Gary Smith’s Market Take

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Here’s my take on the markets today, October 22nd, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The 3M EUR/USD Cross-Currency Basis Swap is rising +2.9% to -24.6 bps. The TED Spread is falling -.6% to 22.4 bps. The Germany sovereign cds is plunging -8.4% to 30.75 bps. However, the Libor-OIS Spread is rising +1.2% to 17.9 bps. The 2Y Euro Swap Spread is rising +1.05% to 40.22 bps. The European Investment Grade CDS Index is rising +1.7% to 122.99 bps. The France sovereign cds is gaining +.8% to 71.27 bps. The Spain sovereign cds is jumping +7.7% to 295.5 bps. The Italy sovereign cds is rising +2.7% to 244.87 bps. The Spain 10Y Yld is gaining +2.3% to 5.5%. The Portugal sovereign cds is gaining +4.9% to 426.99 bps. The Emerging Markets Sovereign CDS Index is rising +2.5% to 182.43 bps. The Russia sovereign cds is surging +7.5% to 146.08 bps. The Germany sovereign cds has plummeted -72.3% since June 12th and traded below the US sovereign cds for the first time in a number of years this morning, which doesn’t correspond with investor perceptions that Germany will put its balance sheet on the line to “save” the euro, in my opinion.

Major Asian indices were mixed overnight as a +.68% gain in Hong Kong was offset by a -.63% decline in Australia. Major European indices are lower today, led down by a -.71% decline in Germany. The Bloomberg European Bank/Financial Services Index is rising +.07%. Brazil is down -.5%.

The euro is rising +.2%. Copper(-.7%), Lumber(-.2%) and Oil(-1.2%) still trade poorly given their perceived upside catalysts. The China benchmark Iron-Ore Spot Index is gaining +1.9% today, but is still -35.1% lower since 9/7/11. The UBS-Bloomberg Ag Spot Index is gaining +.25% and is up +20.8% since 6/1.

China/Japan island ten sions continue to weigh on growth in the region and show no signs of easing. The mid -East continues to unravel at an alarming pace, which will likely be even more of a headwind for equities after the US election into next year. The Spanish elections o ver th e weekend make an imminent Spain bailout less likely, in my opinion. Over the weekend, Welt reported that Spain is seeking concrete yield targets below current levels, which the ECB rejects. I still think Spain is hoping to wait until the next big surge in euro debt angst before agreeing to more favorable bailout terms, which remains a dangerous game.

There still appears to be a f airly large disconnect between how much stocks have risen off the June lows(S&P 500 +12.5%) and deteri orating fundam entals over that period.

Energy, Real Estate and Transport shares are under pressure today. Healthcare, Steel and Coal stocks are relatively strong. The Transports fell back below their 200-day on Friday and are now back below there 50-day, as well. The MS Tech Index is building on recent losses and is down -7.4% in 5 weeks. 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.