Monthly Strategy – March 2010


In the macro arena we have leading indicators rolling over, and a stream of worse-than-expected data pieces on U.S. housing, U.S. employment, U.S. durable goods ordered and large move lower by consumer confidence.

Seems that the markets do not appreciate the data. Things that move the markets are only FED policy on rates, dollar strength and Greece debt problems. China credit tightening in forgotten for the time being (at least to the next announcement).

All dough I’m convinced that the economy is deteriorating  almost everywhere except in China and in their commodity based economy satellites I have only a small exposure to the markets (via a June SPY 105/106 put ratio backspread) to keep me interest for the markets. I do not have a clear conviction short term.

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 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.

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 at the top of the range.

U.S. natural gas – we have seen a large decrease in stockpiles in last couple weeks.  This has supported price in recent weeks. I would expect U.S. natural gas moving to the lower end of trading range ($4.5) as heating season ends.

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 of copper reached 6 year high in London and a 7 year high in Shanghai.

In short term the copper price will be supported by Chile supply disruptions. Chile accounts for approximately a third of world output. The bulk of production is located in the north of the country (1.000 km from the earthquake hit region of the country) and is operating normall. The risks come from the power disruptions and transport difficulties. My guess is that the output will not suffer, but I expect that we will have precautionary buying. I would chose to go speculative long in copper and watch out for a reversal.

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.

Steel – limited vehicles to invest; I expect further losses on deteriorating iron ore/final product differential.

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.

Corn interesting as bad weather is delaying planting season. Will watch this segment closely.

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.


For the time being I expect a strong U.S. dollar, especially against euro and British pound. I expect all commodity based currencies price risk skewed to the downside as strong dollar is negative for the commodity prices.

Looking for a further JPY strength to re initiate short USD/JPY position (at the top of the range).

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This entry was posted on Monday, March 1st, 2010 at 5:16 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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