See this post from Mad Hedge Fund Trader.
http://www.madhedgefundtrader.com/july-29-2010.html
Could IYT (transport) be a leading indicator? This has been signalling weakness since May. BDI (baltic) is also looking weak as of June. TLT (Bonds) also shot up in April.
Since my last post I have gone long Europe due to the recent instabilities in the national budgets of certain countries like Greece which prompted many to question to the viability of the Euro and even the European Union, selling my long dollar position in UUP (April) and purchasing euros / european companies by going long FXE and VGK in May. So far, my VGK position is up 14% and my FXE position is flat (I will update my portfolio in the nex day or so).
In the summer period we also saw the BP disaster at Deepwater which provided another contrarian opportunity to go long BP (which I did not take), which is up over 20% from its low of $27 to $33.
The reason why I mention BP alongwith Europe is because in my view 2010 has been the year where the money is being made in contrarian investing, with most indices being flat or down since Jan. Since this type of investing requires accurate timing in order to get in at or near the bottom, it would have been important to understand how long it took for the market to price in all the bad news. BP took 8 weeks to drop from $58 to $27.5 (end April to end July) before making a rebound and VGK took 6 weeks (Mid April to end May) to drop from $50 to $30 before doing the same. In order to capitalise on this it would have been necessary to wait for a technical rebound before making an entry (placing a stop at the point where the prices rebound). In the case of VGK from end May there were plenty of bullish candles on volume which demonstrated that bulls were starting to come in and in the case of BP the rebound took a V-shape so it would have been necessary to get in just after the bottom of the V was formed. Bottom patterns are not the same in all cases and it takes considerable skill to identify them. However, if you’re a long term bull and looking to scale into a position it does not hurt to wait for the stock you like to demonstrate this kind of weakness before buying. Even if you fail to pick the correct bottom and went in too early too late in my view you would do better in the long run compared to continuously chasing stocks when they are going up. This is why given all the uncertainties and weaknesses in the market, I am looking to buy.
Another trade which I missed was gold, which is by far the best performing asset class in 2010 (up by over 10% since Jan-GLD). The popular theory is that gold is an inflation hedge and the best way to preserve one’s wealth in an era of quantitative easing. The reason I did not buy any gold in 2010 (even though I am a long term gold bull) was because I did not believe that inflation will be a problem in the short to medium term (especially if you compared against other commodities like silver, copper, oil or even property prices). To me it seemed like gold is being run up as a result of speculation. However, well done to all of those who rode this big baby! Those of us like me who missed this boat will consider going long oil instead if we believe that inflation really will become a problem (USO is down -10%+ since Jan, in stark contrast to GLD).
Other than that as part of my plan to start building up equity positions I scaled into EEM on weakness (up around 8% so far) and bought into PGF, the financial preferred ETF which is yielding 8%+ (pre tax). I think that PGF is an interesting one because of its income element and the fact that unlike other preferred shares which generally trade more like bonds this ETF seems to be more highly correlated to bank equities (like XLF) which means that there is also greater potential for upside capital gains.
Not much to report following the past few weeks, as markets held onto their trading ranges, leaving technical traders waiting for a breakout.
I have been looking to increase my equity exposure as the world heads out of recession, but have not added to any positions since adding to EEM a few months ago. I guess I too, am looking for the breakout (hopefully to the down side).
I did get the idea to add to positions which I felt are still undervalued despite the impressive run up, and found financials to be attractive. This is because investors are still wary of betting on banks to recover, but I have no doubt that financial institutions are here to stay and will continue to make massive amounts of money. Right now, the ETF PGF (which consists of preferred financial stocks) has PB ratio of only 1.37 but is yielding nearly 9%, which is much better than S&P’s PB of nearly 3.5 and yield of 2.11%. Of course, the reason why banks are still selling slightly cheaper is because investors are also not sure about the value of assets held on their balance sheets (and hence the true book value), but I think that the odds in favour of them not being as bad as what people thought are quite high. I would caution, however that PGF holds preferred shares with no voting rights and hence should behave more like bonds than equities. But what can I say.. I am sucker for dividends. For those wishing to gain true capital appreciation I would recommend taking a look at XLF instead (PB @ 1.4 and yield at 1.42%). If the market breaks to the downside I might sell my PGFs and move into XLF.
The thing about earnings which investors sometimes forget is that they do not automatically end up in the investor’s pocket, and that earnings which actually get paid out do. Hence the premium which dividend paying companies have over non dividend paying companies. If earnings are not paid out, then they must be used effectively. One of the ways in which an investor can figure out whether or not companies are deploying earnings effectively is to determine whether or not the company’s book value is growing. see this link from Hussman for a more in depth discussion.
