Global Macro Report: 06/25/2012 – 06/29/2012

Dear Reader(s)

About QE: Adding liquidity causes underlying asset inflation meaning additional QE’s subsequently require more $, €, ¥, 元, respectively, to create equivalent % increases (relative to the float) from previous easing events.

United States

The Dow (DJI) fell -0.99% for the week after minor selling (perceived short selling) & capitulation on Monday followed with buying on Tuesday pushed the index up (0.75%) followed with the sell-off on Thursday (-1.96%) after the market did not get the expected response, in full,  from the Fed. The index closed up (+0.53%) on Friday.  Although the Euro Dow (EDOW) closed essentially unchanged, he DJI relative to the Euro Dow was not as volatile given the upside volatility, risk on environment for 2 of 5 days and the downside volatility, risk off environment for 3 of 5 days.  Volume on the DJI on Monday was 281m shares moved w/207m moved on Friday. Volume was well below *200m shares moved from Tuesday through Thursday (given Thursday’s sell-off (146m shares moved, or 3rd highest day of activity).

S&P500 fell -0.58% for the week as the market bought in Monday & Tuesday (+1.13%)  on anticipation of the Fed announcing more easing to which the market sold off on Thursday (-2.23%) after the Fed announced a year end extension to Operation Twist. The index rose (+0.72%) on Friday. Healthcare, Information Technology and Telecom continue be the leading sectors in % return relative to other sectors comprising the index.

NASDAQ returned +0.68% for the week and aside from leading the major U.S. indices in downside volatility on Thursday, appeared to have the most investor confidence of all major U.S. indices over the course of the trading week.  The index experienced buying on Monday & Tuesday (+1.98%) followed by the sell-off on Thursday (-2.44%) with buying (some speculative short-covering) on Friday (+1.17%). ALXA, RGDX, & CACB, each an interesting stock that closed up on Friday.

The underlying economic data suggests the U.S. economy has slowed given the inherent lag between price adjustments w/in the broader economy and the changes in consumer behavior and in producer/retailer response.  And although the relationship between Brent & WTI is much more dynamic, the spread between Brent & WTI has contracted does suggest a higher ratio of global economic slowing relative to U.S. economic slowing. And whether Americans are receiving an income via unemployment claims benefits or via a paycheck, dollars in the pockets of the employed & unemployed coupled with lower real prices will likely increase economic velocity of monetary exchange w/in the economy and increase volume via frequency of purchases of goods.  Rather than consumers stretching the use of items beyond their range of use, the purchase of such non-durables should invariably increase.  This is to include gas consumption.

Therefore, I expect the underlying fundamentals of the U.S. economy to improve.  Here’s why.  Strength of corporate earnings will reflect the ability to control costs (as we’ve seen earlier in the year) to which now volume per unit sold should increase relative to QD at QD*.  Generally speaking, this will shift the short-run marginal cost curve to the left and shift the long-run average cost curve to the right until marginal cost per unit = average cost per unit. The aggregate savings in dollars has been increasing despite the fraction of a % on the deposit savings rate. As consumers depend less on savings and on sources of credit, there should be a causal rise in the consumer confidence number going forward.

* http://www.djaverages.com/?go=industrial-index-data

Recommendations

HMSY: HMS Holdings Corp. – Consumer/Non-cyclical, Commercial Services

MACK: Merrimack Pharmaceuticals Inc. – Consumer/Non-cyclical, Biotechnology

LSI: LSI Corp. – Technology, Semiconductors

Central & South America

IPC returned +3.53% for the week with buying into the index occurring over Monday through Wednesday (+3.27%) and in conjunction w/the sell-off of U.S. indices on Thursday as the IPC lost (-1.17%), which was less downside volatility than experienced with the U.S. indices.  Overall, the major gainers were the consumer cyclicals & non-cyclicals electronics (ELEKTRA:MM, Retail/restaurants (ALSEA:MM), & commercial banks (COMPARC:MM).  Mexico and the U.K. recently signed a tourism agreement that will increase the aggregate number of flights between the two countries.  Hotels, restaurants, and banks should benefit from the tourism as well as other services related companies.

