Investment Ideas and Commentary for Second Half 2011 Sunday, Jun 26 2011 

Investment Ideas and Commentary for Second Half 2011

Washington DC has become a Significant Risk to Investors’ Portfolios. Sunday, May 1 2011 

S&P’s warning on the US credit rating and the subsequent refusal to acknowledge the problem should give investors pause.

The inability to tackle the budget deficit and debt problem is causing the Dollar to selloff and head towards levels not seen since late 2009.

The US government continues to follow the thesis posited in my 2011 commentary. Instead of cutting spending, both parties in Congress are fighting to see how little they can cut.

As the debt ceiling deadline approaches, Republicans are being backed into a corner with media outlets calling for doom if the debt ceiling is not lifted and constituents screaming for spending cuts.

The recent FOMC statement highlights the problems coming out of Washington DC as Federal Reserve governors Charles Plosser and Richard Fisher made the following comments in recent speeches:

Richard Fisher’s comments from a speech on April 8th, 2011: http://www.dallasfed.org/news/speeches/fisher/2011/fs110408.cfm

Personally, I felt the liquidity needed to propel our economy forward was sufficient even before the FOMC opted last November to buy $600 billion in additional Treasuries on top of the committee’s pledge to replace the runoff of our $1.25 trillion mortgage-backed securities portfolio. I argued as much at the FOMC table. I considered the risk of deflation and of a double-dip recession to have receded into the rearview mirror.

Charles Plosser’s comments from a speech in Harrisburg, PA on April 1, 2011: http://www.philadelphiafed.org/publications/speeches/plosser/2011/04-01-11_harrisburg-regional-chamber.cfm

Some fear that the strong rise in commodity and energy prices will lead to a more general sustained inflation. Yet, at the end of the day, such price shocks don’t create sustained inflation, monetary policy does. If we look back to the lessons of the 1970s, we see that it is not the price of oil that caused the Great Inflation, but a monetary policy stance that was too accommodative. In an attempt to cushion the economy from the effects of higher oil prices, accommodative policy allowed the large increase in oil prices to be passed along in the form of general increases in prices, or greater inflation. As people and firms lost confidence that the central bank would keep inflation low, they began to expect higher inflation and those expectations influenced their decisions, making it that much harder to reverse the rise. Thus, it was accommodative monetary policy in response to high oil prices that caused the rise in general inflation, not the high oil prices per se. As much as we may wish it to be so, easing monetary policy cannot eliminate the real adjustments that businesses and households must make in the face of rising oil or commodity prices. These are lessons that we cannot forget.

Yet when it came time they voted to continue the same policies they spoke out against exposing them as doves rather than hawks. In contrast, Thomas Hoenig who spoke out against accommodative monetary policy not just in speeches but in FOMC statements as well.

We have the Democrats spending like drunken sailors, the Republicans paying lip service to the reason they were elected to Congress, and a Federal Reserve that cannot define how inflation is created.
At this time one should be reducing the leverage in their portfolios until the investment landscape becomes clear.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

2011 Investment Commentary – Specific Sectors Wednesday, Jan 12 2011 

Position disclaimer: At the present time I am long Gold, Crescent Point, Qualcomm, and Alcoa. I have no positions in the other securities mentioned.

Charts: I would like to thank sharelynx.com, the World Gold Council, Haver Analytics, and Gluskin Sheff for the Dow-Gold and Dow-S&P charts used in this commentary.

2011 will likely start a bit bumpy as the market works off its overbought condition setting the stage for a nice rally to begin in February leading up to the end of QE2 sometime in the second quarter. The second half of 2011 should feature a sideways move into 2012.

I think Financial stocks will continue to underperform. Looking back after the tech bubble many companies never saw their stock prices recover (Cisco, Intel, Dell, Yahoo, and Microsoft are examples). There are still a number of questions concerning foreclosures and a black swan in terms of the balance sheet pricing from the FASB/IFRS.

It is possible that financial stocks begin to outperform but investors need to pick through the sector with care. Do not think that just because the stock is beat up it represents great value. Underperforming stocks are generally underperforming for a reason.

There will be select buys at the regional level but the large money center banks with significant mortgage exposure will likely see continued difficulties in 2011.

Technology in select areas should do very well.

