A View from the Trenches

Martin Sibileau's market letter

A View from the Trenches, November 18th, 2009: "Update on latest market themes"

Please, click here to read this article in pdf format: www.sibileau.com

Perhaps yesterday was an opportunity to take a break and think matters over more carefully. Although equities closed almost flat in the US, there was some intraday volatility. The underperformance in mortgage-backed securities (some overseas trading at 7am ET exactly) caught my attention, as it would not be the first time that such overseas/overnight trading sets the stage for the day or week…

There are a few themes (not thesis) being discussed lately, that I think may anticipate a tough 2010:

-Global Imbalances, the USD and rates:
This issue has been on the table for decades already. It has gained more airtime with Obama’s recent visit to China and Bernanke’s comments at the Economic Club of New York. The short summary of its 2009/10 version is something like this: China’s monetary policy of fixed exchange rates has forced the Bank of China to buy the dollars the Fed has been issuing. Some analysts (see Bank of America’s “Situation Report” of November 16th) call this”China’s vendor financing”. I think the term is spot on.  When the Bank of China buys dollars, it issues Renmimbis, which have been used to buy local assets, among which real estate has a prominent place.
While China worries about the USD devaluation, the other side of the coin is that if the US was to stop what I am now convinced is an intentional devaluation, it would only need to raise rates. That would kill many bubbles, would it not? This is worrying investors, who see the asset bubbles in China as a potential time bomb, when rates start rising in the US. I am a bit less pessimistic on this issue. First, this is nothing new. It has been going on for a long time and with different countries, as it was denounced back in the ’30s by Jacques Rueff. Secondly, the Bank of China, like any other central bank, always has unlimited means to debase its currency, if they deem it necessary. Please, note that if this scenario played out, the biggest loser here would be gold…

-Emerging Markets:
There is increasing concern on the public finances of Mexico and Brazil. The potential future problems, like the global imbalances that grow by the hour, are still far ahead on the horizon. But the issue with these economies, in my view, is not potential shocks, but their leaders’ sudden and unpredictable reactions to them. In any case, if there were a financial panic, the contagion effect across the globe would be very painful.

-Rates, credit and stocks:
By now, I guess the market has come to understand that stocks have been driven by rates, via the credit markets (Rates decrease as central banks buy securities, the liquidity so injected goes to refinance short term debt, firms delever and together with cost-cutting measures, the value of the call option on the firms’ assets (=value of their equity) rises). The market now seems to accept the futility of seeking fundamentals to justify valuations; the irrelevance of calling an asset class over or undervalued. Liquidity injections distorted all relative prices and relative value comparisons work at best, in my view, within the same asset class. Having said this, what if rates rose? I don’t want to answer this question, because I am convinced rates will not rise until activity picks up meaningfully. The other side of this is the high risk of inflation that would come out of such scenario. Would bonds not sell off? I need to think more about this, but for now, I am not convinced to take either side…

 

The comments expressed in this website and daily letters are my own personal opinions only and do not necessarily reflect the positions or opinions of my employer or its affiliates. All comments are based upon my current knowledge and my own personal experiences. You should conduct independent research to verify the validity of any statements made in this website before basing any decisions upon those statements. In addition, any views or opinions expressed by visitors to this website are theirs and do not necessarily reflect mine. My comments provide general information only. Neither the information nor any opinion expressed constitutes a solicitation, an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). My comments are not intended to provide personal investment advice and they do not take into account the specific investment objectives, financial situation and the particular needs of any specific person.

Posted: Tue, Nov 17 2009 11:21 PM by Martin Sibileau | with 1 comment(s)

Comments

nana said:

LYP-Nike as a historic brand is popular in all over the world,nike australia occupies a very important position. No matter what age the person will have a pair of nike shoes. This shows that people love the Nike.nike shoes australia's success depends largely on accurate market positioning and excellent quality. A lot of people are eager to buy cheap nike shoes, stores often only discount after last season's, how to buy a pair of cheap Nike? Now you can come to nike shoes online store. You can buy an ultra-low price of one pair of the latest nike free,Or the girls favorite nike heels!

NIKE name, in the eyes of Westerners was very lucky, easy to read and easy to remember,it is known.nike shoes trademark symbol of the Greek goddess of victory wings of feathers,representing the speed, but also represents a dynamic and gentle.nike australia's trademark,the pattern is a small hook shape concise,rapid as lightning,and a look reminiscent of the speed and explosiveness of nike shoes australia.For the first time named "Nike" athletic shoes, soles square convex tablets to enhance the stability, the body of the shoe on both sides of the knife-shaped curved hook,a symbol of the wings of the goddess.God's wings.nike shoes online store for Australian consumers,sell cheap nike shoes.Our aim is to let people around the world dressed in Nike.

Many people like the Nike,many people want to buy a pair of cheap nike shoes.Every year nike australia will launch a lot of discount promotions.nike shoes australia online store tailored specifically for the Australians,as long as you to our nike shoes online store you can find that fits your style.2012 new nike heels,nike free all arrive.Our goal is to make every Australian wear nike shoes affordable.

Just do it!Like sports should have a pair of nike shoes.You like to run it?Enjoy that feeling of freedom on the run.But many times because the expensive price prohibitive.Now have a new way to shop, you will buy one pair of your favorite cheap nike shoes.2012 nike australia has launched a lot of the latest style, basketball fans dream of air jordan series,like the nike free running movement series,the influx of people love nike dunk series.nike shoes australia store audience are sold at a discount,you do not have to worry about quality.

nike high heels as a classic in nike numerous series is popular in sthe majority of female friends.In 2012 summer,Nike released a slew of new,including nike heels,jordan heels get consumers alike.nike high heels australia store have hundreds of styles,every nike dunk high heels are carefully selected.The feedback has been supporting our new and old customers,all our goods are at the lowest discount sales.And you do not have to worry about that we have any quality problems.Because all of our nike high heels shoes are made to order directly from the factory,no tax,so our prices are far lower than the stores.

# November 26, 2012 9:00 PM