SUMMARY:
As we bounce from one crisis to the next, equity investors are throwing in the towel and opting for the safety of bonds, Swiss francs (until today) and gold. The debt deleveraging process is unrelenting and has roiled markets during the historically quiet month of August.
As we bounce from one crisis to the next, equity investors are throwing in the towel and opting for the safety of bonds, Swiss francs (until today) and gold. The debt deleveraging process is unrelenting and has roiled markets during the historically quiet month of August.
The model portfolio returned +2.3% last week. Equities gained +2.4%, bonds fell -0.6% and gold in euro terms added +5.1%. There is no change to the 60% equities / 20% bonds / 20% gold split. In August, the model portfolio returned -1.2% compared to -5.7% for the average managed fund. Equities declined -7.4%, bonds rallied +3.9% and gold in euro terms added +12.4%. YTD through 31st August, the model portfolio has returned -0.9% compared to -7.3% for the average managed fund. Equities returned -10.2%, bonds rallied +4.0% and gold in euro terms gained +19.6%.
DJIA
|
11,240
|
Dollar Index
|
$74.70
|
338.10
| |
DJTA
|
4,445
|
CAD/EUR
|
1.3995
|
Gold
|
$1,883
|
DJUA
|
427
|
USD/EUR
|
1.4205
|
Silver
|
$43.25
|
NDX
|
2,480
|
JPY/EUR
|
109.10
|
Copper
|
$4.12
|
S&P 500
|
1,174
|
JPY/USD
|
76.80
|
Oil WTI
|
$86.75
|
ISEQ
|
2,521
|
USD/
|
1.6215
|
Natural Gas
|
$3.85
|
FTSE
|
5,292
|
10 Yr. Tsy.
|
130.35
|
Soybeans
|
$14.55
|
Nikkei
|
8,951
|
30 Yr. Tsy.
|
140.35
|
Corn
|
$7.72
|
EQUITIES:
Bernanke is playing a dangerous game of chicken with investors and I think his bluff is about to be called. He has so far held his ground and has resisted calls for additional monetary stimulus. It is, however, only a matter of time (lower equity prices should do it) until he balks. US unemployment levels remain uncomfortably high and economic growth has once again started to moderate. Equity markets have begun to discount a weaker growth outlook and things appear close to unravelling. Uncle Sam is carrying a huge debt load and needs economic growth and inflation to ease the burden. Money printing is Ben's only option left.
I have no doubt that some form of QE/monetary stimulus is on the way. It's just a matter of timing. The recent price action of gold is telling us as much. Safe haven assets are rallying while equities just can't catch a bid. Bonds continue to shoot higher, but offer little protection for long-term investors. The Swiss Franc has also acted like a port in the storm, rallying sharply in recent weeks, until today that is, when Swiss authorities announced that they are about to engage in unlimited quantitative easing in order to drive their currency sharply lower. Slowly but surely, folks are realising that there is only one true save haven asset; it's yellow, shiny and has been a store of value for centuries.
Next, to Ireland
According to the ESRI, there are indeed some reasons for optimism. In their most recent report, issued today, they discuss the Irish government debt problem and implied debt dynamics out to 2015. They now expect our gross debt/GDP ratio to peak in 2012 at between 110-115%, before falling back to 105-110% in 2015. There is one fly in the ointment however. To achieve John Fitzgerald and the ESRI's expected outcome, we need lots of GDP growth. Fitzgerald has forecast GDP growth to pick up from 0.7% in 2011 to 2.5% in 2012, 4.0% in 2013, 4.3% in 2014 and 4.6% in 2015. Does anybody see a problem with this forecast?
You can't expect an economy to grow when you are cutting €3-4 billion a year from national spending. We had no growth in 2010 and almost flat-lined again this year. If GDP growth in Ireland
As I noted a couple of weeks ago, I think the game has changed. I think the market action of the past couple of weeks has confirmed that the 2-year bull market is over and the bear market has returned. I don't expect the next rally will make new highs. We are still in an extended topping process. Remember, equity markets took 15 months to form a top in 2000 before coming crashing down. It took 12 months in 2007 before a similar outcome. This time round, markets peaked at the beginning of May 2011, so we are only three months in. I had previously thought the return of the bear would be a 2012 event, but it might come earlier than I had expected. I will be able to tell more based on the quality of the next rally in stocks.
