Gary Smith’s Market Take

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Here’s my take on the markets today, July 23rd, 2013. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The TED Spread is falling -3.5% to 24.56 bps. The Germany sovereign cds is falling -6.7% to 27.67 bps. The UK sovereign cds is down -5.8% to 36.52 bps. The France sovereign cds is falling -3.2% to 69.67 bps. The Portugal sovereign cds is down -1.7% to 450.68 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -2.3% to -9.51 bps. The FRA-OIS Spread is gaining +3.3% to 22.1 bps. The North America Investment Grade CDS Index is up +2.9% to 74.64 bps. The European Investment Grade CDS Index is up +1.8% to 99.39 bps.The European Financial Sector CDS Index is gaining +4.1% to 146.75 bps. The Spain 10Y Yld is rising +1.7% to 4.69%. The Emerging Markets CDS Index is up +1.6% to 276.02 bps. The China sovereign cds is up +1.0% to 96.34 bps. The South Korea sovereign cds is up +6.6% to 80.5 bps. The Russia sovereign cds is up +2.7% to 165.37 bps. The Egypt sovereign cds is up +3.5% to 750.0 bps(+11.0% in 5 days).

Major Asian indices were higher overnight, led by a +2.3% gain in Hong Kong. Major European indices are mixed today with a +1.3% gain in Italy offsetting a -.43% loss in France. The Bloomberg European Bank/Financial Services Index is rising +.08%. Brazil is gaining +1.1% and is trading better of late(-19.5% ytd).

The euro is rising +.18% and is still stuck in the middle of an intermediate-term range. The yen is down -.08% and has stabilized over the last month after extreme weakness. Oil is rising +.5% and continues to trade very well. Copper is rising +.7% and is trading better of late. The benchmark China Iron-Ore Spot Index is up +.3%. Gold is gaining +.75% and is trading much better of late. Lumber is giving back some of its recent gains, falling -2.97% today. The UBS-Bloomberg Ag Spot Index is falling -1.4% and continues to trade very poorly. The 10Y T-Note has stabilized after sharp losses, with the yield rising +2 bps to 2.5%, but still doesn’t trade that well.

The major averages are seeing the usual dip-buying after opening weakness, but the rebound isn’t as vigorous as usual, especially given the gains in Asia overnight. Almost all news is still being interpreted in a positive light as investors continue to believe global central bank actions will eventually lead to a meaningful uptick in economic growth. I still believe the troubles in key emerging markets are severe, despite the recent surge in emerging market equities, and will resurface as equity investor headwinds over the coming months. Asian investors cheered more dovish rhetoric from Chinese authorities overnight. However, I still believe that China is unlikely to embark on any significant stimulus plan anytime soon. Moreover, if they do go down this road, once again, it would raise the odds of a hard-landing and make the eventual reckoning even more painful than would otherwise be the case. I still believe the rise in energy prices, which is partially a result of central bank actions, will become a major headwind for the global economy more quickly than perceived given the inflation problems in key emerging markets and the fragility of the global consumer.

Homebuilding, Steel, Gold & Silver and Coal shares are strong today, while Disk Drive, Biotech, Insurance, Restaurant, Gaming, Road & Rail and Tobacco stocks are weak. 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.