NEW$ TO U(SE)

• There is a rising chorus of sceptics who argue that the recovery is hollow and that the miraculous growth rates China has achieved over the last 15 years will soon be over.
• At its most basic level, the bear argument is derived from the fact that China has had what is probably the biggest, longest economic boom in history. The logic applied is that the bigger the boom, the bigger the bust.
• A reckoning may well come to pass at some future point but it won’t be soon. Over the time horizon of most investors, it has a low enough probability of occurrence that people should not pay much attention to it.
• We remain positive on risk assets—equities, commodities and corporate bonds—for the short term, a time frame of roughly six to twelve months. The basic backdrop continues to be one of plentiful liquidity, very low interest rates, gradual healing in the financial system, virtually non‐existent inflation, recovering economies and a stable dollar.
• Fundamentally, the U.S. dollar is a weak currency. Its main attribute is that it doesn’t smell as bad as the euro and the yen and, as we have said many times, no one, apart from hedge
  funds, has any interest in a dollar crisis.
• Stay long risk, stay worried and don’t forget to keep your focus on long‐term wealth preservation. Enjoy the better times because they won’t last.

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Tony Boeckh:

• The bull market is intact, but it does depend on continuing government intervention to compensate for weak consumption and deleveraging. However, gains in 2010 will be much harder to come by than last year.
• Government bond yields have nowhere to go but up, and a sharp rise later in 2010 is possible if the Fed is determined to shrink its balance sheet. At present that is not in the cards but conditions could change in the 2nd half of the year. The compression of corporate yield spreads has been played out. The juicy returns seen in this sector in 2009 won’t be repeated until the next cycle.
• We believe that gold has reached its peak in this cycle, even considering the sovereign debt drama now playing out.
• We must continue to urge investors to focus on wealth preservation. There are plenty of things that could go wrong on a very short notice.

Read the rest of this entry »

Our basic view remains unchanged; we remain positive on equity markets, credit spreads and most commodities because liquidity flows are still very positive and key indicators are supportive. However, we still are very concerned about the artificial nature of the economic recovery and financial markets and when the relatively benign environment might change for the worse.

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• A good part of the reflation effort is to transform private debt into public debt, and this will surely create another, different debt monster.
• The markets are starting to tell us that Governments with brittle, over-extended fiscal positions will soon have to put in place credible fiscal consolidation – tax increases, expenditure cuts, decline in services, etc. This means more deflation, more uncertainty.
• The question for investors is – do you get up on the dance floor like everyone else and pretend that the crash was a bad dream? Or, do you pay attention to the unresolved problems, do a little dancing, but be ready to grab a chair when the music stops?
• there is no long term any more for investors. It is totally inappropriate in this environment to think in terms of point estimates — how high the stock market might go and how long it will keep rising. Estimates of numbers and time are useless and, in this highly uncertain world, no one should believe such forecasts.
• remember that the U.S. reflation is an experiment never before performed in peacetime except in post-1989 Japan. The lesson there is not very consoling. Read the rest of this entry »

Tony Boeckh writes:

• Inflation is non-existent and long bond yields are flat. The Fed has a green light.
• Emerging market asset prices will continue to be driven by U.S. monetary policy for the  foreseeable future.
• We are certainly in the early stages of a bubble.
• Fiscal stimulus, bailouts and monetary policy have created a totally artificial picture.  Fed policy has yet to gain much traction domestically, and low rates alone may not prove successful in establishing sustainable growth. Restructuring the U.S. economy is necessary and will take time.
• Momentum will likely carry gold prices for a while longer but there are clear signs that we are in a mania.  In the absence of any evidence of
  inflationary pressure, current gold prices are vulnerable, particularly if the dollar were to rally.
• Until a pattern of improving earnings is clear, expect equities to be range bound and volatile.  Continue to build liquidity on strength.
• The U.S. dollar will remain under pressure, but the decline should remain orderly as no one wants their currency to rise in a world of deflation nor does anyone relish the chaos a dollar collapse would trigger. Read the rest of this entry »

Three commentators discuss the same phenomenon:

OVER THE PAST DECADE, stock and bond prices have generally moved in opposite directions, meaning that share prices and bond yields have moved together, both higher and lower.(…)

This important relationship held true this year until June, when bond yields peaked. One month later, as yields moved lower, stocks began their current leg up.(…)

Given their relationship at major turning points over the years, something is not quite right. And when it comes to trusting bonds or stocks for the correct "opinion," history would suggest that it’s usually better to go with bonds.(…)

One part of the bond market caught my eye this week. The yield on two-year Treasury notes fell nearly 40% to an unreal low of 0.67% and is just a hair from its generational low of one year ago.

This is important for two reasons. The first is that one year ago, the financial markets were nearly frozen and investors looked for the safest places possible to park their money. Treasury securities with short maturities were the only assets that were holding their value and demand to own them pushed prices up and yields way down.

The second reason is that the yield on the two-year note joined three-month bills in approaching zero again. Longer dated Treasury yields, from five years to 30 years, are not even close to reaching respective 2008 lows and that suggests that some money is moving towards an extreme safety position again.(…)

Full Barron’s article

And David Rosenberg

The U.S. 10-year Treasury note yield gapped above the 50-day moving average yesterday. In the past six months we have been in a most unusual backdrop: bond prices up, equity prices up, oil prices up and gold prices up. Looking back at the historical record, this is what you call a 1-in-15 event. In other words, not normal, and something has to give.

