Byron Wien’s ‘5 Sure Things’

Tuesday, January 29th, 2008

Jan. 29, 2008 - This is irresistible. During periods where there seems to be such confusion in the market, we could certainly all use a dose of clarity. 

Byron Wien, Chief Global Strategist, Pequot Capital, and one of a few prolific market forecasters, shares his 5 ‘Sure Things’ for this turbulent market:

I’m getting older now, so I only invest in sure things. I don’t invest in things that only “might” work out. So let me give you five sure things.

• Gold is going to $1,000 an ounce probably this year. I forecast that it would go to $800 an ounce last year.
• Oil is going to probably $125 a barrel. I forecast that it would go to $80 last year. The dollar is going down for the reasons that I said because large holders of dollars are going to diversify into other assets and other currencies.
• Cotton is going to be the commodity of choice because the world’s standard of living is increasing and the places where it’s increasing fastest are warm and they don’t wear wool, they wear cotton. Cotton is something nobody wants to grow. They want to grow corn instead. So, while the demand for cotton is increasing, the acreage devoted to it is decreasing and that’s all you have to know.
• Finally, I think the Chinese are going to revalue the renminbi (yuan) even more than the seven percent that they did last year.
• As far as stocks are concerned, I think that my investment ideas follow some of my thesis. Our portfolio is very heavily overseas, but we’re in the agricultural area with Potash Corp (POT) and a lot of energy stocks.
• Large caps such as Schlumberger (SLB). Smaller caps such as National Oilwell Varco (NOV) and Ultra Petroleum (UPL). In technology, Qualcomm (QCOM). Finally, in adult education we think that a lot of people will be laid off and they’ll be trying to improve their skills so we would buy the Apollo Group (APOL).

Prior to his current position as Chief Investment Strategist at Pequot Capital, Byron Wien was Chief Global Strategist at Morgan Stanley.

Tags: Agriculture, Canadian Stocks, Commodities, Currency, Economy, Emerging Markets, energy, Gold, India, Investment Strategy, Investment Wisdom, Russia, US Stocks
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Short ETFs - Portfolio insurance

Tuesday, January 29th, 2008

Jan. 29, 2008 - Short and UltraShort Funds provide investors with highly liquid inverse exposure to the markets as represented by widely held benchmark indices.

Check out these charts for a couple of good examples. Most investors have difficulty grasping the idea of taking ’short’ positions or bets against the very markets that they are investing in. These new ’short’ ETFs do not require a great deal of sophistication or a margin account for the average investor to get some portfolio insurance.

iShares FTSE Xinhua 25 (FXI) vs. ProShares UltraShort FTSE Xinhua 25 (FXP)

iShares MSCI Emerging Markets (EEM) vs. ProShares Short MSCI Emerging Markets (EUM)

 ProShares Ultra Financials vs. Proshares UltraShort Financials (Dow Jones Financial Index(sm))

If you believe that there is more downside to come, then its still not too late to get some downside protection.

Don Coxe, in his recommendations from Basic Points, January 2008, warns:

The financial crisis is not centered in stock markets. Its primary locus is in financial derivatives, and in their impact on the stock prices of leading banks. Until the downward drift of bank stocks and the upward drift of derivative debt yields are reversed, the stock market will continue to slide. Keep overall equity exposure to minimums, and emphasize quality.

Tags: Investment Strategy, Technical Analysis
Posted in EEM, ETFs, EUM, FXI, FXP | No Comments »

Year of the Rats: Don Coxe, Basic Points

Friday, January 25th, 2008

Jan. 25, 2008 - In his latest Basic Points (January 2008), Don Coxe, BMO Financial Chief Investment Strategist, whose track record remains among the most unequalled, makes his recommendations, given the prevailing conditions in the market.

