Global Market Perspective / July 2015

So the Greeks have decided to vote for "No" to austerity measures and sent some panic into the financial markets. Shanghai bucked the trend and was one of the few markets to outperform in Asia yesterday.

To know more about the Chinese market outlook, please look at my post http://niftyparadox.blogspot.in/2015/06/china-meteoric-rise-and-free-fall.html

The Chinese market is so far playing out the scrip on expected lines. Some short term market volatility may take the market further down to 3250 levels [A significant correction from the highs of 5100] but with a 5 year horizon, this is the place where fund managers looking for alpha can get a lot of traction

With regards to Greece, my personal opinion is that Grexit must be enforced asap. Whilst this will give short-term shock waves in global markets across all asset classes, it has a longer term benefit for Greece, Europe and the globe overall. One can see my views on the same here
http://niftyparadox.blogspot.in/2015/06/euro-zone-crisis-and-why-it-will-be.html

Since a lot of economists tried their hand at Game Theory, here is my take on how the moves have been plotted

ECB Perspective

Greece Vote = Yes "We told you so; we don't care if Syriza party resigns and Greece has another set of elections; one has actually lost count of the number of elections and interim heads Greece and Italy have had over the last 5 years. More austerity on cards]
Easy road ahead at least in the short-term. However, there would be all the arrears of 340 billion Euros still to be paid and another half a billion Euros over the next 3 years to keep the show running. With the surprise referendum thrown in, the bailouts would come with a lot of backlash and the country would be whipped

Greece Vote = No This was the most dangerous for ECB. Short-term hyperinflation but a lot of bright spots as well. The tourism economy will be extremely affordable for large portions of people globally. Greeks could also use their olive economy to boost employment and should they decide to have some sort of industry in the manufacturing space, Greece would be highly competitive. A complete write-off of Euro denominated debt. They would still be whipped by ECB and Germany anyways.

As far as Greeks were concerned, the dominant strategy was to say No as whips from ECB were going to come through anyways. The No vote has short-term pain and long-term gain and the No vote would put ECB in a Catch 22 situation

If ECB allows Greece to stay in the Euro, despite a "No" vote there are 2 challenges
1] Portugal, Ireland, Iceland would hit back hard for unfair treatment handed out and hence can go astray, here-on

2] It takes away incentives from Spain and Italy to go berserk, abandoning



All the smoke and fog mirrors from the Syriza party as well as Germany and ECB IMHO is to work out an orderly plan for the Credit Default Swaps. The amount of money spent on Greece alone is about 340 billion over the last 5 years.

Expected Dow Movements

A short term bottom at 17500 [give or take 1%] and a medium term bottom at 15800 [give or take 2.5%] if the Grexit gives jitters gets knee-jerk reactions.

Without Grexit, we can say that a short-term bottom is in place and Dow can slowly march ahead with new highs by Christmas

With Grexit, we can say that one more round of fall pending [and severe] with downside of about 15800

Even if a Grexit takes place, we need to note that odds of the markets going higher stay intact. What will eventually happen with a Grexit is that yet another round of QE from all 4 major central banks Fed, ECB, BoE and BoJ will take place

The 5 year chart of DJIA with 50/100/200 DMAs. The 100 DMA has been tested a few instances and 50 DMA has been tested multiple times with remarkable pullbacks to higher levels. The 200 DMA levels have only been tested once in 2011-2012 and prices from that level have bounced off very strongly. In fact the lowest point in the last 5 years were remarkable in the volumes traded. 

From the lows of 2009, markets more than doubled in 4 years; the index has not tested longer term bottoms after 2010-2011. From thelows of October 2010-2011, markets rallied over 61.8%. Volumes are now thinning regardless of rise or fall. Regression to the mean is long pending. A larger correction is over due but DJIA is not showing any signs of bear market grip.

Dollar Index: In the short term, it may spike up towards 100-101 with the safe haven status. We need to remember that Dollar Index started its upward rally in 2010-2011 from about 75 odd levels and 2015 marks the end of a 5 year cyclical rally. Technically, it is poised for a 61.8% Fibonacci Golden Retracement; 101-75 = 26; 61.8% = 16 [rounded]; 101-16 = 85

Technicals clearly suggest that some form of QE is on the cards unlike the rise in interest rates that a lot of media pundits suggest. A strong dollar is hurting everywhere from commodities to equities, especially major economies like China, India and Europe. There will be major fund houses that are already facing liquidity issues due to Chinese slowdown and Eurozone worries.