According to the ESRI, there are indeed some reasons for optimism. In their most recent report, issued today, they discuss the Irish government debt problem and implied debt dynamics out to 2015. They now expect our gross debt/
| 2009 | 2010E | 2011E | 2012E | 2013E | 2014E | 2015E | |
| Total Income | 34,868 | 33,425 | 33,604 | 34,385 | 35,663 | 37,163 | 38,827 |
| Total Spending | -60,129 | -52,100 | -49,697 | -48,227 | -46,834 | -45,512 | -44,255 |
| Deficit | -25,261 | -18,675 | -16,093 | -13,842 | -11,171 | -8,349 | -5,428 |
| Debt (MM) | 100,000 | 149,175 | 165,268 | 179,110 | 190,282 | 198,630 | 204,058 |
| 157,000 | 157,000 | 158,099 | 162,051 | 168,534 | 175,780 | 183,866 | |
| Deficit/GDP | -16.1% | -11.9% | -10.2% | -8.5% | -6.6% | -4.7% | -3.0% |
| Debt/GDP | 63.7% | 95.0% | 104.5% | 110.5% | 112.9% | 113.0% | 111.0% |
You can't expect an economy to grow when you are cutting €3-4 billion a year from national spending. We had no growth in 2010 and almost flat-lined again this year. If G
| 2009 | 2010E | 2011E | 2012E | 2013E | 2014E | 2015E | |
| Total Income | 34,868 | 33,425 | 33,541 | 34,000 | 34,453 | 34,981 | 35,482 |
| Total Spending | -60,129 | -52,100 | -50,148 | -48,669 | -47,535 | -46,432 | -45,358 |
| Deficit | -25,261 | -18,675 | -16,607 | -14,669 | -13,082 | -11,450 | -9,876 |
| Debt (MM) | 100,000 | 149,175 | 165,782 | 180,451 | 193,533 | 204,983 | 214,859 |
| 157,000 | 157,000 | 157,785 | 159,363 | 160,956 | 162,566 | 164,192 | |
| Deficit/GDP | -16.1% | -11.9% | -10.5% | -9.2% | -8.1% | -7.0% | -6.0% |
| Debt/GDP | 63.7% | 95.0% | 105.1% | 113.2% | 120.2% | 126.1% | 130.9% |
As I noted a couple of weeks ago, I think the game has changed. I think the market action of the past couple of weeks has confirmed that the 2-year bull market is over and the bear market has returned. I don't expect the next rally will make new highs. We are still in an extended topping process. Remember, equity markets took 15 months to form a top in 2000 before coming crashing down. It took 12 months in 2007 before a similar outcome. This time round, markets peaked at the beginning of May 2011, so we are only three months in. I had previously thought the return of the bear would be a 2012 event, but it might come earlier than I had expected. I will be able to tell more based on the quality of the next rally in stocks.
From a technical perspective, we broke long-term support last week but regained the upper hand again, just barely. Since markets are oversold to such an extreme – there are fewer stocks above their 50DMA's now than at the March 2009 bottom – I want to give this market a little more time before moving to a defensive position. Like I said, markets should be close to turning around here and crash-type events are low probability outcomes.
BONDS:
The current term structure of interest rates for the German, US and UK
Current Yields
|
German Bunds
| ||||
3-Month
|
0.30%
|
0.02%
|
0.52%
| ||
2-Year
|
0.44%
|
0.20%
|
0.58%
| ||
5-Year
|
0.97%
|
0.89%
|
1.21%
| ||
10-Year
|
1.85%
|
1.98%
|
2.29%
| ||
30-Year
|
2.84%
|
3.25%
|
3.67%
|
AH fair value yield estimates for 5, 10 and 30 year government bonds for the German, US and
Fair Value Yields
|
French Bonds
| ||||
5-Year
|
4.30%
|
4.40%
|
5.30%
| ||
10-Year
|
4.40%
|
4.50%
|
5.30%
| ||
30-Year
|
4.40%
|
4.50%
|
5.30%
|
Government bond yields remain significantly below the fair value estimates of the Asset Allocation Team, particularly for 5 and 10-year government bonds, hence the continued bearish view on this particular asset class. Now, let's take a closer look at the trend in 10-year yields for Germany
German 10-Yr Yield at 1.85% DOWN from 2.35% last week
Irish 10-Yr Yield at 8.75% DOWN from 10.00% last week
Italian 10-Yr Yield at 5.50% DOWN from 6.10% last week
Greek 10-Yr Yield at 19.30% UP from 15.25% last week
Spanish 10-Yr Yield at 5.25% DOWN from 6.05% last week
Portuguese 10-Yr Yield at 10.75% DOWN from 10.95% last week
COMMODITIES:
Gold closed on Friday at $1,883/oz, +3.0% for the week in USD. The USD rallied +2.1% versus the EUR over the week, so gold in euros gained +5.1%. Year-to-date, gold is up +24.9% in euro terms.
