Oristano Capital Management Blog

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• Schafer-The US economy will bumble along and the market will do ok as long as we avoid the fat tails of either hyperinflation or deflation.
• Zulauf-All of Europe will be in recession in 2012 and probably in 2013. If he’s right, this could be the trigger for Germany and the ECB to get serious about quantitative easing and a big plus for inflationary assets.
• Hickey-We haven’t seen technology P/Es this low in over twenty years and as a result, he thinks the secular bear market in Tech may be coming to and end…possibly in October.
• Faber-BCA points out that from 1970 through 2009, developed markets have had real returns (after inflation) of 3.8% vs. 9.9% for emerging markets. Because of their lack of liquidity, emerging markets perform poorly when markets implode (2008, 2011), but outperform in the long run.
• Hickey-Comments on how bad gold stocks performed (down ~ twenty percent) in 2011 vs. the metal itself. He believes their will be a mean reversion this year and has weighted his portfolio toward the producers (NEM) and the miners (GDXJ). 

Two observations about the market: The first is that in the early going of 2012, cyclical stocks, emerging markets, and commodities have been outperforming. I believe this trend may well continue so long as the problems in Europe remain contained. The second is that the rally in the market since the October low has largely been the result of a lack of supply (sellers) and not the result of demand (buyers). This is not a healthy situation, as any negative development could bring in lots of supply. Hopefully, if the the market can continue to climb the wall of worry or if we get some good news, the large amounts of sideline money will reverse itself and create the demand necessary for a sustained upside market. Until such time, I think the prudent course is to remain well diversified and hedged.

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As quoted by Reuters today, “Stocks rose on Tuesday after a bullish Alcoa forecast and encouraging Chinese trade data boosted the outlook for the commodities sector, signaling a stronger global economy”. Finally, at last, this is what I’ve been waiting for as gold, copper, energy and emerging markets are all trading strongly on the upside. Maybe this will put to rest the hard landing theory that many pundits have been predicting for China.

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Just as the 2008 banking crisis in the U.S. caused deflationary fears to trump the reflation trade that has worked so well for most of the past decade, this years debacle in Europe has caused similar problems for real return investors (returns above inflation and currency debasement). However, with the European Central Bank reversing its earlier tight money policies and beginning to inject liquidity into the banking system, I hope and suspect that a mean reversion to the reflationary trade will reestablish itself in 2012.  

I thank you for your continued support and wish all of you a most healthy, happy, and prosperous New Year.

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With central banks fighting a deflationary environment through inflationary policies, one would think that we are in an ideal environment for gold and gold mining stocks to flourish. Then why has the metal slumped over fifteen percent from its August highs? As stated before, I believe that in this deleveraging world, banks, institutions and individuals are selling gold to cover their debt obligations. The paradox is that the risk off trade is now running to US treasuries and cash instead of gold, when in fact these assets are becoming more and more diluted as the Government continues to print money. Here are some tidbits garnered from Barron’s this weekend:

• ETF focus: most advisors looking towards emerging markets, U.S. blue-chip stocks, and gold.
• David Kostin, chief U.S. equity strategist at Goldman Sachs- if multiple Euro nations default on their debt, he sees the potential for a drop in the S&P 500 to ~900, but a successful move to end the crisis could propel the market to 1400. I suspect that gold would do well in either scenario, as any successful conclusion is bound to involve some type of quantitative easing.
• Commodities corner states that the bull case for commodities has been overshadowed by the European crisis, but the fundamentals point to higher prices in select areas; most notably in gold and oil.
• With Asian inflation expected to cool from 5.9% this year to 4.6% next year and with European countries accounting for less than 20 % of Asian exports, Morgan Stanley is calling for the MSCI Asian Pacific ex Japan Index to end 2012 around 530 or up 38% from its recent level of 384.
• My friends Lee Quaintance and Paul Bodsky are at it again in the Streetwise Column. They argue that the U.S. base currency represents only about twenty percent of what’s locked up in checking, savings and time deposits. While the banks can only hope that demand for these obligations will remain subdued, Lee and Paul believe that we are closer to a tipping point than many believe (it’s happening in Europe). If this were to happen here, guess what. The banks would have to print money to pay off these debts. To use their expression, “voila, you have skin peeling inflation” as the new dollars would dilute the currency already in circulation by about seventy to eighty percent. Their solution? Gold and gold mining stocks. The losers? Cash and U.S. securities that ironically are in favor right now. 

 Merry Christmas, Seasons Greetings, and all the best for the coming year.

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For the past several months, a tug of war has been waging between the forces of deflation and inflation. With the announcement today of a major easing by the world’s central banks, it would at least appear that the forces of inflation are about to win out. Defensive stocks (food, beverages utilities, and defense) do relatively well when deflation fears trump the fears of inflation, but cyclical stocks (basic materials, industrials, energy, gold and commodities) normally do better when the reverse is true. Today’s rally may not turn the market around, but from an allocation standpoint, a weighting shift from defensive to cyclical would seem on the surface to make sense.

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In the latest “The Trader” column in Barron’s, Lee Quaintance, CIO of QB Asset Management, a good friend of mine, and a true investing savant, believes that the only way out of the world’s excessive leverage is for the central banks to inflate their way out. This is one of the nuclear options cited by The Bank Credit Analyst, and if true should bring back the reflation trade that has been absent for most of this year. The Bank goes on to say that even as the Italian bond markets riot, the focus will shift to China, where if a hard landing can be avoided (they believe it can), a new phase of growth and reflation commodity plays would emerge. I believe we are well positioned should this scenario play itself out.  

Joe

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Futures are pointing to another rough day in the market, but with gold surging, metals and oil firm, and our hedges in place, I suspect any downside will be held to a minimum. Have a pleasant weekend.

Joe

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With the market down over four percent in early trading, we are down less than one percent. Hang in there, things will get better.

Joe

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The good news is that the Fed is on hold through 2013 (don’t fight the Fed). The bad news is that the Fed is signaling how bad the economy really is by taking this action. I expect to see continued choppy action and a possible test of Monday’s low. The hedges performed well on Monday and we had  a nice recovery yesterday. I’ve rolled the 1200 puts down to 1100 in case Monday’s turmoil was not a capitulation. Early futures point to a down opening, but gold and oil futures are firm. Have a great day.

Joe

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I’m pleased to report that our portfolios performed admirably during the recent tumultuous downdraft, and although I believe this will prove to be just another correction in an ongoing bull market, I also believe that our hedges will serve us well in the event that it turns out to be something more. I will be out of the office till August 12th, but I welcome and encourage you to call me on my cell: (802)558-7325. Thanks for your continued support.