Archive for January, 2014

Gold Rush

Posted: January 31, 2014 in Uncategorized
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January….Gold has been one of the best asset….just when all Global Research Houses downgraded their forecast on Gold.

As usual it is the famous saying “do what Wall Street does, not what Wall Street says” – Specially when Goldman Sachs say something you should do the reverse….up to you guessing why.

Jokes apart – the rise of Gold is one of the various unintended consequences of the tapering. And we had just 2 tapering episodes. So if the FED keeps on tapering (as they will do)  and create shockwaves in the emerging market – emerging market will keep on increasing their flight to safety …US treasury bonds, USD and gold. Gold will be mostly physical…so there will be a delay in the price movement.

The big resistance for gold is USD 1270 , then USD1,340 and USD1,420. As usual it is a good hedge versus equity – and very dangerous play.

The double bottom plus bear trap at USD1,180 looks pretty solid – but Gold is pretty wild at the moment.

The decision of the US Federal Reserve to decrease by another USD10 billion their QE again is sending the world share market tumbling. 

Why? The Quantitative Easing drove the bond yield in the US to extreme lows. As institutional investors look for yield they had to go overseas (Emerging Market) to find satisfactory yield. This provoked a massive inflows of capital in the Emerging Capital with also negative side effects (Eg inflation in Brasil).

Now the reverse is happening and there is a massive reversal of capital flows (to make you understand USD10 billion in the average monthly portfolio investment in Turkey, India, Brazil, Indonesia, Thailand Ukraine and Chile combined!!).

When you make such a massive hole – two things happens:

– The markets change to adjust to the new reality

-The issues of the fragile economies in the Emerging Market come in evidence. And it will keep on coming up anywhere you find  a fragile economy

Why the US FED is doing this?

– The FED mandate is “taking care of the US, not the world”. Unless there is a contagion effect, the FED will not react of these issues.

– The FED cannot keep on buying forever (its balance sheet is heading towards USD3 trillion

-The FED is actually happy to take off some of the steam from the market as it as been accused to create asset bubbles.  A 10% fall in the market is actually welcomed. Maybe not now…but pretty sure between now and July

So definitely this year will be more volatile. And nobody is yet talking of the Debt Ceiling (7 February)


Well I think I found the main source of concern that caused the massive sell off.

A last minute averted bankrupcy in the coal sector in China, Shanxi.

Two of the major Chinese banks took over a shadow lending product of USD496 million of the Zenhfu Energy Compay (coal mining) that was expected to default the 31 January. 

Technically this is a step back from the supposed liberalisation of the market in China.

So this year the eyes on China are all linked to coal (coal, steel, shipbuilding) as they all have overcapacity and coal lost 16% YoY. The Government, as we saw, is prepared to step in, but the real danger is a systemic risk.

But this will be not this this year, I think

2014 – Market Risks

Posted: January 28, 2014 in Uncategorized
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So after the two days of sell off, what are the risks for 2014?

– The US FED could loose control of the US Bond Market during tapering – sending 10 year T Bond over 4.5% that would initiate a sharp slowdown. Probability 40%

– Europe is looking better, but such an high unemployment could cause civil unrest or worse in some countries. Probability 30%

– As we have seen Emerging Market could melt in an Asian Crisis, Probability 60%

-The realignment of US/Iran could provoke positive and negative reactions: oil could be heading lower – this would be positive for the market, but also start a crisis in oil dependant economy (Russia, Venezuela). The proxy war Saudi/Iran could extend from Syria to Lebanon, Iraq (it already has happened…but the media are not focussing on it): Probability 100%…the effect to be seen is very much on the media hands.

– North Korea is always a black hole (see post)

-US international lack of involvement could provoke regional war or at least more non-negotiable position (eg between China/Japan – but also within NATO and MiddleEast (this is a funny one …it is the dream of the anti American public sentiment….but be careful what you wish for)

-China reforms – probability of catastrophic risk 30%


I always warned to pay attention to the markets: all these new market strategies (Eg Quantitative Easing) invented and introduced by the Central Banks and Government really saved us from financial destruction in 2008. But they also introduced potential black swan events that in many case can be “potentially seen”, but that can never be forecasted. A bit like land mines. You know they are there….but you will never know if or when you hit them

For example last year in Japan for 2 days the Japanese bond market went haywire until the Bank of Japan intervened.

