Monthly Strategy – January 2010


Equity performance was impressive in recent month, down to the last trading day of the year. Thursday trading showed that the investors are not so confident that the upside will continue, revealing, maybe a moment of truth. Everybody is long because of fear not to miss further gains, but scared of a potential slip.

The new regulation for real-estate developer land purchases in China; slowing credit growth and Rusal IPO which could capture excess cash which is fueling the rally and serve as a sort of a global wide correction catalyst.

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 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 don’t expect a rise in 2010); 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.

If we have longer term treasury bonds moving out of the post Lehman trading range; I would be a buyer.


Energy Commodities

We have seen a couple of favorable U.S. stockpiles reports giving support to the crude oil prices. The stockpile decrease is slowing, so I believe the draw was a result of a heating season start and people were filling their heating systems. The demand has not returned, in contrary it on the lowest levels in decade. We have lot of  crude oil and especially derivatives stored on sea. I would expect crude oil below $50 in the next 6 months. Looking for a short position.

U.S. natural gas – we have seen a large decrease in stockpiles in last couple weeks.  This has supported price in recent weeks. Same as with crude oil this rate of decrease in stockpiles has slowed down. I would expect U.S. natural gas moving to the lower end of trading range ($4.5).

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.

Looking for a short position in aluminum.

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

I would expect a positive employment report next week; a reaction from the markets would be a sell of in precious metals; this would be, in my view, a favorable moment to re initiate primarily long gold position.

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


As stated earlier in the post I believe Mr. Bernanke will further debase U.S. dollar ; I believe BOJ will do the similar.

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.

Looking for a JPY strength to re initiate short USD/JPY position.

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This entry was posted on Saturday, January 2nd, 2010 at 11:01 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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