These appear on page 34-35:

1.	The financial crisis is not centered in stock markets. Its primary locus is in financial derivatives, and in their impact on the stock prices of leading banks. Until the downward drift of bank stocks and the upward drift of derivative debt yields are reversed, the stock market will continue to slide. Keep overall equity exposure to minimums, and emphasize quality.
2.	Bond investors face two risks: inflation and credit. Nominal Treasury bond yields are far too low, and quality corporates are too rare – with 71% of corporate debt junk-rated. Buy inflation-hedged sovereign bonds – preferably in major foreign currencies. Simplicity is good: avoid complex products that are subject to drastic rating writedowns.
3.	Commodity stocks are at risk to the extent that the financial frauds and foolishness are able to abort the global economic recovery. A US recession would be good news only for gold stocks. It would be bad news for base metal and steel stocks, and negative news for oil stocks. Agricultural stocks should not be hurt, except that major bear raids will likely spew blood broadly across stock markets.
4.	Any panic-driven selloffs in commodity stocks are unlikely to take them off the top-performers lists for more than a few weeks. They are not just fair-weather friends. Not only are most of the majors very cheap on a forward-earnings basis, but mining and oil companies that ordinarily search for resources in remote regions will take advantage of selloffs to acquire reserves in politically safe regions at bargain cost. Coming out the other side of this slowdown, these stocks will experience big increases in their absolute and relative PEs. Someday a big Sovereign Wealth Fund is going to decide that bailing out banks isn’t as profitable as owning matchless reserves of minerals.
5.	Food price inflation should strengthen through the year. It could be offset by broad price declines across the US economy as it struggles with recession, but it is becoming embedded in the global economy and will be a challenge for many years. It will produce a full-blown crisis when a major crop failure occurs.
6.	The Canadian dollar trades right around parity. It might not climb sharply higher if a US recession is confirmed, because of the impact on the industrial sector and tourism. It remains a fundamentally strong currency, and the greenback remains a fundamentally weak currency. Canadian borrowers should borrow in greenbacks.
7.	Gold’s move has been dramatic, but retail investors in North America and Europe have not yet shown signs of true gold fever. That means there is still substantial upside. Soaring silver and platinum prices confirm that this gold move is no mere spastic twitch. The expression “as good as gold” in reference to Treasuries and other US debt instruments should be restricted to use as a warm-up joke at investment policy meetings.
8.	Defence stocks have solidly outperformed the S&P for most of the Bush presidency. Iraq and Afghanistan have run down a wide range of Pentagon inventories and a new generation of fighter jets cannot be postponed much longer. No matter who wins the presidency, these companies should continue to prosper.
9.	Sovereign Wealth Funds have been buying US banks. Wall Street cites these purchases as evidence of great value in bank stocks. For nations that are overweight Treasuries in their holdings and underweight influence in American politics, swapping Treasuries for bank equities and convertibles makes sense. That does not necessarily mean that the stocks are great value for investors who cannot get other – unspecified – returns on their investments.
10.	Use panic days to strengthen your equity portfolio, buying the agricultural, gold and oil stocks you will want to own after the bear retreats to his cave – and selling stocks that are too dependent on US consumers. Retain your quality base-metal stocks: they may well be taken out by other mining companies, or a Sovereign Wealth Fund.
11.	The US small-cap bear market may be overshooting because investors haven’t analyzed the likely improved competitive positions of companies whose principal competitors were bought by Private Equity or are Canadian or European companies hurt by the weakening dollar.
12.	Be like all wise cottage owners: Protect your possessions from Rats.

Tags: Canadian Stocks, China, Commodities, Gold, India, Information, Investment Strategy, Investment Wisdom, Uncategorized
Posted in Uncategorized | 1 Comment »

More volatility coming and more ETF options

Friday, January 25th, 2008

Jan. 25, 2008 - Watch out below. There is sure to be more volatility to the downside in the coming weeks, as the carry trade and proprietary traders continue to unwind profitable trades.

Finding themselves unable to collect on credit default swaps vis-a-vis AMBAC, MBIA, ACA, large institutions (banks) and hedge funds are finding themselves under pressure from a substantial cash call.

An example of this danger came to light when a little-known firm called ACA Financial Guaranty caused some of Wall Street’s biggest banks to write down billions of dollars in holdings, restating their value on corporate balance sheets. ACA revealed last month that it had promised to cover $60 billion worth of mortgage and corporate debt, but had enough cash to cover only a fraction of that. Merrill Lynch, Citigroup and financial institutions in Canada and France, which had all sold swaps to ACA, set aside billions in case the firm collapsed.

