Monthly Strategy – February 2010


We have seen a meaningful correction in equities in recent couple of weeks, we have a market that fails to react to presumably good news, we have low levels of cash in equity mutual funds and still high number of bulls; high beta stocks suffered massively;  For me this is a setup for reversal, I expect further short term losses.

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’m running a short SPY positions. No individual names or sectors; If I would have to chose I would go with Financials, Real-Estate, Consumer Discretionary and Industrials short vs. Health Care, Consumer Staples and Utlities Long.

Geographically speaking (relative) Long Europe vs. Short U.S.; Long U.S. vs. Short Emerging Markets. Short Brasil.


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.

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

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 first half of the year. 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.

Steel – limited vehicles to invest; I expect further losses.

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

The whole complex suffered a lot on back of stronger U.S. Dollar. I expect that we will see additional loses before precious metal return to the what I believe secular bull path.

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.

I believe Greece problems are overextended, yes, the odds are high that they will default, but in terms of the Greek economy compared to EMU economy, it really doesn’t matter.

ECB (together with Bank of Canada and Reserve Bank of Australia) looks as most prudent among developed economies central banks. I would go long with the Euro.

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

, , , , , , , , , , , , ,

This entry was posted on Monday, February 1st, 2010 at 2:00 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.

Comments are closed.


Get Adobe Flash player