Herding Stocks in the Range

Big Picture
OECD: No global double-dip recession

There were bright spots in the U.S. economic data this week, as wholesale prices rose slightly more than expected in August, and new jobless claims dropped to the lowest level in two months, down 11% in the past four weeks. Retail sales rose in August by the largest amount in five months, despite a big decline in autos. The U.S. trade deficit widened on surging imports, resulting in the biggest gap since the end of 2008. Treasury Secretary Mr. Geithner blames the trade deficit on the yuan exchange rate and said the U.S. is considering ways to urge China to let the currency rise faster.
France passed a retirement reform package that increases retirement age to 62 from 60. Spain raised nearly €4-billion in a bond sale, the latest sign that it is earning back investors’ confidence. Turkey’s economy grew 10.3% year-over-year in the second quarter, expanding 3.7%, after a contraction of nearly 5% last year. India raised interest rates for the fifth time, in a bid to tame inflation, which hit double digits earlier this year. There is no prospect of a double-dip recession in the rich world, excluding Japan, according to the OECD, but the recovery remains fragile with 50-million unemployed in OECD countries. Japan sold yen in the market for the first time since 2004 to prevent the currency’s rise from hurting exports.

Markets
Gold hits record; markets range bound

U.S. stocks rose to five-week highs, but mixed economic data and a cautious forecast from economic bellwether FedEx kept the S&P locked in its recent trading range. On Thursday, gold hit another record high, topping US$1,270 an ounce, after surging more than 2% on Tuesday, its biggest one-day gain in four months. As investors sought safety outside the U.S. dollar, billionaire financier George Soros called gold the “ultimate bubble,” warning that prices won’t keep rising forever. Oil prices took a rollercoaster ride after a pipeline leak halted up to a third of Canada’s crude exports to the U.S.
Kinross will pay $7.1-billion for Red Back with its promising new gold mine in West Africa, as mergers and acquisitions continue throughout the mining industry. Hewlett-Packard will buy security software provider ArcSight for $1.5-billion. Cisco will begin paying a dividend in 2011, answering calls from shareholders to share the wealth – the company has about $40-billion in cash and investments. The iPad was launched in China this week at its two Apple stores. Apple plans to open 25 new stores next year in China.

Analysis
Range bound market requires tactical approach

The first half of September has rewarded investors with positive returns on the stock markets, however, historically September has been an unfavourable month in the stock market. With markets continuing to rise, data and analysts are mixed about what we should be looking at in terms of market direction and what strategies are likely to work in this confusing environment. David Rosenberg , Chief Market Economist, Gluskin Sheff published an article on September 14th, 2010 called ”Income Theme Intact, and earnings Revisions as Tried, Tested, True Market Indicators”. He argues that safety and income at a reasonable price are a favourable strategy, especially in a deflationary environment. He points to “the most compelling risk-return attributes lie in the BB sliver of the bond market-the best of the investment-grade space where the yield is juicy at an average 6.7% and provides a very nice 300 basis point premium over A-rated bonds.” In addition, he argues a reliable indicator of when markets turn more optimistic on equities is when revisions to analysts estimates project the bottom. At this time revisions to analysts estimates are falling from their peak in April and continue to fall. Admittedly it is hard to pick a bottom but while we wait, a successful strategy is to seek out income from yield on stocks and bonds and tactically trade your stocks as their price fluctuates within a range even if the prices go down.