Archive for November, 2009

Dubai…not so important

What does Dubai mean?

It looks like an excuse for a bit of profit taking.

As the System has signalled over the past several months, investment flows have been away from the US dollar and towards Emerging Market equities. There has been some concern about profit taking in the Emerging Markets now that the dollar has stabilized and looked poised for a small bear rally into the year end.

That environment has not changed with the events in Dubai. In fact, one should not be surprised that a small Arab Emirate, which has been building whole islands of new property in the middle of a Global Financial Crisis, is now having financial trouble of its own. Maybe one is not meant to ski indoors in Dubai.

How to save a Banking Industry

The US Treasury yield curve is a good place to start to understand some of the forces that underpin current financial flows.

The first impact of the steep curve which starts at near zero cost for overnight borrowing is that banks with access to the Federal Reserve can borrow at costs of around 25 basis points and invest in 2 year treasuries at 67 basis points or 5 year paper for a yield of 2.2%. With 20 times gearing and no need for outside customers, this is also the reason we are not seeing a big surge in lending. Nice business, if you are a bank.

The second impact stems from the question: “Who is paying for this?” Answer: Everyone with a bank account or a money market fund.

What are investors doing? Adding risk to their portfolios in order to get any sort of return.

So when you hear the experts saying that current P/Es discount a 5% GDP growth rate, you now know the real reason is a desperate search for investment return.

Latin America on top

Despite confusing signals emanating from the financial press, the IRP System is giving a clear signal that the recent strength in Latin America will continue in the medium term. The Taiwan portfolio still shows a preference for REITs and Emerging Markets. Metals replaces Asia as the #5 sector.

In our US ETF model portfolio, Turkey is still on top, Brazil is in #2 position and India falls from the top five to be replaced by International Financials.

In commodities, the news is almost entirely about gold. However, the yellow metal is not trending as one might expect. According to the System, silver actually looks the stronger of the two “hard currencies”. Soft commodities are doing slightly better but our entire range of commodities is giving only very weak signals at best. Most likely, this is due to the stabilization of the US dollar. When the dollar weakens after the year end covering, expect to see stronger trends developing in the commodity area.

On currencies, the US dollar has staged its expected rally. The weakest currency in the near term looks like the Japanese Yen. Otherwise, there are not many profitable trades this week.

Top 5 Fund Sectors:

  1. Latin America
  2. REIT’s
  3. Emerging Europe
  4. Emerging Markets
  5. Metals

A change in the markets?

Over the past several months, the System has been fairly consistent with its recommendations. This week is no different with REITS, Latin America and Emerging Europe as the top three sectors in our Taiwanese fund universe. In our ETF universe, three of the four components of the BRICs theme (Brazil, Russia and India) still feature in the top five of that model portfolio.

The System shows us that non-US dollar investments are favored. According to the FED, the supply of US dollars will continue to rise. The demand for new US dollars is low. So, the money flows to the financial markets. The result? The price of the dollar has fallen and the non-US dollar assets have risen.

The question for investors is how long will this supply/demand situation continue? A potential change could come with an expected, albeit small rally in the US dollar at year end.

What will change if the US dollar reverses course?

  1. It may cause changes in the rankings. We may see emerging markets profit taking as the year draws to a close.
  2. It may mean a short term peak for gold. The price of gold crossed US$1,100 last week with the Indian Central Bank placing a large order for 200 metric tons of the yellow metal. A strengthening US dollar may change gold’s direction in the short term.

From our point of view, the question isn’t “Is gold a good investment?”
The question should be: “Is gold a better investment than the other choices you could make?”
Answer: Not yet.

The top 5 sectors this week:

  1. REITs
  2. Latin America
  3. Emerging Europe
  4. Emerging Markets
  5. Asia ex-Japan

The top 5 ETF’s this week:

  1. TUR US – MSCI Turkey
  2. EWZ US – MSCI Brazil
  3. EWP US – MSCI Spain
  4. EPI US – India
  5. RSX US – Russia