of waiting, investors now have one less uncertainty to deal with. The election is over, and voters decided to give President Obama another four years to lead the country.

In addition to winning, the Democratic Party retained a majority in the Senate, picking up 2 seats. However, the Republican Party also maintained its majority in the House of Representatives. This means that the political leadership will not change significantly. That doesn’t mean everything will stay the same. Voters decided to retain many of the same leaders, but recent polls suggest many people want to see different legislative results.

Looking ahead, the new Congress and President Obama must now find a way to boost economic growth and create jobs. Along the way they need to avoid the fiscal cliff, foster trade with other countries and maintain the security of the United States in an increasingly threatening world. Unfortunately, avoiding the fiscal cliff and promoting economic growth are immediate problems. If Congress fails to take action, the Bush-era tax cuts and the Obama payroll tax cuts will expire at the end of this year. At the same time, mandatory federal spending cuts are scheduled to begin (as lawmakers could not agree on a compromise to reduce the deficit during last-years’ debt-ceiling negotiations). The Congressional Budget Office estimates that the economy could go into recession and contract 0.5% next year if all the tax hikes and spending cuts take place as scheduled.

We believe there are several scenarios that could unfold around the fiscal cliff. The most likely outcome would be that lawmakers would find acceptable middle ground including some tax increases and spending cuts but not the full measure scheduled to occur at the end of the year. Modest tax hikes and federal spending cuts would not severely hurt the economy but would be a drag on economic activity next year.

Recent economic news shows that the U.S. economy is slowly recovering from the 2008-2009 recession. Fortunately, the housing market has finally turned up after six years of subtracting from economic growth. The country will face some fiscal drag if Congress allows some tax increases and spending cuts to reduce the deficit next year. This fiscal drag will most likely be offset by the recovery in housing and continued increases in consumer and business spending. As a result, we believe that the economy is likely to grow in 2013.

Many investors may be concerned that the election outcome will lead to continued political gridlock that has existed during the past two years. However, both parties recognize the risk to the economy if lawmakers do not address the fiscal cliff. Therefore, during the next few weeks we are likely to see both parties talk about a willingness to work together, but start the process by stating the pre-conditions for cooperation. We believe this would just be the first step toward addressing policy differences. Obviously, the process will not be quick and easy.

Some strategists are suggesting that Congressional Leaders could allow the country to go over the fiscal cliff as a way to force a compromise. If this happened we would expect any compromise after the first of the year would be retroactive to the start of the year and the economic impact would not necessarily be that severe. The outcome would be volatile financial markets.

So what do the elections mean for investors? We believe that the underlying U.S. economic fundamentals remain favorable. The economy is growing, and the uncertainty of the election is behind us. If Congress and the President can find some middle ground and compromise over tax hikes and spending cuts, the outlook for the economy would be better than the worst-case scenario of allowing all the tax hikes and spending cuts to be implemented as scheduled.

The economy is expected to start the year on a weak note until the fiscal cliff issue is addressed, but we expect economic momentum to build as the year progresses. In this environment, the stock market would be volatile during the next few months. The positive seasonality during November and December could support stocks if investors see Congressional Leaders trying to work together. Longer-term, we look for the stock market to have modest gains next year.

Fortunately, the Federal Reserve’s easy money policies will partially offset the fiscal drag of reducing the deficit. The government may borrow and spend a little less next year if a compromise is reached but net lending in other sectors of the economy has increased, and this increase in credit in the private sector is likely to support economic growth. In addition, the credit markets are likely to benefit if the Fed continues to provide liquidity to the economy by buying bonds until the unemployment rate declines.

My clients have been positioned with asset preservation and potential of positive returns in mind during the past year. This was in order to deal with the uncertainty of the global environment, the Eurozone debt Crisis, slowdown in China’s GDP, the US election outcome and the pending fiscal cliff (to name just a few). Finally, businesses appear to have delayed capital spending and hiring until the direction of governments policies becomes clearer. After waiting much of this year, next year could potentially be a year of action and less worsening situations (possibly even improving situations). Investors may take a less defensive position, assuming investor sentiment improves (on a relative basis, this is anticipated) and this could lead to stocks outperforming bonds in 2013. If this scenario ends out being true then cyclical sectors of the stock market are likely to perform better than defensive sectors. Although this is only an “if”.

