Can the Winning Streak Continue?

Can the Winning Streak Continue?

Can the Winning Streak Continue? 410 386 AMA Team

Screen_shot_2012_10_15_at_4.53.40_PMI hope everyone had a great weekend. For those that are American baseball fans there was some great baseball played over the weekend. The defending champion Cardinals pulled out a miracle by beating the heavily favored Nationals in the ninth inning after being down 6-0 earlier in the game. Exciting Stuff! The resilience of the Cardinals reminds me a bit of how the equity markets have performed over the last couple of years. Despite all of the critics saying otherwise the Cards have found ways to win and so have the markets. The question is when will the luck and winning streak end? Which is an appropriate lead into the market summary.
After weeks of gains, Wall Street is now in correction mode and this is the time for defense.
It is notable that earlier this week, the Dow Jones Industrial Average, the NASDAQ Composite and the S&P500 Index broke below their September lows, thereby signaling the end of the uptrend. Furthermore, this weakness has been accompanied by a rise in volume, which suggests that the decline has further to run. At this stage, it is difficult to predict the magnitude of the downtrend.
Mr. Bernanke
Screen_shot_2012_10_15_at_4.55.58_PMWe must admit that the ongoing weakness in the stock market has surprised us because it shows that despite the open-ended QE, investors are not bidding up stock prices. Instead, it appears as though the urge to sell is on the rise and perhaps the market is anticipating a slowdown in the global economy. Remember, over the past 3 years, the stock market has risen largely due to monetary stimulus, but if the US economy slides into a recession, Mr. Bernanke’s put may not work. For those that are using the Austen Morris Associates fund platform, we always protect each position with a trailing stop and if the stock market declines further, we will further reduce our exposure to risk and increase our allocation to US Treasuries.
China Housing MarketScreen_shot_2012_10_15_at_5.06.42_PMIf the world’s largest economy disappoints and there is a deflationary scare, it is probable that all assets (except US Treasuries) will depreciate in value. Unfortunately, nobody has a crystal ball, so in this business, it pays to be open-minded and nimble.
Turning to the economy, there can be no doubt that China is slowing down rapidly and its property market is in a gigantic bubble. In fact, the ongoing deterioration in China is being confirmed by the price of iron-ore which has already declined by approximately 50% since last spring! Furthermore, this weakness is now spilling over to the other industrial commodities and to the economies which export these natural resources. For instance, Australia’s housing bubble is now deflating and even Canada’s property market is beginning to feel the heat. Elsewhere, China’s major trading partners such as Japan, South Korea and Taiwan are also experiencing a marked slowdown in their business activity.
Over in Europe, things are not getting any better and unemployment is at a record high. Across the pond, it appears as though the US establishment is manipulating the employment numbers heading into the election. Screen_shot_2012_10_16_at_10.24.50_AMPut simply, the economic situation is not pretty and perhaps the stock market is finally coming to grips with the business reality. In the commodities patch, most things are currently consolidating their recent gains and the direction of the greenback will confirm the next move. As you know, we have been negative about industrial commodities for several months and given the weak global economy, the odds do not favor a sustainable advance in the sector.
Looking at precious metals, both gold and silver are caught in a tight trading range and a close above the recent highs is now required to confirm the uptrend. For the next up-leg to commence, gold needs to clear the US$1,798 per ounce level and silver needs to close above the US$35.45 per ounce mark. On the downside, a close below the recent lows will be negative and usher in a deeper correction. At this stage, it is difficult to know which way this trading range will resolve but if Mr. Bernanke’s open ended QE succeeds in igniting animal spirits, gold and silver could stage an impressive rally.
Over in the currencies patch, the US Dollar Index is trying to close above the 80 level and strong overhead resistance lies around the 80.50 area. If central bank reflation wins,US Dollarthe US Dollar will probably decline over the following months. However, if the ongoing private sector deleveraging gains the upper hand, the world’s reserve currency will advance and reclaim its 200-day moving average. So, the best we can do is to monitor the situation closely.
Finally, over in the bond market, high yield bonds are on a tear and credit spreads have narrowed even further. In this world of near zero interest rates, it is hardly surprising that investors are chasing yield. Elsewhere, US Treasury yields have also come off over the past week and this implies that the bond market is getting increasingly nervous about the economy. If the US economy slips into a recession or China’s property bubble deflates, it is conceivable that US Treasuries will rally further and yields may drop to record lows.
For our investors – remember to hold a balanced portfolio and talk with your advisor about any repositioning to take advantage of markets at this time. For more updates on the world financial news please visit our Weekly Global Economic Outlook.
I hope everyone has a great week. Go Cardinals!
Co-Head of Portfolio Management,
Bill Longstreet
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com

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