Gary Smith’s Market Take

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Here’s my take on the markets today, October 3rd, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mixed today. The 3M EUR/USD Cross-Currency Basis Swap is rising +3.5% to -25.84 bps. The 2Y Swap Spread is falling -4.8% to 13.6 bps. The European Investment Grade CDS Index is falling -2.1% to 129.50 bps. The European Financial Sector CDS Index is falling -3.3% to 188.65 bps. However, the Germany sovereign cds is gaining +.93% to 54.5 bps. The Spain sovereign cds is gaining +1.1% to 382.50 bps. The Portugal sovereign cds is rising +.8% to 495.06 bps. The Spain 10Y Yld is rising +.7% to 5.79%. The US sovereign cds is soaring +14.6% to 41.15 bps(+29.6% in 5 days) and the US Muni CDS Index is jumping +7.6% to 167.47 bps. Overall, credit gauges have improved over the last week, but remain at stressed levels.

Major Asian indices were mostly lower overnight, led down by a -.45% decline in Japan. Major European indices are mixed as a +.4% gain in Italy is being offset by a -.6% decline in Spain. The Bloomberg European Bank/Financial Services Index is down -.21%. Brazil is falling -.5%(-2.6% in 5 days) today.

The euro has stabilized just above its 200-day. I still believe that Germany will not destroy its own balance sheet or allow the ECB to monetize debt is any significant way in an effort to “save” the euro project, which will lead to further weakness in the currency over the intermediate-term. Copper is falling -.8% and Lumber is down -1.4%(-10.2% since 8/16) today. As well, oil still trades poorly and is at session lows down -3.1%. The UBS-Bloomberg Ag Spot Index is down -1.1%(+21.2% since 6/1). Gold continues to consolidate recent gains in a healthy fashion and looks poised for another push higher. The 10Y T-Note Yld is only +1 bp higher to 1.63%, despite some better-than-expected economic data today.

The weekly MBA Home Purchase Apps Index rose +3.9% this week, but remains stuck in the same range it has been in since May 2010.

The Transports, Homebuilders and Banks are giving the major averages a boost this morning. Commodity-related shares are weak. Some key market leaders are trading better today. I do not think the recent pullback has run its course. There remains a large and growing disconnect between a deteriorating macro backdrop and rising stock prices. I covered some of my index trading hedges this morning and already put them back in place. I am still 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.