Newsletter
January 2012
A sugar high or a sustainable bull market
The S&P 500 rallied 4.48% in January to record its' best January performance since 1997, and if you believe in statistics, an up January bodes well for a positive year. Our results are currently posted on the performance page. Perhaps more importantly, the deflation trade of 2011 has returned to the reflation trade that has been key to our success for the past ten years. Will this trend continue, or is it a mere sugar high based on Europe's liquidity fix that is doomed to relapse into fatigue? Here are some prognostications from my favorite analysts and a final comment from me.
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Michael Gayed of Pension Partners-After successfully predicting last year's deflationary trade off due in large part to the European crisis, Michael now anticipates a reflationary trade based on these inflationary perceptions:
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Utility stocks are under performing predicting higher costs of capital through inflation,
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The spread between hi yield bonds and Treasuries is narrowing as people position for the higher growth in these companies,
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Treasury Inflation bonds are outperforming nominal Treasuries as investors look to capture the inflation component.
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Marc Faber- While Americans may be under the impression that inflation is contained in the U.S., the reality is that monetary inflation (the Fed's printing of money) will show up somewhere: wages, corporate profits, consumer, commodity, art, real estate, stocks, or in the appreciation of fiscally conservative currencies. I'll be in Montreal next week and will let you how much more I have to pay for the famous Gibbys steak.
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BCA -European Central Bank's new Long Term Refinancing Operation (LTRO) will remove tail risk of a run on the Euro area banks, but does little to solve the structural problems. The U.S. will avoid a recession, but the strong growth in the fourth quarter will slow. Housing has bottomed, labor market has perked up, but consumer spending will slow as the savings rate has fallen to unsustainable levels.
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BCA- Where to look for the best returns:
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High-yield corporate debt: Unlike equities, high yield debt does best in sub-par recoveries where growth is sufficient enough to prevent a spike in bankruptcies.
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Emerging market equities: Loose money will be supportive of stocks, and with valuations lower than their developed market peers, emerging stocks should outperform developed markets over the next one to two years.
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Crude oil: The absence of geopolitical risk premium is surprising given the escalation of tensions in Iran.
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Gold: Should continue to do well as long as we have negative interest rates.
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Commodity currencies: While these currencies are not cheap, they should continue to move higher on the back of strong Chinese growth (FAX, ESD, EDD).
The one thing that keeps me up at night is trying to decide if we have launched into a new bull market (we did have a mini bear market last Fall), or if we are in an aging bull market that began in March of 2009. This is important because new bull markets are measured in years, whereas, a bull market long in the tooth can be measured in months or even weeks. It's anyone's guess at this time, but I'm afraid the technical work that I do would suggest that the market has risen mostly on the lack of supply as opposed to strong demand, and this is a sign of a weakening market. The good news is that if we do get a bear market as we enter into the Spring or Summer, it is likely to be of short duration and considerably shallower than the first two of this secular bear market. Additionally, any downturn is sure to bring helicopter Ben to the rescue with another round of quantitative easing, a positive for the reflationary trade.
-Joe