To summarize, we are approaching a short-term top for Dollar Strength and may have already made a bottom for Dow. In case of crises materializing, there may be a further weakening by 10% to 15% but the correction in Dollar Index will also mark the beginning of the next leg of rise.

Black Swan Events: Grexit is no longer a Black Swan Event with adequate alerts sounded by stakeholders with regards to the same. The challenge will be from Spain and/or Italy

For me, right now the biggest source of challenges will probably come from the Silicon Valley. Prices and valuations are astronomical and unsustainable. A comparison of Google, Microsoft and Apple v/s Facebook, Twitter, Whattsapp, Netflix, Uber etc are showing clear divergences. Google, a virtual cash machine has corrected and shown remarkable slowdown. Facebook is one that is diverting some amount of advertising revenue but Google still remains the undisputed king and bell weather of high-tech space. Apple is moving higher slowly and steadily without too much volatility.
The mania lies in valuations for other apps. The last time such a mania in the high technology space was around 2000 with the craze for .coms; high technology, innovations are here to stay and are part and parcel of our evolution. But currently the valuations in the high technology space are giving an eerie deja vu feeling already.

I look at Google, Microsoft, Apple and IBM as bell weather stocks that show the real pulse of technology. Microsoft with its renowned Wintel partnership and steady revenue flows from Windows and Office is struggling for sustainable growth and already has seen 2 rounds of job cuts in 18 months. Apple with its ever-growing demand for iPhones and iPads is not showing any remarkable outperformance [it seems to have played out its outperformance for now] IBM with its strong industrial consulting and technological assistance has missed street estimates and have long abandoned profit forecasts and have been giving profit warnings. If these names that are well entrenched in B2B and B2C sales are showing protracted growth, I see no reason why social media platforms, aggregators like Uber, and digital streaming like Netflix are commanding such high valuations. A few plugs pulled here and there and prices will rationalize. [And rationalization here means a very strong correction in prices]

So I see Nasdaq topping out around the 5225-5280 levels and correct to about 3900-4200 levels
SPX should make an interim top around 2150-2225 mark and correct to about 1625 levels

{Please note that these are longer term price levels and not immediately for July}

Expected Range For July
DJIA: 16800-18600

Forecast For FTSE: FTSE has seen a meteoric rise from 5250 levels in 2010-2011. Post elections in May 2015, it has seen levels of about 6800 and now correcting. Without Black Swan events and knee jerk reactions, FTSE in 2015 should be in the 5950-6950 levels.

Expected Range For July
6350-6750

GBP-USD: Currently hovering around 1.55 with an interim top around 1.8 levels. Expect GBP-USD to have max downside of 1.35 and a breakout above 1.8 levels to possibly even 2 by end 2015 / early 2016. It will play out as per Dollar Index movement and liquidity injections but I see every fall in GBP-USD as a buying opportunity [not in the hyper-leveraged Forex market where fortunes change with a few pips] but in proper regulated currency futures markets. GBP is one currency that will likely be the best outperformer in 2015

Forecast For DAX: DAX has a 52 Week Low around 8500 levels and a 52 Week High around 12k levels. It started its rally from lows of 5600 in 2010-2011 and has been up-up and away once 6500 was breached on upside. Even with strong and severe corrections, I doubt the odds of DAX going below its current 52 week low

Expected Range For July: 9900-11800

Forecast For Shanghai Composite: [Already covered in posts and links given in the beginning]
Expect Shanghai composite to bottom out in the 3200-3400 zone even in case of a strong correction. Given volatility of China, it is a matter of 2 trading sessions to get to the bottom! My forecast is that Shanghai composite will go on to make a new high of 5250+ levels in second half of 2015. Forecast will be negated with a monthly close below 2900

Expected Range For July: 3200-4200

Precious Metals
Despite all the rout in the metals space, I see them as high probability buying opportunities, As I keep mentioning in my Nifty Paradox blog as well, Gold and Silver had a mega bull run from 2011 to 2012 more than quadrupling in value. So a 2-3 year cooling off is fairly logical. Prices have seen 50%+ collapses and given the forecast for Dollar Index and pending technical bounces, Silver should end up doubling to 28 in a year or 2 and Gold can be headed towards 1550 levels in a couple of years.

