With economists lower the estimates for growth in the developed world and inflation creeping ever higher in the emerging markets; it is hard to determine where to get the best returns. The developed economies will not have the type of growth needed for many institutional investors (with the exception of certain assets such as high yield bonds and dividend stocks). With interest rate negative in some of the BRIC countries there is limited returns in those countries as well. Countries with low or tightening lending could be the place for potential investment as the threat of inflation will not be a severe in those countries outside of commodities.
British American Tobacco taking Productora Tabacalera away from Phillip Morris shows the willingness for big tobacco companies to grow through M&A. I think that the consolidation is not over and there will be at least one big deal that would need to go through for companies to hold onto pricing power (perhaps Imperial will be the next target). I think this is important to look after, as big tobacco companies have very attractive dividend yields and should be considered during any substantial drop in their prices. These companies could become more favorable as the search for yield continues with investors.
With the US govt. at its debt limit it is a bit of a relief to see that the 6 person committee is starting to tackle some of the major issues with the budget. How these discussions go will determine whether we will be experiencing an 11th hour deal, which would definitely make the markets shaky in the run up, or a true bipartisan deal for the greater good of the country’s finances. I would suggest taking profits as the talks progress and prepare to re-enter the market under several scenarios: if the deal gets made early, if the deal is made at the last minute, or (the less likely but more concerning) the US has to default on debt payments. As of right now the market is ignoring the issues at hand (Europe seems to be more of a concern, and to a degree, rightfully so) so this should be the time to get into the proper positions for when this is a front page issue.
Looking at the movement of bonds in the US there seems to be a development forming toward the search for yield we have spoken about several times before. With more fixed income money moving into developing markets and high yield bonds, one should question the year high that the US treasuries hit last week. There will be an unwinding, in one direction or the other, between the need for safety and the desire to make a positive real return. Over the short term there could be a correlation between corporate bonds and assets such a gold and treasuries. With the debt ceiling debate still far from over, it could prove prudent to buy shorter term, investment grade corporate debt and avoid treasuries as August approaches without a resolution to the debt ceiling.
The estimates on Japan’s GDP are projecting a 0.9% decline due to the earthquake and tsunami, but the seeds for a slow down were already in place before then. The disaster will allow the government to take the necessary steps to stimulate the economy (which is no doubt weakening their currency, because they have no other options left) and take some of the attention away from their mounting debt burdens.
In order to pull the economy from a sovereign debt crisis of their own Japan will have to find outside buyers for their debt. This would not prove an easy task because of their ultra low interest rates compared to other Asian countries in the region.
With Reports of China starting to restrict power earlier than normal around the country due to the price of coal, it is evident that they are very concerned about inflationary pressures within the country. Cutting off power seems to be a very drastic step to solve the issue and makes me start to think that the Chinese Govt. is not taking traditional steps necessary to stem inflation for fear of losing their competitive advantage worldwide; and simply doing nothing about the inflation issue would create civil unrest. This is putting the decision makers in a tough position where they will have to allow one or the other (squeeze on growth or squeeze on purchasing power) to occur, as they cannot have both. Naturally I believe they will choose to sacrifice growth over power.
After today we are officially on borrowed time (though one could argue it is the end of borrowing times). The Debt ceiling will be reached today and the Treasury will only have enough wiggle room to prevent a default until August. This will be the beginning of an interesting time for the US and the world as a whole. As the deadline looms there will be pressure on the US treasuries, dollar, and markets; gold could see a rally (bull trap?) from this as well. Couple the US issues with those of the EU and you have good reasons for a general selloff. This could prove to bring opportunities and create buying opportunities or the remainder of the year.
The US vs Euro portfolio has been closed.
Performance(12/14/2009 - 5/13/2011):
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An interesting development for the Oil and Gas industry occurred when France voted to put a ban on fossil fuel extraction from shale. Should this pass and become law it might be a foreshadowing of things to come within the industry. Is environmentalists were to make more gains in the US and prevent, or even just slow, the extraction of gas from shale we could see the price of natural gas increase. With ample supply available now, prices have dropped and stayed low compared to Oil’s rebound from the recent recession lows.
As far as companies, higher prices would be a good thing but for certain companies (such as Chesapeake Energy) the land rights purchased might not become dead weight on the books and result in losses.
All of this is down the road and I do not think the ban on fracking will become an issue, let alone in the US, in any short order; but worth a watch.
The Trade gap in the US widened with much of the blame on oil prices, the current price of oil could finally start to be looked at as a hindrance of global growth. The correlation between the stock market and oil surely has to come down, and possibly even go negative. This is another factor that could take place once loose monetary policy is taken off the table and the markets start to move on more fundamental factors.