Gary Smith’s Market Take

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Here’s my take on the markets today, September 28th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mixed today. The 2Y Swap Spread is falling -3.6% to 12.9 bps. The European Investment Grade CDS Index is falling -2.0% to 133.36 bps. The European Financial Sector CDS Index is falling -1.8% to 199.87 bps. The Germany sovereign cds is falling -2.7% to 52.62 bps. The France sovereign cds is falling -2.9% to 110.62 bps. The Spain sovereign cds is falling -2.6% to 377.5 bps. The Italy sovereign cds is falling -3.0% to 345.50 bps. The Spanish 10Y Yld is falling -1.1% to 5.87%. The Italian/German 10Y Yld Spread is falling -.97% to 361.4 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -4.3% to -27.3 bps. The FRA-OIS Spread is rising +3.1% to 21.9 bps. The TED Spread is gaining +2.6% to 27.4 bps. The Japan sovereign cds is gaining +.3% to 84.83 bps, the US sovereign cds is jumping +11.6% to 36.8 bps and the UK sovereign cds is rising +1.2% to 52.1 bps.

Major Asian indices were mostly lower overnight, led down by a -.8% decline in Japan. The Nikkei is down -3.0% in 5 days. Major European indices were higher today, led by a +2.8% gain in Italy. The Bloomberg European Bank/Financial Services Index is +2.1% higher today. Brazil is gaining +1.5%.

The euro is bouncing higher off its 200-day today, but has not traded as well over the last week. Copper is rising +.6%, Lumber is gaining +2.1% and Oil is +.4% higher. The UBS-Bloomberg Ag Spot Index is falling -.6% after Friday’s surge. This index is +22.1% higher since 6/1. Despite today’s equity rally, the 10Y yld is flat at 1.62%.

It is becoming increasingly apparent that it is just a matter of time before the Eurozone debt crisis flares up again in an even more intense fashion as the economies of the region continue to deteriorate on massively destabilizing fiscal/monetary policy decisions. As well, in the short-term I still suspect October could be a challenging month for equities as US election outcome uncertainty increases, earnings jitters increase, global central bank stimulus effectiveness hopes recede, Eurozone debt angst flares, big funds lock in profits and global growth continues to deteriorate.

Today’s better ISM Manufacturing report conflicts with many other gauges of the health of US manufacturing. A bounce in the euro on Spain optimism and fund inflows are likely also boosting equities this morning. However, the quality of the rally remains poor as breadth, volume, leadership, lack of big volume/gainers and tech/real estate sector relative weakness are concerns. I have not traded today and I am still 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.