Tainted Alpha

We have had some spectacular runs from the recent lows both in the equity arena and among commodities. As I am writing this introductory post markets are hitting new highs for the year. Common to these diverse markets is that we have seen little or no material improvement in underlying fundamentals only consolidation at initially depressed levels.

Chart 1. World Equity Indexes

S&P 500 in white; DJ Eurostoxx 50 in red; NIKKEI 225 in blue;

Hang Seng in yellow; Shanghai Composite in green

Governments across the world employed massive amounts of both fiscal and monetary stimulus and prevented the global economy falling apart. Unintended (or maybe intended) consequences of loose monetary policy and interest rates close to zero brought money to the markets and had driven both stocks and commodities. The stock rally was fueled by massive short squeeze and it was led by low quality/high PE stocks and sectors hardest hit by credit crisis. Volume was light.

Chart 2.  China Money Supply M2

Commodities also got their lift from loose monetary policy but here the main playground was in China which imported record amounts of various commodities both for industrial purposes and speculation. Chinese expansion in commodity buying enabled commodity production to remain close to previous levels despite signs of excess inventory and excess capacity across various commodities. The China story development remains one of the most important elements in keeping the recovery story alive so I will monitor it closely.

Chart 3.  Commodities

Crude Oil in white; US Natural Gas in blue; Gold in red; Aluminum in yellow;

Copper in orange; Nickel in green

Beside China the health of US financial system (primarily banking system) will steer the markets future course with residential and commercial real estate being most important segments to watch. There are some signs of consolidation in US housing, but I cannot get rid of an uneasy feeling that the decline is not over. The commercial real estate problems have not reached the levels we see in residential area, so this will be another important development to watch.

Despite the fundamentals that are not so good, in my view, it is quite obvious that the markets are in “bull mode“and sentiment wise it is hard to expect market direction change (especially major one) without some extremely negative event as a catalyst.

Aluminium, China, China Money Supply, Copper, Crude Oil, DJ Eurostoxx 50, Gold, Hang Seng, Natural Gas, Nickel, NIKKEI 225, S&P 500, Shanghai Composite

This entry was posted on Tuesday, August 25th, 2009 at 9:58 am and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.