S&P500 has broken couple of key technical levels, (1) up-trend since October 4, 2011 low and (2) 50-day moving average.
Looks like it is in the process of forming a head-and-shoulder pattern with the neck around 1,042 level, which also happens to be the 76.4% retracement from October low (1,074) to April high (1,422).
1,040 is a very key technical level. Should it break, then the index is heading to 1,290-1,300 very quickly. Apple earnings after the close today might sent the tone for the short-term move in the S&P500. Personally, I think the set-up for Apple earnings is bullish especially given that the stock has already moved lower heading into the print - it's down again pre-open following results from AT&T. We'll see what happens, we'll just have to wait.
Given that Hedge Funds underperformed the S&P500 in Q1 2012 because they didn't want to repeat the mistake of last year, i.e. they ramped up risk in Q1 but got creamed by market downturn in Q2 and Q3, means if markets survive the treacherous Q2 and Q3, then we're set up for the "mother of all rallies" in Q4 (you read it here first :).
There are lot interesting charts in the latest edition of IMF's Global Stability report. Given the focus of investors on the European sovereign crisis, here are the 4 notable ones.
The ECB has been the most aggressive among the world's central banks in providing liquidity. It seems the Fed is the most conservative, relative to the size of the US economy.
Given the ECB's aggressive stance, credit contraction has been less pronounced there than during other financial crisis. Even in the "worst case scenario", credit cruch will be nowhere as severe as in the US during the 2008-09 crisis.
The IMF estimates that European banks need to shed $1.5 trillion assets during the next year-and-half to bring Tier 1 ratio to the target level. The question is who's going to be the buyers of the assets? The ECB again? The Fed?
Europe's impact on the US banks is something to watch out for given the banks' exposure through their derivatives business. If the crisis spreads to France then the problems will get bigger. If Germany and the UK become victims, then all bets are off.
As playwright Arthur Miller once observed, "An era can be said to end when its basic illusions are exhausted." Most of the illusions that defined the last decade -- the notion that global growth had moved to a permanently higher plane, the hope that the Fed (or any central bank) could iron out the highs and lows of the business cycle -- are indeed spent. Yet one idea still has the power to capture the imagination of the markets: that the inexorable rise of China and other big developing economies will continue to drive a "commodity supercycle," a prolonged upward rise in the prices of commodities ranging from oil to copper and silver, to textiles, to corn and soybeans. This conviction is the main reason for the optimism about the prospects of the many countries that live off commodity exports, from Brazil to Argentina, and Australia to Canada.
I call this illusion commodity.com, for it is strikingly similar in some ways to the mania for technology stocks that gripped the world in the late 1990s. At the height of the dotcom era, tech stocks comprised 30 percent of all the money invested in global markets. When the bubble finally burst, commodity stocks -- energy and materials -- rose to replace tech stocks as the investment of choice, and by early 2011 they accounted for 30 percent of the global stock markets. No bubble is a good bubble, and all leave some level of misery in their wakes. But the commodity.com era has had a larger and more negative impact on the global economy than the tech boom did.
The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments. Copper is piling up in bonded warehouses not because the owners plan to use it to make wire, but because speculators are sitting on it, like gold, figuring that they can sell it one day for a huge profit. Daily trading in oil now dwarfs daily consumption of oil, running up prices. While rising prices for stocks--tech ones included--generally boost the economy, high prices for staples like oil impose unavoidable costs on businesses and consumers and act as a profound drag on the economy.
That is how average citizens experience commodity.com, as an anchor weighing down their every move, not the exciting froth of the hot new thing. The dotcom sensation broke the bounds of the financial world and seized the popular imagination, attracting thrilled media hype around the world and enticing cubicle jockeys to become day traders. There was the dream of great riches, yes, but also a boundless optimism and faith in human progress, a sense that the innovations flowing out of Silicon Valley would soon reshape the world for the better.
Tech CEOs became rock stars because they promised a life of rising productivity, falling prices, and high salaries for generating ideas in the hip office pods of the knowledge economy, or for trading tech stocks from a laptop in the living room. It was impossible in those days to get investors interested in anything that did not involve technology and the United States, so some of us started talking up emerging markets as "e-merging markets," while analysts spent a lot of time searching for the new Silicon Valley, which they dutifully but often implausibly discovered hiding in loft offices everywhere from Prague to Kuala Lumpur.
A decade later the chatter was all about the big emerging markets and oil, but with a darker mood. Commodity.com is driven by fear and a total lack of faith in human progress: fear of a rising phalanx of emerging nations with an insatiable demand led by China, of predictions that the world is running out of oil and farmland, coupled with a lack of faith in the human capacity to devise answers, to find alternatives to oil or ways to make agricultural land more productive. It's a Malthusian vision of struggle and scarcity: of prices driven up by failing supplies and wages pushed down by foreign competition.
