- Tuesday - Portfolio Update: Short Czech Krona
- Wednesday - Currencies: Comparing Dollar's Rally To 2008
- Thursday - Stocks: What's Next For Equities - Part I
- Friday - Stocks: What's Next For Equities - Part II
It was a super week for Commodities with Copper and Silver achieving double digit gains. Platinum, Natural Gas, Palladium, Cotton, Cocoa, Crude Oil ands Gold weren't too far off either, with each of them achieving a minimum gain of at least 6.5%. Why such powerful gains, you might ask? Didn't you hear... Europe has been "saved"! On a serious note, all risk assets became extremely oversold starting first week of October and obviously now we are experiencing a strong rebound.
Portfolio Thoughts
Regarding our own portfolio, both of our small US Dollar long trades have been stopped out now. The Dollar has failed to maintain its uptrend against all currencies, including the weak Eastern European ones as well. Our position in the Singapore Dollar got stopped out as the price triggered a sell order just below 200 day moving average, while the Czech Krona short, which was opened Tuesday as price bounced, got stopped out on Wednesday on a reversal for a break even. We are now in 100% cash for our portfolio.
A lot of people have been asking me why we are so heavily cash overweight, despite calling the bottom around early October (Article: Equities: Sentiment Overview) in the recent risk on asst rally?
Well the answer is quite simple actually. While the market sentiment got extremely bearish, justifying a rally, in my opinion it will only be a short to medium term one. We are coming closer to the end of the business cycle - this is not the beginning of a new business cycle. Since the economy is now in the last inning of the current business cycle, our main goal as long term investors does not line up with risk reward. Our goal is to always buy proper long term bottoms.
Portfolio Thoughts
Regarding our own portfolio, both of our small US Dollar long trades have been stopped out now. The Dollar has failed to maintain its uptrend against all currencies, including the weak Eastern European ones as well. Our position in the Singapore Dollar got stopped out as the price triggered a sell order just below 200 day moving average, while the Czech Krona short, which was opened Tuesday as price bounced, got stopped out on Wednesday on a reversal for a break even. We are now in 100% cash for our portfolio.
A lot of people have been asking me why we are so heavily cash overweight, despite calling the bottom around early October (Article: Equities: Sentiment Overview) in the recent risk on asst rally?
Well the answer is quite simple actually. While the market sentiment got extremely bearish, justifying a rally, in my opinion it will only be a short to medium term one. We are coming closer to the end of the business cycle - this is not the beginning of a new business cycle. Since the economy is now in the last inning of the current business cycle, our main goal as long term investors does not line up with risk reward. Our goal is to always buy proper long term bottoms.
How do we know what a proper long term bottom looks like? Consider the chart above, which shows some of the main economic indicators for G3 countries - US, Germany (EU leader) and Japan. Long term bottoms in risk assets occurred in late 2002/03 and late 2008/09. At that point the economy was in a recession or just coming out of one, earnings were contracting and very low, business confidence was pessimistic, manufacturing was depressed and finally job losses were the name of the game. The best time to buy is during awful times like those, because what waits over the other side of the fence is a whole new upturn in business cycle.
Lets compare those conditions to today... earnings are at record, business confidence is still at elevated optimistic levels, manufacturing is still expending and we do not have any sustainable job losses yet. Does that sound like a pessimistic scenario to put large amount of money to work? No. Therefore, it is safe to say that the business cycle that started after a 2008 recession, is still alive and well.
I have maintained my view that a recession will still not happen in the US, because it is too early. Business cycles last about 4 to 5 years. Bears have failed many times to call a recession and made themselves look like idiots in the process. They get too bearish, over do the short side thinking its 2008 all over again, buy a ton of Treasury bonds and than get killed by huge short squeezes! It's quite hilarious actually. Having said that, recessions in the US occur every 4 to 5 years when we look at the history, therefore this cycle is overdue for a recession in either 2012 or 2013. I rather think its the earlier figure due to sluggish growth and huge amounts of debt. Keeping that in mind, a trader can make money for a powerful rally and I am considering buying some Agriculture soon.
