Monthly Strategy – September 2010


Economic data released in recent month or so is on a absolute and relative basis weak. The difference from July is that the consensus has moved downwards, so the markets focuses on comparing actual data with consensus and disregarding absolute levels.

But we are here to earn some money, not waste our time on lamenting whether someone (in this case consensus) is right or not.

Economic data released in recent month points 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.

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 2011); I believe that the quantitative easing will get some sort of extension comparable in size with the first leg (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.

I believe yields will go further down and curve will flatten further; in the longer term I believe the yields will be comparable to Japanese (bellow 1.5% for 10-year government bonds and bellow 2% for 30-year government bonds)


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 – stockpiling will be higher in the following weeks (mild temperatures) so the supply/demand balance will be better then last year, but altogether bad. This points that we have only technical factors on our side, but price failing to rebound taints that picture.

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

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This entry was posted on Friday, September 3rd, 2010 at 3:44 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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