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Gary Smith’s Market Take

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Here’s my take on the markets today, August 3, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving today with some showing meaningful improvement. The FRA-OIS Spread is rising +2.9% to 26.8 bps and the TED Spread is gaining +2.2% to 36.3 bps. However, the 3M EUR/USD Cross-Currency Basis Swap surging +14.7% to -39.5 bps. The 2Y Swap Spread is falling -2.4% to 20.75 bps. The European Investment Grade CDS Index is plunging -10.9% to 149.93 bps. The European Financial Sector CDS Index is dropping -11.7% to 246.22 bps. The Germany sovereign cds is falling -2.8% to 68.87 bps. The France sovereign cds is dropping -7.7% to 152.50 bps. The Italy sovereign cds is dropping -8.5% to 475.10 bps. The Spain sovereign cds is falling -6.9% to 533.37 bps. The Spain 10Y Yld is falling -4.5% to 6.84% and the Italian/German 10Y Yld Spread is falling -9.6% to 461.31 bps. Even with today’s big improvements, credit gauges are mixed for the week and remain at stressed levels.

Major Asian indices were mostly lower overnight, led down by a -1.13% decline in Japan. However, the Shanghai Comp rose +1.0%. Chinese shares are still flat for the week, weighed down by a -2.8% decline in the Shanghai Property Stock Index, with most other Asian indices registering noteworthy gains. Major European indices are meaningfully higher, boosted by a +5.6% jump in Italian shares. The Bloomberg European Bank/Financial Services Index is surging +4.7%. Brazilian equities are jumping +2.9%.

The 10Y Yld is jumping +10 bps to 1.58%, but is just slightly higher over the last week, which remains a red flag. The euro currency is surging +1.6%, but is just slightly higher for the week. Copper is rising -2.3%, but is -2.7% for the week. Lumber isn’t participating in the commodity rally today. Oil is jumping over +5% and looks poised to test its 200-day. The UBS-Bloomberg Ag Spot Index is rising +1.3% today and is +26.4% higher in 2 months. This index looks to be consolidating before a test of its Aug. 31, 2011 record high.

While today’s jobs report was better and beat estimates, the majority of data still indicate decelerating US economic growth from an already sluggish rate. As well, while investors are pricing in another Euro debt crisis can-kicking, as a result of German officials’ comments today, several key economies in the region will likely continue to worsen as the effects of massive tax hikes and spending cuts take hold. Finally, I still see little evidence that the Chinese economy is accelerating and some other key emerging markets economies are obviously still weakening.

There remains a growing disconnect between a deteriorating macro backdrop and rising stocks, in my opinion. The perceived European can-kicking, investor performance angst and technicals should push stocks higher still in the near-term. However, this fall will likely prove very challenging for stocks if the fundamentals continue to weaken. I covered some of my index trading hedges 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.
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