The big move so far has been the sustained uptrend since early 2009. However, the next big move, in this secular bear market for stocks, will be down once the business cycle together with earnings and the economy starts to turn towards negative surprises. Therefore, you can see that our view is slowly becoming more and more negative, but obviously this rally could still have some legs until early next year.
Be warned though, not all is well with global economy. I continue to believe China is now heading for a serious slowdown. Recent reports, like the video above, suggets the property market is which has been overdue for a correction, is finally entering one. That doesn't mean everything will crash today or tomorrow, but it is just another important signal that the global economic is not on a good foot. In summary, we refuse to be doing any big buying, as we approach the end of a business cycle... that is just a suckers game!
"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people, always have to be playing - they always have to be doing something." ~ Jim Rogers
On that wise note by Mr Rogers, I hope you enjoy the rest of your weekend!
I understand your points perfectly. Anyway,my studies say is highly probable 12 months of bullish trend in equities.
ReplyDeleteCheck this charts where you can see the relantionship of yields, stocks and VIX.
http://www.ferrerinvest.com/2/post/2011/10/vix-bonos-y-bolsa.html
Regards
Yeah I do agree the whole thing might last for awhile, that is why one should by the most oversold assets with the best fundamentals - Agricultural commodities! I certainly plan to in the near future.
ReplyDeleteAgree. What is amazing here in China is the refusal to see a price bubble top behaviour, and continue to claim "measures to push the demand"... It is completely out of sense. The only best thing they can do in front of this bubble is to make the losers loose: loose of real estate price for owners, builders, banks, locals gov... And let the price find a real equilibrium that match the average Chinese purchasing power. It won't happen. If history is a guide, for the bubble top to the pro-tracted economic contraction (USA, Japan, Nordic countries,...), it would take 12 to 18 months.
ReplyDeleteAn interesting question could be... In the USA, people were invested in the Nasdaq in 2000 and they were crushed. They move to the real estate (2005), DJ industrial top (2007), commodities CRB (2008), now they rush into TB. In China, they rushed into the SSEC in 2007 (when everybody had a trading account, even waiters), then to the immo bubble. The good question is: were would they go next? Bonds is not a cultural investment in Asia. It could be hard assets (precious). Bottom line: the one who can tell what the Chinese will do can tell where the prices of gold would go. If they rush in gold, the 80' rise could prove to be a picnic. But if they dont, i won't be that much bull on gold, even in front of Fed printing.
Fred
The last time the Chinese government used administrative power to limit housing speculation around 2003 - 2005, the speculative money found its way into the stock market. For people living in mainland China, their only ways for investment are either the real estate market or the stock market. Gold is not something we traditionally want to hold as an investment, just a form of insurance if things really look bad (like civil unrest).
ReplyDeleteFred- Very nice post. I tend to also agree with Anonymous poster, in that the Chinese Yuan closure means simply either real estate or stocks for the majority of Chinese investors.
ReplyDeleteLet us try and be contrarians for a second... if the Chinese property bubble crashes, there will be huge loses for Johnny Come Lately's who bought apartments last year, plus global economic slowdown with the fall in industrial commodity demand. At that point does the price of Shanghai Composite crash as well? Possibly, but maybe not as the money moves back to the equities from real estate.
However, a more reasonable bet would state that Chinese will not stop importing Soybeans, Corn, Sugar or Cotton. I'd rather think that from a contrarian point of view, Agricultural commodities could boom even in a slowdown case scenario.
History shows that in the last six recessions, Soybean demand has never fallen. In the 1930s and 1970s, during stock market panics and crashes in all types of assets, Agriculture flourished.
Basically... when politicians and bankers hit the debt limit, only farmers win!