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Gary Smith’s Market Take

Here’s my take on the markets today, August 13, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mixed today. The FRA-OIS Spread is falling -4.7% to 26.50 bps. The 2Y Swap Spread is falling -3.7% to 19.6 bps. The 3M EUR/USD Cross-Currency Basis Swap is rising +1.6% to -36.81 bps. The Germany sovereign cds is down -1.0% to 64.87 bps. The Spain sovereign cds is down -1.2% to 508.25 bps. The Spain 10Y Yld is falling -.9% to 6.84%. However, the TED Spread is rising +.8% to 33.81 bps. The France sovereign cds is rising +.3% to 147.12 bps. The UK sovereign cds is climbing +2.0% to 57.5 bps. The Portugal sovereign cds is gaining +1.2% to 776.85 bps. The Israel sovereign cds is jumping +6.4% to 150.03 bps. The Emerging Markets Sovereign CDS Index is rising another +1.6% to 245.92 bps(+8.0% in 5 days). The China sovereign cds is rising +.46% to 105.55 bps. The Russia sovereign cds is gaining +1.9% to 174.16 bps(+10.0% in 5 days). The Italian yield curve is flattening too much again, with the spread down -60.0 bps in 6 days to 2.41%.

Major Asian indices were mostly lower overnight, led down by a -1.5% decline in China. Chinese stocks continue to sit out the global equity rally off the June lows, which remains a big red flag. Major European indices are mixed as a +.5% gain in Spain is being offset by a -.3% decline in UK shares. The Bloomberg European Bank/Financial Services Index is falling -.1%. Brazilian equities are falling -.9%.

The euro is seeing a bounce today, despite worrisome weekend headlines, but continues to look lower over the intermediate/long-term, in my opinion. Lumber is jumping +3.0% today, but is still down -6.7% since 9/8/11. As well, Copper still trades poorly and is falling -1.4% today. The China benchmark Iron/Ore Spot Index is falling another -.8% today and is down -37.6% since 9/9/11. The UBS-Bloomberg Ag Spot Index is down -1.3%, but is +23.1% higher since 6/1. Oil is down -.9% today despite a significant uptick in Israeli rhetoric over Iran’s nuclear program. The 10Y T-Note continues to trade too well, with the yield down -2 bps to 1.63%.

I continue to believe recent investor optimism over Europe’s potential can-kicking is misplaced. Focus Magazine reported over the weekend a recent poll by TNS Emnid found that 52% of Germans don’t want European countries to share debt even if the EU takes control over budgets of individual countries, while 31% were in favor of this. For Merkel to agree to this would appear to be political suicide and if Germany isn’t willing to destroy its own balance sheet in an attempt to “save” the euro then the can-kickings will quickly lose their investor luster.

As well, as I have been saying for several weeks, a new massive China stimulus round isn’t as likely as perceived as worries over their real estate bubble and soaring food prices intensify. Apple(AAPL) is once again helping to boost the major averages off their morning lows on more iTV rumors and optimism over the new iPhone release. While Apple will likely consolidate this year’s gains awhile longer, I still expect the shares to outperform over the intermediate-term. Long AAPL. I added to my index trading hedges this morning and I am positioned 25% net long.

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