Protect Your Portfolio From Inflation

29 Oct

Why invest? Market volatility means there is an inherent risk that capital value may drop and the returns achieved may not match our expectations. The answer is INFLATION. How else can we inflation proof the value of our money?

I have no other answer to this life-long question – so the question becomes, how do we protect against dire volatility while maintaining the true value of money?

Many great statistical minds have tried and all have failed to effectively predict volatility and inflation with any consistency. I believe that it is easier and more appropriate to weatherproof a portfolio against the potential situations.

The case for high inflation goes something along these lines: paper money, not backed by any physical store of value, effectively only derives its worth from the goods and services you are able to exchange it for. By printing lots of it, as we have (such as, through quantitative easing [QE]), without a corresponding increase in the number of things you are able to spend it on – its value decreases.

So, if twice as much money can only be used to buy the same amount of stuff, then it must be worth half as much. It is debatable how much money has to be printed before there is any noticeable drop in value; especially since the extra currency gets recycled many times through the banking system, where its impact could be multiplied massively. The worst-case scenario is that there has already been too much extra cash printed and the effects are slowly gathering momentum.

Additionally, there is the fear that by becoming the lender of last resort to governments, notably in the US and UK and more recently the ECB, central banks will be unable to take corrective action without effectively bankrupting their home nations.

High inflation erodes the real value of your portfolio, and this needs to be protected against. One obvious starting point is inflation-linked bonds. The income on these bonds is indexed to the rate of inflation. While this will prevent a fall in the real value of income received, it could still leave you exposed to falling real capital values. A fairly consistent defence against moderately high inflation has been equities. It makes sense to match up markets to currencies; if you are concerned about UK inflation then UK equities are a good choice. They protect both income levels and capital value. Shareholders will always demand a real return, forcing businesses to pay out higher dividend rates to attract investors. At the same time, the higher rates will attract investors seeking income protection who would otherwise be in low -yielding assets such as cash.

If you are a bit more extreme in outlook, with a sizeable number of people predicting the end of the fiat money system altogether, then it is best to hold physical assets. Gold is the favourite of inflation conspiracy theorists and its record price shows the extent of the fear of high inflation. As a homogenous, globally traded commodity, its value tends to increase any time the threat of inflation rises anywhere in the world. The difficulty with investing in gold is that unless you physically have it in your hand, you are just as exposed to the system of interconnected promissory notes as you are with equities or any other paper asset.

Raw materials such as oil, food and other industrial metals and minerals are likewise relatively good bets in a high-inflation environment. These physical assets can not be debased by simply conjuring more up and as they will always be in demand, their value is reasonably assured. Again, it is quite hard to stockpile barrels of crude oil or frozen orange juice concentrate, but if you are looking for security you want as little separation from the physical items as possible. A focused fund can also be a useful addition to a portfolio. It is important to remember that inflation is a risk that is actively managed by most fund managers as part of their standard investment process.

A well-diversified portfolio, not just across asset classes but taking in a good spread of strategies and outlooks will likely cover you from the most likely inflation scenarios.

Good financial health – The WelshMoneyWiz

Assessing The S&P 500 Performance – The Highs & The Lows

12 Oct

What a Difference Five Years Makes – 10 Years Makes – 15 Years Makes

With this week marking the five-year anniversary of the stock market’s record high, much of the attention will and has been devoted to the market’s steep drop and sharp rebound. The chart below shows, the S&P 500 has been swinging in a wide range for the last 15 years. The pattern has been quite extreme – doubling and then falling by half over and over again.

Five years ago, the S&P 500 closed at a peak of 1,565.15.  Since then the index has seen a huge decline followed by a huge rally.  After all those swings, the S&P 500 has declined 7.9% over the last five years (annualized the decline works out to a loss of 1.63% per year). If we extend the period to the last 10 years, the S & P 500 has increased by 85.6% (6.38% per year).

SPX 5 & 10 Year Return Table

Some people may not remember, is that five years prior to the S&P 500’s all-time high made on October 9th, 2007,  the index bottomed out from the 2000-2002 bear market at a level of 776.76.  Following the post-Internet bubble low on 10/9/02, the index rallied more than a 100% before dropping more than 50% from 2007 to 2009.  After bottoming out in March 2009, the index has since rallied more than 100% once again. 