Companies tied to Android rather than Apple in the cellphone/tablet area as Android has matched Apple in terms of OS penetration in the smartphone sector and appears to be well placed to make significant inroads in the emerging tablet sector.

Google may be on its way to winning the smartphone/tablet OS battle segmenting both Apple and Microsoft but it is early yet and the real winner may emerge over the next two years.

In this sector I like Qualcomm as a play on Android.

I continue to like both Gold and Silver in the hard commodity area after a short correction in January. Gold has an absolute floor at $1265 with $1500 being the upside.

For investors wondering when to sell Gold I would like to introduce the following chart showing the Dow/Gold and S&P/Gold ratios.

For my personal portfolios I am using the following ratio system, 5:4:3 for the Dow and .5:.4:.3 for the S&P.

When the Dow/Gold and S&P/Gold ratios reach 5/.5 sell one-third of your holdings, another third at 4/.4, and the final third at 3/.3. Any holdings below 3/.3 should be met with tight stops as this will likely be the mania phase where volatility reigns supreme.

Investors should implement proper risk management systems in order to manage their risk with respect to increased volatility in the Gold/Silver sector.

In terms of Gold and Silver stocks the exploration sector provides the most upside over developers and producers so long as investors look for properties in well established mining districts in safe mining jurisdictions. These properties continue to offer very good value.

The theft of $2 million in Gold from a mine in Brazil should highlight the risks of dealing in Emerging Markets, even ones as advanced as Brazil.

Oil companies with solid dividend ratios continue to be attractive. The same goes for oil service stocks. Strong dividend yields and cash flows should protect investors on the downside while providing a nice additional return on capital. Crescent Point Energy is a very attractive Canadian oil producer who just switched from being a trust to a corporation in Canada. Crescent Point owns a significant portion of the Bakkan oil reserve in Saskatchewan just across the border from the United States.

The substitution effect should begin to take effect in 2011 as high primary commodity prices force investors to seek cheaper alternatives. This has already taken effect with respect to Gold as investors rushed to Silver in the 4th quarter as a cheaper alternative to Gold causing the Gold/Silver ratio to move to pre-financial crisis lows.

As a contrarian trade I like Aluminum over Copper. There are a significant number of people on the long side of the Copper trade and with the price above $9400 Aluminum looks like a bargain at its resistance level of $2500. A move above $2500 would signal a rally to the market. Alcoa, one of the largest global Aluminum producers, has already broken through initial resistance anticipating a move in Aluminum.

The soft commodity sector is especially attractive right now. Agricultural producers in the sugar, palmoil, and soybeans sectors all look attractive for a variety of reason. Palm oil especially as a biofuel in Asia as oil prices rise putting a strain on economic growth.

Fixed income yields should continue to rise until stocks top then fall into the end of the year with the top in yields coming when QE2 ends.

Looking out over the year it appears as though the trade will be long equities until QE2 ends then switch into fixed income securities in the second half of the year.

Manage risk appropriately in this environment. As we saw with the flash crash last year corrections can come quickly and with force. This is a stock pickers market and even in the areas I cited above a rising tide is not lifting all boats.

Just because I mention a stock that I may like or hold does not mean it is appropriate for the reader. As always, do your OWN homework and come to your own conclusions before investing.

Companies like Microsoft and Intel have not had the same returns as companies like Apple and Google. In the Gold sector, juniors producers and stocks like Pinetree Capital have outperformed their large cap producer brethren like Goldcorp.

There are great values in the market waiting to be found if investors are willing to kick the tires and turn over some rocks and stones.

Investors need to manage risk appropriately and do their homework in the respective sectors in which they invest. The landscape in every sector is changing rapidly and companies that were hot and hold dominant positions are seeing those positions usurped by new entrants that are less than a decade old. Some of the new entrants have yet to go public but hold dominant positions in emerging and established industries.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

2011 Investment Commentary – Part 2 of 3 Friday, Jan 7 2011 

EQUITY MARKETS

After two strong years equity markets are sitting in a slightly overbought status. Technical indicators are flashing ‘pause’ and sentiment indicators are in areas which usually precede a correction. Looking back over some historical indicators there is reason to be bullish for 2011.