MODEL PORTFOLIO:
The model portfolio returned +2.3% last week. Equities gained +2.4%, bonds fell -0.6% and gold in euro terms added +5.1%. There is no change to the 60% equities / 20% bonds / 20% gold split.
In August, the model portfolio returned -1.2% compared to -5.7% for the average managed fund. Equities declined -7.4%, bonds rallied +3.9% and gold in euro terms added +12.4%.
YTD through end-August, the model portfolio has returned -0.9% compared to -7.3% for the average managed fund. Equities returned -10.2%, bonds rallied +4.0% and gold in euro terms gained +19.6%.
TOP TEN INVESTMENT IDEAS FOR 2011:
Top 10 For 2011
|
Comment
| ||
1
|
Long Gold
|
$1,337
|
Conservative inflation hedge
|
2
|
Long CEF.A
|
$18.95
|
ETF backed by 50% gold, 50% silver
|
3
|
Long
|
$55.00
|
Miner leveraged to rising gold prices
|
4
|
Long EGD
|
$4.20
|
Mining services company that sells equipment to the sector without taking the exploration risk.
|
5
|
Long GDXJ
|
$34.60
|
Junior miners ETF – when gold hits bubble territory, GDXJ will best capture the mania that follows.
|
6
|
Short 30 Yr Treas.
|
$121.45*
|
28 year bond bull market over, with US 10-year yields troughing at 2.4%.
|
7
|
Long
|
$27.75
|
The cash machine of the technology sector; single-digit P/E with double-digit EPS growth.
|
8
|
Long CAD/ Short JPY
|
JPY 82.00
|
JPY must decline so
|
9
|
Long Sugar
|
$0.34/lb
|
Commodity play with strong supply/demand imbalance
|
10
|
Long Soybeans
|
$14.05/ bushel
|
Commodity play with strong supply/demand imbalance
|
YTD PERFORMANCE OF 2011 BEST IDEAS:
| 28 January 2011 | 02 September 2011 | 2011 Return YTD | ||
| 1 | Long Gold | $1,337 | $1,883 | 40.8% |
| 2 | Long CEF.A | CAD 18.95 | CAD 25.45 | 34.3% |
| 3 | Long NEM | $55.00 | $64.45 | 17.2% |
| 4 | Long EGD | $4.20 | $4.30 | 2.4% |
| 5 | Long GDXJ | $34.60 | $38.30 | 10.7% |
| 6 | Short 30-Year Treas. | $121.45 | $140.35 | -15.6% |
| 7 | Long MSFT | $27.75 | $25.80 | -7.0% |
| 8 | Long CAD/Short JPY | JPY 82.00 | JPY 78.20 | -4.6% |
| 9 | Long Sugar | $0.34 | $0.30 | -12.6% |
| 10 | Long Soybeans | $14.05 | $14.55 | 3.6% |
PERFORMANCE OF 2010 BEST IDEAS:
| 01 January 2010 | 31 December 2010 | 2010 Return | ||
| 1 | Long Gold | $1,097 | $1,421 | 29.5% |
| 2 | Long Silver | $16.88 | $30.91 | 83.1% |
| 3 | Short 30-Year Treas. | $115.38 | $122.10 | -5.8% |
| 4 | Long NEM | $47.31 | $61.43 | 29.8% |
| 5 | Long PAAS | $23.81 | $41.20 | 73.0% |
| 6 | Long DVN | $73.50 | $78.51 | 6.8% |
| 7 | Long CAD/EUR | CAD 1.5100 | CAD 1.3356 | 11.5% |
| 8 | Long Nikkei | 10,546 | 10,229 | -3.0% |
| 9 | Long Sugar | $0.27/lb | $0.321/lb | 18.9% |
| 10 | Long Soybeans | $10.54/bsl | $14.09/bsl | 33.7% |
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