Gary Smith’s Market Take

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Here’s my take on the markets today, September 14th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving again today. The 3M EUR/USD Cross Currency Basis Swap is rising +2.0% to 16.76 bps. The 2Y Swap Spread is falling -23.1% to 12.14 bps. The TED Spread is falling -1.2% to 28.9 bps. The European Investment Grade CDS Index is falling -6.9% to 118.53 bps. The European Financial Sector CDS Index is falling -8.9% to 185.33 bps. The Germany sovereign cds is falling -4.5% to 49.33 bps. The France sovereign cds is falling -11.8% to 98.93 bps. The Italy sovereign cds is falling -3.55% to 307.5 bps. The Spain sovereign cds is down -3.8% to 336.95 bps. The UK sovereign cds is down -7.5% to 43.0 bps. The Italian/German 10Y Yld Spread is falling -4.0% to 331.35 bps. However, the Spain 10Y Yld is jumping +3.1% to 5.8% and the Japan sovereign cds is rising +2.6% to 68.39 bps. Overall, credit gauges have improved meaningfully again this week, but remain at stressed levels.

Major Asian indices rose sharply overnight, led by a +2.9% gain in Hong Kong. However, the Shanghai Comp was only +.6% higher and its rally has stalled over the last week(-.2%) even as investors globally price in a major new stimulus from China. Major European indices are surging, led by a +2.8% gain in Spain. The Bloomberg European Bank/Financial Services Index is rising +2.7%. Brazil is rising +.7%.

The euro is jumping +1.1% and has broken convincingly above its 200-day. Copper is surging +3.1% and is trading much better over the last week. The benchmark China Iron-Ore Spot Index is surging +5.7% today, but is still -43.9% lower since 9/7/11. Oil is rising +.6%, but isn’t trading as well as expected given the catalysts. Lumber is bouncing +1.7% today, but continues to trade very poorly given the perceived catalysts. The UBS-Bloomberg Ag Spot Index is rising +1.4% and is up +28.5% since 6/1. This index is testing its high for the year and only -2.3% below its all-time high set on 8/31/11 that helped spark rioting in the Mid-east. The 10Y T-Note Yld is jumping +13 bps and is testing its mid-Aug levels and 200-day.

US industrial production is rolling over, falling by the most since March 2009 in August.

The Fed’s actions/statements yesterday will likely continue to boost stocks for awhile longer, as designed. However, over the intermediate-term their recklessness greatly increases the chances of hard-landings in key emerging markets and of a serious global stock swoon, in my opinion. While many argue that current stock valuations are still reasonable, I am increasingly concerned that valuations are masking a significant rise in risk given the major and growing disconnect with the macro backdrop. Moreover, it is just a matter of time before investors focus on the details of the recent ECB “bazooka can-kicking”, which leave much room for disappointment over the coming months. As well, as I have been warning for some time, the Mid-east is unraveling again at a rapid rate. Recent central bank actions will only intensify the situation over the intermediate-term.

The total put/call ratio is very low again today at .59. The market has become meaningfully overbought technically. I covered some of my index trading hedges on the open and have already put them back in place. 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.