Gary Smith’s Market Take

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Here’s my take on the markets today, October 19th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The Germany sovereign cds is falling -5.4% to 33.25 bps and the France sovereign cds is dropping -2.3% to 72.0 bps. However, the FRA/OIS Spread is jumping +10.4% to 20.14 bps. The TED Spread is gaining +1.6% to 22.6 bps. The 2Y Swap Spread is rising +6.5% to 10.7 bps. The N. America Investment Grade CDS Index is rising +2.6% to 93.25 bps. The European Investment Grade CDS Index is up +3.0% to 121.96 bps. The European Financial Sector CDS Index is gaining +3.2% to 163.41 bps. The Spain sovereign cds is rising +4.6% to 288.04 bps. The Italy sovereign cds is gaining +5.6% to 248.89 bps. The Emerging Markets Sovereign CDS Index is rising +1.5% to 177.60 bps. The China sovereign cds is rising +2.1% to 71.25 bps. The Russia sovereign cds is rising +3.5% to 136.0 bps. Overall, gauges have improved this week, but remain at stressed levels.

Major Asian indices were mostly lower overnight, led down by a -.78% decline in South Korean shares. Major European indices are lower today, led down by a -2.3% decline in Spain. The Bloomberg European Bank/Financial Services Index is falling -2.2%. Brazil is down -1.3% on the day.

The euro(-.35%) is getting turned away at its mid-Sept. high and still isn’t trading well considering the large european cds declines of late. Oil(-1.8%), Lumber(-1.4%) and Copper(-2.8%) are weak again today. Copper is down -5.0% since 9/14 despite US housing optimism and investor perceptions that global growth will rebound on central bank stimulus/actions. As well, Lumber is slightly lower since 8/15, which is a red flag. The benchmark China Iron-Ore Spot Index is falling -.17% and is down -36.3% since 9/7/11. The UBS-Bloomberg Ag Spot Index is trading better this week, rising another +.18% today, and is up +20.4% since 6/1. The 10Y Yld is rolling over again at its 200-day, falling -7 bps to 1.76%.

I warned recently that even as conventional wisdom held that a weak earnings season had already been priced into stocks, individual companies reporting that missed estimates were getting punished severely in the market. As well, China worries continue to persist despite some investor optimism for an acceleration in growth. There was more hawkish rhetoric from Chinese researchers overnight. US Fi scal cliff concerns are becoming more pronounced. Unless one of the candidates receives a clear mandate, the upcoming budget battle will likely be quite dis ruptive for stocks over the coming months. Finally, the on-again-off -again european debt crisis can-kicking is also weighing on stocks today.

Market-leading equities remain very weak technically, which is another red flag. The MS Tech Index is breaking convincingly below its 200-day today and is down -6.8% in just over a month. Commodity, Financial, Biotech, Construction and Restaurant shares are also under meaningful pressure today. Homebuilding and Gold & Silver stocks are relatively strong. I have not traded today and 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.