Gary Smith’s Market Take

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Here’s my take on the markets today, October 12th, 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 +2.5% to -24.98 bps(-12.5% last 5 days). The TED Spread is falling -2.5% to 23.76 bps. The 2Y Swap Spread is falling -9.3% to 11.06 bps. The European Investment Grade CDS Index is falling -2.1% to 126.59 bps. The European Financial Sector CDS Index is falling -2.2% to 176.65 bps. The Germany sovereign cds is falling -1.7% to 49.50 bps. The France sovereign cds is down -3.4% to 99.60 bps. The Spain sovereign cds is down -2.1% to 357.5 bps. The Italy sovereign cds is down -3.2% to 306.3 bps. The Spain 10Y Yld is falling -2.4% to 5.62 bps. However, the 3M Euribor-OIS Spread is rising +3.4% to 12.1 bps, the Italian/German 10Y Yld Spread is rising +.48% to 353.83 bps and the 2Y Euro Swap Spread is rising +2.7% to 42.7 bps. The North American Investment Grade CDS Index is rising +.65% to 97.91 bps and the Latin America CDS Index is gaining +.4% to 109.42 bps.

Major Asian indices were mixed overnight as a +.65% gain in Hong Kong was offset by a -.69% decline in India. Japan, Taiwan and South Korea were all lower-to-flat on the day and finished the week down around -3.0%. Major European indices are lower today, led down by a -1.1% decline in Spain. Spain is finishing the week down around -3.8%. The Bloomberg European Bank/Financial Services Index is falling -.5%.

The euro is giving up some of its morning gains(+.09%), but is maintaining yesterday’s bounce off the 200-day so far. Copper(-1.3%), Lumber(-.4%) and Oil(-.9%) continue to trade poorly given perceived upside catalysts. The benchmark China Iron-Ore Spot Index is falling -1.1% today and is down -36.7% since 9/7/11. The UBS-Bloomberg Ag Spot Index is falling -1.7%, but is still +19.2% since 6/1. The 10Y T-Note continues to trade too well with the yield falling another -3 bps to 1.64%.

Japan has likely already moved back into recession as the islands dispute with China drags on and exports to Europe continue to deteriorate. As well, the big China stimulus that investors have been expecting for several months remains unlikely to materialize, in my opinion. The China (Export) Containerized Freight Index(SHSPCCFI Index on Bloomberg) dropped another -2.2% this week and has fallen -11.1% since its peak on May 18th ahead of the holidays.

Spain still appears to be positioning itself to receive more favorable bailout conditions, which remains a dangerous game. France’s economy is likely deteriorating more rapidly now and I expect the French/German 10Y Yld Spread, which has been improving, to move significantly higher next year.

Financial, Homebuilder and Commodity-related shares are under meaningful pressure today. The Homebuilders(XHB), which have been market leaders, are trading toppy. (XHB) is down -5.7% this week. As well, (XLF) has been holding up relatively well during this recent market pullback. A number of other market leading stocks still trade very poorly. The MS Tech Index is not bouncing after its recent break of the 200-day. The Transports are outperforming today and bumping up against their downward-sloping 50-day. I remain cautious on rising US election uncertainty, a deteriorating global economy, the US fiscal cliff, an unresolved eurozone debt crisis can-kicking, more disappointing earnings reports and a rapidly deteriorating Mid-east. I have not traded today and remain 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.