Market participants return after holiday and trading volume increases. In the previous weeks, market is oscillating within a range. Traders are trading accordingly. Many individual and institutional investors that have sold at market bottom are waiting for market collapse in order to replenish the portfolio. However market manipulators have not started panic selling. Some market participants become impatient to wait and start to chase stocks on speculation of earnings announcement.
For the start of a new year, investors incline toward buying stocks despite a pessimistic sentiment. Investors have been hoarding cash in a low interest rate environment. Corporations are benefiting from cheap financing cost and increased labour efficiency due to downsizing as a result of the financial meltdown. The outlook for corporations profit is bright.
Market manipulators appear to stay with the selling strategy. The European sovereign debt downgrade is a threat to the stock market performance. It can be developed into a contagion of fear and causes panic selling.
On the other hand, market have climbed back to the level before the US debt downgrade. There is no obvious profit taking to drag down market. After market close on Friday, the downgrade news of several European nations may cool down the market buying enthusiasm.
There are factors to move market in either direction. In this manipulated market, the flow of capital affects market movement.
Make Money Now Before Euro Phobia Returns
"So we think you start the year off strong, but then as you get towards the 2nd quarter and into summer, I think the problems in Europe come back," he says. "People will realize the issues have not been resolved, the debt problem is still there, the long term structural fix has not been put in place."
There is one exception to this make hay while the sun is shining forecast however, and that is earnings. Despite Alcoa (AA) upstaging itself by announcing capacity cuts two trading days before it is set to lead the Q4 earnings parade after-the-bell today, Banks believes the profit picture will continue to be one source of solidity amidst a swirl of uncertainty.
"We think the earnings story continues to be, in general, positive," Banks says in the attached clip, adding that while all the same old, well-known macro worries will continue to weigh on stocks in the form of low P/E multiples, "earnings will be what it takes to drive markets higher."
Another possible catalyst for higher stocks will be the return of money that has been pulled out of equities. This so-called allocation shift (from bonds to stocks) is little more than money flow, and a zero-sum version at that. That's because every dollar that leaves fixed income and moves back in to stocks is likely to cause as much pain on the departing end as it does profit on the returning end.
In short, he says the super-affluent are still a little nervous and jumpy and in no hurry to rush back in to the market but if and when they do get more clarity and comfort on the big headwind issues, the money will follow.
New Year, Really Big Threats: ‘Fat-Tail’ Risks Rise
The risk of "fat-tail" events is rising, which will make 2012 a particularly challenging year for investors, according to Pimco CEO Mohamed El-Erian.
Still, two of the fattest fat-tail threats were evident as the first full week of trading in 2012 gets underway:
Europe on the Brink: The crisis in Europe remains acute, as evinced by Monday's 6-month debt offering by Germany, featuring negative yields for the first time ever. The ECB's pledge last month to provide banks with unlimited funding for up to three years is helping the market deal with another rise in Italian debt yields and Unicredit's ongoing implosion. But investors' willingness to pay Germany to hold their money is another clear sign of the existential fears stalking the eurozone.
Iran Rattles Nuclear Saber: Reports Iran has begun enriching uranium at a new underground site sparked a war of words between U.S. and Iranian representatives this weekend. Amid Iranian threats to block the Straits of Hormuz, a critical choke-point for global oil, let's hope the fighting stays limited to heated rhetoric.
At the same time, Kim Jong Un continues to try and consolidate power in North Korea and China's economy has been wobbling lately, two other big risks as 2012 gets underway.
A Boom in Starter Capital for Hedge Funds
There is a seeding frenzy happening in the hedge fund industry.
As the industry returns have been disappointing, big money investors need somewhere to park their big money -- and handing development capital to emerging hedge funds has become a strategy of choice.
The frenzy is driven primarily by two things: first, it is tough to raise money for small managers. Some investors are still craving the safety of size after the 2008 financial crisis. On top of that, with a changing investor base, there is a question of scale.
Second, investors themselves are looking for ways to access the returns of newer managers, particularly given how poorly the broader industry has performed.
Investing in Stocks: Is it Better to be Good or Lucky?
If fact, while John Paulson's reversal of fortune may have been the most widely followed, he was in good company last year, as passive or unmanaged index funds beat 80% of their peers, says Larry Swedroe, author and director of research at Buckingham Asset Management in St. Louis.
"Past performance has NO predictive value whatsoever," Swedroe argues, playing off the well worn SEC disclaimer that ''past performance is no indication of future results."
"The last nine years the HRFX hedge fund index has underperformed every major asset class in the world," he says, while hedge funds clearly took on more risk and delivered highly tax inefficient results along the way.
His bottom line advice: Take a ''postage stamp'' approach instead, and stick to what they have selected rather than chasing after performance that has already been delivered.
Uh-Oh: Yawning Chasm of Death Opens Between Stocks and Bonds
Look out U.S. stock investors. Once again a big gap is opening up between prices for stocks and yields for U.S. Treasurys. Stocks have been moving higher since October. That’s usually a sign of economic optimism. At the same time, yields on bonds have stayed really low. That’s usually a sign of economic pessimism.
