Gary Smith’s Market Take

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Here’s my take on the markets today, May 9, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating meaningfully today. The FRA-OIS Spread is surging +10.0% to 42.82 bps. The 2Y Swap Spread is rising +7.6% to 33.4 bps. The TED Spread is rising +1.6% to 38.0 bps. The 3M EUR/USD Cross-Currency Basis Swap is falling -2.6% to -48.2 bps. The European Investment Grade CDS Index is rising +3.9% to 156.50 bps. The European Financial Sector CDS Index is rising +4.2% to 266.83 bps. The Germany sovereign cds is gaining +5.4% to 90.12 bps. The France sovereign cds is rising +4.3% to 211.75 bps. The Spain sovereign cds is gaining +4.0% to 518.50 bps(testing all-time high). The Portugal sovereign cds is rising +4.9% to 1,110.10 bps. The Russia sovereign cds is gaining +5.8% to 209.19 bps. The Italian/German 10Y Yld Spread is rising +4.5% to 408.78 bps. Overall, recent credit gauge deterioration is a big worry with a number of key sovereign cds breaking out technically.

Major Asian indices fell around -1.25% overnight, led lower by a -1.7% decline in China. The Nikkei fell another -1.5% and is down -11.0% in about 6 weeks, closing slightly below its 200-day ma. Major European indices are falling around -.75%, led lower by a -2.8% decline in Spain. Spain is now just 109 points away from its March 9th, 2009 low and down -20.5% ytd. The Bloomberg European Bank/Financial Services Index is down -2.0% today and down -19.0% since March 19th.

The weekly MBA Home Purchase Apps Index rose +3.4% this week, but remains stuck in the same range it has been in since May 2010 despite an improving labor market and record low mortgage rates. The 10Y T-Note continues to trade too well, copper trades poorly and the euro currency is breaking down technically. Oil is testing its 200-day ma again. While it will likely bounce off this level short-term, I expect it to move still lower over the coming months.

US stocks remain extraordinarily resilient with aggressive buyers appearing once again into a morning swoon. Tech/Retail are leading the rally off the morning lows with financials lagging. I continue to believe overall US investor complacency regarding the rapidly deteriorating situation in Europe is fairly high. However, the total put/call is a high 1.20 today. I am watching (XLF) closely to gauge whether or not this morning’s rally gains traction into the afternoon. I covered some of my index trading hedges into the morning swoon and I am positioned 75% 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.