Macro Directed Markets

Few macroeconomic trends resonate in our current investment climate and with the stock markets being driven by Marco-economics rather than valuations, it is important that we seek to understand where the macroeconomic tides are headed. Government policy, emerging market health, interest rate movement and geopolitical risk affecting commodities are all important macroeconomic themes to be explored further in this climate. Most are interrelated and should be considered in whole when making investment decisions.

Perhaps most observable quantifiable is the government policy and interest rate climate we are in. The loudest macro theme seen for the better part of 4Q 2013 into Q1 2014 is government policy impacting interest rates. Recent trouble in emerging markets has forced central banks of emerging economies such as the Reserve Bank of India, the Central Bank of the Republic of Turkey, and the South Africa Reserve Bank to implement emergency rate hikes as their currencies tumbled. Strangely enough, these interest rate hikes are being touted as consequences of the loose interest rate policies most mature economies have enacted over the previous years. These rates are being increased in order to combat weak economic conditions – not growth. The move precipitates the continued chatter of global monetary policy tightening spanning from the U.S to China. The below chart shows the top 20% of the world’s GDP and their recent monetary policy decisions.

Source: Business Insider

Beyond government policy and interest rates, the U.S jobs numbers puts together an interesting macroeconomic story. Though we have seen a general decreasing unemployment trend in the US over the past year, December numbers reported in January proved to be uninspired, thus giving the market and economists reason to question the FED’s decision to taper its bond buying program. A non-voting member of the Federal Reserve stated “even as the 6.5% unemployment threshold approaches, labor-market conditions remain far from where they would need to be in order to justify raising short-term.” Furthermore, North America is experience record lows in the number of unemployed who are not actively seeking jobs, the labour participation rate in Canada and US have been well below 70% for over a year now, indicating the true unemployment rate is well above the reported 6.6% in US and 7.0% in Canada.

Source: www.fxstreet.com

The economic calendar shows that while the unemployment rate that the Federal Reserve bases its interest rate and monetary policy judgement is moving in the expected direction, non-farm payroll growth is underwhelming as is the job participation rate.

In general, we are seeing aversion to risk in the capital markets. We are experiencing a softer stock market, a recovery in commodities, increasing interest rates, and less accommodation monetary policy. All these add up to a reversion to the capital markets norm, where monetary policy was not the sole driving factor in the direction of capital markets, and company performance was the deciding factor in asset pricing. We are experiencing the return of growth in the developed markets with the U.S at 3% and the U.K at over 2%, and the cooling of emerging markets after a period with low yields and a quest for performance. The climate is clearly one for flight to quality, so consider quality in all your portfolio decisions.

For portfolio advice and more insight checkout my affiliates HMS Asset Management. We have an in-depth look at emerging markets, macro environment and micro environment weekly.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right.

Trade Well
-F

Market Report 26-06-13

Good Morning,

What's in the letter

The final revisions for Q1 GDP numbers will be released today, the markets are evidently excited about the numbers as futures have climbed in the pre market hours.

Moodys now has a neutral outlook for Japanese auto makers; sighting the weaker yen and a recovery from a natural disaster.

Gold and precious metals continue to tumble on the back of speeches by Federal reserve chairmen who routinely discuss the end to ultra easy monetary policy.

Blackberry has now opened up its service offering and will now provide security to companies with handheld devices other than BlackBerries. It seems as though the company has a contingency plan in case it's core operations in a saturated market fails to sustain growth.


What I think

The optimism behind today's GDP release raises questions about the rationale behind the market direction in the past few weeks.

The other day, Bernanke's speech outlining 3.4% growth this year was met with a market wide sell-off in what indicated perhaps a longer term market correction to come due to the fear of a taper. Whereas, this mornings GDP report is estimated to be 2.4% and is being met with a rally in the futures.

Are investors betting on a slower economy followed by a prolonged period of ultra easy monetary policy?

If you've followed this blog for any amount of time, you know that  am a BlackBerry bull. We are only days away from the release of Q1 numbers from the smartphone provider, this will be the first complete quarter encompassing sales from the company's new BB10 hand sets. Analyst's estimated range from -$0.15 to $0.70 I'm leaning somewhere in the middle. a good earnings surprise should squeeze out shorts and give the stock a huge boost.


Download your full report

Till next time,
Trade Well

Golden trade

Gold...Is It a Dead Trade?

The last weeks we have seen spot Gold in US dollar terms tumble from 1750 to 1670 despite global central banks coming out with more aggressive monetary policy and looking dovish.



In theory, much has not changed with regards to the fundamental reasons to own gold as an investment. You still want gold to "protect" you from currency devaluing by the central banks in efforts to strengthen their individual economies (As central banks increase their asset purchases/ balance sheet, we expect more money in the system thereby fueling inflation and devaluing the currencies, this in turn makes domestic products cheaper to foreign companies and boosts an economy's exports). However, Something has clearly changed in the last few weeks for the price of precious metals to basically shrug off an increase in asset purchases by the US Central bank, an increasingly dovish Japanese government that threatens to debase their currency and continued reassurance of cheap money around the world... or has it?

Equity markets don't seem to think so, the Dow and other indices have rallied on the news and activities from central banks. Although other news seems to prop these indices up, I suspect that increasing the amount of liquidity in the global economy is the chief driver.



As it stands, it would seem that increased liquidity has caused a "risk on" mentality to run rampant in the markets. Whereas in the past, increased easing caused investors to be cautious of inflation, they have simply disregarded this notion today because they have seen no impact of inflation due to central banks easing. On one hand, it seems Ben Bernanke is achieving at least part of his goal when it comes to his monetary policy.

Bernanke has time and time again insisted that his aggressive monetary policy will achieve many things in order to strengthen the economy, one of them being the wealth effect (people feeling wealthier when their investments are doing well and in turn spending more money). As we have seen since the beginning of his policies, the stock markets have rallied by double digits and consumer confidence has increased, some would speculate about the causal relationship between the two, but regardless of ones stance on the matter it is impossible to deny that both have happened. So much so that the chatter now that of a consumer led recovery in the U.S. All this is good stuff, but what about the price of gold and why its taking it on the chin you ask?

Well there are a few possible explanations
1. The market is completely discounting the idea of inflation and therefore taking a risk on position in equities rather than a protecting their wealth with gold.
2. Glimmer of presumed brilliance with regards to solving the Euro Zone fiscal woes is causing investors to be more optimistic about the future, therefore increasing their risk appetite.
3. (And ill expand on this) The actual effects of the Fed's increased asset purchases are not being felt yet in the market until these purchases kick in in 2013.

Julia La Roche brilliantly notes that "The FED has committed to purchase $40Bn per month in MBS + $45Bn per month in Treasuries (QE). That’s a total of $1020Bn in QE next year, over $1 Trillion in balance sheet expansion. See right axis of chart below….That takes FEDs total assets from roughly $2.9 Trillion to over $3.9Trillion."

To illustrate the correlation between the price of Gold and the size of the Fed's balance sheet



leaning on her analysis we note that this price correction in gold and precious will be short lived until we begin to see an expansion in the Fed's balance sheet.

Otherwise, the common theme in my analysis is that investors have an optimistic forecast for the future and expect to see a global resurgence in 2013.
Ultimately, it pays off to be well hedged; and having some exposure to precious metals is an excellent way to do so.

Gold is financial antimatter; it is the fear factor which is opposite to the confidence factor.

The fact that it has pulled back doesn’t indicate all fear has vanished, but its saying that the "risk on" trade is popular, and we all know how quickly that can go south

Till later Trade well