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A
Picture of Health?
Despite
the 1%+ decline in US equity indexes yesterday, we
have been surprised, heartened and confused by the
resilience of global share prices. The trillion
dollar question is whether or not the global economy
is strong enough to accept the hand-off from central
bank and government stimulus. For our part, we have
ridden the wave of optimism and the result was a good
head start on 2010 performance.
After 15+ years
trading the financial markets we have found only one
statement of truth...things
change.
To
that end we thought it would be not only instructive,
but also financially necessary, to look at some of the
drivers of the global bull run...away we
go....
Chinese
Growth is Boosting Global
Trade
Baltic
Dry Index
 Market
orthodoxy is that Chinese GDP at 10.7% (released last
night) is enough to keep global trade afloat. We
concede that an inventory restocking cycle has
occurred which can be seen in the rising Baltic Dry
Index during October and November. However, if the the
restocking cycle is supposed to hand-off to normalized
trade, then why has the BDI dropped almost 1500 points
since November?
Yes, BDI is a volatile index
which may or may not reflect the actual prices paid to
charter a ship, but for our purposes it is the
direction that counts. If global trade is picking up,
the direction of the BDI should be up, not
down.
Something must be askew, are there other
market based indicators that might support or debunk
the message of the BDI? Glad you
asked...
USD
v. Singapore Dollar
 With
one of the largest and busiest ports in the world,
Singapore is a hub of global trade. It is for
this reason that we use the Singapore dollar as a
proxy for market sentiment on trade. During
October-November 2009, the USD was weaker against the
Singapore dollar suggesting demand for the SGD.
However, over the last few days the Singapore dollar
has been significantly weaker v. the dollar implying
investors are betting against global growth.
Ah,
you say, but the Chinese stimulus package is aimed at
the domestic economy. Quite true, and we would add the
consensus view is a housing bubble is developing in
China
...maybe...
Shanghai
Property Index
 The
last time we checked the primary characteristic of a
bubble was prices at record highs. If the Chinese real
estate market is acting like Mark Cuban circa 1999,
why does the Shanghai property index look like it is
about to breakdown?
Additionally, construction
and over building deplete inventories of raw materials
- that would mean LME warehouse stocks of copper and
aluminum should be at historic lows.
Hmmm...Copper
stocks approaching 5 year highs!!!
These
are not the pictures of a healthy Chinese or global
economy. Once upon a time, a popular economic
catch phrase was "if the US economy sneezes, the
world economy catches a cold." These
pictures leave us wondering what happens if China gets
the sniffles?
Germany
Has Weathered the Economic Storm and Will Carry
European Growth
It
was only a few days ago that we suggested economic
growth in Germany was probably one of the biggest
threats to the Eurozone. Our hypothesis was that
economic growth in Germany would lead to inflationary
pressures and cause the ECB to tighten policy - at the
same time - periphery Europe would still be struggling
and need loose monetary policy.
Our
assumption of German growth was 
based
on the idea that as one of the largest exporting
countries in the world Germany has been and would
continue to be a prime beneficiary of global
growth.
Indeed, German PMI - Manufacturing has
recovered robustly. If Keynesian theory is correct
then the service sector should begin running with the
ball. Unfortuneately, German PMI -Services
(released today) has continued to decline from its
September peak.
Furthermore, the economic
weakness is not limited to Germany, it appears to be
spreading to the Eurozone as a whole.
Eurozone
PMI -Services has also begun to decline. To be
sure, one data point does not make a trend, but when
coupled with tighter Chinese lending, a falling BDI
and rising dollar it does not flatter the global
economic picture.
Additionally, the weaker than
expected PMIs from Europe and Germany make the next
chart even more disturbing.
The spread of Greek
bonds over German Bunds has widened to over 300 bps -
the largest since Greece joined the EU and the highest
in the Eurozone.
Greek/German
Bond Spread
In
a nice bookend to our story we end where we
began...higher equity markets. Most of the
European bourses are trading higher, while Japan and
China both posted gains.
As China attempts to
slow its economy we are becoming less convinced that
sustainable global growth is the path for the economy.
Over the next several weeks/days we shall be using the
strength in equity prices to lock in our
profits.
Perhaps the picture changes, but our
only choice for a flu shot is to take profits first
and ask questions later.
Portfolio
Performance
2010 YTD
Since Inception
US
Equities
3.21%
19.55% (4/1/2008)
Global
Macro
1.07%
8.41% (8/26/2009)
S&P
500
2.07%
-11.84% (4/1/2008)
*The
portfolios were split into US Equities and Global
Macro on 8/26/09
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