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Gary Smith’s Market Take

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Here’s my take on the markets today, February 6th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating again today. The Libor-OIS Spread is down -.91% to 16.4 bps. The 2Y Swap Spread is falling -4.5% to 16.2 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -4.0% to -16.9 bps(-38.5% in 5 days). The North America Investment Grade CDS Index is gaining +1.4% to 89.69 bps. The US sovereign cds is gaining +2.8% to 43.7 bps. The European Investment Grade CDS Index is gaining +1.4% to 117.31 bps. The European Financial Sector CDS Index is rising +1.5% to 157.18 bps(+10.5% in 5 days). The Spain sovereign cds is gaining +3.2% to 293.50 bps. The Italy sovereign cds is rising +4.1% to 272.5 bps(+12.3% in 5 days). The Spain 10Y Yld is gaining +1.0% to 5.45%. The Italian/German 10Y Yld Spread is jumping +5.2% to 295.4 bps(+12.7% in 5 days). The Emerging Markets Sovereign CDS Index is rising +.8% to 171.9 bps. The Brazil sovereign cds is gaining +1.4% to 121.0 bps.

Major Asian indices were mostly higher overnight, led by a +3.8% surge in Japan(+10.3% ytd). Major European indices are lower, led down by a -1.4% decline in France. Spain is down another -.5%(-5.9% in 5 days) and is now down -1.3% ytd. The European Bank/Financial Services Index is falling -.5%. Brazil continues to trade very poorly, falling another -.8% today(-3.3% ytd).

The euro(-.41%) pullback likely has further to go. Oil is flat and copper(-.7%) still trades poorly. The benchmark China Iron-Ore Spot Index is +.58% higher on the day. Gold is slightly higher(+.17%) as it hovers just above its 200-day. Lumber is rising another +2.6% and is back near its multi-year high. The UBS-Bloomberg Ag Spot Index(-.9%) still trades poorly and is rolling over at its 200-day. The 10Y T-Note Yld is falling -3 bps to 1.97%.

Monday’s weakness has proven to be an aberration thus far as investors promptly returned to the “buy every small dip” strategy that has worked so well since mid-Nov. The market remains technically strong despite today’s mild weakness. Investor complacency continues to build at the same time as headwinds grow, which remains a troublesome dynamic. The divergence between US stocks and European credit/equities is becoming especially pronounced. I suspect any more meaningful deterioration in Euro credit/equities from current levels will finally weigh on US shares in a more significant way. Moreover, it is becoming more apparent that China is going to pursue policies that will weigh on their growth rebound later this year, in my opinion, which would become another headwind for global investors.

Alt energy, steel, education and airline shares are strong today, while computer service, oil service, biotech, homebuilding, retail and gaming stocks are relatively weak. I am still positioned 50% 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.
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