S&P 500 15 Year Performance Chart

With the S&P 500 about 7% away from its all-time high of 1565.15, I am skeptical the market is poised for another multi-year decline. The stronger earnings, higher dividends, reasonable valuations and an improving US economy are four main catalysts why I currently doubt the rally won’t fall off the edge of a cliff.

Conversely, I  don’t expect double-digit returns in the coming years.

I believe that stocks may produce below historic average returns in the years ahead and in the near-term the market and associated economies face daunting challenges in the coming months. This includes – a sluggish global economy, European financial stress, U.S. budget battles and the looming fiscal cliff. However, with better fundamental drivers of value than at similar points in the past 15 years, stocks are likely to weather most potential outcomes better than they have in the past, making a return trip to the lows of the 15-year range unlikely, at least for now. Plus, if history is to repeat itself we are three years into the five-year cycle – but that is a very big “if”.

Global Economic Recovery – Weakening ?

9 Oct
IMF managing director Christine Lagarde. (KEITH BEDFORD /REUTERS)

The IMF (International Monetary Fund) have reassessed their forecasts lower and have stated “the global economic recovery is weakening as government policies have failed to restore confidence….the risk of further deterioration in the economic outlook was considerable and had increased”.

The IMF downgraded its estimate for global growth in 2013 to 3.6% from the 3.9% it forecast in July. One of the biggest downgrades was to the UK economy, which is now expected to shrink by 0.4% rather than grow by 0.2% this year. (Change in the forecast since the figures produced in July 2012.)

In response to the downgrade, the UK Treasury highlighted the fact that the IMF had “repeated its advice that the first line of defence against slowing growth should be to allow the automatic stabilisers to operate, monetary policy easing and measures to ease the flow of credit – all of which the UK is doing”.

The overall forecasts are now approaching, in my opinion, more realistic estimates for the current cycle. I suggest that the original forecasts were high and the reality is growth but weaker and more muted growth.

IMF’s General Outlook

The overall economic view from te IMF – “output is expected to remain sluggish in advanced economies but still relatively solid in many emerging markets and developing economies”…but “much would depend on action taken by policymakers in Europe and the US”.

IMF annual growth forecasts (% change)

  Latest forecasts Previous forecasts (July)
  2012 2013 2012 2013
SOURCE: IMF WORLD ECONOMIC OUTLOOK
World output 3.3 3.6 3.5 3.9
Euro area -0.4 0.2 -0.3 0.7
US 2.2 2.1 2.0 2.3
Japan 2.2 1.2 2.4 1.5
UK -0.4 1.1 0.2 1.4
China 7.8 8.2 8.0 8.5
Brazil 1.5 4.0 2.5 4.6
India 4.9 6.0 6.1 6.5
Russia 3.7 3.8 4.0 3.9

It highlighted the importance of the European Stability Mechanism (ESM), the eurozone’s new permanent fund to bail out struggling economies and banks launched earlier on Monday. The fund added that greater integration of taxation and spending policies across the eurozone was needed, as well as measures to begin the process of banking union.

The ESM, hailed on Monday by Jean-Claude Juncker, Prime Minister of Luxembourg and chair of the fund, as “an historic milestone in shaping the future of monetary union”, will have a lending capacity of 500bn euros (£400bn; $650bn) by 2014. It will be able to lend directly to governments, but it will also be able to buy their sovereign debts, which could help reduce the borrowing costs of highly-indebted countries such as Italy and Spain.

The IMF’s view of the US, “growth depended on a deal to avoid the so-called fiscal cliff, when automatic spending cuts and tax increases will kick in at the beginning of next year”. If policymakers fail to agree to delay these measures and increase America’s debt ceiling, “the US economy could fall back into recession”, with serious knock-on effects for the rest of the world”….”assuming agreement is reached, the US economy will grow by 2.1% next year”. This year, the US economy will actually grow by more than previously forecast – by 2.2% rather than 2%.

In Asia, “the near and medium-term outlooks are less buoyant compared with the region’s growth performance in recent years”. It highlighted weaker exports as a result of lower demand for goods in the West.

China, the world’s second-largest economy, would grow by 7.8% this year (down from its previous forecast of 8%), and by 8.2% in 2013 (down from 8.5% forecast in July 2012).

It also revised its growth forecasts for India, which would grow by 4.9% this year and 6.1% in 2013. 

