The Dow closed in the green on Friday, up 1.5% (2.6% since 04/23/2012) with very heavy volume in opening trading experienced on Monday setting the tone for a volatile week. The climb in the index was notably linear, a sign of stability in the growth cycle and not a sign of a liquidity dump into stocks. This is not to say that a sell-off in the future may not come. As global growth slows, the earnings multiple of the Dow will decrease however given the earnings multiple of comparatively risky indices, as an index the Dow remains ahead of the Sharpe-Ratio. The index will continue to be led by IBM, BA, PG.
The NASDAQ also closed in the green, up 2.24% (3.5% from Monday) at 3069.20. Aggressive buying on the open on Wednesday pushed the index by approximately 1.75% where the buying stabilized and the index held gains. The index was led largely by the pharmaceuticals. Stories from analysts and news agencies abound, the story here is in beta. This is a beta move given the volatility in global markets and the underlying expected growth rate(s). If the picture in the U.S. worsens, these stocks may push higher still as pharmaceuticals in the NASDAQ represent multinationals that have diversified revenue stream leading to a broader based earnings from operations. Should commodity prices rise to levels reflecting rising inflation or should stronger numbers arise from Asia, the index could experience a sell-off.
The S&P500 closed up in the green as well, up 1.77% (2.98% since Monday) at 1403.36. The index experienced the same trend as the NASDAQ but with less upside volatility. The reason: there was a sell off in the NASDAQ on Tuesday prior to the open on Wednesday. Expect to see these moves going forward. The index declined -0.75% before rising to -0.50% on Tuesday. The S&P didn’t experience the same movement as the other U.S. based indices due to sector exposure the Dow and NASDAQ enjoy. Earnings of S&P based companies going forward should be of concern. Analyst have the index pegged from 13x to 14x earnings however I feel the return will be lower. That is, the forward P/E will be higher as investors must pay a premium for future earnings. The Dow and NASDAQ over the summer should remain strong should the global economy continue to deteriorate.
The U.S. based energy (utility) companies, such as Consolidated Edison will do well over the summer months as higher temperatures push the demand for energy. Less vacations also spell greater home energy usage. I continue to like Anheuser Bush. The U.S. jobs picture will continue to remain marginal with wage growth not outpacing inflation. Inelastic demand for certain goods and services will continue to drive growth in earnings.
The Nikkei closed up 0.86% (0.61% since Monday) on the week to 5777.10. The index sold off on Monday and then rose linearly to its Friday close. The announcement of easing from the BOJ and U.S. economic and earnings data in addition to the European bond sales and political rhetoric from the E.U. led to the movement. The Nikkei is not expensive at this level.
The Hang Seng closed down 1.25% (0.93% since Monday) to 20741. The index experienced a sell off on Friday which was a full peak to trough movement that reflected the market appreciation as a percentage over the week. This is to say, the market had a peak to trough of about 1.8% and the Friday sell off was -.8, after a rebound from the floor. The STI experienced a major sell off to which opportunities exist for value plays.
Gold is expected to rise given the pumping of liquidity into the markets and low interest rates. Low growth means there is no value created with the money that is out there, which puts upward pressure on measures of value, such as gold and other precious metals. NYMEX and Brent crude will trend higher but not to the level expected by many. The demand for oil will subside with short-term upward volatility limited to trend at $106.50 with spikes near or at $107.00.
The USDEUR trade is a reflection of central banking policy and therefore will continue trending as a function of previous cyclical movements as a function of the central banks. The USDJPY is interesting considering the stronger CAD. I remain bullish on the USDJPY.
Thank you for reading.
Enjoy the week ahead.
Vidia Ramdeen, CEO – Ricochet Alternative Asset Management