As we cross the midway mark on January, the various portfolios that we run under the Fund King System are all pointing in the same general direction. Commodities (metals, softs and energy), and US sectors – tech, regional banks (acquisition targets) and small caps are all clustering around the top of the rankings.

Part of the reason is the stimulus package which came attached as a condition of continuing the Bush tax cuts beyond their expiration date. According to this article in Zerohedge, the payroll tax cut and the “Make Work Pay” tax credit will amount to 180 billion in stimulus this year. Add in the main premise of the article, that non-paying mortgages amount to a stealth stimulus, and much of this year’s expected GDP growth is coming from non-renewable sources. What is not stressed in the article is that the $1.4 trillion dollars in non-paying but not yet foreclosed mortgages amounts to 10% of US GDP. Some of that money will be recovered eventually when the foreclosed houses are sold but it is safe to say that in the meantime a big chunk of wealth is tied up in the process.

But if the US were the only economy to consider, commodities would be heading down rather than up. Commodities are rising because developing countries are importing the incredibly loose monetary policy of the US through linked exchange rates (or simply a desire to stay export competitive). Whether one thinks China is growing at 7% or 10% (and there is a range of opinion even within China’s government), a near zero percent accommodative monetary regime is not the correct policy response. A number of articles comparing today’s situation with the Asian Crisis of 1997-98 have started to connect the dots which is why there are so many warnings of overheating in China (ie. we have all seen this movie before and we know how it ends). The flooding in Australia may add further pressure to the inflation picture. Coking coal is a key ingredient in steel production and the flooding in Queensland has temporarily suspended production at mines which amounts to an estimated 40% of world supply.

Which of these trends has staying power? Small caps are famous for running out of steam as soon as February rolls around. Regional bank acquisitions might trundle on for longer because the industry is due for consolidation and the banks at the top of the feeding chain are not only TBTF (too big to fail) but enjoy preferred access to Central Bank funding. The jury is out on the tech surge. If cashed up corporations are ready to invest in productivity enhancements, there might be a sustainable trend. If the improvements are just part of the inventory restocking, then the sector will fall back next quarter. Only the upward pressure on commodity prices appears to have staying power for now. So, watch the System closely because we are likely to see leadership changes in the coming two or three months.

Seeking Alpha Portfolio

SA Portfolio RankingThis week is a good time to review what we have in the 20 ETF Universe and start to plan for any changes we might want to make at the three month mark which is coming up in three weeks.

The changes will center around correcting for my bias in favor of Emerging Markets and Asia, potentially removing SPY because it is too broadly based and adding at least one fixed income asset class.

A quick review of the performance of the portfolio: We are currently holding 250 shares of IXC (Global Energy), 550 shares of EWT (Taiwan MSCI), and 160 shares of EWW (Mexico Investible) plus $659.85 in cash. So far we have racked up $87.45 in commissions and $1,450.50 in short term capital losses. The portfolio was up 2.1% last week so we are still underwater in week 9 with a total loss of 1.86%. We started with $30k on November 15th and at Friday’s close, we are looking at $29,441.95.

As you can see from the ranking, there is no need for any switches this week.

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Filed under: Emerging MarketsETFHard CommodityInterest RatesInvestment IdeasPrecious MetalsSoft Commodity

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