Weaker demand for exports would also impact on Latin American economies, as would lower domestic demand due to government policy tightening. As a result, Brazil’s economy would grow by 1.5% this year and 4.0% in 2013.

Investor Snapshot

29 Sep

We are in a volatile market, the news and information is conflicting (good and bad) and relevant institutions are stepping in to save the day.

Personally, I believe the current climate is the “new normal” and the data will remain weak – requiring brave and effective strategy from the ECB, IMF, US Federal Reserve, etc. I believe and expect this will happen – and my thoughts are the only solution to the debt scenario on a macro scale is time and inflation (eroding the value, if not the size, of the debt). This is not a quick solution but in time I believe will be effective.

chart provided by forextv.com

Ben Bernanke, chairman of the US Federal Reserve has announced on Thursday 13.09.2012 extending the Quantative Easing Programmes and launches QE3 – the buyback of mortgage related securities – a further $40 Billion each month. This is in addition to the $45 Billion Twist Programme already in existence. This is hoped to bolster buying by the American people as they see signs of prosperity through house valuations and a better environment. This coupled with low-interest rates and accepting higher inflation – a loose monetary policy beyond 2014 into 2015 – he plans will lead to improving prospects in 2013 & 2014.

Growth in the US economy between April and June has been revised downwards. Gross domestic product (GDP) in the second quarter grew at an annual rate of 1.3% in the second quarter, down from the previous estimate of 1.7%.

Most of the UK’s major banks sign up to the new Funding for Lending scheme, which aims to stimulate the economy by making cheaper loans available. 

The UK economy shrank by less than thought in the second quarter (0.4% in the April-to-June period), the Office for National Statistics (ONS) said in its  third estimate of gross domestic product (GDP). The ONS had initially estimated a contraction of 0.7%, before revising that to 0.5% last month. 

UK service sector bounced back in July, raising hopes of an economic recovery in the third quarter of this year. The ONS said services output, covering a range of sectors from retail to finance, rose 1.1% on the month. However, this followed a decline of 1.5% in June which was affected by the extra Diamond Jubilee bank holiday. The service sector accounts for about 75% of UK economic output (GDP). Its performance is an important guide to the direction of the overall economy. All the main areas registered increases in activity in July, with the category covering retail, hotels and restaurants showing the biggest rise of 1.8%. Business services and finance output was up 1.2%.

French unemployment has topped three million for first time since June 1999, as the economy continues to struggle. 

France has unveiled its budget for 2013, avoiding big austerity spending cuts in favour of higher taxes on the wealthy and big businesses. French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year. But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget. The government plans to raise 20 Billion Euros in extra revenue. That compares to 10 Billion Euros in spending cuts. The emphasis on tax rises is a policy of the new French President Francois Hollande that is against the prevailing mood of Europe where countries from Ireland to Greece are slashing spending to try to placate investors and lower borrowing costs.

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment. There are expectations that the country will soon seek a bailout from its Eurozone partners. 

Spanish police ringing parliament in Madrid fire rubber bullets at protesters taking part in a mass rally against austerity. 

Spain’s banks will need an injection of 59.3bn euros ($76.3bn; £47.3bn) to survive a serious downturn, an independent audit has calculated. The amount is broadly in line with market expectations of 60 Billion Euros, and follows so-called stress tests of 14 Spanish lenders. Much of the money is expected to come from the Eurozone rescue funds, the current EFSF and the future ESM. Spain said in July that it would request Eurozone support for its banks. The Spanish banking sector has been in difficulty since the global financial crisis of 2008, and the subsequent bursting of the country’s property bubble and deep recession.

Greek police fire tear gas to disperse anarchists throwing petrol bombs near Athens’ parliament during a day-long strike against austerity measures. Greek finance minister Yannis Stournaras says the three parties in the country’s governing coalition have reached a “basic agreement” on the austerity package for 2013-14.

International Monetary Fund head Christine Lagarde has warned Argentina it could face sanctions unless it produces reliable growth and inflation data. 

The International Monetary Fund looks likely to cut its forecast for global growth next month when it updates its projections for the world economy.

Japan’s industrial output fell more than expected in August, as cars and electronics suffer from weak global demand. 

headline photo

Investment/Pension Portfolios – we are well positioned for this volatility and expect this to lead to profitability. I am in the process of a client by client investment audit and in some cases we are adding additional asset classes to diversify the investment risk. To all my clients, either thank you for your involvement and help; and to all of those I will see shortly – I will explain my thoughts to you in our meeting.