The MERVAL (Buenos Aires) returned 3.01% for the week as buying on Wednesday & Friday was not offset by selling on Thursday (-1.71%). The banks (FRAN:AR) and communications (TECO2:AR) did well. As of June 13th, 2012, the index is up 8%. As of May 8, 2012, for each instance the index reached these market valuation levels, the index retracted on average about 9%. The second retracted was less volatile given the smaller gradient reflective of the ratio of the slope. The third retraction (should there be a retraction) may prove to be less volatile.

The BOVESPA (Sao Paulo) fell -1.19% for the week as the sell-off on Thursday more than erased the gains received from Tuesday’s day of trading. Energy including oil exploration and integrated oil & gas, as well as energy alternatives ended higher on Friday’s close. Utilities have performed relatively well over the past few weeks given the tail-risk event. Energy consumption should remain high which should bolster the profit margins of the energy companies through out the winter months.

Europe

FTSE 100 returned +0.64% for the week as buying ebbed on Wednesday (+2.62%) on speculation of easing from the Federal Reserve & from the Bank of England pushed stock prices higher. The news clearly disappointed the index as the linear sell-off on Thursday extended into the close on Friday (-1.93%).  Telecommunications & consumer non-cyclical pharmaceuticals closed up on Friday’s trading. The FTSE 100 is up about +4.0% since June 1st and has outperformed the S&P500 over the same period YTD. The FTSE 100 recent contraction has moved the indices closer to relative parity on basis of percentage movement. 5432 is a key level to which a break through the floor should signal further weakness in the euro & further economic & fiscal issues reflective of the peripheral EMU.

The CAC40 closed up marginally for the week +0.11% after capitulation on Monday led to upside volatility on Tuesday followed with marginal buying on Wednesday and a sell-off on Thursday & Friday. Overall, the index volatility was not bad to which the index may push higher from the 3066 capitulation level. Utilities (EDF:EN) traded higher over the week whereas Utilities closed down on Friday on the FTSE 100. Given a retraction the utilities should outperform given downside volatility.

The DAX returned +0.54% for the week with buying occurring from Monday through Wednesday followed by a sell-off on Thursday & Friday. The volatility of the index given the close in the green reflects a stronger upside reflective of underlying confidence in the Germany economy as the downside volatility of the sell-off did not trigger a close in the red. The index is up sine June 14 and appears reflective of expected market liquidity to which the sell-off brought the index down to pre-expectation levels. 6130 to 6160 appears to be approximate to the current market valuation.

The BEL-2o (Brussels) fell marginally +0.35% for the week with roughly the same trading pattern as the CAC40. The banks performed well, led by KBC:EN. The index is up about 3% since June 5th & although has not outperformed the S&P500, the risk to return has been higher for the BEL-20 to which the index closed higher on a percentage basis relative to the S&P500 since May 24th. Suppose the BEL-20 is the proverbial tortoise going forward.

The ATX (Vienna) fell -0.84% for the week as the sell-off on Thursday & Friday was extended to the point of eliminating the gains from Tuesday & Wednesday. Industrial transportation stocks correlated to the volatility to which such stocks experienced buying on Friday (POST:AV) relative to the sell-off. Without added liquidity, the index should tread marginally higher  from 1888 given more stable global macro economic conditions and improved confidence in economic growth w/in the euro zone.

SMI (Swiss) index returned +1.31% for the week as upside volatility pushed the index higher on Tuesday (+1.60%), to which Wednesday through Friday reflected more capitulation that pure fear & index valuation inadequacy recently accredited to sell-offs.  The SMI has outperformed the S&P on a risk to return basis & has returned about 4% since June 4th. Any positive news out of Europe, the U.S., or Asia will likely push the index higher.

Asia & Far East

BSE30 (India) closed up marginally higher at +0.13% for the week as Monday’s sell-off was followed by buying from Tuesday through Friday. The Bank of India is seeking to stabilize a falling rupee and curb rising inflation which, in part, pushed stocks higher as capitulation on Friday did not reflect extensive downside index volatility. The BSE30 has outperformed the S&P500 since June 5 & has returned about 6% over the same period YTD. The index is likely to decline over the coming week.

