(C) 2012 – Ricochet Alternative Asset Management
The U.S. indices all experienced downside volatility tail-risk (statistical alpha of .10) as the NASDAQ reclaims the title for most volatile of the three. The Dow closed down -3.52% for the week as Monday and Thursday saw the sharpest sell off followed by Friday; with Tuesday and Wednesday trending downward however not as sharply. The NASDAQ closed down – 5.28% as the index pared lower followed by a strong sell off Thursday & Friday. And the S&P 500 closed down -4.30% with a moderate sell off Monday & Friday, paring lower Tuesday & Wednesday with a strong sell off on Thursday. It’s clear, the markets want further easing from the Fed. How low will the markets go until investors feel the markets reflect future growth without further asset & earnings inflation.. The S&P 500 should continue to trend lower as the dollar continues to strengthen. S&P 500 should close near 1225, the Dow 11850, and the NASDAQ 2410.
Bonds will continue to see capital inflows as global equity markets remain at risk for major losses. Basic Materials, Consumer non-cyclicals, Aerospace/Defense, and the Financials continue to weaken the Dow. Makes sense, concerns are reflective of global macro exogenous variables. The S&P 500 continues to weaken given global macro growth concerns and the slowing demand for energy and natural resources in accordance with a higher global median supply of fossil fuel energy and renewable resource energy technology.
However there are buys.
APOL – Apollo Group
AEP – American Electrical Power Company
XYL – Xylem Inc.
Latin & South America:
The IPC (Mexico) experienced downside tail-risk (statistical alpha .05) and closed down -5.18% for the week. The regression trend line for the index reflects a downward sloping linear demand of 45degrees for Monday – Wednesday & Friday (-3.54%), Thursday’s decline does have a lower gradient.
The MERVAL (Buenos Aires) closed down -7.37% for the week, experiencing a downside tail-risk with a statistical alpha of .01. The index sold off over the week with slight buying on Friday (0.63%)
IBOVESPA (Sao Paulo) closed down -8.30% over the week. The index sold off Monday – Thursday with slight buying on Friday (0.88%)
The FTSE 100 closed down -5.52% with downside tail-risk (statistical alpha of .01) for the week with a notable sell off Monday, Thursday and Friday – the Tuesday, Wednesday slope of sell off not as steep. The momentum of the index is expected to swing upward with no tail-risk even for next week’s close.
DAX closed down -4.69% for the week with downside tail-risk (statistical alpha of .01). Major selling occurred Monday (-2.72%) combined with a (-1.97%) Tuesday-Friday. The index is expected to rebound and close in the green next week.
CAC 40 closed down -3.89% for the week. The index sold off on Monday (-2.29%), Tuesday (-.61%), Wednesday – the market rises marginally 0.31% (only one to do so thus far), and sold off (-1.33%) Thursday & Friday. The CAC 40 will close down next week but with a downside volatility of <-2.50%
Sensex (India) The index closed down -0.86% over the week. The index recouped Monday’s loss on Tuesday closing in the green, Wednesday’s sell off (-1.83%) followed by buying on Thursday and Friday (0.77%). Infosys remains the darling stock of the index.
TA100 (Tel Aviv) May 10th – May 17th closed down -4.35% as more selling off occurs this week after profit taking last week. Global macro concerns especially with Israel’s key markets are now effecting future index valuation.
Nikkei 225 closed down -3.82% for the week. The index closed up Monday & Thursday but traded down Tuesday, Wednesday, and experienced extended losses on Friday (-2.99%). Asia continues to experience downside tail-risk however for a longer duration than comparative global indices. Further easing from the BoJ should intercept the falling index however future growth prospects for Japan remain opaque given the low birth rate and the business culture mores of Japanese business operations that prevent innovative workers from being ‘organizational climbers’. The segue to equity growth in Japan is a function of Global Macro growth to which BoJ easing may assist non-Asian indices.
Hang Seng -5.07% The index closed up Tuesday, erasing about 4/5ths of Monday’s loss. However, the market sold off considerably on Wednesday experiencing downside tail-risk of (-3.19%) given statistical alpha of .10; Thursday and Friday the index losses (-1.60%). The Hang Seng continues to experience tail-risk at a higher beta than other indices. China continues to have the strongest rate of GDP growth so the sell off speaks of a lack of knowledge and confidence underlying the Chinese economy. There is value here.