Four Years Since The Lehman Brothers Collapse

24 Sep

Four years ago, Lehman Brothers, a Wall Street investment bank collapsed. The shockwaves are still reverberating through the global financial system. The collapse of Lehman Brothers was the Pearl Harbor moment of a financial crisis that almost brought down the entire U.S. and Global financial systems.

The eurozone’s inherent weakness has been ruthlessly exposed, while here in Britain the crash ensured the death of a discredited regulatory architecture. By the end of 2012, a new regime in the UK will put responsibility for financial stability back in the hands of the Bank of England. 

Many still debate the blame for the collapse. People bought homes they couldn’t afford, peddled by lenders who knew (or should have known) that the loans were destined to fail. Stock Markets sucked up these loans and sold them off in bundles to investors.

Everyone should have known better. At the top of this list were the government regulators who are supposed to protect the economy from these Stock Market excesses, but who instead sat and watched as a global bubble built of rotten subprime loans kept expanding.

Financial institutions, each indebted to the next via complex financial products whose value outstripped that of the banks themselves, threatened to topple like dominoes.

After regulators forced the shotgun wedding of the investment bank Bear Stearns to JPMorgan Chase in March 2008, the Federal Reserve Bank of New York and the Securities and Exchange Commission sent teams of observers to Lehman Brothers to gather information and monitor the company’s condition. Like Bear Stearns, Lehman Brothers had invested heavily in mortgage bonds.

Instead of sharing their findings, as they had agreed to do, they did not. Had they shared information, they would have discovered that Lehman’s statements about the robustness of its liquidity were false, according to an independent examiner appointed by the bankruptcy court to determine what had gone wrong at Lehman.

When it finally became clear in the week before Lehman fell apart that disaster was imminent, regulators claimed that they didn’t have the tools to prevent its collapse. Lehman’s lawyers warned that an unplanned bankruptcy would lead to “armageddon.” Regulators let it fall, only to watch in horror as the entire financial system began to unravel, and lending of all sorts came to a halt.

It is impossible to say how the last four years would have unfolded had regulators, upon discovering Lehman’s failings, sounded warnings earlier about the instability of the nation’s largest banks. It is also not clear whether an orderly unwinding of Lehman from world financial markets would have significantly altered future events.

But here is a safe bet, economists and financial crisis scholars say: The financial system hasn’t yet been purged of greed, irrational exuberance or wilful misconduct. Another crisis will come.

Are regulators now better equipped to sniff out and prevent a disaster in advance (and/or manage the collapse of a major bank if they don’t)?

The risks to the financial system of a bank collapse have only grown. That’s because the banks themselves are even bigger than they were four years ago.

Size is no insulation against a full-fledged panic. The biggest banks are tied together through an endless series of loans, bets, side bets and even bets on whether each other’s financial products,investments that they don’t even own, will succeed or fail. 

Banks have the cushion to weather a storm as the government will prop them up.

Balance sheets were ravaged and in the UK both HBOS and Royal Bank of Scotland had to be bailed out with more than £65bn of taxpayers’ money just weeks after Lehman’s fall from grace. 

As Lehman staff filed out of their Canary Wharf tower for the last time, any sympathy soon evaporated at the sight of their office gear stuffed into boxes stamped with the logos of Chateauneuf-du-Pape and Cristal champagne.

Within six months, thousands of protestors overran the City of London, staging furious protests targeting London’s once-proud financial sector. 

Today’s banking landscape, at least in Britain, looks very different. Lenders must hold much higher cash buffers to absorb future financial shocks, while the City have been forced to rein in executive pay.

The Independent Commission on Banking is considering some form of split between investment and retail banking to accompany the regulatory shake-up.

As far as the safety of Britain’s banks goes, Investec analyst Ian Gordon thinks we’re on the right path.

Market Outlook On Wednesday 19 September 2012

20 Sep

Last week started in typical pessimistic terms, this changed abruptly on Thursday when the ECB’s President Mario Draghi said the central bank would be willing to buy as much Eurozone Bad Debt as necessary to recapitalize the Union’s struggling banks. Stockmarkets soared on the news and continued to move higher on Friday.

