Tainted Alpha

Little late…but better late then never…

Equities

Only extremely favorable economic data could change the negative trend established. This is highly unlikely. So I would say we will soon see S&P 500 at 900.

On a macro level, the stimulus is wearing off, politicians and central bankers are not ready to continue with loose fiscal an monetary policies, just the opposite, austerity is the game. For now.

Private demand is weak. Private investments also show no strength.  Real-estate is burdened with unsustainable debt levels, still to high prices and weak demand. Without real-estate investment recovery, we cannot talk on sustainable and historically high economic growth rates.

On company level, the margins are record high, having high margins, the competition and price decreases to increase sales will push for a margin normalization.

Bonds

I think that Mr. Bernanke game plan is to have interest rates low longer than anyone expects (I don’t expect a rise in 2010); I believe that the quantitative easing will get some sort of extension (probably when we see second notable leg down). I expect that the short-term price trends in economy to be deflationary because of private and household sector de-leveraging (leading to weak demand) and large output gap (leading to strong supply).

Because of deflationary expectations I believe that the demand for government debt will be strong especially from bank side as they have large amount of cash reserves they are not using to lend to private sector.

All that translates into rising yields at near end of the curve translated into curve flattening in short term at least.

Commodities

Energy Commodities

Crude Oil – fundamentally, the market is over supplied; since crude oil is a high beta play on equity markets my target for WTI spot at 50 in the next six months.

U.S. natural gas – Drilling ban gave a lift to the gas markets, but the effects of that will not be short term, so it looks we will return to 4 USD/MMBtu which could be called a floor. I would be a buyer bellow 4 USD/MMBtu.

Industrial Commodities

The fundamentals for both aluminum and copper are similar, the oversupply is evident but Chinese stockpiling and investment demand are keeping excess supply off the markets. The stockpiles are at multi-year high.

The China slowdown is in the air. Short both aluminum and copper.

Steel – same as with aluminum and copper it will follow China down path.

Agricultural Commodities

Been totally wrong on this, the production is outweighing demand in almost all commodities. Corm maybe an exception.  

Precious Metals

Short term, I see gold overbought and over-owned, especially having in mind the dollar strength.

Long term, in light of further fiat currency confidence problems the precious metals are place to be.

Currencies

For the time being I expect a strong U.S. dollar and further weakening of the Euro. Resource currencies could lose part of their strength on weaker commodity prices.

British Pound also does not look good.

Agricultural Commodities, Aluminium, Ben Bernanke, Bonds, British Pound, Copper, Crude Oil, Euro, Gold, Natural Gas, S&P 500, Steel, U.S. Dollar, U.S. Treasury Bonds

This entry was posted on Wednesday, June 9th, 2010 at 3:05 am and is filed under Monthly Strategy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.