Gary Smith’s Market Take

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Here’s my take on the markets today, September 5th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mixed today. The TED Spread is down -5.3% to 30.8 bps. The European Investment Grade CDS Index is -2.1% to 140.12 bps. The European Financial Sector CDS Index is falling -2.5% to 232.83 bps. The Germany sovereign cds is down -1.1% to 58.66 bps. The France sovereign cds is down -1.3% to 131.33 bps. The Spain sovereign cds is down -4.2% to 451.50 bps. The Italy sovereign cds is down -5.9% to 395.84 bps. The Spain 10Y Yld is falling -2.4% to 451.5 bps. The Italian/German 10Y Yld Spread is falling -5.6% to 403.55 bps. However, The 3M EUR/USD Cross Currency Basis Swap is plunging -11.8% to -30.47 bps. The FRA/OIS Spread is gaining +.93% to 23.69 bps. The 2Y Swap Spread is rising +1.54% to 16.5 bps. The China sovereign cds is gaining +.5% to 105.19 bps. The China Blended Corporate Spread Index is gaining +.67% to 453.0 bps. Overall, most credit gauges have improved of late, with the exception of those in China, but remain at stressed levels.

Major Asian indices fell overnight, led lower by a -1.74% decline in South Korea. The Nikkei fell another -1.1% and is down -4.3% in 5 days. The Shanghai Comp fell another -.3% to the lowest level since early March 2009. This index is now down -7.4% ytd and down -15.7% over the last 12 months. Major European indices were mixed today as a +.46% gain in Germany was offset by a -.62% loss in Italy. The Bloomberg European Bank/Financial Services Index rose +.4% today.

The euro is bouncing today, but still trades poorly given elevated hopes for an ECB “bazooka” can-kicking. Copper is bouncing +1.4% to the upper end of its 3-month range and is just below its 200-day. Oil is flat today and isn’t trading as well of late given potential upside catalysts. Gold is maintaining recent gains, falling just -.2% today, and is trading well of late. Lumber is falling -.4% and continues to trade very poorly(down about -10.0% in a year) given investor hopes for a major housing bottom. The UBS-Bloomberg Ag Spot Index is falling -1.4% today, but is +25.0% higher since 6/1. The benchmark China Iron-Ore Spot Index continues to crash, falling another -.23% today, and is down -52.1% since 9/7/11. The 10Y T-Note continues to trade too well with the yield rising +2 bps today to 1.59%.

The weekly MBA Home Purchase Apps Index fell -.83% this week and remains stuck in the same range it has been in since May 2010. The Transports continue to trade poorly(-.43% ytd) and remain a big red flag for the broad market. Little being discussed by global central bankers will actually boost global economic growth enough to offset the growing macro headwinds over the intermediate-term, in my opinion. The quality of the stock rally off the June lows remains poor as breadth, volume, leadership, lack of big volume/gainers and copper/lumber/transports relative weakness all continue to be concerns. Thus, I still believe recent market p/e multiple expansion and growing investor bullishness on global central bank stimulus/action hopes is creating an unstable situation for equities, which could become a big problem this fall unless a significant macro catalyst materializes soon. I have not traded today and I am positioned 50% 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.