Nasa_satellites

The question being – will it be enough to keep the market rising?  There is a good chance that this will help fuel the long-term recovery but in the near future volatility will be a factor of the investment markets’ landscape.

Economic Calendar

There’s little doubt as to last week’s economic focal point… employment (or nearer the lack of improvement).

The US unemployment rate dropped from 8.3% to 8.1%, which is better, but as expected a slow reduction. This is in-line with optimistic expectations but means the recovery is slow, unspectacular and muted.

The other piece of impressive (potentially) data were auto sales.  The U.S. saw an increase in August of 19.9% vehicles sold. If this moves from an exception to a trend (we will see the results over the next few months), this could bode well for 2013 – auto sales have been a good future indicator of retail sentiment but typically a lead indicator of 9 – 15 months.

Market outlook: Hammerson, Rexam, Centrica

Stock Market

The question everyone wants answered – did last week’s strength reignite the bigger uptrend? Some feel, the market is overbought, and we still haven’t seen what one could consider a healthy and expected pullback following the recent rises – this would set up a big move for the fourth quarter.  

Currently, I’m maintaining a modestly bearish view on things and say we could have more downside to go before ‘the’ current bottom has been made. That leads to the next question…. where will that bottom be?

For reference, the average recent-market corrective move is circa 9% from the peak (as, for example, happened earlier this year). I am aware that only with hindsight can we forecast the “bottom”. Personally, I believe it to be a wasted effort and prefer to focus on the performance relationship between asset classes and their propensity for profit and loss based on the current circumstances. Correctly combined, this will steer you towards holding assets when combined have the best chance to minimise losses and strong chances of realising profits.

CBOE Volatility Index

One other factor working against several indices right now – the upper 50-day Bollinger band has stepped in again as a ceiling.

Does anything change when you take a few steps back and look at the longer-term weekly chart? Not really.

There’s still room for the longer-term trend to keep rolling before hitting a major ceiling.  That’s probably going to be somewhere around where the six-month and 52-week Bollinger bands will likely be converged.  

Once again, the CBOE Volatility Index (VIX) (VXX) is back to oddly-low levels.  The market continue to drift higher even with the VIX this low, but it’s going to be unlikely to see a strong and prolonged market rally with the VIX at these low levels.

 

Market Trouble?

6 Sep

I am pleased with the positioning of the portfolios I manage and believe we are well placed for the current volatility. We have made healthy profits over the last three months and during the previous market declines were well insulated against and retained our position well relative to the investment markets.

The recent dip is expected to lead to the third losing week in a row, following six straight weeks of gains.  While that may have bled off some of the over-bought pressure, the bears may not be done yet.  We’re headed into one of the weakest periods of the year, and the floors the bulls are hoping will hold up are going to be tested soon.

First things first though – last week’s and this week’s major economic data.

 

US Economic Data

Most of last week’s economic numbers were bigger-picture items

On the consumer sentiment front, the Conference Board’s confidence score fell drastically in August. The Michigan Sentiment Index, rose to a three-month high.  It does make you question how two seemingly – so similar measures can end up with wildly different results.

Real estate continues to look stronger.  The Case-Shiller home price index was up and July’s pending home sales are expected higher.

The surprise positive last week was Quarter 2 GDP growth rate – up above estimates; and, if July’s Factory Orders are any indication, then the trend may actually be improving rather than decelerating.

 

Some potential market-movers:

Construction Spending – this number has been generally healthy of late. 

Auto Sales –  Car sales have been relatively firm of late

Job Cuts and ADP Employment Change – this is the prelim before Friday’s unemployment rate figure and official jobs-created figure.  

Nonfarm Payrolls and Unemployment Rate – economists are looking for 145,000 new private payrolls; and most expect the unemployment rate is not going to move from last month’s 8.3% figure. 

If these figures fail to achieve estimates – this would create uncertainty and an expected decline in the markets – although the expectations are low and that may not inspire a positive move either.

 

Market Movements

After everything is said and done, the imminent path of least resistance is still downward-pointing. I am not anticipating a major correction but rather some sell trades, most likely just enough to fully burn off the overbought condition.

 

 

South Korea

The South Korean economy is starting to lose steam as the European debt crisis remains unresolved and export markets remain weak.

The latest figures show the country’s economy grew by 0.3% between April and June, down from 0.9% growth in the previous quarter.

