March 2010

China- Hard or Soft Landing?

In a narrow and select market, the S&P 500 powered ahead in March with a gain of 6.03% and a positive return of 5.38% for the year. Our results are posted on the Performance Page. In a market that ignored what has been working for the past eight years (hard assets), the market returned to large cap stocks at the expense of everything else. Perhaps it was the relative strength of the dollar that gained in value over the euro as a result of the Sovereign debt crisis in Greece, or the fact that it is begging for correction, and the generals (large cap) become the last standing soldiers. The big question is whether this is a short term counter cyclical play, or the beginning of a longer term trend. I think the evidence supports the former:  

• With a poor Treasury auction last week, the ten year is now at four percent, and while rising interest rates may prove to strengthen the dollar further over the short term, it is most certainly a sign of inflationary fears and a positive for commodities and hard assets in general.
• The dollar has been making higher lows  as of late, but can it sustain this move in the face of the current grim fiscal picture? I don't think so, and because hard assets are priced to the dollar, I think we'll see further gains in these assets once the dollar returns to its longer term falling trend line.
• Despite the administration's public rhetoric, it is not in the best interests of the economy to have a strong currency, and in fact it appears that their jawboning about manipulation is working and we should see at least a partial float of the yuan in the near future. Again weakness in the dollar, a positive for commodities.  

  In what has clearly been a confusing market, I believe that the longer term secular trend favors our current allocation, and in fact over the past week we have outperformed the market as energy, gold and emerging markets came to the fore. As far as the long term picture for all risk investments, it may well come down to how well China handles their recent credit restraint in an effort to slow inflation. Will they end up in a hard or soft landing? I'm betting on the latter, and if true, this will be very positive news for hard assets as well as risk investments in general.

 

-Joe