22 August 2011

Market Update

Dear Valued Clients,

Over the past week we have assessed how the economic and financial landscape has changed since markets started plunging. Despite the recent strong relief rally, concerns about the economy have brought us back to square one. Volatility remains heightened, even in the developed markets. Instead of being swayed by the wild market swings, we have taken a more objective look at the economic data before deciding the next course of action.

Figure 1: S&P 500 Large Cap Index

Over the past two weeks, there has been both positive and negative news. To give us a better perspective, we need to look at what has actually changed:

A. Fundamentals


  • Mortgage refinancing index has increased. The drop in mortgage rates to 50-year lows is spurring more to refinance their loans.
  • Industrial output for July was up 0.9% month on month against expectations of 0.5%. This compares favorably to the manufacturing PMI which showed deterioration in growth for July. June figures for industrial production was also revised upwards.
  • Retail sales for July was up 0.5% month on month. Both auto and non-auto sales contributed to growth. June figures were also revised upwards.
  • Italy managed to grow faster in the second quarter (0.3% versus 0.1% in the previous quarter). This contrasts with the Italian PMI numbers which showed slowing growth.
  • The Conference Board US Leading Economic Indicator increased in July, another sign to indicate lower recession risk.
  • The 4-week moving average of jobless claims fell to 402,500 signaling a slight improvement in the labour market.


  • The Philadelphia Fed manufacturing index fell to -30.7, signaling a significant contraction in manufacturing activity.
  • Existing home sales and housing starts continue to be weak (-3.5% and -1.5% respectively)
  • The Empire State Index (which covers the state of New York), fell to -7.72, again signaling a contraction in business activity.
  • Consumer sentiment fell to 54.9 which is just below levels during the 2008 crisis. The debt ceiling crisis and the wild gyrations in the stock market were cited as possible reasons.
  • The EUs second quarter growth slowed, led by Germany and France. German growth slumped to 0.1% while France stagnated.

B. Market Action


  • Cyclical stocks broke past the August 8 low, led by transport, consumer discretionary, industrials and small caps.
  • European financials continue to underperform, making new lows, signaling reducing confidence in European banks.
  • Bear trend intact (lower highs lower lows). Major market indices around the world continue to exhibit this trend.

C. Other Market Signals


  • Yields on Spanish and Italian bonds have fallen and remain stable as the ECB continues to provide support. Risk of further damage to European financial institutions balance sheet is low.
  • Cyclical commodities like copper and oil are holding up since the plunge in risk assets which is still above the August 8 lows.
  • High yield bonds are holding up against the August 8 low while emerging market bonds uptrend remains intact.


  • TED spreads are inching up from 0.25 to 0.30 which is still low compared to 0.49 when the European debt crisis first erupted (also far from the 4.60 number when Lehman Brothers collapsed).
  • Yields on long dated US Treasuries continue to make new lows (lower than August 8) as recession fears persist.
  • Greek bond yields have been rising.

D. Policy


  • Federal Reserve commits to hold rates till mid-2013.


  • Finland, Austria and The Netherlands are asking for collateral in the new bailout loan to Greece. This could complicate extending help to Greece or other potential bailout recipients.


Volatility may be high but fundamental data and signals from markets and policy makers do not suggest a repeat of 2008. Nonetheless we see the risk of a recession rising as confidence has fallen significantly. As such, adopting defensive strategies would be prudent at this time.

The United G Strategic Fund (our core fund within the gManaged portfolios) had further trimmed equity positions to 40% (as of last Thursday 18 Aug) from a high of 90% at the beginning of 2011. The Managers will be looking to take advantage of relief rallies to further trim positions in the near term.

IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

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