Most of the strength that the market is witnessing is due to short covering and this will manifest itself over and over during the next two to four weeks.

Institutions are still unwinding their profitable trades to raise cash. The market goes down. Then short covering occurs, and you get what appears to be a bounce or recovery in stock prices. The problem is that as long as the cash call remains larger than the outstanding short positions the market will continue to trend lower.

Don Coxe, in January’s Basic Points, puts it in these terms:

Sadly, the central bankers have been forced into injections of all-time record amounts of liquidity. Jim Cramer and some other prominent apologists for Wall Street glitterati screamed, “The Fed doesn’t get it,” and demanded bailouts for their buddies who faced demotion from Croesus status to morally cretinous status. The biggest benefi ciaries from these bailouts were not overstressed homeowners, but the biggest, baddest, borrowers who had made the biggest, baddest, bets through use of complex derivatives.

Despite strong openings today, both the Dow and TSX look unable to hang on to gains. You also have to look at trading volume for clues about the weakness of the recovery. Volumes are down 20% at the NYSE and 15% at NASDAQ. 

Assuming you agree with the idea that there is more downside in the market, there are some relatively new and interesting ways that you can take positions on the short side to reduce downside that do not involve derivatives or short positions. In particular there are a new breed of ETFs that provide short exposure to various sectors and country bets. These are aptly referred to as ’short’ and ’double-short’ ETFs.

ProShares has created ETF’s that trade inversely with the markets.  These allow investors and traders to hedge against market downturns or that want to bet against the market.  These ETFs are very liquid and actively traded and are designed to go up when indexes go down.  As a reminder, the SHORT funds use no leverage, but the UltraShort funds employ leverage.  Here is partial list by Fund (Ticker):

Recession and Bear Markets - Bespoke Reference

Friday, January 25th, 2008

Tags: Economy, Investment Wisdom, Markets, US Stocks
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Breakingviews: Sovereign Wealth Funds Risk Index

Friday, January 25th, 2008

Jan. 25, 2008 - Today, we received this piece about Breakingviews.com’s new SWF Risk Index:

Breakingviews sovereign wealth fund risk index

By Una Galani  AND  Simon Nixon

To see the full index with detailed rankings, click on the link below

• BV SWF Risk Index

Sovereign Wealth Fund Index:  Sovereign wealth funds were hardly talked about twelve months ago. Now they are one of the hottest topics in global financial markets. Over the last year, these state-owned entities have spent over $75bn snapping up stakes in some of the world’s biggest banks, taken big positions in stock exchanges on both sides of the Atlantic and even attempted a takeover of one of Britain’s leading supermarkets.

Such funds have existed for decades, but the shift in global economic power and the current weakness in western markets has given SWFs – forecast to grow assets fivefold to $13.4tr by 2017 – new influence and raised new fears about their motives. Critics such as President Sarkozy of France and some US politicians worry that SWFs tend to be secretive, target political as well as financial returns, and operate at the whim of governments not always sympathetic to western economic and political interests…

Tags: Brazil, BRICs, China, Emerging Markets, Russia, SWFs, Uncategorized
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More Carry-Trade commentary

Tuesday, January 22nd, 2008

Jan. 22, 2008 - Here are some more clippings about the ‘carry-trade’ at the heart of global market volatility:

Jan. 21 (Bloomberg) — The Australian and New Zealand dollars fell against the yen as concern over a slowing U.S. and global economy spurred a reduction in holdings of higher- yielding assets bought with funds from Japan.

The New Zealand currency traded near the lowest in almost two months versus the yen as a slump in Asian stocks deterred investors from so-called carry trades. Australia’s dollar also declined against the U.S. currency after a government report showed producer prices rose by less than economists estimated, prompting traders to pare bets the central bank will raise interest rates from an 11-year high next month.

