Markets Outlook (05/07/2012 – 05/11/2012)

(C) Ricochet Alternative Asset Management, 2012

Dear Reader,

The global market indices over the past week were volatile and largely to the downside, led by the DAX (-3.55%) followed by the CAC 40 (-3.1%). The U.S. markets encountered downside volatility with the DOW closing down about -1.22%, the NASDAQ down about -2.9% and the S&P down about -2.05%.

The DOW, S&P, and NASDAQ, breaking trend, traded somewhat inversely to previous weeks. Monday traded marginally lower with a horseshoe buying and selling pattern on Tuesday. Positive earnings reports and weakness from Europe and Asia pushed the indices higher. There was selling on the opening on Wednesday though the market did close higher; previously, Wednesday trading patterns exhibited buying on the opening with marginal movement into Thursday. Thursday and Friday the market sold off on macro economic data with the NASDAQ leading the way in downward volatility movement.

In the U.S., the good microeconomics data by way of corporate earnings, in many instances, came way of cost cutting of operations or revenue via non-operating activity. The December 2012 P/E ratio is y/y higher and although some companies are expected to report higher quarterly earnings, the share price relative to earnings is at a premium. Many stocks are already trading w/in 1 standard deviation of their December 2012 P/E.

The major macroeconomic U.S. data included a shrinking U.S labor force participation rate (U-6) as the ADP private payrolls number (unrevised) came in at 119k. The ADP number is statistically significant only in the aggregate, that is, given over a 3 month (or greater) period. Any month to month movement is relatively ‘noise’ and may be associated with seasonal or cyclical employment. Expect food prices to rise as the year progresses with weather events creating agricultural supply shocks.

The U.S. indices are beginning to reflect a downward revision in December 2012 P/E to which earnings may be weaker than expected throughout the year, driving down the indices. The volatility indices, including the VXD, VXN, VIX, and RVX all show a rise in volatility with a notable (steep) incline on Friday’s sell off. The volatility in tech options in light of the upcoming Facebook IPO should be concerning as the IPO will launch as the RVX is trending upward albeit from yearly lows.

The rise in the volatility indices reflects a premium paid for earnings. A tenuous market will sell off on what is construed to be ‘weak’ earnings, that is, earnings that are unlikely to be repeated next quarter. Strong earnings companies are returning earnings growth in their key markets via core products and/or services. A company that beats estimates but does so via cost cutting as seen with a low or declining revenue figure, a sell off on the earnings report is likely to follow.

The following have a buy recommendation:

VRSK Verisk Analytics
VR Validus Holdings
VRTX Vertex Pharmaceuticals

The BOVESPA closed down -.45, and the IPC closed up .15% with an absolute volatility of only .60, the Latin American markets did not experience tail-risk volatility. The FTSE closed down -1.5%, the DAX down -3.55% and the CAC 40 down -3.1%. Europe experienced tail-risk downside volatility once again as geopolitical and geosocioeconomic uncertainty in the Euro zone has constantly revised corporate earnings downward given the lack of growth, the rise in costs, and the decline in the value of the euro. Additionally, corporate taxes in the euro zone may increase given new political regimes which will further decrease market returns and ostensibly the aggregate retained earnings of the European indices, which are a function of growth and dividends paid.

Bonds of peripheral Europe represent equity risk. Not to say that European equities will trend sideways, the pattern will likely remain cyclical, with buying and selling of European stocks with marginal declines as the broad trend. European markets will continue to experience tremendous volatility and will test a trader’s ability and gut instinct for the foreseeable future.

The Tel Aviv exchange is up 4.8% since March 12 and is likely to continue to appreciate going forward. The Sensex is down -1.75% for the week and there is tremendous uncertainty surrounding growth in India as well as rising inflation. The Nikkei is down -1.85% and remains relatively inexpensive. The Nikkei at current levels is to say a strong yen will hinder Japanese exports and hurt earnings. A strong yen yields imports and a consumer economy. Consumer stocks should do relatively well. The Hang Seng closed up 1.6%, rebounding after concerns of a ‘hard’ landing early in the week to cause selling of indexed stocks. FDI into China however should cause the index to push higher. The Straits Times closed up .41% and the TSEC (Taiwan) closed up 2.7%. The Taiwanese market is a hot area to invest in at the moment.


Oil demand has waned with Brent and WTI falling. WTI below $100/bbl will provide reason for gold and other market reactive metals to depreciate. Gold should trend down toward $1550 and not toward $1700. Major geopolitical events represent the upside risk. Copper has started to decline. Rising copper prices should reflect a rise in growth.

Thank you for reading.

Have a wonderful close to your weekend.


Vidia, CEO – Ricochet Alternative Asset Management



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