James Gerrish - Morning Note

 

12/08/10   - 8.27am   -  by James Gerrish 

The US market threw its hands in the air last night and dumped stocks across the board. The reason being pushed by commentators is that the Statement from the Federal Reserve yesterday showed that the US recovery was weakening while data from China showed that industrial output rose the least in 11 months. To me this is pointing out the obvious - we know that the US recovery is weak and the move by the Federal Reserve to initiate more stimulus should be supportive of equity markets while in China - they've openly flagged their desire to slow growth to more manageable levels and all the evidence so far suggests they're managing that slow down effectively. 

Last night the risk trade we've been discussing for the past month or so unwound in pretty spectacular fashion. You need only look at the US Dollar to see the strong buying of defensive assets. The market is continually looking for reasons for particular moves and we constantly here experts come out after the fact to explain why the market acted the way it did as if it was all very obvious before hand. Its irritating and the reasons that were given for last nights move were not new. I'm more a believer that we over extended to the upside, investors got nervous and the Penguins started to jump. We essentially got too optimistic about theRECOVERY THAT STILL IS OCCURRING.  Thats an important point. The recovery is still under way and although we are going to have blips in economic data and subsequent concern from the market, the trend is improving. 

We continue to believe that companies with exposure to emerging growth (ASIA, LATIN AMERICA etc etc) will outperform those that are exposed to developed economies such as Europe and the US. Sentiment from US and Europe will continue to dominate but this theme towards risk and growth, will reemerge and this pullback in the market could present an opportunity to gain exposure to this theme. I think its important to note however that when we look at stocks, price action is the biggest determinant for entry. The market remains range bound and unfortunately we're not getting any real impetus to push us above the current range. 

As we suggested yesterday, sentiment can change on a dime and near term, the market has turned bearish. Risk assets are now out of favour and would be prudent to increase cash in portfolio's or hedge using options. 

On the market last night, THE DOW JONES lost  -265 points or 2.49% to 10378. The FTSE 100 lost -131 or 2.44% to 5245. Locally, the SPI FUTURES lost -80 points.