Graphics: The Risk On Environment

Rampaging bulls set some milestones last night…

The US S&P 500 hits the highest level since 2007

Nasdaq at an 11 year

Volatility Index at 5-year lows

Cost to insure debts has fallen on a global scale

Bespoke Invest writes, (chart theirs too)

The average country on the list has seen default risk drop by 16% this year. As shown, Norway currently has the lowest default risk at 27.74 bps, followed by the US at 33.18 bps. Switzerland, Sweden and the UK round out the top five in terms of the lowest CDS prices. All five of these countries have seen default risk drop by more than 30% so far in 2012.

This is certainly not about a Goldilocks economy (not to hot, not too cold, but moderating growth)…

Chart from Zero Hedge

…but of markets being manipulated by central banks.

This represents the salient opiating impact from the initial round of money printing by global central banks. Put differently, this is the boom phase of a boom bust cycle. These has also been the partial fulfillment of my expectations

Graphic of the Day: Share of World Market Cap by Country

From Bespoke Invest

Just a reminder: The state of today’s global equity markets have substantially been dependent on central bank steroids, especially for major economies. This means that rankings of the share of market cap can drastically change when major shifts will be made in central bank policies. Of course, given the huge margin, US equity markets will remain the leader for sometime. The important point to observe will be the change in variance .

Global CDS Update: The Risk ON Environment

One substantial driver of the direction of interest rates would be the financial market’s perception of credit risks as measured on the credit standings of each nation.

The fierce start of the year rally seen in equity markets have likewise mirrored the actions in Credit Default Swap (CDS) markets

Writes Bespoke Invest (charts their too)

every country except one (Portugal) has seen its default risk decline in 2012. European countries have mostly seen the biggest drops in default risk, with Belgium leading the way with a drop of 31.6%. Greece -- while it still has by far the highest default risk -- has seen its default risk fall the third most in 2012 with a decline of 25.5%. (France ranks second at -25.7%.) The US currently has the lowest default risk out of all the countries shown by a wide margin.

Additional observations

The concerted accelerated massive credit easing programs undertaken by central banks of developed economies has so far soothed or bought off unsustainable debt concerns. Much of the deluge of liquidity apparently has diffused into the global equity and commodity markets through intensified yield chasing actions by market participants.

The easing environment has been complimented by central banks of emerging markets whom has been mostly slashing interest rates too.

The global financial markets have been heavily politicized and greatly relies on sustained central bank support. Given the heavy dependence on central bank steroids, we should expect sharp volatilities in both directions for the marketplace.

I wouldn’t read through the current façade as lasting. That’s because central banks would need further rationalization to pursue current policies. And the only pretext to do more of the same is to see markets undergo spasms anew.

I wouldn’t also interpret the low default risk of the US as sustainable. The US Federal Reserve has been expanding their balance sheet and has been running massive fiscal deficits which means current sanguine conditions are artificial and manipulated and most likely related to the coming US presidential elections.

One interesting observation is that ASEAN CDS are on the lower half of the table and has shown resiliency compared to many major emerging markets contemporaries and even to some developed economies (e.g. France).

If you are counting on a potential ‘decoupling’ by ASEAN relative to developed economies, the CDS markets will likely be the first area to emit such signals. So far, the CDS markets has been manifesting the same dynamics driving other financial markets--the rising tide lifts (almost) all boats.

Has Ben Bernanke Been Working to Ensure President Obama Re-election?

Following the closure of the QE 2.0, the US Federal Reserve’s monetary aggregate M2 has ironically been reaccelerating

Part of this may be due to actions undertaken by team Bernanke to erect a firewall to protect the US banking system that has been vulnerable to a contagion from the Euro crisis.

And perhaps another very important interpretation could be to insidiously promote the probability of President Obama’s re-election.

Chart from Bespoke (green superimposed arrows mine)

An ascendant S&P 500 has so far coincided with President Obama’s improving re-election odds. That’s because a rising S&P 500 has been projecting an ‘economic recovery’, albeit a manipulated one, viz., flooding the system with enormous liquidity to engineer an artificial boom that eventually leads to a bust.

Whatever the underlying reason/s, we are seeing the business (boom-bust) cycle in progress.

