Gary Smith’s Market Take

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Here’s my take on the markets today, October 15th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving today. The Libor-OIS Spread is falling -2.5% to 19.12 bps. The TED Spread is falling -1.68% to 23.36 bps. The Germany sovereign cds is down -6.4% to 45.15 bps. The France sovereign cds is down -4.2% to 93.75 bps. The UK sovereign cds is dropping -6.5% to 43.12 bps. The Italian/German 10Y Yld Spread is falling -.8% to 351.07 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is down -.6% to -25.16 bps. The 2Y Euro Swap Spread is rising +2.68% to 43.70 bps. The Spain 10Y Yld is rising +3.42% to 5.82%. Overall, credit gauges have improved modestly of late, but remain at stressed levels.

Major Asian indices were mixed overnight as a +.5% gain in Japan was offset by a -.4% decline in South Korea. Major European indices are mostly higher, led by a +.9% gain in France. The Bloomberg European Bank/Financial Services Index is rising +1.0%. Brazil is rising +.75%.

Despite gains in European equities, the euro is -.15% lower on the day. Oil(-.6%), Copper(-.1%) and Lumber(-.1%) continue to trade poorly given their perceived upside catalysts. The benchmark China Iron-Ore Spot Index is falling -1.3% and is down -37.6% since 9/7/11. Gold is under pressure today(-1.0%) after getting turned away for the third time this year at $1,800. The UBS-Bloomberg Ag Spot Index is falling another -1.0% today and has broken below the range it has been in since early-July. This index is still +18.0% higher since 6/1. The 10Y T-Note still trades too well with the yield just +1 bp higher to 1.67% despite the equity rally and better retail sales report.

Retail Sales for September beat estimates, but much of the gain was related to iPhone 5 and gasoline/food. Moreover, last week’s weekly retail sales report came in at a tepid +1.6% gain, which tied the lowest reading since the week of 2/2/10. Despite some meaningful improvement in some of the higher-profile jobs data, many other labor gauges continue to show weakness as the employment measure in the Empire Manufacturing Index fell to minus -1.1, the worst this year, from 4.3 in September.

The major averages remain resili ent in the face of still developing significant macro headwinds. Homebuilding and Drug shares are outperforming today, while Road/Rail, commodity and networking/internet stocks are not participating in today’s advance. As well, a number of market leaders still trade poorly and are badly lagging again today. I suspect broad market weakness will resurface later this week. I covered some of my index trading hedges this morning and already put them back in place. 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.