We are currently within the sweet spot of the four year Presidential cycle for the equity markets as the 4th Quarter of Year 2 and the first 2 quarters of Year 3 have the best returns. This means that the current rally should last into April at the very least at which time investors should look to book some profits and take money off the table.

Overlaid on the Presidential cycle is the decennial cycle in which Years ending in 1 are mostly negative.

What may cause the current rally to run out of steam? The end of Bernanke’s QE2 in the second quarter of 2011.

Valuation metrics, while on the high side are still attractive. Global multinational firms are showing strong profits on the back of a weaker dollar and increased sales penetration in the BRIC countries. Both factors should continue to drive profit growth in 2011.

Every 3rd year of the Presidential Cycle since 1939 has been positive which makes it likely that 2011 is an up year as well.

CURRENCY

The US Dollar Index is currently in a trading range with 89 being the top and 70 being the bottom. More than likely the US Dollar Index will end the year higher and closer to the 89 level although a test of the 70 level is not out of the question.

Europe will need a weaker Euro in order to help the PIIGS and refinance debt in 2011. That means a stronger US Dollar since the Euro makes up more than 50% of the US Dollar Index.

The problem with a weaker Euro is that it feeds the German export engine which pushes up German economic growth numbers which will increase calls for removing excess stimulus.

Germany has been experiencing an export boom and strong growth relative to the rest of Europe in 2010. France is experiencing strong consumer led growth as well on the backs of low interest rates. If the Euro were to begin depreciating economic growth in Germany would rise and when combined with the consumption led growth in France would begin to fan the inflationary flames across Europe.

The Dollar will continue to depreciate against most Asian and other EMEA countries. Since these countries are not part of the US Dollar Index the depreciation is invisible to those not watching the individual countries.

China will continue to encourage domestic firms to write overseas contracts in the Yuan instead of Dollars. This is a trend that started about 5 years ago and has been picking up speed. It is mostly off the radar but is important in that global firms, not just Chinese firms, are feeling more and more comfortable dealing in currencies other than the US Dollar.

HARD COMMODITIES

As we enter 2011 precious metals demand will continue to increase driven by the buildout of EMEA economies.

The easy money, however, has already been made in this cycle and investors would be well served to play the substitution effect as high commodity prices for precious metals such as Gold, Copper, Tin, and Platinum will force industrial users to switch to alternative and cheaper metals.

One particular example is Copper whose primary use in electrical wires and residential piping is well known. At $9,000 it becomes more effective for industrial users to substitute Aluminum in electrical wiring and PVC piping in residential pipes. Given the high inventories and lagging price for Aluminum versus Copper there is a good chance the Aluminum outperforms Copper in 2011.

This story should play out across the commodity spectrum as the year goes on.

It is a bit worrisome that so many investors are on one side of a trade, especially with respect to certain hard commodities. When this happens demand destruction and substitution begins to take effect causing a ripple effect across the commodity spectrum.

Gold and Silver should continue to see a flight from investors worldwide seeking a security marking another year of strong gains after a small correction in January.

Oil will continue to climb, moderately, on the back of a strengthening global economy.

Natural gas prices will be constrained my weather and strong production issues. While there may be a strong rally to start the year prices should fall back over the summer months.

FIXED INCOME

The fixed income bubble is continuing with the markets moving from consumer debt, whose debt bubble popped in 2008, to sovereign debt and eventually to corporate debt which will lead to a corporate recession preceded by a mergers and acquisition boom in which corporations lever up their balance sheets and put the enormous amounts of cash to work.

We are likely to see a move upward in fixed income yields as long as QE2 is in effect. Once QE2 ends however, traders will move back into the fixed income space creating a solid rally.

SOFT COMMODITIES

Agriculture will do the best amongst commodities. By agriculture I mean companies that actually grow and harvest their own crops.

The strong La Nina is still in effect and should remain so throughout the year. It will begin easing up shortly but return towards the end of the year.

This means a wetter than expected rust belt and drier than expected southeast and southwest in the United States.

In Asia this will likely mean a dryer than normal northern China and a wetter than normal Southeast Asia and Australia.

The Mount Merapi eruption will not have a major effect on Asian agriculture as the ash that was thrown up into the atmosphere was of a low sulfur content.

Green energy begins to heat up once again as the oil price moves higher.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Follow

Get every new post delivered to your Inbox.