Monthly Strategy – August 2010


Economic data released in recent month or so is dominated by bellow consensus readings and on absolute level pointing to only marginal and slowing growth. Consumer demand proxies point to deceasing level of consumer demand. Unemployment is high and it is not falling. The government stimulus is wearing off.

But the market is rising despite all of that and contrary to my (correct) macro calls.

I still believe that the market is overvalued; I believe that there is disconnect in what equity and bond markets are pricing – with equity being wrong; I believe we will correct to sub 900 level in the S&P 500.


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 (probably when we see second notable leg down). 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.

Unchanged and correct.


Energy Commodities

Crude Oil – fundamentally, the market is over supplied; since crude oil is a high beta play on equity markets my target for WTI spot at 50 in the next six months.

U.S. natural gas – hedge funds going long here on improving fundamentals. Long.

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 confirmed by the numbers. Short both aluminum and copper.

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

Agricultural Commodities

We had a rally here, I expect a reversal on profit taking and sluggish fundamentals.

Precious Metals

Short term, I see gold overbought and over-owned.

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


I still expect a strong U.S. dollar and weakening of the Euro. Resource currencies could lose part of their strength on weaker commodity prices.

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This entry was posted on Monday, August 2nd, 2010 at 7:29 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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