Monthly Strategy – July 2010
Almost unchanged from June.
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 875.
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.
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 weakening of the Euro. Resource currencies could lose part of their strength on weaker commodity prices.
Agricultural Commodities, Aluminium, Ben Bernanke, Bonds, British Pound, Copper, Crude Oil, Euro, FED, FED Funds Rate, Gold, Natural Gas, S&P 500, Steel, U.S. Dollar, U.S. Treasury Bonds