Gary Smith’s Market Take

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Here’s my take on the markets today, November 12th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The Libor-OIS Spread is falling -2.4% to 16.1 bps. The Germany sovereign cds is down -3.3% to 32.18 bps. However, the Western Europe Sovereign CDS Index is jumping +8.2% to 122.67 bps. The France sovereign cds is surging +5.6% to 88.49 bps(+22.6% in 5 days). The UK sovereign cds is gaining +3.9% to 30.81 bps(+7.6% in 5 days). The Portugal sovereign cds is rising +2.7% to 610.69 bps(+13.0% in 5 days). The Spain sovereign cds is gaining +2.6% to 352.08 bps(+10.0% in 5 days). The Italy sovereign cds is up +2.20% to 315.66 bps(+10.2% in 5 days). The Spain 10Y Yld is rising +1.1% to 5.89% and the Italian/German 10Y Yld Spread is up +1.2% to 367.13 bps. Some key sovereign cds are starting to move up too much again and overall credit gauges remain at stressed levels.

Major Asian Indices were mostly lower overnight, led down by a -.93% decline in the Nikkei(-3.7% in 5 days). Major European indices are mostly lower, led down by a -.9% decline in Spain(-3.4% in 5 days). The Bloomberg European Bank/Financial Services Index is rising +.08%. Brazil is down -.33%.

The euro is flat today. Oil(-.2%) and Copper(+.2%) still trade poorly, especially given investor perceptions that the Chinese economy is rebounding. Gold is flat, but is consolidating recent gains in a healthy fashion. Lumber is falling -1.4% today. China’s benchmark Iron-Ore Spot Index is unch. today, but is still -32.5% lower since 9/7/11. The UBS-Bloomberg Ag Spot Index is falling -1.6% today and is testing its 200-day moving average.

China reported over the weekend that its exports in Oct. surged +11.6% even as its major trading partners continue to see decelerating economic growth. However, China’s new loans fell -14.0% during the month. Moreover, India reported a -1.6% decline in exports during October. Chinese data is even more suspect than usual right now during the leadership transition, in my opinion. US Rail traffic was already decelerating before Hurricane Sandy and I suspect the overall US economy is likely weaker now than investors currently perceive.

The results of the election ensure that any likely US fiscal cliff deal will not be comprised of the correct policy mix that would help boost economic growth even with less uncertainty, in my opinion. Big tax hikes/spending cuts is the European formula and that formula is failing terribly right now. Moreover, I still expect more European sovereign downgrades over the coming months as a result, notwithstanding outside attempts to “rein in” the ratings agencies. While a US fiscal cliff “solution” or “can-kicking” would boost US stocks in the near-term, I suspect any rally will be less vigorous and more short-lived that is commonly perceived.

Biotech and Transport shares are relatively strong today, while Homebuilding stocks are very weak. The Bloomberg Home Builders Index had been a market leader, but is breaking down through its 50-day moving average on volume today. I am still positioned 50% 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.