Saturday, November 15, 2014

Thinking Outloud

I've been effectively cut out from the outside world the whole of this week. Not too shabby actually, it gives me a nice break from watching the markets, which I must concede is a guilty pleasure of mine. What a geek, amirite?

Anyway this breather has given me some good time to step back and think about things from a bigger perspective, so I'm just going to pen down my thoughts.

Switzerland's gold referendum - this month's end, we will be seeing the outcome of the Swiss gold vote. After having toured pretty much the whole of Switzerland a few years back, I must say that I have the deepest respect and the highest regard for their country and society. I was thoroughly impressed earlier this year by their complete shutdown of the minimum wage referendum that their socialists tried to pass. Though the MSM barely mentions it, I personally think it is was an important moment for their country and libertarians who advocate free markets. I suspect that the news was glossed over because it is fundamentally different from most developed economies who have minimum wage in place, and there is where most of our international news come from. I think the Swiss are really pragmatic and sensible people. It isn't personal, it's just good business. A gold backed currency might just be the thing that can hold their central bank in check, to resist the temptation of debasing their money, much like what Japan has done to themselves. Too many people care about nominal growth even if there is no real growth. Better ask Zimbabwe how that turned out for them. A soaring stock market does not mean a healthy economy, but far too many people overlook this.

Oil and Gold - Somewhat related to this is gold and "black gold". Of course I have deeply vested interests if the prices of precious metals soar (refer to my many previous posts on this pain trade), but I try to be open to many angles of analysis. Both gold and silver soared at the very end of the week, so I suppose my P&L is less negative now, haha.

With oil just puking itself out, it's definitely due for at least a retrace sometime soon, it would seem. I don't believe that this strong dollar is sustainable at all, but who knows? If the dollar does reverse, then we might see my ideal scenario of the previous metals taking off. Oil however, seems to be having a demand and supply pressure that is pushing prices down. I doubt it is because of alternatives, so it is because the global economy is slowing down? I'd vote for that as the likely scenario.

I see miners as offering extreme value at this point. Although profits are mainly driven by the prevailing market prices of the commodities that they sell (which has been dropping), the other side of the story is that their costs are also dropping (cheaper oil, trimmer operations) which would help their short term operations. With exploration and future production being sacrificed for current survivability, I think certain commodities could realistically be more expensive in the future. Gold miners have reached crazily cheap historical valuations that are pricing them as horrible investments. I would beg to differ. Better margins could see this sector take off, considering the massive massive hate in this sector. Ki chiu, who actually has exposure at all to this niche segment? I suspect not many. Bull markets don't appear once everyone is already in and nicely positioned. It appears once everyone has left it for dead.

Commodities - I have been reading a book on asset allocation, and I must agree that yes, commodities are for speculation. It generates no yields and pays no interest, but if you think that it is trading below its fair value, you would buy it wouldn't you? As such, I do not recommend commodities as a staple in a long term portfolio for investing. It should merely be an in-and-out trade, identifying times of price weakness and taking a position, and exiting when prices have recovered. Now the only problem is trying to find out if they are cheap, or if they are expensive. Hmm.... However an exception is precious metals as a form of portfolio insurance and a "put" on your wealth and purchasing power. Precious metals will always have a place in my portfolio in that regard, though the insurance portion will always be kept small, while the speculative portion may balloon.

Equities - There is absolutely no way anyone who is a long term investor can tell me with a straight face that the US markets are attractive. Quote me anything with the words forward / future / expectations and I can show you how wrong these analysts have been in predicting them. What we know for a fact is that the market compared to its own self is historically expensive. I am a believer that comparisons to historical rolling performance in percentage terms is very mean reverting. I just can't bring myself to allocate anything here. Can it still go up though? Yes, the market can be very irrational at times, and I believe that this is no different from other crazytown times like the dotcom bubble. I don't even think a blowoff top is possible with the current allocations and leverage. I just can't see where the fuel driving up a higher market could be. Of course I could be wrong, I've been repeating this for so long, but it only seems to be getting worse. Even a broken clock is right twice a day, but I sure hope that's not me. I'll be bullish the day I feel that the market is attractively priced, and now it clearly isn't.

One of the things that I have come to realize lately is the broken yield curve. Usually an inversion is seen when something bad is going to happen. However with ZIRP, a yield curve inversion is impossible. Therefore, flattening of the yield curve itself should be as scary as an inversion, especially at these low rates. Just food for thought.

On the flip side, China and Russia looks like amazing buys, with Russia looking a lot more attractive. I just read an article that Apple is now worth more than the entire Russian stock market. If Apple was liquidated, the proceeds is enough to buy over the entire stock market as well as give every single citizen a brand new iPhone6. Overvalued Apple or undervalued Russia? Or both? With the ruble dropping so hard lately and the market falling deeper in the pits, Russia looks so good to me!

Anyway, these are just some of the thoughts and it's accompanying train that I've been thinking about since I've not much other constructive things to do. Feel free to share your thoughts, would like to see what other people about these thoughts. There's no right or wrong since it all boils down to your time frame. At the end of the day when you close your position, the person who made money was right. Although, some people might be more right than others, haha!

TL;DR: long precious metal miners, Russia. short USA

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