Gary Smith’s Market Take

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Here’s my take on the markets today, September 12th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving again today. The Ted Spread is falling -1.49% to 29.8 basis points. The 3M EUR/USD Cross-Currency Basis Swap is rising +2.7% to -21.41 bps. The European Financial Sector CDS Index is falling -4.9% to 198.24 bps. The Germany sovereign cds is falling -3.5% to 52.12 bps. The France sovereign cds is falling -4.6% to 114.99 bps. The Spain sovereign cds is falling -6.9% to 354.75 bps. The Italy sovereign cds is down -6.2% to 319.51 bps. The Spain 10Y Yld is falling -1.2% to 5.63% and the Italian/German 10Y Yld Spread is falling -3.5% to 341.18 bps. However, the FRA-OIS Spread is gaining +2.3% to 21.92 bps. The 2Y Swap Spread is rising +2.5% to 15.12 bps. Overall, credit gauges continue to improve, but remain at stressed levels.

Major Asian indices rose overnight, led by a +1.7% jump in Japan. China stimulus optimism continues to rise, however, I suspect recent announcements will lead to an intense focus on growing bad loans next year. Major European indices are mostly higher, boosted by a +1.2% gain in Italy. The European Bank/Financial Services Index is gaining +1.3%. Brazil is rising +.5%.

The euro is moving +.2% higher to just above its 200-day. Copper is reversing -.2% lower, oil is flat and lumber is down -.65%. Copper is not trading well given investor expectations for more QE, China stimulus building, a major US housing bottom and European “bazooka” can-kicking. Moreover, lumber has traded poorly throughout the year. The China benchmark Iron-Ore Spot Index is falling -2.1% today and is down -45.8% since 9/7/11. The UBS-Bloomberg Ag Spot Index is gaining +.5% and is up +25.7% since 6/1. This index is only 4.5% from its all-time high, set in Aug. of last year, that helped spark Mid-east rioting. I continue to believe QE3 would be a mistake given the recent surge in stock prices, rising inflation expectations, rising gas prices, worrisome food crisis headlines and less pessimistic US economic data. The 10Y T-Note continues to trade too well, despite a +4 bps move higher in yield today to 1.74%.

The weekly MBA Home Purchase Apps Index jumped +8.1% this week, but remains stuck in the same range it has been in since May 2010.

I remain skeptical that Germany will destroy its own balance sheet or agree to monetizing debt in any major way, notwithstanding the market’s perception of another big debt crisis can-kicking. Stock multiples have been expanding rapidly on global central bank action/stimulus hopes. I will be surprised if there isn’t a “sell the news” reaction in equities over the next couple of weeks, especially given the poor quality of this rally off the June lows, as investors become more focused on the macro backdrop, uncertainty surrounding the election and another likely disappointing upcoming earnings season.

The Total Put/Call Ratio has averaged the lowest over the last 4 days since early January of last year. Market leader Apple(AAPL) is not trading as well as usual over the last 2 weeks ahead of today’s launch. Long AAPL. 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.