Straits Times closed down -3.75% over the week. The index closed up Tuesday, recovering about 5/7ths about 71% of Monday’s losses but sold off on Wednesday (-1.58%) and Friday (-1.54%).
TSEC (Taiwan) -3.38% The index had a very volatile Wednesday (-2.18%) and Thursday (1.69%); with a major sell off Friday yielding a downside volatility tail-risk (-2.79%) given a statistical alpha of .90.
NZX 50 (New Zealand) -1.31% The index experienced buying on Monday & Thursday and a sell off Tuesday and Wednesday (-1.15%) with further selling on Friday closing down (0.57%).
SMI (Switzerland) -2.64% The index experienced major selling on Monday (-1.33%) & Friday (-1.28%) with Tuesday – Thursday remaining relatively unchanged.
Commodities & Futures
May 14th – May 18th: Gold closes up 1.77%, WTI NYMEX closes down -4.48%
Gold sold off until Wednesday to about $1533.20tr/oz to which buyers pushed the market value higher to close at $1590.80. Gold, as a support measure to stabilize global currency markets (balance sheet asset, foreign exchange reserves), will continue to trend higher and likely spike on news of Greece-Eurozone exit. The USD can support gold at prices above $1700tr/oz to which the market is able to sustain upward volatility in gold respective to volatility necessary to stabilize global foreign exchange markets.
Copper continues to sell off, down -4.76% from May 14th – May 18th on global growth concerns.
Orange Juice sells off on concerns of oversupply and of higher than average California & Florida yields. Should OJ continue to fall below $104 is worth a buy. Orange Juice will trade higher over the summer.
Sugar is experiencing upside and downside volatility, closing down 0.20% from May 14th – May 18th. There is volume in this market and depending on sugar demand out of India (expected to decrease) sugar volatility should be reflective of emerging market demand which is a function of a downward sloping QD curve with concerns of oversupply as the northern hemisphere moves into the summer months.
U.S. 10yr trading range has fallen from the 1.8n% yield to 1.72% as of Friday’s close. The principle is trading between slightly below to slightly above par and so is losing attractiveness to investors as the principal falls below par (100). The U.S. 30yr yield is falling however to 2.81% with a principal slightly above par, the bond is trading similarly to the French 10yr bond. Capital inflows were to Australian and New Zealand 10yr issues toward the end of the week as these debt instruments are seen as the new capital flight to safety. The stability of ‘Down Under’ inclusive of Australia and New Zealand has attracted investor capital. The bond yields of Australian and New Zealand debt should continue to decline going forward. In peripheral Europe, bond yields remain at a premium as European yields are doubling some South American yields however with much greater exposure to interest rate (bond principal) risk. The most attractive South American yield appears to be Columbia bonds with a 3.79% yield and a principal of $141.00.
As the equity markets continue to experience volatility the net change in aggregate bond yield will continue to fall.
As expected, the euro has trended downward and a weaker euro is in the best interest of the eurozone given the propensity for growth in tourism and for manufactured exports. The short term euro dollar target is $1.25 as the dollar will continue to strengthen against the euro and the yen with the yen stabilizing against the euro, to which the yen has experienced a tremendous rise in purchasing power from April 15th to May 15 (107:1 to 101:1). Brazil decided to ease toward the end of the week to which the Brazilian economy is experiencing inflation and the stock markets are selling off. The easing will help the euro rise against the real, which exposes Brazil to the euro and to European markets. With a strong real to euro float on the market, there will be pressure on Brazil to create demand for the real in the global markets by increasing growth, controlling inflation and eventually raising raising their interest rate.
The GBP has recently begun to weaken against the dollar, euro, and continues the decline against the yen. Further easing by the BoE will be beneficial once the Bank of Japan (BoJ) decides to ease once again. The BoJ is likely to purchase U.K. gilts to facilitate growth in England to add more liquidity to the global banking system to which the BoE will do a round of Japanese bond purchasing further into the summer.
Thank you for reading.
Enjoy the rest of your weekend.
Vidia S. Ramdeen – President/CEO, Ricochet Alternative Asset Management