Global Macro Markets Outlook: July 16, 2012 to July 20, 2012

Dear Readers,

United States

The Dow closed +0.04% for the week as the index trended downward until the tail-risk event on Friday. Friday is a great example of upside tail-risk for investors holding weekly put options or short sellers of Dow stocks. The expected growth in China’s GDP from 7.6% going forward into the second half of 2012 pushed the markets higher along with the loosening of credit from the Central Bank of South Korea & PBoC which may increase borrowing thus spending from businesses should the demand for alternative goods (substitute goods) which are a function of export demand from South Korea & China continue to increase or at least remain accelerated. Demand for South Korean imports from China have increased to which demand The Dow is subject to risk from the South Korea’s industrial (petrochemical) exports to China.

The index has recently seen bottoms on Wednesday’s or Thursday’s to which the index would then experience short covering and long positioning. Additionally, the index has traded from +/- 12500 on June 6 to +/- 12500 on July 12, to which the closing price on Thursday’s during this time interval has seen the index trend marginally higher.  However the close on June 28th was marginally higher than the July 12 close , which indicates the level of shorting of the index over the aforementioned period. The dates for these events are: June 6, June 13, June 21, June 28, July 6, & July 12.

Therefore, a divergence in growth of the Dow (semiconductors: INTC) from the S&P is likely heading into Q1 2013, as the S&P is likely to outpace the Dow in growth of index market value.  However, stocks within the index will seek to benefit from stronger U.S. sales via a stronger USD which should offset the decrease for Dow exports to developing economies. I’ll reiterate John Deere (DE) and add Disney (DIS), American Express (AXP), & Cisco Systems (CSCO),  Additionally, Intel is producing state of the art processors which will increase the revenue per unit of QD in the U.S., Europe, the Middle East, and Japan, offsetting increased demand for South Korean exports. A slowdown in South Korean IT exports may bolster business to United Tech (UTX) however some companies in the Dow including UTX must eventually clear up their long-term debt corporate liabilities due to interest rate risk. Holders of UTX corporate debt are obtaining a return that stocks (dividend + stock appreciation) are finding hard to match given many companies in the Dow are enjoying a very low corporate debt yield.

The S&P500 closed +0.16% for the week ostensibly mimicking the trading chart of the Dow. The index has pared higher over the recent month and looks to increase the divergence between itself & the Dow back to around 1.3% from approximately the current level of 0.9%. The downside for the index over the coming week is 1320 with the Bayesian statistical probability in favor of occurrence before Wednesday’s close however I believe the index remains largely bullish, with upside risk of establishing 1380 toward the end of the week. Healthcare stocks (THC), the teen driven retailers such as Abercrombie (ANF) – (I still wear that) should benefit from the stronger USD as stocks such as Family Dollar & Dollarama (earlier recommendations) are sellers due to the relative strength in the dollar. After all, a stronger dollar doesn’t make anything any cheaper at the dollar store! The strong dollar will however reduce the cost of obtaining inventory & improve revenue per unit sold.

Over the recent one year period, the dollar index spot has trended higher along with the S&P. However over the most recent one month period, given the slowdown in the emerging markets, the strong dollar is seen as a negative to earnings growth overseas which has seen a stronger USD negatively correlated to the S&P500. Keep in mind, the stronger USD has strengthened domestic earnings as a function of domestically led revenue due to the shift from emerging market demand. The lower USD ostensibly was to increase demand for U.S. exports and increase revenue from overseas however the quality of earnings, for the time being, is greater from U.S. revenue sources. Emerging markets are sellers of their currency and buyers of USD’s to which it just makes sense to increase earnings domestically.

The Nasdaq closed -0.98% for the week and again was the volatility leader & laggard of U.S. indices. The index could not recover quite as well as the Dow or S&P500 and remained below water for the week. The strength in the Nasdaq in the second half may be in the pharmaceuticals and in select tech stocks. A number of small capitalization growth stocks are experiencing buying pressure as biotech & green energy are major areas of American innovation. There are more than a handful of biotech/pharma companies that trade below $5.00, which are worth a strong look (OPXA, AMPE, CTIC, DAEG, OPTT). These sectors should outpace the broader index going forward to which the index should trade tangentially with the Dow. Additionally, South Korean IT exports are decreasing, which may signal weakening demand for IT services & the underlying systems & peripherals.

Important Macroeconomic Indicators:

Monday: June Retail Sales (Market expects +0.2%) – Beat

CPI (+0.1%) Core (+0.2%)

Tuesday: Industrial Production

Wednesday: June Housing Starts (743k)  – Beat

Thursday: Initial (market expects 365k) & Continuing Claims (market expects 3300k)

Friday: Existing Home Sales (Market expects 365k)

NB: Due to recent option expiry’s, the aggregate short demand as a function of long puts/short calls has decreased which is a reason to expect U.S. stocks to trend higher over the short-run.