Excitement about rising commodity prices exists only among the investors, financiers, and speculators who can gain from it. Commodity.com has inspired many an Indian and Chinese entrepreneur to go trekking across Africa in search of coal mines, yet it has no positive manifestation in the public mind at all. At the height of the tech bubble millions of American high school students aspired to become Stanford MBAs bound for Silicon Valley; today the growing number of oil, gas, and energy-management programs represents a small niche inside the MBA world. The only popular manifestations of commodity.com are complaints about rising gasoline prices and outbreaks of unrest over rising food prices in emerging markets.
It is well-justified unrest. If anything, the negative impact of sky-high commodity prices on the larger economy is underestimated. The price of oil rose sharply before ten of the eleven postwar recessions in the United States, including a spike of nearly 60 percent in the twelve months before the Great Recession of 2008 and more than 60 percent before the economy lost momentum in mid-2011. When the price of oil trips up the United States, it takes emerging markets down with it. In 2008 and 2009 the average economic growth rate dropped by 8 percentage points in both the developed and the emerging world, from its peak pace to the recession trough.
The strongest common thread connecting the dotcom and commodity.com eras is the fundamental driver of all manias: the invention of "new paradigms" to justify irrationally high prices. We heard all sorts of exotic rationales at the height of the dotcom boom, when analysts offered gushy explanations for why a company with no profits, a sketchy business plan, and a cute name should trade at astronomical prices. It was all about the future, about understanding why prices in a digitally networked economy "want to be free," while the "monetization" problem (how to make money on the Internet) would solve itself down the line. The dotcom mania, while it lasted, was powerful enough to make Bill Clinton -- who campaigned as the first U.S. president to fully embrace the "new economy" -- a living emblem of American revival, just as the commodity price boom played a role in making Vladimir Putin a symbol of Russian resurgence and Inácio Lula da Silva the face of a Brazilian recovery. When the rapture is over, the nations and companies that have been living high off commodities will also share the sinking feeling that followed the dotcom boom.
Low-wage Lessons By John Schmitt Center for Economic and Policy Research [Full Link]
The economics of "economic distribution" is not only relevant to politics but also to investment. Given that the US has a such a large share of low-wage earners and the share of that has been trending up for 20 years, it is good news for companies cater to that segment of the demographics like the Wal-Mart and Dollar stores of the world.
According to the OECD, in 2009, about one-fourth of U.S. workers were in low-wage jobs, defined as earning less than two-thirds of the national median hourly wage.
Not only has the U.S. the highest share of low-wage workers in the OECD countries, the incidence of low-wage work has been rising for at least three decades, from just over 20 percent in 1979 to just under 30 percent in 2010.
The minimum wage in the U.S. has been set at a level that is well below the threshold for low-wage work. As a result, it has had little or no impact on the share of the workforce experiencing low pay by the standard definition.
The Federal program, the Earned Income Tax Credit (EITC) which reimburses low-income earners (27 million families, $60 billion in 2009 with complicated eligibility rules (max benefit 4.8K and max earnings 39K) may have exacerbated the low-wage problem in the U.S. because it increased the supply of low wage workers who then do not become eligible for the EITC or get the EITC that is too small.
The Paradox of Low-Risk Stocks By Kent Hargis and Chris Marx [Full Link]
A white-paper by Kent Hargis and Chris Marx, portfolio managers at AllianceBernstein argues that the best stock investment strategy for the long-run is "low-volatility, high-quality".
That begs the question, why low-vol portfolio outperform in the long run? The simple answer is "compounding". A more volatile stock does outperform in upturns but also underperforms significantly during downturns. And following downturns, they take long longer to get to break-even point.
The second question is why does this "anomoly" persist? The authors cite two reasons (1) behavorial biases and (2) agency issues.
From portfolio standpoint low-vol stocks provide additional benefit because they do not share many characteristics with "growth" or "value" stocks. That means their inclusion in a portfolio will enchance the portfolio's efficient frontier.
The third question is, there must be a catch! Yes there is, and that is investors must have "long horizon". So it is ideal for pension fund managers especially given new pension-accounting and insurance-solvency regulations.
Edward J. DeMarco, the acting director of the FHFA gave a speech at the Brookings Institute and talked in details about the US Treasury's programs to help struggling mortgage borrowers. DeMarco said that 11 million homeowners are under-water and raised issues over principal reduction.
Goldman Sachs has developed a "House Price Index" that estimates the percentage of zip-codes with year/year increase in house price. Like the Case-Shiller index, it is bouncing at the bottom. What is not exactly clear is how many zip-codes GS analyzes to create the index but I think it is certainly less than 43,000 zip-codes (43,191 to be precise) in the US.
There seems to be lot going in the Money Market Funds (MMFs). The SEC proposed a rule late last year to let NAV of MMFs fluctuate and to require them to impose higher reserves and restrictions on withdrawals. The SEC has been tightening rules over MMFs since 2008 crisis. In October 2008, Reserve Primary Fund, the oldest MMF "broke the buck" because it held $785 million in Lehman debt out of $64.8 billion in total assets. In May 2010, a SEC rule shortened the average maturity of assets held from 90 to 60 days, required that 10% of a fund be in cash or securities that mature in one day and that 30% of a fund must mature within 60 days. But looks like the SEC's new proposal is dead on arrival owing to push-back from powerful industry players.
Book Excerpt: Breakout Nations
