Gary Smith’s Market Take

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

Credit gauges are mixed today. The Libor-OIS Spread is falling -.61% to 32.7 bps. The European Investment Grade CDS Index is falling -2.2% to 139.87 bps. The European Financial Sector CDS Index is falling -1.3% to 244.25 bps. The Germany sovereign cds is dropping -3.5% to 83.67 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -1.1% to -45.0 bps. The 2Y Swap Spread is rising +.84% to 29.9 bps. The Spain sovereign cds is gaining +.95% to 477.0 bps. The China sovereign cds is gaining +1.9% to 113.66 bps. The Japan sovereign cds is gaining +.97% to 95.16 bps. The US sovereign cds is gaining +.74% to 38.31 bps(+37.5% in 8 days). Credit gauges are handling the Spain downgrade fairly well today, however they remain at stressed levels and have deteriorated meaningfully over the last few weeks.

Major Asian indices were mixed overnight as a +.58% gain in Korea was offset by a -.43% decline in Japan. The yen’s reaction to the BOJ’s activities overnight is a negative. Major European Indices are rising around +1.0%, led by a +1.9% gain in Italy. The Bloomberg European Bank/Financial Services Index is rising +1.3%.

The 10Y T-Note continues to trade too well, despite the big surge in the US sovereign credit default swap. The Citi US Economic Surprise Index is falling another -6.0 points today to -8.0, which is the worst reading since early-Oct. of last year. The equity market seems even more inefficient than usual of late. The huge moves higher in certain key large-cap stocks on earnings reports that were good, but not that surprising, are a big psychological plus for the bulls.

US stocks remain extraordinarily resilient, however breadth and volume remain poor. Despite a +1.6% gain for the S&P 500 for the week, Coal, Alt Energy, Steel, Paper, Networking, HMO, Gaming, Airline, Restaurant and Software shares were all flat-to-lower on the week. As well, Asian stocks have not participated in recent US gains, which is another red flag.

In my opinion, QE has been a major reason that the US “recovery” has been very sluggish. However, most investors are convinced otherwise and continue to believe that another round is just around the corner. As long as Europe can hold off another disorderly decline in credit/economic growth, Asia remains stable and until the US “fiscal cliff” begins to be a focus of investors, select US stocks will likely work higher. However, in the second half of the year these issues will likely be of intense focus.

One of my longs, (TFM), is testing its recent record high. I still see substantial outperformance for the shares over the intermediate-term. I covered all of my index trading hedges today and I am positioned 100% net long.

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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.