Bank of Nova Scotia: BNS

Entertainment Properties Trust: EPR

Seiko Epson Corp. SEKEY:OTC


Central & South America

The IPC (Mexico) closed +1.67% for the week having recovered from a -1% drop from the close on Wednesday through the early morning on Thursday by rising approximately 1.7% from midday Thursday through the close on Friday. Stocks of diversified companies (petrochemicals) have outperformed to which there’s a question of whether competition from South Korea will reduce the strength of diversified industrial companies going forward. Given the slowdown in the expected growth of Cummins, there is likely opportunity for growth of competition within the IPC (ALFAA:MM). Banks are also doing well (GFNORTEO:MM) (COMPARC:MM) and will continue to do so on expectations of a stronger peso & increased tourism from Europe & the U.S. as improvements to economic conditions at Mexico’s tourist destinations relative to the strength of tourist currencies & FTA should increased direct deposits of foreign currency given the euro is trading at yearly lows against the peso & currencies of developed economies are also falling against the peso making currency conversion a natural hedge.

The IBOVESPA closed -1.92% for the week as selling & shorting activity on Tuesday led to marginal activity through Thursday followed by short covering & long positions on Friday (+1.70%). The index has been bound to a trading range, to which there is room to run higher this upcoming week though the index will reflect global sentiment meaning that the index could move lower early in the week before moving higher. Companies with broad global exposure (ITSA4:BZ) and energy stocks will do well over the short-run.

The MerVaL closed -0.10% for the week as the index sold off on Tuesday (-2.78%) before recovering to close marginally lower for the week. Banks, exploration companies for natural resources, and manufacturers of metal supplies for exploration companies will ostensibly continue to do well when the index does well as a function of a beta play. Global macro economic conditions will continue to drive the index, which has seen steady growth in the index market value over the most recent 1 month period.



The FTSE closed +0.06% for the week after having performed quite well over a 1yr period given investor sentiment regarding the future of growth w/in the eurozone & the broader EU. Although the index has recently pared lower, there is strength above 5500 providing a 166 pt cushion going forward. The downside volatility in the index is greater than the upside volatility to which companies exposed to U.S. revenue streams (GKN:LN), (NXT:LN), (DGE:LN), (ABF:LN), (ULVR: LN or UN: US) should outperform the index going forward.

The STOXX50 closed +1.05% for the week with relatively considerable volatility in intraday movement, which is not bad for those well prepared. The index should bounce higher if retracting to 2225 in next week’s trading as the trading range should contract with 2280 as the ceiling. Building Construction (SGO:FP) & consumer cyclicals (ITX:SM) should outperform over the short-run.

The BEL-20 closed +0.40% for the week as the index is range bound with the STOXX50 although the BEL-20 is trending higher. Continue to follow the previous recommendations for the index as were made over the previous weeks.

The DAX closed +2.29% for the week after marginal activity from Monday through Thursday proceeded the upside tail-risk event on Friday. Germany remains the anchor of the lower European economy (non-Scandinavian) and subsequently any positive news regarding Europe will lead to a higher index valuation. German exports are also expected to rise given a euro below $1.25. The week ahead is bullish for the DAX with auto manufacturers, e-business (SAP:GR), transport services (DPW:GR) & industrial machinery (MAN:GR) stocks likely to outperform.

The CAC40 closed +0.38% for the week and has recently exhibited weakness in the underlying index valuation.  3133 is a key valuation to watch going forward relative to the BEL-20. Should the BEL-20 diverge from the CAC40 then a broader slowdown is expected of beta stocks w/in the CAC40. A lower euro should increase luxury exports, which will benefit companies such as Lois Vuitton (MC:FP) and basic materials companies with a competitive advantage (specialized & diversified steel producer/manufacturer, MT:NA).

The IBEX35 closed -1.10% for the week with very little buying on Friday given the upside tail-risk experienced in surrounding indices. The defensive stocks are the best bet going forward for investors looking for exposure. One notable excaption is Grifols SA, which has seen a meteoric rise since early December 2011, given the relative weakness of the index.

The SMI closed -0.03% for the week as the index remains relatively stable on the upside, with greater upside volatility than downside volatility. Industrials have pared down with energy stocks remaining as bullish plays. The index appears to be defensive to prevent exposure to broader downside volatility within the eurozone.

The OMX30 closed +0.69% for the week, which although is below the return on the DAX, remains sensible given the index is approaching 1yr highs. The industrials and metal processor stocks will do well (ATCOB:SS, ASSAB:SS).

European markets should ostensibly start trading higher given the weaker euro and the movement toward a fiscal & banking union to which business at Cisco Systems has recently increased.

