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Gary Smith’s Market Take

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Here’s my take on the markets today, May 4, 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 -41.50 bps and the Italian/German 10Y Yld Spread is falling -.97% to 385.03 bps. However, the 2Y Swap Spread is rising +4.2% to 29.25 bps. The TED Spread is up +1.3% to 39.5 bps. The 3M Euribor-OIS Spread is gaining +1.2% to 38.4 bps. The European Investment Grade CDS Index is gaining +2.8% to 144.81 bps. The European Financial Sector CDS Index is up +2.0% to 244.52 bps. The Portugal sovereign cds is surging +4.2% to 1,012.22 bps, the UK sovereign cds is gaining +1.6% to 65.33 bps, the Brazil sovereign cds is gaining +2.3% to 122.75 bps and the US sovereign cds is up +1.4% to 40.1 bps(+44.0% in less than 2 weeks). Moreover, the North American Investment Grade CDS Index is jumping +3.1% to 99.08 bps. Overall, credit gauges continue to give back too much of their 1Q improvement and remain at stressed levels.

Major Asian indices were mostly lower overnight, led down by a -1.9% decline in India. The Sensex broke down technically, closed below its 200-day moving average and is down -9.1% since Feb. 22. Major European indices are falling -1.75%, led down by a -1.95% decline in Germany. Italy is down another -1.55% and is now down -18.8% since March 19. As well, Russia is plunging -4.1% on the decline in oil and is breaking down technically. The Bloomberg European Bank/Financial Services Index is down -.8% and is now down -17.0% since March 19. The Citi Eurozone Economic Surprise Index is falling another -6.9 points today to -34.7, which is the lowest since mid-November of last year. The recent intensification of the downturn in Eurozone economies raises the odds of further sovereign/bank downgrades over the coming weeks.

The 10Y T-Note continues to trade too well, copper continues to trade poorly and the euro has turned lower the last 3 days despite weaker US economic data. Oil is falling to the lower end of the range it has been trapped in for the last few months. I expect oil to fall another $10/bbl+ by the fall assuming no serious supply disruptions. Fitch is out warning today of a Eurozone breakup. As well, a senior official of the Greek Ministry of Finance is saying today that “Greece will exit  from the Euro.” I continue to believe that the ECB’s LTRO plan will be viewed in a very negative light over the coming months and that the Eurozone will not exist in its current form over the intermediate-term. Given the upcoming US “fiscal cliff”, intensely negative political rhetoric and likely reigniting of the European debt crisis, more caution is warranted into the second half of the year. I added to my index trading hedges this morning and I am positioned 25% net long.

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Gary D. Smith

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.
Gary D. Smith

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