 

Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=ah9E711dlJh4&refer=australia>

 

Australia’s 11-year high benchmark rate of 6.75 percent and New Zealand’s record 8.25 percent rate drew investors in the past as part of the carry trade strategy. Those rates compare to 0.5 percent in Japan. The risk in the carry trade is that swings in exchange rates erode profits from interest-rate differentials.

The carry trade strategy involves borrowing in countries where interest rates are low, and investing where returns are higher.

Commodities, which make up about 60 percent of Australian exports and 70 percent of New Zealand’s, tumbled since the beginning of last week. Falling global economic growth may reduce demand for commodities these countries export, such as metals.

 

Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=a3dRGK0srjXo&refer=australia>

 

Another nervous week as the ‘carry trade’ unwinds. Many equity indices and Yen crosses are poised at key support levels: ‘necklines’ of ‘head-and-shoulders’ patterns or the lower edge of the big trading band of the last year or so. Leading the pack South are GBP/JPY and Sweden’s OMX Index, closely followed by the Dow Jones Industrial Average and FTSE 100. These have already seen weekly closes below these key levels and should, one by one, topple all the other ones over too. An unseemly scramble is likely if not next week then in February; at-the-money implied volatility could soar.

 

Energy products and most metals eased, many thinking if not talking recession, and Baltic Dry and Capesize Freight Indices have halved since their peak at the end of last year. Even the more pessimistic are saying contraction will be shallow and short and that by Q3 2008 things will be mended and economic growth will pick up. We feel this is way too simplistic and that the unravelling of all the mess in the financial system will probably take the whole of this year (and then some more).

 

A ‘flight to quality’ has resulted in Treasury yields moving lower, US ones leading the way to multi-month lows with yield curve steepening seeing two-year TNotes at a mere 2.39% (lowest yield since September 2004). Credit spreads against junk bunds are at July’s record highs. The US dollar has been contained in relatively small ranges around last week’s levels although the Swiss franc did dip very briefly to a new record low (1.0838) as did the Czech koruna (17.318). Sterling has regained some of its composure, EUR/GBP down from a record £0.7614, and the Yen had the best all round performance, dipping to 105.92 to the greenback.

 

Stock indices are all lower, the New Zealand bourse for a staggering twelve consecutive days while Jakarta and Mumbai are down nearly 8% this week alone. US and European indices lost roughly 5%, many now lower than they were at any point in 2007.

 

Inserted from <http://www.fxstreet.com/technical/market-view/weekly-market-commentary/2008-01-21.html>

 

The Japanese currency climbed against higher yielding currencies as investors looked for safe havens amid the turbulence in equity markets. The yen carry trade, where the low-yielding currency is sold to purchase riskier, high-yielding assets, proved a popular investment strategy in the first half of 2007 as stable equity market conditions ensured a healthy appetite for risk.

But the deepening financial market gloom since August has seen carry trades scaled back since the beginning of this year.

The real test of carry trade activity is the relationship between the yen and the New Zealand dollar. The yen fell 15 per cent against the Kiwi between January and August last year as the latter’s interest rate hit 8.25 per cent against Japan’s 0.5 per cent. But the Kiwi has since lost nearly all these gains, and was down 4 per cent this week to Y82.05 as the yen continued its rally.

 

Inserted from <http://www.ft.com/cms/s/0/0600819a-c634-11dc-8378-0000779fd2ac.html>  

Tags: carry trade, Currency, Emerging Markets, Investment Strategy, Technical Analysis, Uncategorized
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Why the selloff in commodities and emerging markets?

Tuesday, January 22nd, 2008

Tags: Brazil, BRICs, China, Commodities, de-coupling, Emerging Markets, energy, India, Investment Strategy, Latin America, Markets, Metals, Russia
Posted in Markets | No Comments »

Five Simple Steps to Becoming a Billionaire: The Greenspan Method

Sunday, January 20th, 2008

Tags: humour, Information, Uncategorized
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Doug Kass’ 12 Sound Investment Principles

Sunday, January 20th, 2008

Jan. 20, 2008 - Doug Kass writes in RealMoney.com recent article for investors looking into the abyss, however, the advice is good anytime. 

1. Err on the side of conservatism.

2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.

