Gary Smith’s Market Take

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Here’s my take on the markets today, October 10th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The TED Spread is down -1.7% to 24.61 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -4.4% to -25.31 bps. The Libor-OIS Spread is rising +1.0% to 20.67 bps. The European Investment Grade CDS Index is gaining +1.5% to 133.25 bps. The Germany sovereign cds is gaining +2.7% to 51.5 bps. The France sovereign cds is rising +2.3% to 103.83 bps. The Spain sovereign cds is rising +2.4% to 366.66 bps. The Portugal sovereign cds is gaining +3.2% to 477.27 bps. The Ireland sovereign cds is jumping +4.1% to 291.60 bps. The US sovereign cds is gaining +.5% to 41.37 bps(+53.0% since 9/19). The Emerging Markets CDS Index is gaining +.75% to 226.97 bps(+5.6% in 5 days). Overall, gauges have stopped improving and remain at stressed levels.

Major Asian indices were lower overnight, led down by a -2.0% decline in Japan. Major European indices are lower, led down by a -1.0% decline in Spain. The Bloomberg European Bank/Financial Services Index is falling -.6%. Brazil is down -.8%.

The euro is bouncing slightly again off its 200-day, but still doesn’t trade well overall. Oil/Copper are flat and also don’t trade well given perceived upside catalysts. Lumber is bouncing +2.2% today, but is -10.0% since 8/16. Gold is flat and continues to consolidate recent gains in a healthy fashion. The 10Y T-Note still trades too well with the yld flat at 1.72%.

Weekly retail sales, reported yesterday, rose +1.6%. This ties the slowest increase since the week of Feb. 2, 2010 at time when the economy is supposedly firming. The weekly MBA Home Purchase Apps Index rose +2.4% this week, but is still stuck in the same range it has been in since May 2010.

Even if the ECB eventually uses its perceived bazooka, I don’t think it will offset the many drags on economic growth in the region, which remains a huge problem for the global economy. Investor’s growing bullish sentiment remains a worry, in my opinion, given the magnitude of the still developing headwinds. Many investors currently perceive the equity market as being addicted to dovish Fed actions/rhetoric. A further gain in the polls by Mitt Romney, while perceived as a longer-term positive by most investors, could further pressure equities in the short-term in anticipation of major FOMC changes, less support for Europe’s kick-the-can approach and a stronger US dollar.

Technology stocks are very weak again today as the MS Tech Index(-6.5% since 9/14) is breaking below its 200-day. Commodity-related stocks are also under meaningful pressure again. Restaurants and Homebuilders are relatively strong. 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.