Middle East, Asia, Oceania, & the Far East

The TA100 closed – 1.48% for the week though the index largely has remained range bound to which recent trading has the index valued the TA100 toward the lower bound of the range. The index did not experience any buying on Friday, indicating the relative unattractive nature of the region relative to the northern European & smaller growth markets of Oceania & southwest Asia. Given exponential smoothing, the index has tracked the eurgbp currency pair indicating a weaker eurgbp will hurt the revenue of Israeli companies going forward. Israeli companies will likely seek to expand exports to Japan, Brazil & the U.S.

The BSE30 closed -1.75% for the week with greater downside volatility than the TA100 index. Profit taking and short selling appear to have lowered the index with potential for further downside the upcoming week.

The Nikkei225 closed -3.29% for the week bringing the index to a lower bound trading range. The strong yen is not bullish for the index as Japan is ostensibly a net importer given the pricing of exports relative to the currency weakness of export partners. Japan remains an importer of energy to which basic materials & technology stocks (which Japan maintains a competitive advantage) should outperform (5714:JP).

Shanghai closed -1.69% for the week as the competition for mining and precious metals from stocks represented within other indices has pulled the appeal from the index. Additionally, the growth picture is not strong enough given the relative strength of the yuan to support the index valuation, to which the sell off over recent weeks remains noticeable. The index is expected to establish further lows and decline relative to the Hang Seng.

The Hang Seng closed -3.58% for the week as the slowdown in China and expected weakness in the GDP number caused the index to experience a tail-risk sell off. The index however has trended higher over the recent few months and given the expectation that 7.6% GDP is the ‘bottom’ and going forward GDP growth will be higher, the index is relatively inexpensive with domestically oriented (state funded) stocks not in direct competition to South Korean exports to benefit from the increase in growth.

The ASX200 closed -1.08% for the week however the index has trended higher since June 26. The index has outperformed the NZX50 until recently. On July 11, the indices crisscrossed relative valuations on a percentage basis having then crisscrossed again on July 15 as the ASX200 pushed higher. The strength of the ASX200 appears to be somewhat inline with the strength of the audusd, audcny and is a leading indicator of the NZD50. Foreign companies with multinational investments in Australia will do well along with banks, oceanic commercial services & precious metals/mining stocks (BDR:AU, MRM:AU)

Jakarta closed -0.88% for the week as the index did not recover from a sharp sell-off on Monday.  The index is likely to trend lower for the week as exports may slow given the overheated market valuation and the high level of liquidity from surrounding economies of which are export competitive. Home building stocks should however outperform the index (ACES:IJ).


The USD index is expected to remain above 83 given the safe haven trade of holding dollars. The stronger USD will increase the yield on foreign currency time deposits, which is actually a hedge against everything I’ve described with regard to the growth in U.S. based earnings relative to the decrease in expected earnings from emerging markets. The Aussie has appreciated from the lower bound range value to move above $1.02 against the USD. The DXY above 83 should keep the Aussie below $1.03/USD. The euro is making the move lower against the USD which makes European exports more attractive to the U.S. and given the lack of global growth to which (what has recently been) a high euro makes foreign purchases of materials goods less expensive, European exports will have a greater impact on European earnings than in previous months. Brazil is expected to lower interest rates and ease further which will lower the real against the USD and facilitate the weaker euro by not appreciating on the rate of change against the export currency.


Expect the safe haven yields to rise as capital leaves bonds in favor of equities in pursuit of yield. The U.S. 10yr will likely rise to 1.53% and remain above by Friday evening. The U.S. 2yr however will trend lower with the potential to reach 0.19% given the ratio of available liquidity to short-term debt outstanding. The principal value on the 2yr bond is near par which reflects the long term structural debt to GDP issue of the U.S. but does not reflect the working capital to short-term debt ratio. The Italian & Spanish 10yr bond yield shorts are likely to get squeezed at around a 3% rise in yield, respectively, to which the yields should drop (Italian to below 6.0%, Spanish to below 6.53%). The German 10yr bund will outpace the declining yields as the declining euro is a net positive for German exports to which should bolster the underlying fundamentals of the German economy. The net growth in GDP given the fiscal constraints on spending will facilitate the attractiveness of the bund.


Gold will remain lower bound on the 1650 to 1550 range as the USD should keep the value of gold above $1550 should QD increase from the emerging markets, notably India & China. The expected increase in growth should increase the expected demand for precious metals as a function of luxury goods heading toward the holiday season. Copper demand is expected to increase given high copper inventories, which offsets demand given the amount of supply available for absorption. The growth in other precious metals signals demand for hi-tech goods whereas the copper demand usually reflects growth for conductive materials for purposes including cables & piping for commercial & residential development. NY Copper should have demand to $3.65.

Thank you for reading.

Enjoy the week ahead & best wishes.


Vidia – Ricochet Alternative Asset Management (yeah I run the whole shebang)



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