Thursday, March 31, 2011
A must watch interview on geopolitical outlook of our past, present and future by Singaporean master diplomat, Lee Kuan Yew. Link here.
Wednesday, March 30, 2011
Corn days of supply shows a perfect long term commodity demand and supply picture. Agriculture has been neglected since the 1980s and that is perfectly seen in the days of supply for Corn.
Same picture applies for Spybeans days of supply. Once again, one can notice that agriculture has been neglected since the 1980s.
I remain very bullish on grains, including Soybeans which has a huge demand coming from China.
As we can see from the charts above, a smart investor should buy commodities that China does not have. Grains imports are quite strong, but majority of demand is coming for Soybeans.
Tuesday, March 29, 2011
One of the main aspects of the current bull market is the example above in both charts of how well cyclical sectors, as well as the overall equity markets, have performed against defensive sectors like Utilities and Telecom. This should make one think that from a contrary point of view it might be time to buy defensive sectors against cyclical sectors, sooner rather than later.
Developed markets mutual fund flows since March 2009 lows have remained in negative territory for majority of the bull market, until in the last few months, where flows have recently accelerated due to emerging economies inflationary problems.
Asset class allocations in the US show huge popularity in the Bonds just the yield reaches the smallest amount since the 1950s, when the last Kondratieff Cycle ended. Average allocation towards equities not yet reached levels of late 1970's and into 1982, when the last Brenner Cycle started. Finally, lowest allocation levels towards cash indicate that eventually, interest rates will rise back towards more normal levels.
Long term contrarian outlook: Short bonds, expect higher interest rates and be patient until equities bottom out.
Source: Nomura Newsletter
Monday, March 28, 2011
The following article is an abstract from Nomura's recent economic newsletter:
Alarmist views about Japan's ability to cope with its public sector debt burden have circulated for some time, even before the Sendai earthquake. For example, the normally reliable New York Times ran a series late last year portraying Japan's economy in general decline and malaise.
To some extent, these portrayals are a victory for certain elements of Japan's foreign policy establishment, eager to present an image of weakness and struggle. If Europe and the US buy into such a view, the story goes, they will be less likely to get as tough on trade issues as they did in earlier decades. Think of China’s official self-portrayal as a “poor” country.
It is easy to forget that Japan still runs major current account surpluses. It produces more than it consumes, thus continuing to accumulate net financial claims on the rest of the world. The latest available data on Japan’s net foreign assets are from the end of 2009. Figure 1 shows that Japan had net foreign assets of almost USD3 trillion, over one-third more than China. It is easy to confuse official reserves with total foreign wealth. China has more official FX reserves, but Japan has more total assets when including both private and public sectors.
Another aspect of this picture is shown in Figure 2. Yes, net public sector debt is about USD5 trillion – higher than GDP – but private sector net worth is about US$23 trillion. As Nomura Chief Economist Paul Sheard has often noted, Japan does not have a “debt problem”, but the Japanese government does. Big difference.
Sunday, March 27, 2011
Margin debt climbed almost $21 billion in February, according to the NYSE. The accumulated total hit $310 billon, while the market entered a correction by 18th of February 2011. Mr. Market has been doing a great job sucking in all the Johnny Come Lately's, as S&P 500's price sits at 1310, which about 5.5% higher than in April 2010 highs at 1240, however the margin debt has jumped by almost $48.5 billion. To put this into perspective, the overall increase in margin debt since March 09 lows has been $137 billion.
The main aspect of the European Sovereign Debt Crisis that is quite noticeable is that the still market perceives Greece, Ireland and Portugal insolvent as CDS keep rising, however one main fundamental shift is occurring. CDS of major countries like Spain and Italy are falling and completely diverging from the rest, indicating that the market now has a view that European leaders have done enough with their backstop mechanism.
Saturday, March 26, 2011
Majority of investors feel that this was just another 5% pull back and that a more meaningful correction will not be a nasty surprise, lurking just around the corner. However, consider that Bloomberg reported last night that the drop in the VIX readings was huge over the last week. VIX fell by more than 42% since 16 of March short term bottom. Bloomberg report went onto say that this is the largest ever 7-day drop in the VIX's history. Within one week, every single investor ditched the wisdom of buying puts for protection and jumped straight back into the equity market. Usually downtrends slide on a slope of hope where prices fail to make new highs as yet optimism flourishes, while uptrends occur as we climb a wall of worry where prices make new highs and yet majority exercise disbelief. From the VIX's point of view, majority currently aren't worried.
When we look at the market internals, we can notice that defensive sectors have done the best since the February 18th top at 1343 on the S&P 500. That means Utilities, Staples, Health Care and Telecom have outperformed the market, by going down the least. Also in this list is Energy, a cyclical sector unlike others, which usually stages a rally in the later parts of the market cycle.
My point of view is that the market could be, but not necessary is, staging a topping pattern of some sort, where a stronger correction occurs in the bad seasonal months of May, as majority of investors have once again become complacent. However, there are many factors still going for the equity bull market, so it is not necessary to get extremely bearish just yet. Commodities and commodity related stocks, like energy, usually perform very well in the later parts of the cycle, so keep that in mind as well.
Commitment of Traders Positioning
While not at record lows, futures contracts held against the US Dollar in foreign currencies, remain extremely bearish as majority see the Dollar going lower.
Daily Sentiment Index
Daily Sentiment Index (DSI) on the US Dollar just hit a fresh new low at 4% bulls according to the trade-futures.com survey. Therefore, 96% of traders are bearish on the Dollar and see it going lower.