Max downside can be around 12 for Silver and 1025 for Gold

Crude: Crude boiled through and has already corrected more than 50% in the last 12 months. Max downside is about 35 [Historical lows] and it should soon regain the 65+ levels

So happy trading and investing for July 2015. My trading updates for Apple, Google, Boeing, Goldman Sachs, Netflix and indices will be updated via the twitter feeds

Global Market Perspective - June 2016 / Part1

Well almost everybody is going head over heels with Grexit. I have covered this aspect in my India focused blog http://niftyparadox.blogspot.in/2015/06/euro-zone-crisis-and-why-it-will-be.html

Overnight, there have been many articles in the blogosfear with classical economic theories explaining why it is gloom and doom for Euro. For all those so called pundits talking about gloom, I would like to remind them [and of course all the readers of this blog], let us rewind history a bit and look at major sovereign debt / currency issues over the last few years

Germany 1932 , Mexico 1982, Yugoslavia 1983, Russia 1998, Argentina 2001
Source: https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises
In each instance, there was gloom, doom and Armageddon posted across the press [because the concept of blogs didn't exist then] Do these countries exist on the political map today? Yes of course
Does business thrive in these countries; Germany and Russia stand out distinctly right?

Specific to Germany, it was a result of World War 1 reparations that of course led to a hyper-inflationary period but what happened over a period of time? Germany got its act together, focused on its strengths of meticulous engineering and became one of the strongest manufacturing economies of the world. Look at where Germany is today [I won't go into the details of World War 2]
This list is missing the Brazilian default in 1986-87

Another Source: https://en.wikipedia.org/wiki/Sovereign_default

Then of course we had the Asian currency crisis and historical details of the same are covered here
https://en.wikipedia.org/wiki/1997_Asian_financial_crisis

The classical economist version for Grexit starts with the premise: Greeks [public + private] people put together do not have enough Euros for starters. And they rightly point out that in the event of default, credibility of Greek Sovereign will be very much in question.

My rebuttal to that is look at US, UK, Japan - all these economies are surviving by debt monetization. Yes I agree that there are no quick fix solutions and global markets will temporarily go into panic mode - but that will be extremely short-term. Let us say that Greece does go ahead and trigger a sovereign debt default as it does not want to reel under pressure from creditors with regards to modifications in government spending

It decides to return to drachmas [hyper-inflation will be the first and direct consequence of this] then the classical economist asks how will Greece grow without any Euros in hand first.
My Answer: They don't need it. Let us look at the most low hanging fruits

Tourism: They can create a Special Purpose Vehicle and form a consortium of Public-Private-Partnership. Rights and Warrants can be created for social and corporate tourism requirements. There will be bidding processes and the winning bids have to place money upfront. No matter how much the pressure from other Euro-zone members, the bids will go through eventually.

So much was written about the outsourcing challenges when businesses in US, UK and Central Europe started outsourcing jobs to emerging countries like India, Philippines in the IT/ITES space. There were protests, lobbying but the end result? Profit and economic gains over-ride all other concerns eventually and the same will happen to Greece

The very instance of privatization of airports and seaports can also be taken up by Greece [currently a suggestion by Troika for next bailout] Greece can default on its debt and still take up the privatization route.

For agriculture, it can tie up with commodity majors like Cargill or other major food companies

Last but not the least, if we look at the German default, Russian default, Greece is nothing in comparison today. All the short-term pain will be behind us in less than 5 years and Greece will be a thriving economy.

So that is it as far as Grexit is concerned - short-term pain followed by a prolonged phase of economic hustle and bustle.

Let us now shift attention to major indices

DJIA

Last 10 years

To put things in perspective, in a larger monthly / quarterly time frame, the swing low for DJIA has been about 11k on downside [2010-11] and swing high has been 18200 [2015]. Ignoring inflation effect and assuming that 18200 was indeed the top, 61.8% of the retracement is very logical.

Total Swing = 8200 points [61.8% = 5068] So even a sharp fall to 15k [Swing Low 11000 + 5068] or 14k [Swing High - 5068] is well within reasonable limits of market trading ranges.

Giving more credence to this is the fact that despite so many negatives that cropped up, in the last 5 years, no correction has exceeded 2k on DJIA in the last 5 years. So it may just be the time when the larger correction plays out.

The other argument is leaning towards the US Fed discontinuing Zero Interest Rate Policy [ZIRP] and look to raise interest rates later this year. If one goes through the fine print of policy details, that premise holds true only under normal business circumstances and Grexit is not normal business circumstance. Should there be a Euro-contagion, then forget about rising interest rates, one can expect a fresh round of QE all over again!!!