S&P 500 Sector Performances: Technology Sector Remains the Leader

Another great insight from Bespoke Invest (which includes the charts below),

The Technology sector ended the year with a 19% weight in the S&P 500, and that is where it stands now as well. The Financial sector, which saw its weight bounce significantly from the March 2009 low through the end of 2010, suffered a drop in weight from 16.1% to 13.4% in 2011. It has, however, bounced by 0.7 percentage points over the first two weeks of 2012 as Financial stocks have gotten off to a good start to the year.

Health Care, Consumer Staples and Utilities saw their S&P 500 sector weightings jump the most in 2011 as investors flocked to high dividend paying defensive names. Along with the Financial sector, Industrials and Materials are the only two other sectors that saw their weights in the S&P 500 drop in 2011. Interestingly, both Industrials and Materials have already gained back all of their 2011 weighting losses in the first two weeks of the year.

My view is that the continuing dominance of technology, despite last year’s underperformance, has been a manifestation of the US economy’s transition to the information age.

Global Equity Markets: Philippine Phisix Grabs Second Spot

Below is a year to date table of 78 nations monitored and tabulated by Bespoke Invest

Bespoke Invest writes

Nine trading days into 2012, the S&P 500 is currently up 2.25% year to date. So how do we stack up with the rest of the world so far this year? Below are the year-to-date returns for the major equity market indices of 78 different countries.

The average year-to-date change for all 78 countries is currently 1.13%, so the US is outperforming the average. There are 49 countries that are in the black for the year (63%) and 29 that are in the red (37%). The US ranks 24th out of 78 in terms of performance.

Just like last year, Greece is currently down the most out of any country with a YTD decline of 5.21%. Jamaica is 2nd to last with a decline of 3.99%, and Pakistan is the third worst at -2.94%. Argentina currently ranks first out of all countries with a gain of 11.26%.

The only G7 country that is down for the year is Italy with a decline of 0.52%. Germany has been the best G7 country with a gain of 4.15%, followed by the US, Canada (1.87%), France and Britain (1.16%) and Japan (0.53%).

The overall good news is that compared to last year, the bulls seem to have reclaimed dominance. The jury is still out as to whether the salutary start can be sustained.

Further, former laggards the BRICs (excluding China) appears to be on the top ten of the list revealing rotational moves anew.

Whereas the Philippines seem to have outsprinted everyone else, including neighboring Thailand, Indonesia and Malaysia but trails Argentina whom has leapt out of the gate to take clear command of the pack (horse racing vernacular). Singapore has been in close second.

Am not sure if the regional outperformance by the Phisix will last though, but this sterling performance certainly has been validating my predictions, here and here

US Equity Markets: Sectoral Rotation

I have been pointing out how asset markets have increasingly been driven by monetary factors, which leads to the interim relative price changes and eventually to tidal flows that in the end accounts for boom bust cycles or what I call the Machlup-Livermore paradigm.

Activities in the US equity markets seem to be following this pattern.

Here is last year’s performance by industry

Table from Money and Markets

Now we seem to be seeing a rotation of leadership away from the previous leader, i.e Utilities.… [The following great charts from Bespoke Invest]

…to the laggards…

Global Equity Market Performance Update: Philippine Phisix Ranks 6th among the Best

Of the 78 countries in the list of Bespoke Invests’ global equity benchmarks, the Philippine Phisix ranks 6^th among the best performers!

Chart from Bespoke Invest

Venezuela whose economy has been suffering from escalating inflation has taken the top spot…

Chart from Tradingeconomics.com

…but real returns appears to have been eroded by resurgent inflation

A brewing symptom of hyperinflation is when surging rates of inflation drives people into stock markets as with the Weimar or Zimbabwe experience.

chart from goldonomic,com

With only 10 nations posting positive returns (among the 78 or 12%) on a year-to-date basis, the US remains in the top 15 down by only 3% and has outperformed her peers. In contrast 25 nations (or 32%)mostly in the Eurozone are in bear market territory.

Aside from the outperformance of the Phisix, ASEAN bourses have been among the top 15.

Indonesia whose gains have been slightly below the Phisix has ranked 7^th whereas Thailand placed 10^th and Malaysia at 15^th.