3. Avoid advice from those who lack flexibility and are dogmatic.

4. Be more concerned with return of capital than return on capital.

5. Trade/invest with below-average positions in order to take advantage of the market’s volatility and opportunity.

6. Take a base on balls, hit a single, but don’t go for the fences.

7. Buy straw hats in the winter (meaning, but out of favor items).

8. Buy only the best of breed in periods of economic/market uncertainty.

9. Always leg into a position.

10. Be patient.

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

12. Always remember investing is about common sense.

Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST

Tags: Investment Strategy, Investment Wisdom
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Watch out for “Black Swans”

Sunday, January 20th, 2008

Jan. 20, 2008 - Black Swan’ author Nassim Taleb warns traders to look out for the improbable:

Market meltdowns that scorch investors, 100-year floods that occur every 10 years and terrorist attacks such as 9/11. Nassim Taleb, an author, lecturer and big thinker, calls such unforeseen events “black swans,” borrowing from a tale about 17th Century European seafarers who landed on Australia and, much to their surprise, learned that not all swans were white.

Such shocks occur, Taleb says, because even experts fail to consider the likelihood of extreme scenarios. That’s why his theory, outlined in his book, “The Black Swan: The Impact of the Highly Improbable,” is so intriguing to Chicago’s trading community, which seeks to lessen risk by exchanging futures and options. His ideas have earned him cachet with investment bankers as well as rock ‘n’ rollers. (Copyright 2008 - Chicago Tribune)

Tags: Investment Strategy, Investment Wisdom, Uncategorized
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Counter-Party Risk

Friday, January 18th, 2008

Jan. 18, 2008 - At the beginning of January we featured Ted Seides’ view Junk Bonds and Couterparty Risks, in which he asserts that the risks that remain are significant and concern the outstanding counter-party risks. Barry Ritholtz in his Big Picture blog, re-iterates that this credit mess is far from over, and that counter-party risk remains an unresolved and shrouded facet of the problem that has yet to come to light. He also makes an interesting point about Warren Buffett’s recent choice. This is a must read:

Counter-Party Risk 

Barry Ritholtz, January 18, 2008 

Get used to hearing that phrase: Counter-Party Risk.

You will be hearing a lot of it in the coming year. Its one of the reasons I disagree with my friend Doug Kass about any bottom in Financials.

Consider this small concern: Given the enormous amount of hedging that was done by Investment Banks (Merrill, Morgan Stanley, JPM, Citi, etc.) if the  monoline insurers fail, well, then you are no longer hedged. So while some people are arguing that the write downs are now over, I am not quite so sure.

And that’s before we get to the issues of defaults which have yet to occur. These are problems in the near future, and they are likely to cause an ongoing set of dislocations. Hence, why I expect the financial sector bottom will be a long tedious   process.

But I digress. Back to the monolines and counter-party risk.

The AMBACs (ABK), MBIAs (MBI),  and FGICs (a GE/Blackrock company) of the world used to have a nice little business going. They wrote insurance on bonds that cities, states and municipalities issued. It was “the vig” on getting a triple AAA rating, and the premium more than paid for itself in reduced borrowing costs. A lovely, low risk business, with little defaults and a steady revenue stream. At one point in time, AMBAC had the highest revenue per employee on the planet.

That situation was obviously intolerable. So they brought in the financial engineers. Hey, we should be issuing insurance on Credit Default Swaps (CDS) — the premiums are much much bigger than boring old munis!

Any time you hear words to that effect, you know you are dealing with an idiot of the highest magnitude. Those are the equivalent to “Give me a match, I want to see if there is any gas in the tank.”

The monolines are not in trouble because Municipalities are defaulting on bond payments. (That’s waaaay in the future). The problem is they wrote insurance — taking in that fat premiums — without properly understanding the risk.