When we look at the consumer confidence from the main developed economics (G4), we get a diverging picture on the way the recovery is progressing. For example, in the US, consumers are slowly becoming more upbeat despite rising gasoline prices and difficultly of finding a job. Similar story is portrayed in Japan, however it will be interesting to see the March update for consumer confidence after the Japanese earthquake, radiation problems and the stock market crash. German consumers were in doldrums during the northern hemisphere summer months, just as the European crisis was in full swing. You will remember that it was on 07th of June that the Euro finally bottomed out against the US Dollar as well. Finally, consumers remain the most pessimistic in the UK, where we haven't had a positive outlook since the good old days of 2007 (pre-financial crisis times).
Note: February Data
Friday, March 25, 2011
Most American citizens now believe that clearly majority of the countries problems are to do with the economy. This has been a clear trend since 2008.
Majority believe that economy in general as well as unemployment are the main issues, while there has slowly been an increase in citizens who think that governments deficits are not sustainable in the long run.
Investor Intelligence Sentiment was updated this Wednesday. Despite the correction in the equity markets, newsletter advisors remained quite bullish.
Thursday, March 24, 2011
According to Merrill Lynch research, hedge funds were the biggest buyers of the Energy sector in the last four weeks, as well as the last week alone. There has been heavy selling in the Financial sector as well as some ETFs.
Furthermore, hedge fund exposure towards the S&P 500 shows that majority of hedge funds are now becoming more bullish and not bearish.
Source: Merrill Lynch Newsletter
Households remain quite cautious after the 2008 crash, with cash exposer move towards 40%. Equities and Bonds are close in exposure at around 30%. This is quite a contrast when compared to the end of the great secular bull market in the year 2000, when exposure hit 45%. UK remains the most exposed household in the developed economies towards equities, while Japan remains the most underexposed.
Source: JP Morgan
S&P 500 and Crude Oil are moving in the same direction, S&P 500 and Long Bond are moving in the opposite direction, while S&P 500 and the US Dollar are moving in their own directions (neutral correlation).
Out of the main 10 sectors of the S&P 500, the most oversold during the current correction have been Utilities, Materials and Technology. On the other hand Energy has completely outperformed the market. This has been the area that I have been advising to invest into for quite sometime, unlike many other blog writers which think/thought Energy including Crude Oil were about to crash. For me this investment is paying big dividends as it has gone up the most and now down the least. I would not buy the Energy sector right now, because I like buying under performance and wait for it to become out performance.
Over the last four years, cumulative mutual fund flows have shown that investors favour bonds over equities in general. This pattern is quite worrying because bonds have been in a bull market for almost 30 years now, since 1981. Foreign equities including emerging markets are also receiving strong flows, despite an amazingly powerful rally since 2001. On the other hand, the most ignored asset class seems to be the US equity market. Once again this pattern is quite worrying, because S&P 500 has been out of favour and in a secular bear market for over 11 years.
These opinions are obviously my own and are by no means to be used to time todays market over the next few months, but as the old saying goes: "Investors never chase bears". It is my opinion that bonds are nearing the end of their secular bull trend and in the next few years stock could be at bargain prices. But investors seem to be doing a completely opposite strategy.
Tuesday, March 22, 2011
Aluminium stockpiles on the London Metals Exchange continues to remain relatively high, Copper stockpiles on the London Metals Exchange are starting to increase, Nickel stockpiles on the London Metals Exchange are slowly falling, while Zinc stockpiles on the London Metals Exchange rise substantially towards 2004 levels.
Source: Danske Markets Newsletter
Monday, March 21, 2011
This Fridays commitment of traders report showed that a basket of commodity futures speculators remain extreme bullish. The basket is presented under my own tool against the CRB Index and the futures contracts are weighted to that of the CRB weightings as well.
Merrill Lynch Fund Managers Survey for the month of March 2011, showed managers were trimming commodities exposure allocations with net 21% OW from 28% OW last month.
The March FMS shows a scaling back of investor optimism as high commodity prices sap confidence in corporate profitability and global growth. It feels like wait & see rather than risk aversion; cash is replenished but this could reverse with easing MENA geopolitics or if the ECB threat of higher rates proves over-played.
A slight shortening in views on Fed rate hikes was trumped by wholesale buy-in to ECB rate rhetoric with 72% now expecting a rate rise in Q2 (vs. 0% last month). In light of agreement being reached on an expanded EFSF, this may be premature.
Global inflation expectations remain high at 75%. A net 31% see stronger global growth but down from 58% last month and broadly similar to the fall in profit expectations (32% from 51%); a net 24% see corporate profit margins falling compared to 10% expecting an increase back in Jan.
The FMS Risk Appetite Index fell back to 41 (from 47) the lowest in six months. Hedge fund net exposure fell to 34% (from 39% in Feb) and cash increased to 4.1% up sharply from 3.5% last month.
This closes the cash sell signal triggered last month since when global equities have fallen by c.3%.
Equities (45% O/W vs. 65%) and commodities (21% O/W vs. 28%) were cut in favour of cash (14% O/W from 9% U/W). However, bonds saw very little benefit with the U/W closing only modestly to 59% from 66% in Feb.
Pharma had the biggest jump on the month (10% O/W from 4% U/W) but investors remain resolutely pro-cyclical with tech, energy, materials and industrials the top-4 preferred sectors.
EM exposure fell to 0% from 5% O/W. The US was cut to 23% O/W from 34%, with both EU and Japan at 8% O/W (note: the survey closed before news of the Japan earthquake). This puts regional conviction at the lowest level since Jul-01.
The major currency moves this month saw GEM moving further into undervalued territory and the Euro going the other way. Sterling under-valuation is closing the gap while limited changes were seen in USD and Yen.
Source: BofA Merrill Lynch Newsletter