I expect the rankings of ASEAN bourses to improve by the yearend.

More Evidence of Tidal Flows in the US Stock Markets

Boom. Bust. Financial markets are being held hostage by politics and subjected to monetary tidal flows which can be seen in increasing correlations of price actions of US stocks.

Evidence from Bespoke,

We consider all or nothing days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400. With today's current net A/D reading of -460, there have now been 55 all or nothing days for the S&P 500 in 2011. At this rate, 2011 is now on pace to see 66 all or nothing days, which is well above the prior high of 52 back in 2008.

In the 66 trading days since the start of August, more than half (35) have now been all or nothing days. As we noted last week, the number of occurrences that we have seen in the last three months eclipses the total number of all or nothing days that we saw from 1990 through 2001 (34).

Again because of the politicized nature of the financial markets, price actions can go extremely volatile either way.

It would signify a reckless assumption that the prevailing risk environment can be traded short term.

The highly fluid turn of events that brings about an aura of heightened uncertainty appears to enhance the risks of rapid deterioration of events which could be vented on the marketplace beyond anyone’s expectations.

This should apply to the Philippine markets as well.

Where the extreme gyrations of the financial markets reflect on casino like odds, I’d rather play cards.

Global Equity Markets Update: Deepening Losses

Global equity markets appear to be in a deepening funk.

Of last month's 10, now only four of the 78 global equity market indices monitored by Bespoke Invest posted gains, the Bespoke writes,

Just four countries are currently in the black this year -- Venezuela, Botswana, Jamaica and Ecuador. Greece and the Ukraine are the worst performers year-to-date with respective declines of -45.15% and -46.93%. The UK ranks second out of the G7 countries with a decline of 7.35%, followed by Canada (-10.13%) and Germany (-13.70%). Italy is the worst performing G7 country so far in 2011 with a decline of 19.25%. All of the BRICs are down more than 10% year to date.

And nearly a third of global benchmarks may be tipping into the bear market territory. Currently 8 or 14% of the total have losses of more than 20%

So far ASEAN markets continue to outperform the world but they have also been in the red.

The broadening of stock market declines reveal how interrelated today’s financial markets are and how global markets react in tidal flows as consequence to central banking boom bust policies.

US Equity Markets: More Signs of Tidal Flows

Anyone who argues that stock market valuations have been about contemporary fundamentals should see this.

The market breadth of the US S&P 500 has increasingly been either about floating or sinking ships from tidal flows.

This great observation from Bespoke Invest, (chart above from Bespoke)

We consider 'all or nothing' days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400. With today's A/D reading of -470, there have now been 42 'all or nothing' days for the S&P 500. At this rate, 2011 is now on pace to see 57 all or nothing days, which would eclipse the record high reading we saw back in 2008.

The most shocking development of late is how common 'all or nothing days' have become. Up until a few years ago, these types of days were pretty rare, but in the 42 trading days since the start of August, more than half of them (22) have been 'all or nothing'.

This exhibits how US and global equity markets have been massively distorted by sundry government interventions, such that intense ebbs and flows into the marketplace are increasingly manifestations of internal boom bust cycles at work.

So sharp market volatility on both directions should be expected or has become the 'new normal'. This makes stock markets seem more like a gamble, since steep gyrations encourage short term actions rather than long term investments. Yet the above dynamic basically tilts the benefits to those whom are proximate or personally close to policymakers at the expense of the public.

Again, such skewness is courtesy of the politicization of the financial markets by political stewards led by Mr. Bernanke et. al.

US Equity Markets: Signs of Intensifying Boom Bust Cycles

More evidence where US equity markets seem as increasingly being influenced by monetary policy propelled tidal flows.

Again another marvelous observation as exhibited by the chart above and the comment below by Bespoke Invest

we have made numerous references to how the increased volatility this Summer has caused a big uptick in the number of 'all or nothing' days for the equity market. We consider 'all or nothing' days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.

So far this year there have been 38 days where the net A/D reading for the S&P 500 was above +400 or below -400. On an annualized basis, this now puts 2011 on pace to see 54 'all or nothing' days, which would make it the most volatile year since at least 1990.

