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Ways to play knowns among the unknows

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March 22, 2011 – Comments (8)

Bullish Ideas from David Rosenberg for the current environment of unknowns.

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David Rosenberg
http://pragcap.com/what-we-know-and-how-to-play-it


THERE ARE STILL SO MANY UNKNOWNS

    There are still many unknowns with regard to the global macro picture, but what we do know is the following:

    1. Despite the success of the Allied air raids, Libyan oil production is not coming back for at least six months and the situation in Bahrain could hit an acute stage; there are more upside than downside risks to the oil price.

    2. Japan was already the number-one importer of liquefied natural gas (LNG) and this status will be accentuated as replacements for a damaged nuclear grid is sought.

    3. Nuclear energy development takes a near-term hit here by the politics of the Japanese crisis but not a permanent hit (weekend FT editorial was spot on with this file), but in the interim natural gas and coal should really benefit.

    4. The aftershock in Japan will be related to contaminated food supply so we can expect to see more inflation on this score too. Looking at the U.S. PPI data, the producers have been successful in passing on the increases to the food retailers.

    5. With Mizuho shuttering 38,000 ATMs due to the crisis, one has to wonder the extent of any fallout on the country’s banking system. That said, the Nikkei is the only major market trading at book value, so the market itself would seem to have little downside from here.

    6. The gold market has a new buyer — Iran, as it reduces its exposure to U.S. dollars and lifts its bullion reserves (to over 300 tons).

    7. Whether QE2 morphs into QE3 will be making the headlines more and more. A CNBC poll showed one-third of portfolio managers positioned bullishly for this. I just cannot see how the Fed can justify doing this as early as June when we will likely be seeing headline CPI inflation in the U.S. at 4.5% and PPI inflation near 8%. Remember, there is an 86% correlation between the movements in the Fed balance sheet and the direction of the S&P 500 over the past two years.

    8. U.S. real average weekly earnings are down in each of the past four months (and five of the past six), and at a -4% annual rate. So the problem is that even though the labour market is getting marginally better, wages are not keeping up with prices, which means a big squeeze on real income and spending. The incremental stimulus for the U.S. consumer ends this quarter. Big problem for the consumer discretionary group. Also consider that in the past six months, 90% of the wage gains incurred by the household sector has been absorbed by the food and energy bill.

    9. For the first time since last November, we are starting to see real GDP and earnings downgrades in the U.S.A. — this is a sign to be favouring defensive paper over domestic cyclical securities.

    10. The Canadian dollar is quietly emerging as a safe-haven currency and yesterday’s budget will likely solidify the country’s status as a fiscally stable jurisdiction. Meanwhile, the G7 countries’ efforts to weaken the yen will likely persist … so the cross rate here is going to be highly in the Canadian dollars’ favour — we could see a 5 -10% rally in coming weeks/months in this relationship. There have been only two days that the Canadian dollar has closed below “par” so far in 2011; at this same stage last year, that number was 55.

    INVESTMENT THEMES
    • Gold and silver
    • Energy exposure, especially oil and the drillers
    • Canadian dollar denominated corporate bonds
    • Hybrids with oil/gas paper content and a running yield that exceeds U.S. Treasuries
    • Hedge funds that hedge — relative value trades
    • Emerging debt and equity markets, selectively — value has opened up recently
    • Japanese equities for value too … recession is already priced in
    • Staples over cyclicals; strong balance sheets over weak; large caps over small caps
    • Various muni bonds — states in areas where the economic base is linked to energy and food such as Texas, Kansas, Iowa, and Missouri — what Meredith Whitney dubs “the emerging markets of the U.S.A.”

8 Comments – Post Your Own

#1) On March 22, 2011 at 11:17 PM, checklist34 (99.71) wrote:

the japanese market and its valuation is definitely an interesting thing here. 

I know we talked about that a while ago, I found a chart just the other day showing the p/e of the Nikkei at like 90 in 1989, 45 in the mid 90s, and so forth.  It had never really gotten cheap until the most recent years.  

