The April-July 15% equity markets correction did breach the year low but quickly rebounded. Despite muted economic news, no double deep is expected to take shape. Continue investing in high yielding securities / net cash companies with strong franchise and selected stocks in fast growth economies.

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The magnificent 7 and equity markets - Review 8
The S&P 500 has recovered 2/3 of its 15% April/June correction and is just
trading above its 200 days moving average, itself in a flattish slope (the 1000 level held
well). Economic news from the US are pointing towards a slower GDP growth and still
high unemployment, but no double dip; Europe has showed recent signs of better growth,
mainly thanks to German exports that are reaching growth rates not seen since 1984.; Fast
growing economies in the rest of the world do not see signs of weakening, despite the
continued fear of a real estate bubble in China (but authoritarian states are better armed to
prevent/cope with it).
The magnificent 7 are telling us that equity market continue to be resilient
with no sign of becoming negative. (I recommend readers to go to the GTI web site
(www.global-thematic.com) for their monthly newsletter, one of the best available – don’t
forget to quote Markets & Beyond to get a special welcome).
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S&P 500 Banks index: after falling +/- 25% during the recent equity markets
correction, the index is stalling on the 140 level. There is still a lot of noise around
additional regulations of the banking sector in the US which to me is largely included in
prices. Technically, the sector closely trades around its 200 days MA. Positive.
Global 1200 financial index: The world financial lost +/- 20% during the April-June
correction, mainly due to the sovereign default risk in the Eurozone and has since
recovered 2/3. The index is trading around its 200 days moving average. The publication
in July of stress test results for 91 EU banks has alleviated fears of a meltdown in the short
term at least. Positive.
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TED spread (LIBOR USD 3 mth - US 3 mth T-bills): After peaking mid-June at
nearly 50 basis points (0.5%), the spread went sharply down whilst not yet at its “normal”
level. The interbank market shows little stress. Positive.
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USD bank BBB 10 yr - US 10 yr yield: Whilst still high and above historical average,
the spread is back to it April 2008 level; it has been however stalling around the 3% mark
since mid-April. Positive.
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OEX volatility: OEX volatility is above 20% but 50% below its recent peak in May. We
need however this indicator to stay at or below 20%, but the trend is right. Positive.
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S&P Case Shiller house price index: The latest data (May) published 27th July
continue to show improvement in their annual rates of return. Measured from June/July
2006 through May 2010, the peak-to-date figures for the 10-City Composite and 20-City
Composite are -29.6% and -29.1%, respectively.
In May, the adjusted 10-City and 20-City Composites numbers show the 12th m/m and 10
out of 12 months consecutive increase respectively; the unadjusted data are also positive
(2009 number in bracket).
Composite-10: May 2010: m/m +1.25%; y/y +5.4% (m/m +0.50%; y/y -16.8%)
Composite-20: May 2010: m/m +1.27%; y/y +4.6% (m/m +0.52%; y/y -16.9%)
As the report comments :
“While May’s report on its own looks somewhat positive, a broader look at home price
levels over the past year still do not indicate that the housing market is in any form of
sustained recovery … The last seven months have basically been flat.”
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“We need to watch where the housing markets will go after these temporary stimuli go
away. June’s existing and new home sales and housing starts data do not show much real
improvement in those statistics either. It still looks possible that the housing market might
bounce along the bottom for the foreseeable future, before showing any real improvement
that will filter through to the rest of the economy”
Whilst one should not be distracted by short term noise, recent data are also pointing
towards a decrease in prices. Signs are mixed and do not point towards either a rapid
recovery or a double-dip. Average.
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Oil price: The oil prices continue to be trade in a $70-90/b. Not much happening on the
energy front. In the US gas prices trade below $5/btu from despite a positive seasonal
factor. Uranium is back where it was in November 2009 at $45: Positive.
Conclusion: All these indicators are positive but for the housing market. The 15%
correction seems to have just been a pause in a bull market.
Continue investing in high yielding securities / net cash companies with
strong franchise and selected stocks in fast growth economies.
Despite the strong showing of some financial stocks, I prefer to stay clear in Western
economies.
I stick to my no tightening by the FED expectation (only the fed funds really
matter, not the discount rate) and the ECB any time soon despite the rhetoric. This will
be supportive to equity markets and a major tailwind.
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