- It is my opinion that there isn't much value anywhere in the financial market environment today. However, one asset class that remains out of favour with investors are Soft commodities such as Coffee, Cotton and Sugar with price currently down between 26% to 32% from a year ago. Furthermore, Soft prices are down even more from their peak in February and March of 2011. Most retail investors have given up on these assets, while technician traders are calling charts "ugly", "awful", "value traps" etc. This is all happening as investment banking analysts forecast large surpluses for 2013 and hedge funds continue to add short positions. When everyone is thinking the same way, the majority of the time no one is doing any thinking at all. My opinion is that those willing to go against the grain by investing today, will find handsome returns in their portfolios in a few quarters to a year or two.
Source: Morgan Stanley
- We are witnessing the first wave of meaningful earnings downgrades since the Financial Crisis as the slowdown starts affecting profit margins, revenues and earnings of global corporations. The Morgan Stanley research team forecasts a 14% drop in Shanghai Composite earnings, 12% drop in Euro Stoxx 50 earnings, 8% drop in MSCI Emerging Markets earnings and finally only a 1% drop in the S&P 500 earnings. Only a 1% drop in the US? Is this a 2008 deja vu moment with the famous buzz phrase "de-coupling" all over again? With the current disappointment mainly skewed towards China and Eurozone, it should come as no surprise that Shanghai Composite has had a disaster of a run, while US equities have significantly outperformed EU & GEMs over the last several quarters. My personal opinion is that US equities are overvalued right now (on both a nominal and relative basis) and even though the majority of hot-shot ace analysts state that the P/E multiple is historically low, where they will go wrong is with the "E" component. In other words, I expect US earnings to be downgraded rather swiftly in the up-and-coming 2013/14 rescission, bringing the "P" component down with it.
- Despite continuous selling of US equities over the last few weeks, especially in the Nasdaq index, it is very surprising to see only one major sector (Energy) currently oversold in the short term. No sectors are oversold in the medium or long term, but alarmingly we now have the majority of sectors in a downtrend from the medium term perspective. With the S&P only a few percent from the bull market highs, it is also worrying to see long term 200 day MA weak participation from leading cyclical sectors such as Semiconductors and Technology. Remember, it was Technology that led us out of the March 09 lows with a powerful performance, so could it lead us into 2013 with a bear market disappointment? Furthermore, economically sensitive small caps also look quite weak too. Finally, gold bugs should be pleased to see that PMs miners have the strongest long term participation, with 85% of stocks within the sector trading above the 200 day moving average. Those that follow the blog closely should remember that only several weeks ago, Gold Miners were largely out of favour with investors.