Gary Smith’s Market Take

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Here’s my take on the markets today, September 24th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating today. The 3M EUR/USD Cross-Currency Basis Swap is falling -7.3% to -22.12 bps(-15.4% in 5 days). The 2Y Swap Spread is rising +6.9% to 13.95 bps(+15.4% in 5 days). The TED Spread is gaining +1.1% to 27.1 bps. The FRA-OIS Spread is rising +2.8% to 23.4 bps. The European Investment Grade CDS Index is gaining +3.1% to 130.54 bps(+8.5% in 5 days). The European Financial Sector CDS Index is up +2.5% to 187.33 bps. The Germany sovereign cds is jumping +5.7% to 49.67 bps. The France sovereign cds is climbing +2.9% to 108.0 bps(+11.0% in 5 days). The Italian/German 10Y Yld Spread is gaining +.7% to 347.63 bps. The Russia sovereign cds is surging 5.9% to 149.56 bps(+15.2% in 5 days). The Asia-Pacific Sovereign CDS Index is jumping +5.1% to 116.86 bps(+23.7% in 5 days). The Japan sovereign cds is rising +3.6% to 86.72 bps(+27.5% in 5 days). Overall, credit gauge improvement has stalled at still stressed levels.

Major Asian indices were mostly lower overnight, led down by a -.5% decline in Australia. The Shanghai Comp(-7.6% ytd) opened at another new multi-year low, but rallied modestly into the close to finish +.3% higher. Major European indices are lower today, led down by a -1.2% decline in Spain. The Bloomberg European Bank/Financial Services Index is -.56% lower. Brazil is +.5% higher on the day.

The euro is trading -.6% lower on the day and I still see substantial downside risk for the currency over the intermediate-term as the debt crisis escalates further. Oil is falling back below its 50-day despite perceived upside catalysts. Lumber and Copper continue to trade poorly, as well, given investor perceptions of a major housing bottom, global central bank stimuli and the belief that global growth will soon accelerate. The benchmark China Iron-Ore Spot Index is falling -2.5% today and is down -42.7% since 9/7/11. The UBS-Bloomberg Ag Spot Index is down -.6%, but is still +22.0% higher since 6/1. Gold is -.7% lower on the day and is too extended short-term, but is consolidating recent gains in a healthy fashion so far. The 10Y T-Note continues to trade too well with the yield falling -4 bps to 1.71% today.

The China/Japan island dispute continues to escalate and is evolving into another negative economic headwind for the region. As well, Chinese officials/researchers made more hawkish comments regarding real estate over the weekend.

The Transports are outperforming today after last week’s poor showing. Market leader Apple(AAPL) is heavy, mainly on worries over iPhone sales. I suspect the shares could see further short-term weakness on rising Asian growth worries, technical selling and more “selling the news”. As well, it’s quite likely that funds, in general, have massively overweighted the shares in an attempt to catch up to the major averages into quarter-end, which could result in some trimming of the position over the coming days. I still expect the shares to outperform over the intermediate-term. Long AAPL. Google(GOOG) is hitting a new all-time high today. While the stock is getting too frothy and extended short-term, I still expect the shares to outperform over the intermediate-term. Long GOOG. Facebook(FB) is under pressure today on the Barron’s piece. I continue to believe the shares will underperform over the intermediate-term as the multiple contracts on concerns over their ability to further monetize the business model and slowing growth. No position. I added to my (IWM)/(QQQ) hedges this morning and I am positioned 25% 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.