Gary Smith’s Market Take

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Here’s my take on the markets today, October 8th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The TED Spread is down -.4% to 25.4 bps. The Germany sovereign cds is down -1.3% to 49.37 bps. The US sovereign cds is down -1.3% to 38.86 bps(+52.3% since 9/19). However, the 3M EUR/USD Cross-Currency Basis Swap is down -8.9% to -24.07 bps. The FRA-OIS Spread is up +1.0% to 24.13 bps(+12.5% in 5 days). The 2Y Swap Spread is rising +2.0% to 14.25 bps(+8.0% in 5 days). The European Investment Grade CDS Index is up +2.4% to 129.65 bps. The European Financial Sector CDS Index is rising +2.5% to 183.0 bps. The Ireland sovereign cds is rising +3.1% to 289.37 bps. The Spain 10Y Yld is gaining +.5% to 5.71%. The Italian/German 10Y Yld Spread is up +1.95% to 360.31 bps. The Emerging Markets Sovereign CDS Index is gaining +1.93% to 203.72 bps. The Russia sovereign cds is rising +2.7% to 142.22 bps.

Major Asian indices were lower overnight, led down by a -1.21% decline in India. Major European indices are lower today, weighed down by a -2.0% decline in Italy. The Bloomberg European Bank/Financial Services Index is -1.7%. Brazil is gaining +.8%. Venezuela’s IBC Index is plunging -12.6% on the Chavez victory.

The euro is heavy today, falling -.51%. Copper(-1.6%), Lumber(-.9%) and Oil(-.2%) continue to trade poorly, given the perceived upside catalysts. The benchmark China Iron-Ore Spot Index re-opened after the holidays +5.95% higher(down -39.0% since 9/7/11). Gold is -.3% lower on the day, but continues to consolidate recent gains in a healthy fashion. The UBS-Bloomberg Ag Spot Index is -.06% today, but is +21.6% higher since 6/1.

The economies of the eurozone continue to weaken and I still suspect more sovereign downgrades are forthcoming after the US election. Spain still appears to be positioning itself for easy terms in any bailout, which could easily become another big problem. As well, the rise of separatism sentiment within the eurozone will only complicate matters during the next escalation phase of the debt crisis. I also remain skeptical that Germany will destroy its own balance sheet or allow the ECB to monetize debt in a major way in an effort to “save” the euro.

China/Japan island tensions continue to percolate and remain another growth headwind for the region.

A number of market leaders are trading poorly again today, which is another broad market red flag. Tech, homebuilder and biotech shares are especially weak. Coal and Steel shares are trading well today. I have not traded today 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.