Monthly Strategy – December 2009

I am starting a monthly strategy overview to have my strategy in one place and a to test accuracy of my views. Written revisions and accommodations would also contribute to my investment discipline.


I have been surprised by the market strength as the market rejected the Dubai turmoil as a correction catalyst. This has substantially changed my views on the markets. The belief (in my view incorrect) that the economy will start recovering at average post recovery rates is strong. The Dubai spurred correction has only proved to be a buying opportunity. Because of that I wouldn’t exclude S&P 500 moving ahead of 1200 points. I would also expect short-term equity strength on both global and emerging markets level.

My mid-term view remains unchanged – this is just a bear market rally; U.S. and E.U. economies will experience same patterns in both economy and markets as Japan in ’90ies.

I believe it is too risky to be long equities, as the markets could change course any moment, so I will be looking for short opportunities. Only sectors I view undervalued are utilities and health-care, but I don’t plan to take positions because of lack of catalysts.


I think that Mr. Bernanke game plan is to have interest rates low longer than anyone expects; I believe that the quantitative easing will get some sort of extension. The rationales are to keep mortgage rates low and to remove assets from bank balance sheets to keep banking system minimum liquid. On the other side 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 in lower yields and curve flattening in short term at least. I would also expect corporate credit both spread and yields falling. Long term view would be exactly the opposite.


Energy Commodities

I believe that the crude oil is one of most overpriced commodities when looking at demand and supply fundamentals. The crude price is fulled only by U.S. dollar weakness and hopes of economic and demand improvements. I expect the demand to remain flat; I expect China will slow down its stockpiling efforts and supply glut to push crude oil price below $50 in next 6 months.

Natural gas is far better priced than crude oil, but the slow demand (despite low price) and persistent supply do not warrant any improvements in both fundamentals and price of the commodity in near term future.

Only interesting commodity in this arena is uranium, but I am not aware of vehicles to invest in uranium for a retail investor. The alternative is to invest in mining companies, but that brings additional risks. Just an observer for the time being.

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. Because of production process differentials; bauxite from which is aluminum produced is one of most common ores in earths crust; copper ore very scarce; I would look for a aluminum short position. Copper has both industrial metals and precious metals characteristics, it is scarce, not my number one candidate to short in falling U.S. dollar environment.

Steel – limited vehicles to invest; I think it is overvalued, but not looking to play that.

Agricultural Commodities

The supply and demand fundamentals are favorable here (wheat excluding for the time being); they have lagged other commodities rally; whole universe potential long play, looking for a entry point.

Precious Metals

Recent BOJ actions have convinced me that a competitive currency debasement is a high possibility scenario. I light of further fiat currency confidence problems the precious metals are place to be. I’m running a long gold position despite not being a gold bug and not agreeing with all gold investing premises. Careful, because of a possible short term correction, but a believer in secular upward potential.


As stated earlier in the post I believe Mr. Bernanke will further debase U.S. dollar ; I believe BOJ will do the similar (running short USD/JPY position with which I am not so happy). So short USD vs. all mayor currencies , short JPY against USD.

ECB (together with Bank of Canada and Reserve Bank of Australia) looks as most prudent among developed economies central banks but I believe that E.U. economy will suffer from strong euro, also possible that they will do something to keep euro down, but as a response to falling USD and JPY later down the road.

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This entry was posted on Wednesday, December 2nd, 2009 at 5:57 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.

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