In the past, it has been Mr. Bond, shaken and stirred, that has been the arbiter of realigning the asset mix. (…)

The odd man out here is clearly the bond, but if yields head back up to 4% (about 50% of the rally in the 10-year note has just been retraced in this recent spasm in yield), expect a countertrend rally in the U.S. dollar over the near-term and a giveback in all these risky assets that all of sudden become 90% correlated with the greenback.

As for the vast amount of supply we mentioned above, well, the U.S. Treasury is going to auction — get this — $105 billion in Treasury bills and notes next week. Talk about choking on the wishbone. This fiscal largesse may come at a pretty big cost and aside from a countertrend rally in the U.S. dollar (as Mr. Trichet is pushing for) a further yield spasm in the Treasury market at a time when the economy is still struggling (ISM services back below 50 — that is not good) could well be enough to upset the equity market apple cart; just as investors are closing their books as the year draws to a close. Buying some protection, especially now that it is cheap, may not be a bad idea.

Tony Boeckh adds

The last nine months have been a remarkable period in that equities, gold and corporate bonds have all appreciated by double digits. This has only occurred on two other occasions in the last 50 years. Typically, equities perform best during periods of low and stable inflation, like the current environment. Gold (and other commodities) performs best during inflationary periods and when the dollar is weak, while government bonds tend to outperform during periods of deflation and risk aversion. The current, unusual dynamic where almost everything has gone up together cannot last forever.(…)

The current environment diverges from the typical cycle in that easy policy is not translating into domestic consumer or business credit expansion.

Tony Boeckh worries about China but remains positive on equities.

• China’s success in stimulating its way out of the global
  recession has been wildly successful
• This success masks a growing set of imbalances
• The close relationship between money
  supply and property prices (Chart 2) indicates that prices are likely to move up substantially over the next 6 to 12 months.
• the authorities are taking the threat of
  another bubble seriously but
• If asset bubbles are the price of stimulating
  employment, the authorities will keep pumping up credit.
• we are in the “sweet spot” of the equity cycle
• The bears are gradually capitulating. They tend to make the same mistake in every cycle, projecting where they think the economy is going and assuming that the market will follow their projections
• Seasonally, and following a huge rally, one would have expected a sharper correction. It would appear that another major up-leg is underway Read the rest of this entry »

(Tony Boeckh is President of Boeckh Capital Co. Ltd., a family office and private investment firm. From 1968 until recently, he was Chairman, Chief Executive Officer and Editor-in-Chief of BCA Publications, known for the Bank Credit Analyst and related international investment publications.)

Summary:

• The real culprit of the Crash of 2008/9 is the U.S. debt super cycle, which has operated for decades, mostly in a remarkably benign manner. The inflationary implications of the twin deficits (current account and fiscal), as well as the steady increase in private debt, have been moderated by the integration of emerging markets into the global economy.
• The speed and magnitude of the bailouts and stimulus – the end of which we won’t see for a long time – aborted the meltdown. However, the story is far from over.
• Anemic growth, falling tax revenue, increased government spending, and bailouts of indigent states, households, businesses, and an aging population will all undermine public finances to a degree never before seen in peacetime.
• The Fed is in a very difficult position. Its room to maneuver is either small or non-existent and the markets understand this. That is why there is a sharp divergence between those worried about price inflation and those fearing a lengthy depression.
• Investors who need income are probably safe holding reasonably high quality bonds in the five-year maturity range.
• Investors who can afford a little risk should own some assets that will ultimately be beneficiaries of the wall of new money being created and thrown at the economy.
• There is a major risk to our relative near-term optimism, and that is the U.S. dollar. The most likely outcome is a nervous dollar stalemate.

However, this is a fragile, unstable situation and the dollar must fall over time. Investors need to diversify away from this risk. Read the rest of this entry »

(Tony Boeckh is President of Boeckh Capital Co. Ltd., a family office and private investment firm (specializing in small public companies, hedge funds, private equity, high yield securities and currencies). From 1968 until recently, he was Chairman, Chief Executive Officer and Editor-in-Chief of BCA Publications, known for the Bank Credit Analyst and related international investment publications.)

Summary:

• Buy Natural Gas
• Housing and CRE remain dangerous
• We are still in the sweet spot for stocks…but the sharp rally requires a period of consolidation or a correction.
• Oil and some other commodities have probably moved too far too fast and are also due for a correction. But all the new money that has been created has to find a home and commodities and gold seem likely candidates.
• We remain negative on Treasury bonds but the panic over future inflation has been overdone and some improvement in prices is likely in the near term.  Lower grade bonds provide a much better
  risk/reward balance.

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See previous comments from Tony

• The wall of money pumped into the system is hitting an economy that is deleveraging and has a pricing structure that is between disinflationary and mildly deflationary. Cyclically, this is the most bullish time for equities. The market is up roughly 30 – 35% from the very depressed lows and will probably consolidate for awhile, but higher levels are likely.
• The big concerns are two-fold: the U.S. Treasury market and the U.S. dollar.  Investors in highest quality bonds should have very short duration. Treasury bonds are also suffering from the migration of investors to higher yielding assets and the worry over funding gigantic Treasury deficits.  Investors should continue to bet on a lower dollar with a risk of a dollar crisis down the road.
• The wall of money creation and potential inflation are very positive for gold longer-run, but with so many bulls around, there may be some consolidation in the shorter-run.
• We would be cautious on oil in the short-term, while remaining bullish longer-term.

Read Tony’s previous comments

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