Friday, 5 December 2014

Weekly Update - Week ended 5 December 2014

Market Summary and Technicals 

  • Emerging markets continue to underperform
  • Are markets too complacent ? Vix down more than 10%
  • Gold up despite continued dollar strength – Gold could be in the bottoming phase, especially since the dollar is due for a pullback
  • HYG indicating some stress in credit markets
  • Market Breadth deteriorating – near term divergence has appeared  


Readings and Trends 
  • Shanghai Composite up this week, continuing its outperformance in the last few months – 39% gain this year (By the way, wall street analysts are now deciding to raise their target prices for the Shanghai Composite, in the same way they are now almost unanimously negative on offshore drillers)
    • People seem to be speculating on further monetary easing – if so, commodities will benefit
  • Fed and ECB reacting in opposite fashion to the oil shock – see this article by Gavin Davies
    • ECB cut its growth and inflation forecasts and now says it “intends” to expand its balance sheet to around €3tn to boost inflation, rather than simply “expecting” to meet this objective (FT)
    • Meanwhile, Fed vice-chairman Stanley Fischer suggested that the Fed might soon drop the assurance that it would not raise rates for a “considerable time”, replacing it with alternative language that is less constraining on its future actions
    • Further impetuous for the Fed in the form of strong Non-farm payrolls numbers yesterday
  • S&P 500 earnings growth rolling over or merely a pause?
    • Something to watch for in the next few months
    • Brian Gilmartin at fundamentalis thinks earnings growth apart from the energy sector should remain strong
    • I’m undecided whether this sudden drop in oil prices is a net positive or negative 
Source: Yardeni Research, Inc.

Investment Implications and Opportunities 

  • Gold play - my favourite play is Timmins Gold Corp (TGD), a small cap gold producer with a pristine balance sheet
  • Still waiting for energy counters to form a bottom to add positions - see my previous article for some ideas 
    • Ultimate bottom might not be in yet given that energy companies with high debt are in trouble – quoting from FT – ‘Currently, nearly a third of speculative grade debt issuance by energy companies trades so poorly it qualifies as being classed as distressed, indicating a high likelihood of being restructured’
    • This is why I place an emphasis on companies with a strong balance sheet and cash flow generating ability
    • On the positive side, oil companies have already delayed capex decisions on new projects – positive for oil prices in the longer term
  • Added TWM (2 times inverse short Russell 2000) as a hedge this week

 [Disclosure: I am long TGD, call options in TWM]

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