The Eurozone continues in crisis mode. Many French and Italian banks are on life support. Dexia in Belgium Greece
The model portfolio returned +0.9% last week. Equities gained +1.5%, bonds fell -0.8% and gold in euro terms added +0.9%. There is no change to the 60% equities / 20% bonds / 20% gold split. In September, the model portfolio returned -1.9% compared to -2.1% for the average managed fund. Equities declined -2.1%, bonds rallied +1.3% and gold in euro terms gave back -4.5%. YTD through end-September, the model portfolio has returned -2.8% compared to -9.2% for the average managed fund. Equities returned -12.2%, bonds rallied +5.3% and gold in euro terms gained +14.2%.
DJIA
|
11,103
|
Dollar Index
|
$78.75
|
303.50
| |
DJTA
|
4,360
|
CAD/EUR
|
1.3905
|
Gold
|
$1,638
|
DJUA
|
431
|
USD/EUR
|
1.3380
|
Silver
|
$31.15
|
NDX
|
2,479
|
JPY/EUR
|
102.65
|
Copper
|
$3.25
|
S&P 500
|
1,155
|
JPY/USD
|
76.75
|
Oil WTI
|
$83.15
|
ISEQ
|
2,563
|
USD/
|
1.5560
|
Natural Gas
|
$3.50
|
FTSE
|
5,303
|
10 Yr. Tsy.
|
128.90
|
Soybeans
|
$11.70
|
Nikkei
|
8,606
|
30 Yr. Tsy.
|
141.30
|
Corn
|
$6.13
|
I go away for two weeks and all hell breaks loose. The DJIA plunged 1,000 points in the third week in September, then rallied by 900 points, fell again by another 1,000 points and has once again regained the majority of that decline as I write. Gold investors didn't escape the carnage and were shaken by a $400 drop in a matter of days as margin clerks forced a number of well known hedge funds to unwind profitable positions in the precious metals sector to cover losses elsewhere. One of John Paulson's funds is -47% YTD (Paulson is the guy who made billions shorting US housing related ideas a couple of years ago). The USD and US Treasuries were the main beneficiaries of the mayhem as investors once again ran for the safety of greenbacks and Uncle Sam. At some stage over the next few years, investors are going to realise that these are not safe havens and that is when things will get interesting, but that's another day's work.
In the short-term, equity markets are oversold and due a rally, which could last through to the end of the year. Beyond that, however, I think the bear market has more work to do before it has completed. The 2007/8 bear market wasn't allowed to run its course. Instead, central bankers intervened to try and halt the decline, printing gobs of money in the process. The bear market was postponed for a couple of years. It will return in 2012.
The good news is that many of the world's biggest corporations are quite well prepared for the next bear market. Valuations for large cap stocks are not overly expensive (albeit measured off peak earnings) and their balance sheets are in good nick. The two fundamental problems I see are 1) weak aggregate demand across the developed world markets and 2) record corporate margins that are set to mean revert, which could mean a 20-30% drop in corporate profits. A combination of weak demand, declining corporate margins and potentially rising interest rates will in all likelihood translate into declining stock prices next year. Throw in a systemic shock by a sovereign state or two in the Eurozone and I just don't think equity investors are going to get paid for the risks they are taking. I would look to sell once the current rally exhausts itself.
From a technical perspective, we broke long-term support in August but have recently regained the upper hand. The primary trend remains upwards.
Bonds:
The current term structure of interest rates for the German, US and UK
Current Yields
|
German Bunds
| ||||
3-Month
|
0.38%
|
0.01%
|
0.60%
| ||
2-Year
|
0.64%
|
0.29%
|
0.65%
| ||
5-Year
|
1.31%
|
1.08%
|
1.42%
| ||
10-Year
|
2.07%
|
2.08%
|
2.57%
| ||
30-Year
|
2.79%
|
3.02%
|
3.47%
|
The following are fair value yield estimates for 5, 10 and 30 year government bonds for the French, US and UK
Fair Value Yields
|
German 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 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 2.00% UP from 1.85% last week
Irish 10-Yr Yield at 7.75% DOWN from 8.75% last week
Italian 10-Yr Yield at 5.50% DOWN from 5.60% last week
Greek 10-Yr Yield at 23.50% DOWN from 25.70% last week
Spanish 10-Yr Yield at 5.00% DOWN from 5.35% last week
Portuguese 10-Yr Yield at 11.25% DOWN from 11.35% last week
Commodities:
Gold closed on Friday at $1,638/oz, +0.9% for the week in USD. The USD was unchanged versus the EUR over the week, so gold in euros gained +0.9%. Year-to-date, gold is up +15.3% in euro terms.
Gold has at least another 3-5 years before we can even start contemplating a top. The public still isn't really on board yet. It will happen but it will take time. Corrections in the gold market, when they come, are usually quite scary and can be quite violent. It is all part of the process. The gold bull likes to advance with as few folks as possible on board. The recent correction was tough to hold through but is now over or close to finishing. Gold could drop another $100 or $200 or the correction could be over today. What euro investors should remember is that, when the USD price of gold falls, and we have seen a -20% drop in a few weeks, the USD usually rallies versus the EUR, cushioning the blow. This time round, the USD rallied from 1.45 to 1.33, an 8% move. So, although the correction seems quite violent, it is only -12% for euro investors. Not great, but not too bad. My first target is $5,000 and it could go much higher, depending on what the central banks do.
Model Portfolio:
The model portfolio returned +0.9% last week. Equities gained +1.5%, bonds fell -0.8% and gold in euro terms added +0.9%. There is no change to the 60% equities / 20% bonds / 20% gold split. In September, the model portfolio returned -1.9% compared to -2.1% for the Aon Hewitt Managed Fund Index. Equities declined -2.1%, bonds rallied +1.3% and gold in euro terms gave back -4.5%. YTD through end-September, the model portfolio has returned -2.8% compared to -9.2% for the Aon Hewitt Managed Fund Index. Equities returned -12.2%, bonds rallied +5.3% and gold in euro terms gained +14.2%.
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
|
* Incorrect price listed in week 4 update and amended above.
YTD PERFORMANCE OF 2011 BEST IDEAS:
| 28 January 2011 | 26 October 2011 | 2011 Return YTD | ||
| 1 | Long Gold | $1,337 | $1,720 | 28.6% |
| 2 | Long CEF.A | CAD 18.95 | CAD 23.00 | 21.4% |
| 3 | Long NEM | $55.00 | $66.25 | 20.5% |
| 4 | Long EGD | $4.20 | $3.70 | -11.9% |
| 5 | Long GDXJ | $34.60 | $31.50 | -9.0% |
| 6 | Short 30-Year Treas. | $121.45 | $139.00 | -14.5% |
| 7 | Long MSFT | $27.75 | $26.40 | -4.9% |
| 8 | Long CAD/Short JPY | JPY 82.00 | JPY 75.35 | -8.1% |
| 9 | Long Sugar | $0.34 | $0.28 | -17.6% |
| 10 | Long Soybeans | $14.05 | $12.80 | -8.9% |
| Average Performance | -0.4% | |||
| Average Managed Fund | -9.3% | |||
| Global Equities | -12.2% | |||
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% |
| Average Performance | 27.8% | |||
| Average Managed Fund | 12.0% | |||
| Global Equities | 20.1% | |||
