Monthly Strategy – April 2010
Equities
Although I’m convinced that the economy is not pulling a V-shaped almost everywhere except in China and in their commodity based economy satellites I believe that in the short term the equity gains will continue. I have a 1200 S&P 500 target.
I have only a small exposure to the markets (via a June SPY 105/106 put ratio backspread) to keep interest for the markets. It’s performing bad.
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.
There is a possibility of a equity bubble fueled by low interest rates, but for the time being I’ll stick with the bear market theory.
Bonds
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 higher yields at near end of the curve translated into curve flattening in short term at least.
Commodities
Energy Commodities
The demand has not returned, in contrary it is flirting with lowest levels in decade. We still 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 (that’s now).
U.S. natural gas – the heating season has ended, and the draw was not high enough to support natural gas prices. Nice speculative buy opportunity as short squeeze will be massive.
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 are at multi-year high.
I would take profits from the copper price increase; possibly reverse position to short.
Steel – China demand is so strong that despite record stockpiles levels the price is moving higher. Dangerous market.
Agricultural Commodities
Been totally wrong on this, the production is outweighing demand in almost all commodities. Corm maybe an exception.
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.
Currencies
For the time being I expect a strong U.S. dollar. JPY against USD a potential long.
Aluminium, Ben Bernanke, China, Copper, Crude Oil, FED, FED Funds Rate, Japanese Yen, Natural Gas, S&P 500, Steel, U.S. Dollar, U.S. Treasury Bonds