Monthly Strategy – May 2010


With my 1,200 S&P 500 target reached I’ve moved to a kind of a ambiguous stance to the markets. Now I believe the equity markets are bound for a 10%+ down move at least.

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.

Recent pickup in consumer spending was due to decreased savings rate, not income growth, so I believe it is unsustainable mid term. The inventory cycle has ran its course, government stimulus is wearing off. A slower GDP growth is almost certain for the second half of the year.

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.


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. 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 into rising yields at near end of the curve translated into curve flattening in short term at least.


Energy Commodities

Crude Oil – a weak uptick in demand is coupled by massive stockpiling. Record spreads (WTI-Maya, Brent-Urals, Canadian oil sands-WTI and a  broken WTI- Brent premium) suggest massive oversupply. Crude oil is a high beta play on equity markets; if we see equities falling; Crude oil price will melt bellow $50.

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.

The China slowdown is in the air. Short both aluminum and copper.

Steel – same as with aluminum and copper it will follow China down path.

Agricultural Commodities

Been totally wrong on this, the production is outweighing demand in almost all commodities. Corm maybe an exception. 

Precious Metals

Short term, I see gold overbought, especially having in mind the dollar strength.

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 and further weakening Euro. Resource currencies could lose part of their strength on weaker commodity prices.

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