And there are quite a few other risks, as these few days showed. What happened?

In  two days the SP500 fell almost 3% going to oversold and now sitting on the last defence (DSMA 75 days – at the break of that it would aim for the SMA 200 – 1710). We have been somewhat sheltered by the Australia Day holiday.

On news/media analysis all was sparked by the PMI reading in China. This acted as a contagion fear as Emerging Markets are on a verge of a high inflation/ debt default (specially we find that Brazil, Argentina, Thailand, Indonesia,Turkey, Ukraine are under stress).

Delving on the matter this is one of the unintended consequences of the tapering of the US Federal Reserve stimulus (the Fed is holding a 2 days meeting now):

– The Federal Reserve Quantitative Easing flooded the emerging market with easy money that fuelled growth, but also growth. Now that capital repatriates to the US.

-Emerging Markets Government, in the face of slowing Western consumer demand, did their own style of quantitative easing increasing the debt size.

– China is restructuring – Bank of China always use the Chinese Spring Festival period. In this case the POBC used buy-back purchase of 21 days reverse REPOs to restrict liquidity during the Spring Festival (which automatically will unwind in 21 days). Liquidity issues and credit liberalisation will be the focus of  2014.

Investment scenario:

Thursday was the start of the crash. There was some unidentified (FED probably) support at the end of the day that limited the damage.

Friday the support was taken off and even market intervention did not save the day.

Monday was a day of stabilisation and ended off the lows – a few minutes from the final bell it still ended in slight negative territoriy – but it wasn’t a crash.

The market does not look in panic mode, but the big decider will be the big corporate earning situation in the US (Apple , Amazon and Google ) and outcome of FED. We are tethering on the edge.

I think this is a warning shot of things to come. We are not in crash status and this healthy correction could also make the Fed (currently in meeting) rethink its bond purchase program. So in the end , the rally could resume into March.

But a warning shot is a warning shot. Usually another, harder, will follow when you do not expect it

Last year North Korea purge of the powerbroker uncle, a close friend of China, (also Kim Yong-un recalled home a lot of businessmen doing work with China) left many wondering what was happening.

Surely it is about consolidation of power. But the North Korean leader is yes a terrible dictator, but not stupid.

I just found the news that North Korea made a co-operation agreement with the English company SRE Minerals forming a newco Pacific Century Rare Earth Mineral Limited.

Delving in the news one finds that recent studies have shown that North Korea has 6 times the rare earth quantities that has China (which has, now, 90% of the global reserve of rare earths).

This clearly places North Korea in direct competition with China and, suddenly, on the economic radar of South Korea, Japan and USA as rare earths minerals are mainly used in electronics (TVs, mobile phones and weapon delivery systems).

So the “dismissal” of Chinese ties could signal a new direction for North Korea.

It is just a theory, but with a logical sense. It is a poor country sitting on an estimated 6 trillion dollar bonanza, one competitor, China, and many buyers South Korea, Taiwan, Japan, US, Europe, India…

Bond 2014

Posted: January 22, 2014 in Uncategorized
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2014 for the bond market will be much of the same.

Interest rates will stay low – in Australia possibly going even a bit lower.

So corporate bond, specially fixed interest, will be the prized asset of the year – the investor will lose a bit at matury (often they are at premium), but the interest will more than compensate that.

In the second part of the year inflation fears will appear so will see a movement towards floating rates nond and inflation linked bond.

For an Australian investor an interesting play would be foreign corporate bond as the Australian DOllar is weakening.

The novelty of the year are the Contingent Convertible Capital Securities (nickname Cocos).

They are not really new (last year new hybrid securities they were all Cocos).

They are Hybrids that substitute the old hybrids (step up securities) under Basel III.

What usually people do not understand is that they are much more risky than the previous hybrids as there are non-viabilities clauses and default/forced conversion triggers embedded as they are made as capital of last resource if the entity does not meet the capital requirements (specially true for European banks).

They pay more than the old hybrids (as spread from benchmark) as they are more risky. So just be aware of what you are doing. Trigger events are remote, but far from impossible.