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Gary Smith’s Market Take

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Here’s my take on the markets today, August 22, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The 2Y Swap Spread is falling -3.3% to 20.09 bps and the TED Spread is falling -.8% to 32.9 bps. However, the European Investment Grade CDS Index is rising +3.5% to 141.97 bps. The European Financial Sector CDS Index is rising +4.3% to 236.91 bps. The Germany sovereign cds is jumping +6.3% to 58.44 bps. The France sovereign cds is gaining +6.0% to 129.94 bps. The Spain sovereign cds is gaining +3.1% to 460.59 bps. The Italy sovereign cds is jumping +5.6% to 418.15 bps. The Spain 10Y Yld is gaining +1.1% to 6.28%. The Italian/German 10Y Yld Spread is rising +2.4% to 420.33 bps. The Asia-Pacific Sovereign CDS Index is gaining +3.8% to 127.5 bps.

Major Asian index fell overnight, led down by a -1.1% decline in Hong Kong. The Shanghai Property Stock Index fell another -1.7% and is down -16.1% in about 6 weeks. Major European indices are lower today, weighed down by a -2.7% decline in Spain. The Bloomberg European Bank/Financial Services Index is down -1.3% on the day. Brazil is -.4% lower on the day.

The euro is bouncing off morning lows, but continues to trade poorly given investor perceptions of another euro debt-crisis can-kicking and global central bank stimulus hopes. As well, Lumber is falling another -1.6%(-4.5% in 5 days) and continues to trade poorly given perceptions of a major US housing bottom. Copper is flat and the UBS-Bloomberg Ag Spot Index is slightly lower. The China benchmark Iron/Ore Spot Index falling another -1.6%(-7.4% in 5 days) and is down -42.1% since 9/7/11. Moreover, China is ramping up steel production even as prices plunge. Oil continues to trade pretty well and is +.5% higher on the day. The 10Y T-Note is trading too well again with the yield down -6 bps to 1.74%.

The weekly MBA Home Purchase Apps Index rose +.85% this week, but remains stuck in the same range it has been in since May 2010. Overnight, Japan reported that exports to Europe and China plunged -25.1% and -11.9%, respectively, which is a large red flag. I continue to believe China’s economic problems are more severe than perceived. They are dealing with a real estate bubble and massive overcapacity in huge swaths of the economy at the same time as food prices soar. A large govt stimulus package, which many still want/anticipate, would be another major mistake for the longer-term health of their economy, in my opinion.

There is a lot of scary rhetoric regarding the ramifications of Greece leaving the eurozone. S&P said today that “a Greek exit from the eurozone could raise significant investor doubts about the future eurozone membership of Spain and that of other peripheral sovereigns“. The fact that Greece can cause this much consternation remains a huge red flag for the longer-term prospects for the success of the entire euro project, in my opinion. Given the loopholes that Germany appears to have negotiated and reports that Spain is having trouble implementing their austerity package, I continue to believe recent euro optimism is overdone. I still remain skeptical that Germany will destroy its own balance sheet or allow the ECB to monetize peripheral debt, which is what investors have priced into stocks. I am still 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.
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