Certainly TM and HMC and Nintendo and Sony aren't fantastically cheap (or necessarily off all time highs).  So something is cheap, but what?  I know nearly nothing about Japanese stocks.  

It may be time to dig...  

 

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#2) On March 22, 2011 at 11:19 PM, checklist34 (99.71) wrote:

one thing... 

owning "defensive" stocks anticipating a drop in the stock market just isn't good business.  If the market does drop, they will drop too, maybe just drop less.  

But if one has a high conviction that the market is going down significantly, why own any stocks?  Why even ABT or MO?  They're all going down if wall street gets really ugly, the correlation in the market in downdrafts is just extremely high these days.  

Rosie, like Marcin at Real Money and other "hyper bears" from the last few years is being more moderate lately.  As is Roubini, and many others.  I wonder, sometimes, if there is some kind of significant contrarian kind of meaning to that.  

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#3) On March 23, 2011 at 2:15 AM, DarthMaul09 (29.74) wrote:

   INVESTMENT THEMES
    • Gold and silver
    • Energy exposure, especially oil and the drillers

Why diversify too much?  The US dollar's progressive devaluation is the only certainty, as long as Bernanke lives and breaths.  So since he appears quite healthy to me the above two investment themes appear to be the best way to beat the market.

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#4) On March 23, 2011 at 2:42 AM, checklist34 (99.71) wrote:

is it a certainty?

holy hannah thats not something I'd bet my life on.  I think today people betting on the dollars demise and the inevitable rise of commodities are betting on the "new economy", differently, but the same.

the next few years shall surprise the majority, as Mr. Market always must

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#5) On March 23, 2011 at 12:25 PM, binve (< 20) wrote:

checklist34 ,

Why are you calling Rosenbeg high pressure?

Hyperbaric .... hyper bears ... yuk, yuk.

DarthMaul09,

I would not call anything 'certain'. Investing is a game of probabilities, not certainties. That said, I agree with those two themes as high probability ideas for the current environment..

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#6) On March 24, 2011 at 4:52 AM, checklist34 (99.71) wrote:

binv, I do apologize for my density, but I don't follow the high pressure comment?

I do have a distaste for rosenberg, sorry if I wrongly slammed him or something.  He just strikes me as hyper-bearish and overly certain.  

I have pondered, sometimes for hours at a time, why bears tend to be certain in expressing their views and bulls tend to express theirs in "well, I think" terms.  I have no really satisfactory answer to that one.  

So I try sometimes to be more certain and less "well, I think" when making comments, to counter my own tendency to be bullish about stuff.  Thats going to get me in trouble someday if I don't keep an eye on it.  

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#7) On March 24, 2011 at 4:54 AM, checklist34 (99.71) wrote:

I'm going to wind up dead wrong and eating mud over being a gold bear.  I don't mind missing out on the gold returns, but I would openly admit that if somebody had held a gun to my head 2 years ago and said gold 1400 or gold 700, i'd have picked 700.

But, all in all, it doesn't really seem like gold reaching some kind of parabolic end to this great move is a low probability event at all.  It just concerns me, i guess, to wonder what kind of badness in the world would bring such a thing about.  

 

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#8) On March 24, 2011 at 9:41 AM, binve (< 20) wrote:

checklist34,

No worries man, it was just me being a dork :)

Hyper = Latin for high / over
bar = meaning pressure (or the measure of std. atmosphere)

The term hyperbaric usually refers to high pressure chambers (used to adjust the body to allow dissolved nitrogen to release slowly to prevent the bends).

But when you called Rosenbeg a 'hyper-bear' (which I had not heard before) my mind made that association.

Like I said, just me being a dork. :)

Re: Gold.

No worries. You were wrong on gold, and I was wrong on equites.

And if it never does reach a parabolic end move because governments really do get their act together, then great! I don't hold gold because I want anything bad to happen, I do so because I don't know if it will but moreso because I see the possibility / liklihood for bad policy decisions that got us into the mess. I am not seeing much 'lessons learned' being implemented at the fiscal level. And I think that is ultimately bullish for gold.

So in short: not hoping or wanting badness, but thinking there is a non-trivial possibility for more badness.

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