Taking Stock

its been a long time again; am setting myself to writing atleast once a month in the future - lets see.

So where do we stand now in terms of the markets ? I had mentioned in my earlier post in May that massive liquidity is starting to drive asset prices & if it continues then it would only be creating a further mini-bubble & postponing the inevitable. Or if the rally gets quickly nipped, it would pave the way for a range-bound markets. Well, clearly the former has happenned. The govt measures especially in the US (cash for clunkers & home buyer credits - which btw, seems to have created a big scam!) coupled with the liquidity deluge & inventory restocking ensured continued good data improvement & that has supported further rally into all assets - stocks, gold & commodities. They have hit near 60-80% of previous highs or as in case of Gold, vaulted to new highs.

In terms of views on 'what next' am going to be a bit more specific about each asset class rather than broad economic views. So here goes....

US stocks - 10500 pretty much seems as best as it can get for the dow. Already there seems realisation that 4th quarter GDP will not be as good as the 3rd in the US. If the govt does not extend these programs like cash for clunkers then likely that consumption will drop & that will automatically impact the GDP growth. 10500 is only 25% below the alltime high level of 14000 in Sep-oct 2007. I don't know about the S&P valuations (& I don't think many people know given that many companies are shifting from full year Losses to Profits), but I think 25% off the peak is a fair value by any optimistic assessment given the uncertainity & unemployment situation & sheer over value by a more pessimistic assessment. Verdict: Short; stop at dow 11000; s&p 1200

US Bonds - this is one market which is rallying belying all expectations. Am still betting on eventual inflation & hence would like to short the long end Treasuries...but the bond market & US rates have resisted bravely the euphoria declared by the equity markets over the last month & more & over the last 3-4 days have fallen substantially. This market still continues to be betting on deflation rather than inflation. I'm not sure of this, but I think US Bonds will go out of favour at some point & hence slow accumulation of TBT/PST is in order

Oil - Unless you believe in double-dip recession in Y 2010, this market is headed higher. Buy on dips would be the call. There is a nice consolidation in the 70s which could form base for next push higher. If 70s break, though we could oil into the 50s. That would be a great buy.

Gold - In my Feb post, I had mentioned a few indicators which would play out before end of crisis. One of which was that the central banks will buy Gold as part of reserve holdings. Thats commenced & Gold has zoomed to 1200. But I think this is just a start & with worsening fiscal situation everywhere, paper money has already lost the battle & Gold will become a crucial store of value & reserves. Keep buying on every dip.

Emerging equities - again buy on dips is the call. There are 2 risks -
1. The western economies go through another crisis like late 2008. Especially these East European economies are still dodgy. A sell off from such crisis can impact all. IF that happens, great, BUY big time;
2. China surprise - while I think its too early & low probability (but not NIL), there is always a potential China surprise. I say this for 2 reasons - one, there has been so much hype & hope about China even in the face of compelling consensus on non-transparency from the country; this means there is some amount of guesswork in all the hype & thats always dangerous. Two, its a fact that China did prop up the commodity markets earlier this year purely hoarding at low prices not supported by actual demand. Such hoarding driven strategy can work if actual demand catches up within a reasonable time frame. If not, a 2nd crash may not be far away especially for commodities. A China surprise can hit Emerging market stocks big time & could really crash all assets across the globe actually - stocks, commodities, currencies, gold too. Only bonds & USD will benefit. As I said probability is low & hence no point planning for such an eventuality now.

Currencies - Theme is still sell USD & long EUR, GBP & AUD. I would be a little cautious in putting fresh trades though, since am bearish equities. With present market correlation being so high, any equity fall will lead to USD gains. So, you may get better levels to execute these short USD trades. One final point on currencies - JPY went to about 86.5 yesterday. Watch out here...I think 84 would form a big floor & that would probably be the best JPY would see for some time. Shall explain why in my next blog.....

hope its sooner.

cheers