LEANDRO

 TAUB                        No.  16  –  JUN  02,  2010  –  BUENOS  AIRES,  ARGENTINA  

INTUITION  INVESTMENT  REPORT  

 

SPECIAL  EDITION  
Strategy  for  the  current    
market  environment  
 

 
Financial   managers   around   the   world   are   asking   themselves   if   the   current   adjustment   is   over   or  
whether  it  will  rather  continue  deepening.  As  an  answer  to  this  uncertainty  environment  I  offer  the  
following  article  with  the  purpose  of  clarifying  my  position  on  the  issue.  
 
I   will   start   by   the   conclusion:   I   consider   the   adjustment   of   the   American   stock   market   does   not  
indicate   we   will   go   back   to   a   bearish   market.   I   believe   the   bull   market   still   stands,   that   what  
happened  over  the  last  month  and  a  half  was  a  correction  mainly  driven  by  the  Euro  crisis  and  the  
dollar's  appreciation.  
   
It  seems  as  though  the  big  oversell  the  market  experienced  over  the  last  weeks  is  coming  to  an  end.  
When   looking   at   the   VIX   Index   (CBOE   Market   Volatility   Index),   that   shows   the   implicit   volatility   in   the  
North  American  market,  we  observe  the  Index  attained  two  peaks  on  May,  one  of  them  around  the  
40   value   of   the   Index,   the   other   almost   at   50   (while   coming   from   values   around   20   during   the   last  
months).  It  now  remains  close  to  40  and  it  appears  that  the  implicit  volatility  in  the  North  American  
market  saw  its  worse  on  May  and  started  June  decreasing.  
 
Moreover,  many  technical  indicators  find  themselves  at  short-­‐term  oversell  levels.  
 
The  Dow  Jones  fell  a  13  per  cent  from  its  11.258  April  peak  between  April  and  may.  It  now  seems  to  
begin  a  recovery  path  that  leads  back  to  the  bullish  market.  
 
I  regard  this  month  and  a  half  adjustment  as  a  stage  the  market  had  to  go  through  for  the  cleaning  of  
its  middle-­‐term  oversell  levels.  
 
Greece   is   not   as   bad   as   the   pessimists   keep   announcing.   The   aid   package   offered   by   the   European  
Union   and   the   IMF   covers   Greece's   needs   of   liquidity   to   respond   for   its   short-­‐term   obligations.  
Europe's  banking  system  gained  enough  time  for  settling  and  the  design  of  plans  that  will  lead  it  out  
of  its  current  crisis.  

 
 

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INTUITION  INVESTMENT  REPORT            No.  16  –  JUN  02  2010  –  BUENOS  AIRES.  ARGENTINA  

 
Nevertheless,   we   still   find   ourselves   today   with   a   number   of   issues   that   are   resulting   in   great  
controversy  in  the  European  Union.  The  savings  rate  in  Europe  has  been  increasing  over  the  last  10  
years,   the   general   prizes   level   keeps   falling,   as   does   the   money   supply,   the   product   in   many   of   its  
members   is   in   recession,   domestic   expenditure   is   still   decreasing   and   credit   has   contracted.   The  
general   result   of   this   situation   has   been   that   Europe's   contribution   to   the   growth   of   the   global  
product   has   been   falling   for   the   last   10   years   (from   over   15%   to   the   current   under   4   per   cent).   In   the  
short-­‐term   the   consequence   has   been   the   drag   of   the   stock   markets.   This   was   the   necessary  
argument  for  the  markets  to  adjust  after  a  little  over  a  year  of  value  rise.  
 
Conditions  in  the  American  economy  remain  very  favourable,  all  its  signs  are  improving  and  benefits  
are   coming   better   than   expected.   Employment   is   on   the   rise,   as   is   the   business   confidence.  
Inventories  are  being  rebuilt;  the  ISM  Manufacturing  is  growing,  as  well  as  domestic  investments  and  
the  available  income.  
 
Chinese   authorities,   contradicting   forecast,   did   not   raise   interest   rates.   Which   shows   that   Chinese  
economy  is  not  reaching  a  halt,  as  many  were  expecting.  
 
One   of   the   key   elements   in   the   recovery   of   the   North   American   market   is   being   the   dollar's  
appreciation  –  fundamentally  provided  by  weak  economic  conditions  in  Europe.  In  a  world  where  the  
risk  of  deflation  is  in  the  air,  no  country  wants  a  strong  currency.  
 
It  is  my  belief  that  the  balance  will  ultimately  favour  the  Euro  against  the  dollar.  It  can  nevertheless  
happen   that   the   Euro   appreciation   will   not   yet   crystallize   –   at   least   until   stress   conditions   still   prevail  
in   the   European   region.   While   the   positive   economical   conditions   in   the   U.S.   sustain   the   bullish  
market   everything   will   be   fine,   however   this   situation   cannot   continue   in   time   since   the   dollar's  
appreciation   threatens   to   impact   the   North   American   stock   market.   This   situation   amounts   to   a  
discount   of   the   economical   growth   due   to   the   partial   absorption   of   the   companies’   values   by   the  
dollar's  appreciation.  I  consider  that  ultimately  the  U.S.  will  stick  to  the  path  it  has  taken  for  the  last  
60  years:  that  of  small  and  sustained  inflation;  by  that  making  the  dollar  slowly  depreciate  in  relation  
to  the  rest  of  currencies.  
 
When   listed,   all   this   factors   suggest   that   the   expanding   global   business   cycle   remains   untouched.  
Therefore  the  bullish  stock  market  at  a  global  level  is  still  latent.  
 
I  think  that  those  who  closed  their  positions  due  to  adjustment  could  find  again  the  suitable  space  for  
re-­‐entering  in  the  next  weeks.  And  I  believe  that  those  who  maintained  their  positions  should  keep  
doing  so.  
 
 

 
 

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INTUITION  INVESTMENT  REPORT            No.  16  –  JUN  02  2010  –  BUENOS  AIRES.  ARGENTINA  

Our best friend in the market is ourselves and our worst enemy in the market is ourselves.
Remember to revise your sleep, breathing, feeding, movements and thoughts. These five activities are the base of our
mental and physical health.

Everything you have read in this article can be reproduced only if the source is included:
Leandro Taub
INTUITION INVESTMENT
leandrotaub@intuitioninvestment.com

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