The Macro View From 30,000 Feet - Part III
Good Morning. With stocks in an uptrend at the present time and nothing much new to report, we're going to finish up what will now become at the very least a bimonthly review of the global macro picture. This morning we will take an executive summary look at Japan, Commodities, and Currencies. Again, I do not pretend to suggest that the commentary provided this week is anything even remotely close to a thorough analysis of the various global macro categories. However, as someone who does run a portfolio that looks all over the world for performance, sometimes the K.I.S.S. method is all you need to get the really big moves right.
History shows that a "global macro" investment strategy has been a strong performer over the years. In fact, up until 2008, the strategy of utilizing U.S. stocks and bonds, foreign stocks and bonds, emerging markets, commodities, and currencies had been the number one performer for many years. This probably explains why everyone and their brother is now running a global macro hedge fund.
However since 2008, the space has been no picnic and 2013 is proving to be another very difficult year. While the "dumb money" that just sits in the U.S. stock market has enjoyed gains of +12.6% on the year as of the end of June, Hedge Fund Research, Inc. reports that the Global Macro Index was actually down -0.35% YTD. How can the "2 and 20" crowd be so wrong this year, you ask? In short, because the U.S. stock market is about the only thing on the planet that is working right now. My simplistic "global equity index" which is made up of equal parts S&P 500, EAFE, and the emerging markets, was up just +0.07% as of 6/30. The problem is that emerging markets are down hard, Europe is struggling, and bonds of all shapes and sizes sport negative returns on the year.
My point here is that by employing a K.I.S.S. approach and staying away from the areas of the world that aren't "working" you can stay ahead of some of the brightest minds in the business. So, with that said, let's take a peek at the rest of the major global macro categories.
Japan: If you've been in this business for a while, you will likely agree that Land of the Rising Sun hasn't exactly been a great place to invest over the past 20+ years. In fact, the Nikkei last hit an all-time high in 1989 - right before the mother of all deflationary spirals set in. Sure, there have been opportunities for a "trade" in Japan, but rarely have such moves lasted more than a few months.
However, since the fall of last year, Japan has indeed been one of the places to be invested for global investors as the advent of "Abenomics" has resulted in an impressive rally. In short, Prime Minister Abe pledged to break the back of deflation by launching a massive QE program that is only slightly smaller than what Ben Bernanke's gang is implementing in the U.S. But given the relative sizes of both economies, this is a very big deal in Japan.
As you can see on the chart below, the Japanese stock market has enjoyed a nice run over the past nine months or so.
iShares Japan ETF - Weekly
But to be fair, the move has come at the expense of the Yen, which has lost about one-quarter of its value since the huge stimulus program began. Remember, a falling currency makes a country's goods less expensive. However, this plan also "imports inflation." But since Japan would welcome a little inflation right about now, the "race to zero" is on and the Yen is leading the pack.
CurrencyShares Japanese Yen ETF - Weekly
The question of the day is if the Japanese market is "investable" right now. Some argue that the current move has gone too far too fast, is fueled only by the "carry trade," and is destined to fail. However, the bulls remind us that it is never a good idea to "fight the Fed" in any language.
So, what to do about Japan, you ask. My answer is to tread carefully. We actually "bought the dip" recently as Japan is really the only foreign market working and our Global portfolio demands that we own a certain percentage of non-U.S. equities. But we are watching the position as well as the political situation closely. The Bottom Line: If you MUST own foreign stocks, we'd continue to nibble into the dips.
Commodities: Up until just recently, the global macro crowd has had it pretty easy. Buy the emerging markets (which, generally outperform their U.S. counterparts), buy bonds, and buy commodities of all shapes, sizes, and colors. Boom - you outperformed year after year. However, rising interest rates and a resurgence in the dollar have put those games on ice.
Nowhere is the problem in commodities more obvious than in gold. Just so we're clear, I am NOT a gold bug. And frankly, I'm not sure I have ever truly bought into ANY of the reasons to own gold. But since it is a major investing class, we pay attention to the charts. Speaking of charts, take a peek at the chart of the GLD below.
SPDR Gold Shares ETF - Weekly
This, my friends, is the very definition of (A) a broken market and (B) a long-term downtrend. While we understand that the yellow metal is dramatically oversold, this is an asset we have absolutely no interest in at the present time as trying to "catch a falling knife" is not part of my investing strategy. Typically, this type of decline leads to a long period of consolidation before any meaningful new uptrend can develop. And given that rising rates are bad for gold and that the bond market may very well be entering a secular bear market, things may be tough for the gold bugs for the foreseeable future. The Bottom Line: Gold is in the "10-foot pole" category (as in, I wouldn't touch it with a...).
We could go through a long list of commodities, but steel probably tells the best "story." While Dr. Copper is said to have a PhD in economics, the graph of steel clearly shows the problems with global growth right now. This one is simple. You see, if countries are building stuff, they use more steel and, in turn, the price goes up. Yes, there is the complicating factor that China has been accused of hording steel, which would help keep the price down. But if global demand was strong, the price of steel would likely overcome this issue and be moving higher. The Bottom Line: We're not interested in steel, copper, silver, or any other metal at this time.
Market Vectors Steel ETF - Weekly
Instead of reviewing each of the commodities individually, let's take a look at a basket of commodities. Again, we find here that a picture can tell us an awful lot about what is happening. In short, rising rates, slowing growth in places like China, India, and Brazil, and a strong dollar have all spelled trouble for commodities. The Bottom Line: We'd avoid the commodity space unless/until the dollar enters a downtrend or inflation starts to pick up around the globe.
PowerShares Commodity Index ETF - Weekly
Currencies: While the chart of the Japanese yen above is an extreme case, the vast majority of the currencies we monitor don't look so hot on a chart basis. For the record, we review the U.S. Dollar, Euro, Yen, Swiss Franc, Australian Dollar, British Pound, and the Canadian Dollar on a weekly basis. And right now, the ONLY currency worth considering is the good 'ol U.S. greenback.
PowerShares Dollar Index ETF - Weekly
The key is that from a fundamental standpoint, the prospects for the dollar aren't half bad. No, the economy isn't in great shape. But it IS growing. And interest rates are going to rise for what sounds like quite some time. So, given that "money tends to go where it is treated best," the dollar may be the best of the currency bunch.
However, before you run out and buy the UUP, we need to recognize that (a) getting long the dollar is a very popular trade, (b) the greenback has been range bound for some time (see the $23 zone on the chart), and (c) the dollar is overbought and at the top of the range. As such, "buying the dips" may be the best way to approach a position in the dollar. The Bottom Line: BTFD in the buck if you want to own currencies.
In conclusion, the current situation in the global macro world is strange in that the U.S. stock market and the dollar appear to be the only games in town from the long side. Of course, if you are a short-seller, there are lots of markets where you can sell into rallies - take your pick! But for long-only investors, the pickings (and the returns) are pretty slim right now.
P.S. Please use the "contact us" tab and/or the comment section below to let me know if you find this type of analysis useful as we have been talking about providing this type of update on a monthly basis.
Turning to this morning... Things have gotten a bit sloppy in the early going as China's trade data was weaker than expected. Although Chinese stock markets actually advanced, Europe is lower across the board this morning and U.S. futures are also slightly in the red as traders brace for the release of the minutes from the most recent FOMC meeting. The bottom line is after the recent move higher by U.S. stocks, some backing and filling is to be expected.
Positions in stocks mentioned: none
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