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Gary Smith’s Market Take

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Here’s my take on the markets today, July 27, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving today. The FRA-OIS Spread is rising +2.6% to 27.18 bps, the 2Y Swap Spread is gaining +.9% to 21.63 bps, the Saudi sovereign cds is jumping +6.5% to 106.50 bps and the Japan sovereign cds is gaining +1.2% to 97.50 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is gaining +4.8% to -39.5 bps. The European Investment Grade CDS Index is falling -4.2% to 162.89 bps. The European Financial Sector CDS Index is falling -4.6% to 266.82 bps. The Germany sovereign cds is falling -6.9% to 71.75 cds. The France sovereign cds is falling -5.6% to 163.62 bps. The Spain sovereign cds is falling -6.2% to 551.0 bps. The Italy sovereign cds is falling -5.9% to 493.83 bps. The Spain 10Y Yld is falling -2.5% to 6.75% and the Italian/German 10Y Yld Spread is falling -2.9% to 459.70 bps. Credit angst in Europe has subsided meaningfully over the last two days, however gauges remain at stressed levels.

Major Asian indices were higher overnight, led by a +2.6% gain in South Korea. The Shanghai Composite has not participated in the recent global equity rally and is down -1.8% this week despite rising stimulus hopes. Major European indices are jumping today, led by a +3.6% gain Spain. Spanish equities are up +5.1% this week, but still down -23.3% ytd. The Bloomberg European Bank/Financial Services Index is rising +2.6%. Brazil is gaining +1.4%.

Copper is rising +1.0% today, but has barely bounced off recent lows. The euro has seen a bounce as well, but is still below its downward-sloping 50-day moving avg. The 10Y T-Note is giving back some of its gains today, but the yield at 1.51% is still a big red flag. Lumber is rising 2.1%, but is down -2.0% for the week. The China benchmark Iron/Ore Spot Index is falling another -.94% today to the lowest since Dec. 2009 and is down -36.0% since Sept 7th of last year.  The UBS-Bloomberg Ag Spot Index is gaining +1.3% and is up +25.2% in about 2 months.

Back on the day of the Facebook(FB) IPO, I said that I would avoid the shares for the intermediate-term given its valuation, slowing growth metrics and too many questions surrounding the company’s ability to further monetize its business model. While the stock is becoming more appealing, I still believe it is too pricey at 48x forward estimates given these concerns.

Recent sharp equity gains are mainly the result of global central bank hopes, not actions, and the Fed’s ZIRP policy forcing institutional money further out on the risk spectrum. Little if anything being discussed will actually boost global economic growth in any meaningful way. Moreover, massive tax hikes and spending cuts have yet to hit several key economies in the eurozone that are already seriously contracting. Thus, recent market p/e multiple expansion is creating an unstable situation for equities, in my opinion, which could become a big problem this fall unless a significant macro catalyst materializes very soon. I have not traded today and I am positioned 75% 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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