Blog Summary
First week of 2012 is done! As I have not been as active as I usually am, the above is a summary of the last week of December 2011 and this recent week. I shall return to more active posting schedule in the coming week.
Market Summary
I was looking at some sentiment indicators over the Christmas and New Year period and I noticed that while investors were quite optimistic on Crude Oil, they were decently negative on Heating Oil. I was wondering if that type of discount will create an arbitrage opportunity of some kind. Well... judging by this weeks price action, Heating Oil definitely caught up with a very impressive 6% gain. Other notable gain was Cotton. On the other hand, decently large weekly losses were present in some Agricultural commodities including Wheat, Cocoa and Oats - all of which declined by 4% or more. Oats, especially stood out from the Grains sector, with a large 7% decline. Finally, Euro was experiencing another one of its miniature free falls from $1.31 earlier in the week, all the way down to $1.27. Speculator positioning once again creeped up to new record high.
Talk Of The Week
Surely it has to be the New Years eve / day celebrations, instead of another week dominated by Eurozone collapse stories. On the other hand one could claim that the talk of the week has been about 2012 predictions, which I already discussed previously with our blog poll article. While the voting is still on going, many readers have asked me to write some type of a prediction as to what I see could occur in 2012. I would rather not engage in astrology, fortune telling and market forecasting, but since more than a few of you have asked, I would also rather not be a hold out either. So here goes nothing...
1. Treasury Note Yield Will Rise Above 3%
According to the media, the European situation is on the verge of total collapse as a Greek default triggers domino effect throughout the whole EU. Fair enough, I am not one to disagree about this outcome, but I disagree about its timing and that it will happen in 2012, as majority are expecting. So my view is that Treasuries, with such low historical yields, will reverse in 2012 and experience an awful year, after being star performers in 2011. I personally think there is a very good chance that the US Treasury 10 Yr Note Yield moves above 3% or even higher, while the 30 Yr Long Bond moves north of 4% once again. Currently, as I am writing this the 10 Yr Yield is at 1.96%, while the 30 Yr Yield is at 3.02%.
2. Wheat Prices Will Gain Handsomely
I am very bullish on Agriculture, which is not the most accepted outlook when one is constantly bombarded by CNBC to Bloomberg on how harvests are better than expected, while the global economy is slowing. But I have to admit that it must be quite insane from consensus's point of view, for one to be predicting that one of the most shorted and most hated commodities - Wheat - will gain in 2012. There are plenty of bears on Wheat, there are plenty of stories about oversupplies, and as we can see from the chart below, there are also plenty of short positions. My view is that Wheat will not only gain during 2012, but it will be one of the best performers. As one of the major surprises of the year, Wheat will quite possibility spike to a new high above $9 a bushel.
3. GEM Equities Will Outperform US Equities
Goldman Sachs recently put forward a view, in a Bloomberg article, that the best of Emerging Market growth is over after a decade long boom. With record mutual fund outflows and slowing growth, Goldman's view is to stay away from GEM equities as they could drop by another 20% or more in 2012. In light of this article and many other indicators I follow, I happen to think that Emerging Markets relative to Developed Markets (especially relative to the US), are extremely cheap. So in 2012, my view is that Emerging Markets will outperform nicely and surprise many with a substantial gain.
4. Financials Will Outperform S&P In H1
Financials have been a disaster in 2011 and have under performed the S&P 500 for over two years now. There are so many investors, including smart money Hedge Fund managers, who got completely fleeced by the recent August crash in the Financial Sector. Many major banks and financial institutions have actually fallen so much that they do not trade any higher than March 2009 lows in nominal terms. While I am not bullish on this sector in absolute terms, I think that for the first six months, Financials will outperform the S&P 500 in a similar fashion to March 2009 until November 2009. Financial Sector leadership on a relative basis will signal a strong bull trend for the overall equity market, which "could" take the S&P 500 to a new high in 2012.
As I already described the European situation in point No. 1, I will not go over it again. As one can see from the chart below, there are plenty of bears on the Euro just like the Wheat market. But this is more than that, this is a full out short fest as every single bear has left the cave. Even the Super Bears like Gary Shilling or John Taylor see Euro Dollar at parity again. In financials markets, it is not enough to just be a contrarian. Instead, what is required is that one has to be right, while consensus is wrong, and to be a contrarian. Therefore, one would say, betting on the Euro is just a contrarian trade with no fundamental foundation - as the Euro's conditions are terrible. Personally, I agree.
However, you see currency investments are relative and not absolute. The Euro is competing against the US Dollar here. Majority of the investors constantly forget that they are selling the Euro only to buy the US Dollar. All of a sudden, my view on the Euro changes as there is no match for the awful fundamentals the US Dollar brings to an investor. So to conclude, while everyone is negative on the Euro, I happen to think it will surprise on the upside, not because it has strong fundamental outlook, but because the focus will turn back on the US Dollar. Adding further fuel to the fire and making this call almost impossible is my expectation that the Dollar will make a lower low this year. The call is so impossible from today's perspective, that a close friend of mine has engaged me in a bet over a bottle of alcohol!
We will come back in several months to see our progress...
It will be interesting to see how you do with your calls. I've been following this blog for awhile and your calls so far have been very good.
ReplyDeleteTiho:
ReplyDeleteLet 'em rip. All insights make good sense-and Wall Street strategists are negative on the US market. Hooya, can't wait until they upgrade their views and become positive. We need someone to sell back to at the new highs.................
Put some Fosters on ice, please.
Great post with a great selection of charts. I do have to tell you that is difficult to see the Euro above 1.49 with Italy's yields above 7%. So how could one see bank shares rise and bond yields rise as well?
ReplyDeleteHey Tiho, have you been watching CNBC? Guests through the Asian show are super bearish on the Euro.
ReplyDeleteCould Italy's rates above 7 become attractive as a buy, enhancing the Euro in the process because of the flow of outside money coming back and having to be converted into Euros for the Italy purchase?
ReplyDeleteAnonymous #1 - thank you.
ReplyDeleteAnonymous #2 - fosters is on ice for you buddy haha!
Anonymous #4 - yes I actually did notice. I smsed some trader friends of my at a highly bearish tone lots from lots of anaylsts on the Euro.
Anonymous #5 - very interesting point. ECB LTRO program of giving banks the funding is very much linked to that possibility. Draghi is trying to give banks cash, so they can go buy Italian bonds at 7% yield with leverage and repair balance sheets.