The amplifying accounts of market breadth volatility signifies as intensifying price distortions which have been symptomatic of the escalating government interventions in the US financial and monetary system, which I would add as being transmitted or diffused worldwide.

Global Equity Market Performance Update: ASEAN Equity Markets as co-Leaders

ASEAN equity markets are among the world’s best performers.

Below is an updated year to date chart from Bespoke Invest

Indonesia, the Philippines and Thailand has thus far ranked 5th, 7th and 10th respectively, while Malaysia ranked 18th has been down by 4.78%, a notch below another ASEAN member Vietnam (down –4.48%).

Of the 78 nations on the roster, there are only 11 gainers, whereas 22 nations, mostly from the Eurozone, are in a bear market.

Clearly global markets have now been biased to the downside…

…where 6 of the top 20 largest world equity markets have also been treading on bear territory.

The distribution of losses are almost similar to the broader picture, but the gains have not been represented since the latter are from emerging and frontier markets.

To add, the US and Canada appears to outperform the average, even if they are likewise enduring losses.

In my view, outside a real recession, and with major central banks pumping money furiously, the current complexion, characterized by the dreary outlook, will likely improve going to year end.

Graphic: Distribution Share of World Market Cap

…of select countries.

Below is another deck of wonderful and telling charts from Bespoke Invest

Basically, the above charts say that the % share of developed economy equity markets has been declining overtime as Asian and emerging markets have been increasing.

What we are seeing is simply a deepening of the convergence trend and a rebalancing of roles which previously had been dominated by the former.

Of course there are many factors driving this, one of the principal factor would be globalization. But the point is: market dynamics, which essentially is about acting humans, has been about constant changes.

Information Age Investing: Entrenching Technology Sector Leadership

Bespoke Invest shows us some very important developments in the US stock markets during the recent sharp volatility: Technology Sector’s market leadership has been intensifying

Bespoke Invest writes

As shown, the Technology sector, which was already the largest sector in the index, has seen the biggest gain in weighting since the bull market peaked. On April 29th, Tech had a weighting of 18.07%. As of now, its weighting is 19.06%. The gain in Tech is even more impressive because the only other sectors that have seen increases in their weightings since the bull market peaked are non-cyclical in nature (Cons. Staples, Utilities, Health Care, Telecom).

Additionally, the technology sector has been outpacing the industrials.

Again from Bespoke Invest

While Industrials have been slumping, the Technology sector has been ramping. Although there have been numerous calls to avoid the sector during this downturn, Tech stocks have been handily outperforming the market. In fact, heading into today, Technology was the least oversold of the ten sectors.

My thoughts

Recent volatility has been proving to be more of a shakeout than a genuine inflection point.

The underlying change of market leadership or divergent actions in the sectoral performances, which reveals of an ongoing rotation towards the technology sector, shows that this has not been a debt deflation driven financial market sell down, as global central bankers have been applying aggressive activists measures.

The gap in the market cap weighting of the technology and other sector has been widening. In the Philippines, the Mining sector has been assuming this role.

As I have been saying, as the information age deepens, the pie of the technology sector relative to the economy will continue to expand.

Global production process will continue to lengthen or experience enhanced specialization as more technology products and services will be offered and provided to the marketplace. Competition led innovation will be the major driving force for this dynamic.

People hardly notice that the internet search industry is one big example of this ongoing dynamic.

The technology market leadership dynamic will continue to be reflected on prices of technology equities, which should be expected to have a greater share in the US equity market’s sectoral weightings as time goes by.

Essentially, a bet on the information age should translate to a bet on the technology sector.

But as caveat, since policies of central bankers have led to periodic bubble cycles, the capital intensive technology sector could be in a formative bubble cycle process. Although I guess this has yet to reach a maturity phase.

Of course, US treasuries are the ultimate bubble in the US, which I think is in a near maturity or blowoff phase. The global bond bubble applies to many developed economies based on the 20th century designed welfare system.

And so goes the US treasury securities and other bond bubbles (EU, Japan), so with the US dollar and the US dollar system.

I’d stick to precious metals and the technology sector.

