Gary Smith’s Market Take

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Here’s my take on the markets today, September 27th, 2013. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating today. The 3M EUR/USD Cross-Currency Basis Swap is falling -6.9% to -6.5 bps. The Libor-OIS Spread is jumping +11.4% to 14.4 bps. The US sovereign cds is rising another +2.8% to 31.0 bps(+43.0% in 5 days). The European Investment Grade CDS Index is gaining +3.0% to 102.39 bps. The European Financial Sector CDS Index is gaining +3.2% to 145.23 bps. The Spain sovereign cds is gaining +1.5% to 230.04 bps. The Italy sovereign cds is jumping +3.8% to 261.65 bps(+8.2% in 5 days). The Itlalian/German 10Y Yld Spread is surging 5.2% to 263.8 bps(+12.6% in 5 days). The Emerging Markets Sovereign Debt CDS Index is rising +4.3% to 248.14 bps(+16.9% in 5 days). The China Development Bank Corp CDS is gaining +3.9% to 110.0 bps(+7.4% in 5 days). The State Bank of India cds is gaining +5.3% to 309.97 bps(+18.3% in 5 days). The Brazil sovereign cds is rising +4.9% to 175.62 bps(+9.2% in 5 days). The Indonesia sovereign cds is gaining +4.8% to 252.90 bps(+16.1% in 5 days). Overall, select European/US and Emerging Markets credit gauges are flashing warning signs again.

Major Asian indices were mixed overnight as a +.6% gain in Taiwan was offset by a -.84% decline in India. India, Thailand(-4.7% in 5 days) and Indonesia are starting to give back too much of their recent gains. Major European indices are lower today, led down by a -1.3% decline in Italy. The Bloomberg European Bank/Financial Services Index is falling -.44% today. Brazil is flat, but is still trading better of late.

The euro is rising .3% and is at the high end of its intermediate-term trading range. The yen is rising +.8%, but is still in the middle of the range it has been trapped in since March. Oil is down -.13% today and is not trade as well of late. Copper is up +.48%, but still trades poorly given USD weakness, the recent decline in long-term rates and the perception that global growth is re-accelerating. The benchmark China Iron-Ore Spot Index is falling -1.4% and is not trading well. Gold is rising +1.2%, but still doesn’t trade well given potential catalysts. Lumber is gaining +.6%, but is down -3.8% this week despite the recent large drop in long-term rates. The UBS-Bloomberg Ag Spot Index is down -.7% and still trades very poorly. The 10Y T-Note is trading much better of late with the yield down another -4 bps to 2.61%.

The major averages saw their usual intraday v-lows this morning after opening weakness, but the gains are fading by an unusually large amount this afternoon. While investor sentiment gauges are registering less complacency over the last couple of weeks, stock price action still indicates too much complacency. This is likely a result of investor angst rising over what they see going on in Washington and the Middle East, but actually buying every small dip on the undying belief that the Fed will bail them out if things get too out of hand. While the odds favor some sort of eventual US debt can-kicking once again, the chances are higher this time than investors perceive for a temporary shut-down, in my opinion. The structural problems in key emerging markets continue to grow despite a temporary lull in equity investor angst on a bounce in China growth and subsiding Fed taper worries. Moreover, the political crisis in Italy has the potential to spark another round of European debt crisis worries even as most investors perceive that “Europe is getting better”.

Overall, I continue to believe the risks to US equities over the intermediate-term are much higher than perceived due to the magnitude and number of bubbles currently being inflated globally. In the short-term, I suspect stocks can mount another push higher from lower levels once the inevitable US can-kicking takes place. Alt Energy, Precious Metal and Biotech stocks are relatively strong today, while Steel, Coal, Oil Tanker, Paper, Tech, Homebuilding, Gaming and Airline shares are weak. I covered some of my index trading hedges this morning and then added them back. I am still 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.