To summarize, under normal business circumstances, a correction on Dow upto 16k is very much likely and then catch up with Nikkei to 21k levels. Under special business circumstances, a correction upto 14k on Dow is highly likely only to surge higher from there. Also note that even at 14k levels, the DJIA level will be almost double that of the swing low experienced in 2008-09

FTSE: FTSE rallied from 5250 levels in 2010-2011 to 7k levels in 2015. So a Fibonacci correction to 5950-6080 levels is very much warranted

DAX: It started its rally from a swing low of 5700 and nearly tripled from there. Even in case of a severe correction, it is unlikely to go below 7700. DAX will be a bit tricky because should a Euro-contagion take place, all PIIGS countries will be far more cost competitive and can throw German businesses temporarily out of gear. On the positive side, German government and corporates can still spring positive surprises. Eurozone breakup will bring hyper-inflationary and currency crisis for peripheral Europe but what happens to DMs and Bunds? They will sky-rocket in purchasing power - don't be surprised to see large scale mergers and acquisitions by German companies on the back of a strong DM thus ensuring that a large part of loss in Germany is offset by the stakes in businesses acquired ;)

Empirical Evidence suggests that once central banks hit the ZIRP zone, there is no looking back from there. Of course, this cannot be a general conclusion as the only data point we have is Japan. Japan started the concept of ZIRP but has never ever managed to raise interests after that for some reason or the other. Any major crisis and ZIRP by FED, ECB, BoE and BoJ will continue at an aggressive rate.

BOTTOM-LINE: ANY MAJOR CORRECTION OUT OF A CONTAGION NOW IS A BIG BIG OPPORTUNITY. Ignoring short-term blips, the structural bull market is very much intact.
Markets rarely move in the direction that masses are expecting. If you ask me where is the next major shock going to come from? The next major shock will come from the Silicon Valley IMHO.

Crazy valuations in billions of dollars when firms are not even listed and private equity funded ventures are posting losses big time to gain traction; this is the space that has a massive asset bubble, similar to the dot-com mania in 1999-2000. The music at some point will start here and there will be a lot of plugs pulled out.

Gold / Silver: Both of these have had phenomenal bull runs from 2001 to 2013 followed by a corrective phase. In terms of price, silver has seen over 50% shaved off from its swing high and gold has seen almost 40% shaved off from its swing high. In terms of time correction, a 13 year rally is very much a prime candidate for a time correction of 2-3 years. It is very difficult for gold to go below $1000 per ounce and for Silver to go below $12 per ounce. These are high probable profit trades on the long side as we are in the last phase of both price and time correction. Forget what academicians and economists say about Gold / Silver, they will continue to generate 10% gains compounded annually from current prices over the next 5 years.

Any major credit crisis will basically take out speculative and leveraged long positions from the system without really impacting the physical demand for gold / silver. Countries like China and India have an insatiable appetite for physical gold and prices will eventually regain all lost ground and go on to surpass old highs to create new highs

Nymex Crude: This too, has witnessed over 50% correction from last 2 years' highs. Technically as well as fundamentally, prices need to hover around the $70 / Barrel mark. That is where crude will eventually stabilize even if it goes to $30 / Barrel [rare and low probability event]

To wrap up, ignore all the noise with regards to Armageddon. A correction is very much likely globally and corrections are healthy for the markets. They weed out complacency and keep the structural bull market intact. In current circumstances, the extent of correction is perhaps underplayed. The carnage may not end at 61.8% of rise but will be a major buying opportunity nevertheless.

My Big Alpha Trade Recommendation for 2015-2016
Short NetFlix [CMP 657]
Expected Price over 18 months: 250
Worst Case Scenario: Price 250 in October 2016

Investment Outlay

August 2015 Expiry 475 Put = 2 Dollars
December 2015 Expiry 475 Put = 10 Dollars
January 2017 Expiry 470 Put = 45 Dollars
Total Outlay = 57 Dollars
Assuming that the pay-off does come through by January 2017 and that the Put being deep in the money will have no time premium, Even then, the value of the Put will be about 225 netting about 170 dollars in the bargain. The earlier this happens, greater will be the pay-off.

From an option buyer perspective, the maximum loss on this trade is the premium paid i.e. 57 dollars

Risk-Reward Ratio almost 1:3
No Iron Condor, Straddle, Butterfly or any such synthetic combination. Simply Long Puts as mentioned above. Probability of Success: 90% plus according to my estimate