Philippine Phisix: What An Incredible Turnaround! (Global Equity Markets Update)

Amazing, the Philippine Phisix simply shrugged off the US-European market rout yesterday.

Chart from technistock.net

The actions of the market can’t be argued as having been boosted from US Federal Reserve assurances as alleged by some, for the following reasons:

One, the Phisix opened down only less than 2% (81.47 points). This represents evidence that even with heightened uncertainty overseas, investors put an immediate floor on the Phisix from the opening bell.

Two, Japan’s Nikkei is still down more than 1% as of this writing. This hardly means Fed assurance factor.

Three, except for Indonesia which is down about 1%, Malaysia and Thailand are slightly lower. In other words, today's action is another validation of the ASEAN divergence process at work.

Fourth, the mining issues spearheaded this magnificent intraday recovery.

The mining index surged by 4.2% and carried the weight of the Phisix rebound!

Nevertheless, the big picture tells us that the Fed’s (stealth QE) and the ECB’s QE may have been interpreted by the world markets as an antidote with insufficient potency to overwhelm the prevailing negative factors

Second, the Eurozone’s crisis continues to affect global markets

And that’s why Ben Bernanke came out last night swinging at the notion that dissensions from within the ranks of the US Federal Reserve board of governors would stop him from declaring another round of overt Quantitative Easing.

We will see.

In my view, I believe that despite today's superb performance by the Phisix, caution is highly warranted until we see:

-concrete or definitive actions by the US Federal Reserve. Again, stealth QE by the Fed and the ECB’s overt QE has been essentially eclipsed or overpowered by the banking-PIIGS meltdown in Eurozone.

-signs of stability in global equity markets (where large swings or gyration dissipates), even if most of the world markets continue to decline.

Though yes, $1,800 gold appears to be lending support to the Phisix as I have been arguing here.

Just to show how the Phisix-ASEAN seems to metaphorically defy gravity, this great year to date chart is from the Bespoke Invest is telling.

As of yesterday, of 78 nations monitored by Bespoke Invest, there are only 10 gainers so far.

Two of them hails from ASEAN, particularly Thailand and Indonesia. The Philippines (12^th) and Malaysia (14^th) are still ranked in the top 20 of the world's best performers despite marginal losses.

The US is ranked 19^th in spite of the series of recent blood bath.

If you look at the overall performance, one would note that global equities have mostly been in the sea of red, with more countries joining the ranks of bear market losses (20% or more) rather than of the gainers’ column.

Such broadening losses should be seen as a source of caution, nevertheless, cautious optimism.

Graphic: US Default Risk—Short and Long Term

Nice chart from Bespoke Invest on the risk of a US default, as measured by Credit Default Swaps—CDS).

Following the announcement of the debt ceiling deal, US CDS prices materially declined exhibiting an easing of default concerns.

It is important to point out that yesterday’s steep drop could be seen as ‘temporary’ relative to the 3 year trend (violet arrow), which reveals that the risks on the credit standing of the US has been on the ascent.

Nonetheless, last night’s debt deal has not helped US equities as the US S&P 500 slumped anew.

However, one would note that as US default risks have been on the rise over the past 3 years, so has gold prices.

So gold could partly be manifesting these concerns too (gold sizably declined yesterday in conjunction with the fall of US CDS).

How Global Equity Markets have Measured Up to the PIIGS Crisis

My favorite equity monitor site, Bespoke Invest has a nice updated graph on the performances of global equities as of yesterday.

Here are my observations:

Of the 78 global benchmarks shown, only 24 or 30% of the countries have registered gains.

Although most have been in the red, the degree of losses have not been on a bear market scale.

The current top performer has been Venezuela, who along with Greece shares, represents one of the highest default risks.

8 of the 24 top gainers hail from Asia.

As I keep pointing out, ASEAN mainstays have been among the biggest gainers: Indonesia (7^th), Malaysia (14^th) Philippines (18^th) and Thailand (19^th) which has been moving in near synchronicity.

Among the BRICs, only Russia is in the winning column. India and Brazil have suffered hefty losses.

