March, 2010

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A Positive Trend Worth Following

Friday, March 26th, 2010

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The yuan forwards rose 0.2% last night, reflecting a bet that the currency will rise 2.3% over the next year, and although modest in absolute terms, nevertheless, it is the first such rise since China pegged its currency to the dollar as a result of its anti-crisis policy in July of 2008. According to El-Erian of PIMCO, this could lead to as much as a fifteen percent appreciation over the dollar in the next few years (the yuan appreciated twenty-one percent in the three years prior to July of 2008). I believe the implications could be significant:

  • It should help to relieve inflationary fears and allow China to refocus on growth and basic material consumption.
  • A strong yuan would also benefit other emerging market countries whose primary export partner is China.
  • Most EM sovereign debt would appreciate as their currencies would rise along side the yuan.

 I may be getting ahead of myself, but I think this is a positive trend worth following.

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Look Over the Valley

Tuesday, March 23rd, 2010

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The market has been frustrating for us lately, as secondary forces have begun to outperform the primary trend that has enabled us to so consistently beat the S&P 500. As our philosophy states, at times we will get out of sync, but we prefer to ignore these short term trends in order to keep the big picture in place. What works for Oristano is a weak dollar, strong Yuan, strong growth in emerging markets and their currencies. What is taking place currently is a strong dollar (Greece remains a problem), tightening of credit in emerging markets (fears of inflation), and an over supply of commodities (possibly the result of over stocking by China). It is my humble opinion that these are short term events. The dollar will certainly weaken again as the problems are resolved either by the EU or the International Monetary Fund; the Yuan will rise to promote domestic spending and reduce the fear of inflation helping China and other emerging markets as well, and commodities will resume their upswing as global demand and a weak dollar reassert themselves.

 As I’ve stated many times before, the reason for our superior performance is that we have gotten the macro right. In a secular bear market, one that I believe we are in now, what works best: emerging markets (in the ‘66-’82 bear market it was Japan), commodities (weak dollar and inflationary fears), and small cap domestic securities (largely because they’ve been so neglected). If you’re a good trader, you can do well playing short term counter cyclical secondary trends. This is difficult at best to do, and so I prefer to look over the valley and stick with the longer term trends. Patience is prudence.

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