It's up to Germany
In a market reacting to news headlines, the S&P plummeted over eleven percent from its October highs, only to recover almost eight percent to close the month with barely a loss of .22%. Our results have been posted on our performance page. While it's nice to get bailed out by news events, I'm afraid it's going to take more than words for the market to rally above its trading range (1270-1100) of the last four months. The US Fed created some temporary relief last week with its dollars for euros swap trade, but now it's up to Germany to come up with a plan to either freeze rates or to put in place a bail out plan for the weaker European sovereign debt. We'll see how this plays out at this weeks European summit meeting in Brussels, but here are some thoughts that may have an impact on other sectors of the market in the coming weeks.
The US economy remains resilient and equity valuations are reasonably priced, but a failure of Europe to address the euro crisis would ultimately engulf our domestic economy. According to the Bank Credit Analyst, the odds of a euro collapse are now one in four.
The turbulent environment in Europe should be positive for gold, but if the crisis continues, it faces the same liquidation pressure as that of all assets easily converted into cash. If Europe begins to print money (how can they avoid it?), this should also be positive for gold as it dilutes their paper currency.
OPEC is trying to keep the price of oil above $100, but once again the forces of deflation vs. reflation will most likely determine its short term direction.
China has stopped tightening and is beginning to ease. While there is a lag effect in pumping up the economy, this has normally been a big positive for China's equities. In addition, they have engaged in a five year major domestic growth program which will enable them to continue to be the world's major consumer of basic materials.
In a special report, BCA (The Bank Credit Analyst) concludes that the majority of Hedge Funds do not adequately diversify risk, as markets and styles become more correlated. It is their opinion that "global macro and multi-strategy funds will be the key beneficiaries in terms of relative performance going forward". I agree with this thesis and it is what Oristano Capital has always tried to achieve.
From all of us at Oristano Capital, I want to thank you for your continued support and wish you a most pleasant Holiday season.
-Joe