Gary Smith’s Market Take

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Here’s my take on the markets today, September 26th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating meaningfully today. The 2Y Swap Spread is jumping +18.4% to 16.1 bps. The 3M EUR/USD Cross-Currency Basis Swap is dropping -17.0% to -26.66 bps(-29.2% in 5 days). The FRA-OIS Spread is surging +12.2% to 27.3 bps(+25.9% in 5 days). The European Investment Grade CDS Index is gaining +4.6% to 141.28 bps. The European Financial Sector CDS Index is jumping +6.3% to 206.2 bps. The Germany sovereign cds is jumping +8.8% to 57.12 bps(+21.9% in 5 days). The France sovereign cds is soaring +10.2% to 122.83 bps(+28.6% in 5 days). The Spain sovereign cds is up +9.6% to 399.37 bps. The Italy sovereign cds is gaining 10.1% to 367.12 bps. The Portugal sovereign cds is soaring +11.7% to 530.64 bps. The Ireland sovereign cds is jumping +7.9% to 306.33 bps. The Spain 10Y Yld is jumping +4.8% to 6.02% and the Italian/German 10Y Yld Spread is gaining +5.4% to 370.61 bps(+11.8% in 5 days). The China sovereign cds is up +1.6% to 93.0 bps(+26.9% in 5 days). The China Development Bank Corp CDS is rising +3.7% to 141.0 bps(+19.9% in 5 days). The Russia sovereign cds is gaining +4.4% to 155.41 bps(+19.4% in 5 days). The Brazil sovereign cds is gaining +4.5% to 116.6 bps(+15.5% in 5 days). Gauges of credit angst are breaking out technically and remain at stressed levels.

Major Asian indices were lower overnight, led down by a -2.0% decline in Japan. The Shanghai Comp fell another -1.2%(-8.9% ytd) to the lowest since Feb. 2009. China’s ChiNext Index of faster growing smaller companies fell another -3.0% and is down -13.2% in 2 weeks. Major European indices are under substantial pressure, led down by a -3.5% decline in Spain. The Bloomberg European Bank/Financial Services Index is dropping -3.9% today. Brazil is -.8% today and testing its 200-day.

The euro is under pressure again, falling -.3%, and tested its 200-day, as well. Lumber is slightly higher, but is down -11.7% in six weeks. Copper(-1.8%) and Oil(-1.7%) also continue to trade poorly given perceived upside catalysts. The benchmark China Iron-Ore Spot Index is +.48% higher today, but -4.8% over the last 5 days. The UBS-Bloomberg Ag Spot Index is falling -2.0% today(still +20.3% since 6/1) and breaking down from a 3-month trading range. The 10Y T-Note continues to trade too well, with the yield falling another -3 bps to 1.64%.

The weekly MBA Home Purchase Apps Index rose +.7% this week, but remains stuck in the same range it has been in since May 2010. I continue to believe that housing has just stabilized after a historic crash, but will see another meaningful downturn during the next recession.

The China/Japan island dispute continues to escalate and is another growing economic headwind for the region. It appears to me that Spain is intentionally trying to escalate the debt crisis again to gain more bargaining power, which is a very risky proposition. As well, the economies of the region continue to deteriorate. Given the substantial economic deterioration in the Eurozone since the last round of sovereign downgrades, I suspect a new round will occur shortly after the US election. I still believe over the intermediate-term the crisis will escalate significantly.

US investors are aggressively buying the dip this morning as complacency remains high given the still-deteriorating macro backdrop, in my opinion. Last night, Bloomberg ran an article titled “CMBS selling Like It’s 2007 in Pre-Crisis Spirit”.

The article said “commercial-mortgage bond sales are surging to the most in almost five years with yields at record lows, fueling a lending boom. Banks have arranged $6.9 billion this month in sales of bonds linked to skyscrapers, shopping malls and hotels, the most since December 2007. Securities in the Barclays Investment Grade CMBS index yield 2.15%, the lowest since the index started in 1997. Property owners are benefiting as investors chase riskier assets on the Fed’s ZIRP”. Many of the same dynamics are now at work that inflated prior bubbles over the last 15 years, in my opinion.

Homebuilding and Tech shares are especially weak today. Consumer Staples shares are relatively strong. I covered some of my index trading hedges this morning and I am positioned 50% net long.

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Gary D. Smith

Gary Douglas Smith actively trades his portfolio as well as the portfolios of family members. In addition, Mr. Smith maintains Between the Hedges, an investment-oriented blog. Previously, he was founder and managing member of Olympus Capital Management, an alternative investment firm. Olympus consisted of a long/short diversified hedge fund and a long/short technology sector hedge fund. Prior to the formation of Olympus, he spent five years as Vice-President of Research and Portfolio Manager for an independent money management firm. Mr. Smith has been engaged for the past 23 years in the analysis and selection of equity and other investments. His expertise is in long/short U.S. equity investing across all market sectors with an emphasis on technology stocks. He uses a top-down investment approach, investing in securities at a reasonable price relative to their growth prospects. As well, technical analysis plays a role in the timing of his investment decisions. He received his undergraduate degree from the University of Tennessee and subsequently received an MBA, with a concentration in finance, from Vanderbilt University’s Owen School.