The government is therefore looking at ways of boosting domestic demand to compensate for weakening exports.

 

UK Rises in Competitive Rankings

Leaders from 2008 World Economic Forum

The UK has risen to eighth from 10th place in an annual study of global competitiveness.

The World Economic Forum’s (WEF) Survey said the UK had benefited from a more efficient labour market compared with more “rigid” European economies.

The US economy fell from fifth to seventh place, although WEF said it remained the top innovator.

Switzerland topped the table, followed by Singapore and then Finland in the survey of 144 economies.

The ratings are compiled using public data as well as executive opinion.

The survey placed China as the most competitive major emerging economy.

 

‘Innovative businesses’

The WEF said the UK had benefited from “clear strengths such as the efficiency of its labour market” and praised the UK’s “sophisticated and innovative businesses”. However, the UK’s macroeconomic economic environment – ranked 110th, down from 85th last year – was hindering competitiveness.

The Treasury said it “welcomed” the report, saying the UK’s improvement was down to the government’s reforms.

 

Europe’s north-south divide

The WEF survey showed a clear divide between Europe’s northern countries and the troubled periphery economies which are suffering from recessions.

In total, six European economies are in the top 10 – Switzerland (1st), Finland (3rd), Sweden (4th), the Netherlands (5th), Germany (6th) and the United Kingdom (8th).

But the southern Eurozone economies are ranked much lower, with Spain in 36th place, Italy 42nd, Portugal 49th and Greece 96th.

The southern economies, which are at the heart of the Eurozone sovereign debt crisis, have suffered a chronic lack of competitiveness and low levels of productivity that led to unsustainable imbalances in the economy, followed by rising unemployment.

The WEF urged an overhaul of labour regulations “sooner than later” as one of the necessary reforms to restore growth.

Switzerland maintained its top position thanks to its scientific institutions, a strong collaboration between academia and business sectors, high spending on research and development as well as its high rate of patenting per capita, the WEF said.

 

US political gridlock

The US ranking has continued to fall due to weakness in the overall economy as well as worries among businesses towards what they perceive as government meddling in the private sector and distrust towards politicians.

The WEF warned that in the US, despite being the world’s top innovator with the likes of Google and Facebook, political gridlock over fiscal tightening could dampen growth prospects.

The survey cited an inefficient government bureaucracy and tax rates as the two biggest impediments to doing business in the US.

Is QE3 Imminent?

28 Aug
So this year has seen the typical post Recession 2008 cycle – a climb, dip and then a climb so far – with last week seeing the first decline since the rally started beginning of June.
With all the issues coming to a head (maybe) in September – what is next for the markets?
If the Fed decides next week not to implement another round of QE it could turn the tables on investors, with emerging markets in the doldrums and UK, European and US equities once again leading the charge.
While some believe the minutes from the latest Federal Reserve policy meeting imply that a large-scale asset-purchasing programme could be on the horizon, the markets are still in the dark about the likelihood of such an event. I personally doubt a QE3 asset purchasing programme is on the cusp of the horizon – but then who ever said governments, treasury functions, etc. had to act rationally?
If the Federal Reserve rejects the ‘printing money’ option and the dollar stabilises, it will create an environment that is not conducive to things like emerging markets and commodities, but it could be hugely bullish for everything else that hasn’t worked well in the last few years. It is plausible that, if these assumptions are correct, European and Japanese equities could stand to benefit. 

Looking at relative valuations, they are trading at extremely low prices relative to US equities in historical terms. You could argue the same thing about European equities which are trading back to where they were in March 2009 and US equities are expensive in relative terms. 

Government bonds are also out because they are so expensive (some with actual negative yields), and emerging markets – controversially given their heavily tipped status in recent years – could be out in the cold with them. 

In the UK, I believe some of the cyclical companies such as house builders and unloved sectors such as media stand to benefit the most from this new environment, as they are priced at huge discounts to the market. Whereas, defensive investments, which last year did their job, and are now at a record premium.

So I am in the process of planning to reposition my clients portfolios for a change. I believe there is a risk currently of reversion here, with some of the areas people really love reverting and de-rating to the downside.
The major issue seen – is QE3 and if Ben Bernanke sanctions an asset buying/money expansion programme – I personally do not think this is necessary, desirable or suitable timing and could well be counterproductive. 
Does this mean it won’t happen? Who knows!!!