Brazil may endure a recession next year, following an inversion of its yield curve—oops! chart below from Bloomberg

Vietnam's equity bellwether, which has been among the worst losers, has a yield curve that has likewise been leaning towards inversion ala Brazil.

chart from ADB’s Asian Bonds Online

Vietnam’s equity has been fumbling from her government’s attempt to contain inflation by tightening the monetary environment. So the yield curve has reflected on this concern.

Among the G-7, the US and Germany are the only gainers ranked 12^th and 16^th.

How Global Stock Markets Reacted to the Greece Crisis Resolution

One of my favorite website, Bespoke Invest, has a nice rundown on the performances of 78 world equity benchmarks this week highlighted by the Greece vote on crisis resolution measures.

As expected, most of the benefits accrued to markets that had been most sensitive to the risks of a Euro crisis contagion.

The Philippines have seemingly been indifferent (but not today where the Phisix rose 1.4% to breakout from the massive reverse and shoulder pattern)

But what I find interesting is this comment.

From Bespoke (including chart) [bold emphasis mine]

Looking at year-to-date performance, Bangladesh is down the most with a decline of 26.21%, followed by Peru at -19.20%. Other countries that have really struggled so far in 2011 include Finland, Oman, Malta, Kuwait, Kenya, Vietnam and Brazil. With so much attention being paid to the problems in Greece, you would think that its stock market would be getting absolutely crushed this year, but it's currently down just 9.54%. This obviously isn't a positive number, but it's at least better than ten other countries on the list.

This is true.

I’ve seen many people soooo fixated by the Greece crisis such that they almost see the end of the world take place. This I argued successfully against.

In behavioral science this known as the focusing effect, where people transfix their attention to one event at the expense of the rest.

Black Swan author Nassim Taleb calls this tunneling or “uncertainty of the deluded”

People who tunnel on sources of uncertainty by producing precise sources like the great uncertainty principle or similar, less consequential, matters to real life, worrying about subatomic particles while forgetting that we can’t predict tomorrow’s crises.

Such focusing effect/tunneling vision seems so elaborate on people whom are plagued by political and or economic creeds or those who see the world rigidly in the prism of their (self-righteous) designs and who interprets evolving events that gives much weight on the short term or present oriented actions.

And this is why obsession or getting married to a view/theme can lead to blindspots that can be very fatal.

Aside from the global rally in equities, the Euro-Gold correlations, both have substantially been rallying, have once reaffirmed its relational harmony in defiance of the world according to these ideologues.

Updated Ranking of Global Credit Default Risks

Consistent with my earlier post, FT’s James Mackintosh: US Credit Risk Greater Than Indonesia, Bespoke Invest has updated tables of the 5-year Credit Default Swaps (CDS) reflecting on default risks of 60 countries.

On a year-to-date basis, Greece has the highest default risk while the US has seen a hefty nearly 20% increase.

Major ASEAN nations have also seen an uptick in default risks with Thailand registering as the worst performer.

Meanwhile major European economies posted most of the improvements over the same period.

But it’s a different view when seen from the ranking in terms of CDS prices.

The biggest improvements seen among European nations have been as consequence to the previous actions, where the nations affected by the PIIGS crisis have led to a contagion as seen with the prior price surges.

And almost along the lines of Newton’s second law of motion, where for every action there is an equal and opposite reaction, the previous steep increases has prompted for equally substantial declines.

What this seems to suggest is that the Greece crisis appears to be isolated for now.

And Europe's performance can be measured relative to the major ASEAN economies. While CDS prices of the ASEAN contemporaries did suffer some deterioration, in the context of prices, ASEAN CDS remains below the levels compared to the prices of nations affected by the PIIGS crisis.

So the above only reveals of the degree of price volatility or the rapid changes in the market’s perception of credit risks.

As Bespoke notes,

The countries that investors believe are least at risk of default are currently Norway, Sweden, Finland, and Denmark. The US used to be the least at risk of default, but CDS prices here have ticked up 20% so far in 2011. US default risk is still low relative to the rest of the world, but any tick higher is something we don't want to see.

Credit rankings can shift swiftly and meaningfully. All these depend on the policies adapted.

So far, the practice to inflate debt has subdued default risk concerns on some the major economies as the US. However, the law of the late economist Herb Stein should apply “If something cannot go on forever, it will stop”.