Greater reward requires greater risk. This is such a simple formula, yet I find myself repeating it again and again. How anyone fails to understand it, quite frankly, is beyond my comprehension. These were once great businesses, and now, there is the increasing chance –perhaps likelihood — they will be zeros.
Can you imagine Warren Buffet destroying such a delightfully simple, profitable business? Me neither. That’s why Berkshire is going to own this space in a few short years . . .

~~~

I’ve said it before, and I’ll repeat it again: To err is human, but it requires an MBA to create total clusterfuck . . .
 

>

Disclosure: A relative used to work at AMBAK, and now works at FGIC. We don’t really discuss work, and they were NOT consulted on anything in the commentary. 

Tags: credit market, Currency, Economy, Fixed Income
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Resurgent Yen is Scary News

Wednesday, January 16th, 2008

Jan. 16, 2008 - Back on January 4, 2008, we wrote that “On days the yen falls to the euro [or dollar], stocks almost always rise; when the yen strengthens to the euro [or dollar], stocks fall. Its almost always a short term concern and the volatility it brings with it can be dramatic, but opportunistic.

Well, here we are facing the latter, as recessionary winds are putting pressure on the US dollar. This article provides a very good overview and it may be that some of this weeks heavy selling across the strongest sectors in the market could be attributed to the pressure on Yen/Dollar carry trade. Read on…

*** 

At a time where all the news looks grim - from awful results that forced Citigroup to cut its dividend, to bad US retail sales figures that deepened recession fears, to the ZEW survey showing German business confidence at a 15-year low (and, we might add, Wednesday’s FT report that confidence in the UK property market has hit its lowest level since the housing crash of the early 1990s) - the “potentially scariest news of all” is the resurgence of the yen, according to John Authers in Wednesday’s Short View column.

Some analysts are more sanguine, predicting the yen’s surge will be temporary. But Authers points out the Japanese currency’s jump on Tuesday to less than Y107 to the dollar - for the first time since June 2005 - broke what Nomura called the trend of “reasonably steady weakening against the dollar that had been happening since 1994″.

This is important, in Authers’ view, because the yen has become a gauge for risk aversion in the markets.

When traders feel confident, they borrow in yen to fund investments elsewhere. This yields easy profits unless the yen suddenly appreciates. A rising yen betokens fear.

Hence its close correlation with the equity indices, and with equity volatility. Share prices fall, and volatility rises, when the yen does well

The yen’s rise has “nothing to do with fundamentals”, notes Authers. Indeed, the Bank of Japan on Tuesday reduced its economic assessments of four of its nine regions and admitted the economy was slowing, reducing the chances of a rate rise.

A strong yen is not good news for anyone — including the Japanese, he warns. Falls this year have left the Nikkei 225 stock index in a bear market, down 23.4 per cent from its high of July last year. Fears that the revived yen will damage exporters have contributed to the damage.

Are there any signs of light?, asks Authers.

Tags: carry trade, Currency, Technical Analysis
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Recent ETF Performance

Wednesday, January 16th, 2008

Tags: Uncategorized
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The US Loses Ground While China Gains Significantly — Country Market Caps

Wednesday, January 16th, 2008

Courtesy of Bespoke Investment Group

The percentage of global market cap that US equities make up has fallen from 35% at the start of 2007 to 28.35% at the moment.  At the start of 2007, China made up just 1.89% of global market cap, ranking 12th out of the top 18 countries.  Chinese equities currently rank second and make up 8.12% of global market cap!  China is followed by Japan, the UK, France and Hong Kong.  Over the past year, there has been a significant shift in these numbers.  Developed countries like the US, Japan, the UK and France have all suffered at the expense of China, India, Hong Kong and Brazil — all considered “emerging.”      

Tags: China, Emerging Markets, Markets, US Stocks
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It’s Bad Everywhere…Except China

Wednesday, January 16th, 2008

Tags: Brazil, BRICs, Canadian Stocks, China, India, Uncategorized, US Stocks
Posted in Uncategorized | No Comments »

LIBOR, TED Spread, and Fed Funds

Wednesday, January 16th, 2008

Tags: Currency, Economy, Investment Strategy, Technical Analysis, Uncategorized, US Stocks
Posted in Uncategorized | 1 Comment »

How Solid are the BRICs? (Part 1)

Tuesday, January 15th, 2008

Tags: Agriculture, Brazil, BRICs, China, Commodities, Emerging Markets, India, Russia,