December 2009

'There is nothing so disturbing...as to see a friend get rich' -Charles Kindleberger

The S&P 500 finished the year with its strongest showing since 2003 with a positive 26.46% return; our performance is posted at our newly designed website: www.oristanocapital.com. In what has proved to be one of the most mistrusted rallies, the market recovered from an early swoon to record one of the greatest comebacks in financial history. But now with this liquidity driven rally mostly over, it will almost certainly be a question of a strong economy and  getting the macro right if one is to earn above average returns for 2010. Here are some thoughts that I have gleaned from my research (mostly BCA) which hopefully will guide us to another successful year: 

• The consumer is retrenching and their savings will help to keep rates low despite heavy government borrowing. This will allow the Fed to continue with its expansionary monetary policy.
  
  
• The super debt cycle (borrowing to spend) is shifting to South East Asia (ex Japan) as newly initiated social safety nets are freeing the  Asians to become spenders as opposed to savers. This should be a big plus for domestic small cap emerging market stocks as well as US multi-national exporters.  
  
  
• China is again expanding at full throttle, but the surprising strength of their domestic economy will keep growth in line with their capital expenditures.
  
  
• The rally in sovereign credit (FAX, ESD, EDD) has mostly eliminated the undervaluation; nevertheless, they are likely to do just fine with healthy global credit markets.  
  
  
• Low rates and an improving economy are positives for the US market, but a correction of more than we've experienced in the last nine months is overdue. We'll continue to roll the relatively inexpensive puts.
  
  
• Despite the dollar rally in December, low interest rates and a widening of the deficit should continue to put pressure on the  dollar. That, along with the fact that China's growth will remain resource intensive should be a positive for commodities and related emerging markets.
  
  
• Gold may well continue to surge in an environment of generous liquidity, weak dollar, disturbingly high deficits, low interest rates and a renewed surge in jewelry purchases from the emerging domestic economies.

The market has gone vertical for most of the year and a tactical correction should  come as no surprise; however as the late Charles Kindleberger wittily remarked: "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich". In other words, with the record amount of cash on the sidelines just itching to be invested, this market could go a lot longer and a lot higher than one would believe. Here's hoping.

 

-Joe