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Gary Smith’s Market Take

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Here’s my take on the markets today, June 25, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating again today. The 3M EUR/USD Cross-Currency Basis Swap is falling -7.2% to -58.36 bps. The 2Y Euro Swap Spread is rising +4.5% to 74.45 bps. The European Investment Grade CDS Index is rising +4.0% to 176.87 bps. The European Financial Sector CDS Index is jumping +5.2% to 290.39 bps. The Germany sovereign cds is gaining +1.2% to 100.58 bps. The France sovereign cds is gaining +3.6% to 198.5 bps. The Spain sovereign cds is rising +3.0% to 580.87 bps. The Italy sovereign cds is up +4.44% to 528.16 bps. The Spain 10Y Yld is rising +3.6% to 6.61%. The Italian/German 10Y Yld Spread is jumping +7.3% to 452.55 bps. The Emerging Markets Sovereign CDS Index is gaining +3.2% to 312.97 bps. The China sovereign cds is gaining +3.0% to 124.64 bps(+8.7% in 5 days). The Russia sovereign cds is rising +3.4% to 245.65 bps(+9.5% in 5 days). The Brazil sovereign cds is gaining +2.8% to 155.87 bps.

Major Asian indices fell around -1.0% overnight, led lower by a -1.63% decline in Shanghai. China is down -3.6% over the last 5 days, has given back almost all of its gains for the year and remains technically weak despite ongoing expectations that a big new easing cycle is underway. Major European indices are falling around -2.75% today, led down by a -3.9% decline in Italy. Italy is down -12.1% ytd, is rolling over at its downward-sloping 50-day and is approaching its recent lows. The Bloomberg European Bank/Financial Services Index is falling -3.2%.

The UBS-Bloomberg Ag Spot Index is jumping +3.4% today and is up +9.3% in 5 days as it approaches its 200-day. While this is a positive for ag-related equities, it is a big negative for several key emerging markets that already had inflation problems.

Copper, oil, lumber remain very weak technically and the 10Y T-Note continues to trade too well. Cylical stocks remain relatively weak, as well. The MS Cyclical Index rolled over at its 200-day again and is down -14.6% over the last year vs. a +4.9% gain for the S&P 500. I continue to believe cyclicals will lag over the intermediate-term.

I cautioned last week that European leaders were setting the markets up for disappointment after this week’s summit. Some actually appear to want an even bigger crisis in hopes that Germany will capitulate and further damage its own balance sheet in the name of saving the euro. However, this strategy could easily backfire if Germans become even more disenchanted with the euro as a result of these tactics. I continue to believe the euro currency still has substantial downside over the intermediate-term. I added to my index trading hedges this morning and I am positioned 25% net long.

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Gary D. Smith

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.
Gary D. Smith

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