TA100 (Tel Aviv) returned +0.36% for the week as the index pushed higher on the 18th & sold off on the 19th & 20th. Lower commodity prices will indirectly benefit the index as Europe receives more bang per euro for raw materials such as oil priced in U.S. dollars. The TA100 has pushed higher by establishing subsequent floors since June 4.

Nikkei 225 returned +2.67% for the week and has outperformed the S&P500 by about 3.2% since June 19th (largely attributed to last week). The market experienced capitulation on Friday which extends confidence going into the upcoming week. The Bank of Japan will continue to promote a dovish monetary policy as the bank seeks to weaken the ¥ primarily & relative to the $ and €. Consumer cyclicals leisure(9681: JP, Tokyo Dome Corportion) & Home Furnishings A/V products (6758: JP, Sony) should continue to do well if not outperform.

The HSI (Hang Seng) fell -1.24% for the week as buying on Monday & Wednesday led to a linear sell-off on Thursday & Friday (-2.68%). Energy & Technology were the biggest decliners on Friday which primarily reflects the downside volatility w/in the index over Thursday & Friday. The index appears to be trending down since May 8th. 2470 is an important level, should the index fall below there could be pressure to really sell-off against buy in pressure. Should watch the short selling going forward.

New Zealand (NZX50) fell -1.39% for the week as buying early on was followed with a major sell-off Wednesday through Friday (-2.33%). Basic Materials were major decliners, which reflects the underlying raw materials necessarsy for industrial manufacturing & technology growth, pointing to concerns perhaps related to slowing exports. A stronger kiwi will ostensibly make Basic Materials more expensive to export which will make markets such as China, Brazil & Sub-Saharan more attractive.

ASX200 (Australia) fell marginally by -0.22% for the week after upward volatility on Monday (+1.96%) proceeded marginal activity on Tuesday & Wednesday, which followed downside volatility as no QE3 event from the Federal Reserve facilitated a sell-off (-2.04%). The index is ostensibly in a trading range reflective of an environment of basic materials, retail earnings & profits from tourism. However, financials including REITS (CHC: AU) & electric utilities (EWC: AU) should outperform the index over the winter months though perhaps w/limited upside. Australian dairy profits are expected to push higher as higher dairy prices from New Zealand facilitates Australia dairy products as equivalent market substitutes.

Commodities

Brent and WTI continue to trend downward and have further room to fall given easing from central banks other than the federal reserve as the summer progresses. Major downside volatility for Brent should be limited as major upside in USD volatility relative to the ruble is not expected to breach 34 over the next week. Should the ruble weaken further then Brent will likely continue to contract in pricing against WTI.

Gold has continued to fall from $1620tr/oz and should fall below $1550tr/oz this following week though a bounce off of $1550 or $1545 to a level above $1550 is likely. The relatively strong dollar relative to the rupee & yuan should prevent rising gold prices over the upcoming week.

Copper demand has fallen -2.68% from the close of June 18th through June 22. Deflationary pressure as a function of slowing growth should continue to force downward pressure on Copper over the coming week as prices can fall another 1% to 1.5% over the coming week should oil and gold prices tangentially fall.

Currencies

The eurusd will likely reach $1.23 by week end should the Bank of Japan ease and facilitate a weaker ¥ against the euro which should raise the $ against the €.  As of May 31, 2012, the U.S. treasury holds $13.2 billion in € deposits and 11.8 billion in ¥ deposits, which makes a BoJ easing event less of a weakening event against the $ however will strengthen the $ against the €.

Bonds

Spain 10yr bond yield has fallen from 7% and should be trading close to 6% by week end. The Italian 10yr yield has fallen from 6% and is likely to retract toward 5.5% rather rise back toward 6%. The Australian 10yr yield is likely to fall below 3% and stay below that level by week’s end. Capital will flow out of the bond market and back into the equities market.  There should be an increase in volume of shares moved in the major indices.

Thank you for reading & enjoy the week ahead.

Best,

Vidia – Founder, President, CEO

Sources:

http://www.bloomberg.com

finance.yahoo.com

(C) 2012 Ricochet Alternative Asset Management

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