And and the crisis in Europe is keeping a steady stream of cash flowing to U.S. Treasurys for safe-keeping, which has helped to keep bond yields low. If anything, it’s the bond market which has looked the most disconnected from the decent U.S. economic data lately.
Still, one would do well to watch the message being telegraphed by the bond markets. Back in late April 2011, we spotlighted another moment when the stock market and bond market were offering very different views on the economic outlook. That time, the bond market turned out to be correct. Stocks topped out on April 29, with the S&P losing about 8% through the end of the year.
We pointed out another divergence between stock market and bond yields back in September. That time too, stocks eventually fell back in line with the story the bond market was telling.
Investors Are Scared But Still Chasing Stocks
It's a trader or fund managers nightmare; fresh off a difficult year that never really let Santa have much of a run, many are already playing catch-up just two weeks into the New Year.
Eubanks is certain there's going to be a reversal of the current trend, but he and other pros are loathe to get out of the market and are simply "chasing performance."
"There's a lot of complacency," he says of the Vix, which is now down 50% from October when it hit a multi-year high. "It's like a 'hopium' trade, everyone is just hoping for better news and better earnings."
The fear now in the market is in "missing the bus," Eubanks says, but admits, "the bus may be getting a little full" as the S&P moves toward and above 1300.
Hedge funds hunker down for Greek debt standoff
Hedge funds are positioning to profit from a plan to slash Greece's towering debt pile as Athens enters final talks that could sway the country's membership of the euro.
The deal asks creditors to voluntarily write down 50 percent of the notional value of their bond holdings. But hedge funds may opt out, hoping that Athens will let them get away with it to save itself political embarassment.
"I think we'll hold out. People are so slow in Europe and by the time they've got everything in place logistically this might be the one window where investors might be paid back in full," said one hedge fund manager who owns Greek bonds.
The stakes for Greece are high. Without the deal, the international lenders will not bail Athens out a second time, which means it will likely default around March 20, when a 14.5 billion euro bond falls due.
But hoping that Greece will pay out after all looks increasingly like a dangerous strategy. According to three senior euro zone sources on Thursday, the country is likely to force all creditors into the deal.
Many funds have followed a more traditional strategy of buying the Greek bonds at distressed prices from banks keen to get the toxic paper off their books.
This means that these funds might sign up to the deal, if the terms on offer are better than the price they paid for their bonds. Others might hold out, hoping enough creditors will do the same and enabling them to exact a better payout from Greece.
Funds who have bought Greek debt in the last few months are likely to have paid anywhere between 20 and 45 cents on the euro, depending on the maturity.
By signing up to the deal, which is for a 50 percent haircut, they would still make a profit.
ECB sees "substantial" effect from cheap money
The European Central Bank's flood of cheap three-year money is helping the euro zone's banking system substantially and supporting confidence in the bloc's economy which is showing some signs of stabilization, its president said on Thursday.
To help fight the euro zone debt crisis, the ECB provided banks with nearly half a trillion euros of three-year money in December, called LTRO, and will make a similar offer in February.
"The more time passes ... the more we see signs it has been an effective policy measure," Draghi said. "This decision has prevented a credit contraction that would have been ... much, much more serious."
Banks remain very reluctant to lend to each other, so the ECB's action has helped keep the system working although there is less evidence that the money is making its way into the real economy.
The State of American Business? Not Bad
On Thursday, Thomas Donohue, chief executive officer of the U.S. Chamber of Commerce delivered his State of American Business address. The Chamber is the chief Washington, D.C.-based lobby for business, representing the interests of large and small. (Some prominent members, like Apple and utility Exelon have left the Chamber in recent years over clashes on its policies towards climate change).
Donohue talks a good deal about how the U.S. economy might perform in 2012 and how that performance could be improved. But the state of American business and the state of the economy, at least as the typical American experiences it, may be two different things. Since the financial crisis, business has bounced back much more rapidly than the consumer and than the economy at large. In the three years since the meltdown of 2008, U.S. companies have returned to impressive profits, refinanced debt at low rates, cut costs and reaped efficiencies in impressive fashion, stormed into global markets. They're now collectively sitting on nearly $2 trillion in cash; the stock market has made up most of the vast losses it suffered. Labor unions have never been weaker, and with large amounts of slack in the labor market, management has been beating the living daylights out of its employees.
It's a great time to own a company. But it's not such a great time to work for one.
Because companies increasingly operate on a global scale, and gain an ever-larger percentage of their revenues from consumers and businesses outside the U.S., this dichotomy simply doesn't matter to today's executives as much as it might have ten years ago, twenty years ago, or thirty years ago. Thanks to productivity, smart focus on efficiency, and globalization, U.S companies can thrive even as consumers and workers in their home market suffer.
The state of American business may be pretty good. But the great divergence between the one percent and the 99 percent, between company owners and workers, between global players and local ones, is increasingly coming into focus. And as former Massachusetts Governor Mitt Romney churns steadily toward the Republican nomination, this is a theme that is likely to be discussed with greater frequency.
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