On another note, there was a scare in the sovereign debt market last week as the solvency of several countries were called into question. EMD took a hit as a result and yields increased to around 7.5%. If this continues to drift down and hits the 10% mark, I will scale in.
EEM has now dropped for four straight weeks and is now resting at last September’s low. I am a buyer, but do not feel the fear yet.
Today I updated my portfolio allocations. Over the past few months I have sold a great chunk of my TIPs as well as some equities and some riskier bonds. My cash allocation is now at a whopping 56% of my total portfolio. It costs money to stay in cash because of the low interest rates in my brokerage account, but there is utility in having the liquidity. Usually, bonds will rise when equities fall but I did not load up on bonds due to the prospect that interest rates will rise this year. If anything, I am more inclined to believe that this is just a correction in a bull phase and that I should be scaling back into equities at lower prices. However I will not be rushing in and will be happy to sit tight and protect the impressive returns made last year.
Last week, the Dow gave up all the gains made in the past 3 months, and the FXI plunged to what it was last August and EEM is now back to where it was last October. This will certainly worry the technical analysts, but how ominous is this really? Will the fundamental traders step in to get things on the cheap? This is one of the questions I will be asking over the next few weeks.
On the bond side, interest has been creeping back in both TIPs and IEF, and on the commodity side, Gold has also given up its gains from last October due to the strengthening dollar.
The Hong Kong’s Securities and Futures Commission has published an unbiased review and preview of global markets which I heartily recommend. Unlike ‘reports’ published by bank, funds and brokers – reports published by exchanges are less likely display bias.
Despite the fact that most investors (including myself) do not expect equities to perform as well this year as they did last year, there is still strength which showed the Dow breaking above the intermediate resistance level established in November ’09.
This also occured in the emerging markets indices.
Many traders (especially those who took profits in December) will be taking this opportunity to add back their positions as a result.
An interest chart to observe is Japan, which roared back in December to test recent November highs. Those with a constructive view of Japan were presented with a golden opportunity in the last week of November, and will adding once this level gets broken.
I was asked whether or not this will be a good year to invest in equities, especially if you missed the bull run last year. My view is that although I prefer to buy when prices are low, it sometimes pays off to buy when prices are high especially when you are going with the trend BUT you have to be prepared to lose money if the market turns. This is the risk that one must balance when chasing rewards. I, for one am not selling any of my equities.
In November last year, the World Bank published a report on Malaysia. There are also summaries here and here.
However the question is not what Malaysia needs to do. It’s whether or not it has the political will to do it. Can we carry out our “New Economic Model”? This is a question which economists hate because it is so hard to quantify.
Welcome to 2010!
Most economists are now wondering whether or not inflation will reappear as a result of the loose monetary policies adopted by governments across the world in 2010. A lot of very successful investors have also recently reiterated that they think it will. The argument is also compelling (it is even taught in my CFA curriculum) and has been supported by historical events. If enough investors act on this belief, prices will move as a result. And they will move in a way which reinforces the theory.
The questions for me are currently a) how pervasive this theory is, b) is or has this translated into price action and c) is this trend likely to continue? This is story has been more or less in the news for the past 4 or 5 years, so I don’t think that anyone would doubt that it is very pervasive. In relation to b), the rise of gold prices and drop in bond prices is evidence that investors have been acting and that this was the story in 2009 as well.
Long dated treasuries
(For longer dated government treasuries the story the selloff occurred throughout 2009 - indicating investor expectation of inflation, according to Seeking Alpha. see also this discussion.)
Short dated treasuries
(Note the renewed selloff in bond prices over December - with IEF penetrating its 50-period SMA on the weekly charts and prompting me to sell my short dated government bonds in early December ’09).
According to this link however, perhaps the move in short-dated treasury securities was caused by technical traders fishing for a bottom in bond prices (at 0.5% how much lower can bonds go?). But even if you did not believe that this has anything to do with investors being bullish on inflation, worsening technicals have provided another reason to believe that price action began quite a while ago.
So next question is: Will this trend, which has been in place for most of the year, continue?
I don’t have personal views on this but have made the following observations:
Although the weakening dollar has supported the view inflation view, in early December it has reversed suddenly (prompting me to buy $ in early December ’09).
Agricultural commodities – the unspeculated portion of commodities has also not seen much price action.
For inflation to really be a problem, commodities across the board must strengthen (including wheat and natural gas, like in 2006) and the $ must continue to fall (and break through Nov ’08 lows.
StarBiz Business Times Bank Negara| Ftse Bursa Malays | 1435.67 | ||
| Sse Composite Ind | 2655.39 | ||
| Ishares Trust (ba | 42.03 | ||
| DJIA | 10447.93 | ||
| Spdr Gold Trust | 121.86 | ||
| United States Oil | 33.09 | ||
| Ishares Trust Ish | 107.38 |
24-08-10: Bought TBT@32.10