Sunday, January 17, 2016

Market Musings - January 17, 2016

Currently, the market participants are embroiled in discussions about whether the market is simply undergoing a simple but violent correction, or if something more sinister is in the cards. To me, it appears to be a little bit of both. While the U.S. appears to be seeing improved economic metrics, much of the rest of the world is not. Europe, China, South America and much of the rest of the advanced economies of the world are experiencing slowing growth or outright recessionary pressures. China is sporting a 282% overall debtload to GDP, and is desperately trying to prop up its market via the currency market. Europe continues in the doldrums they have been stuck in over the last 7-8 years, and their demographics continue to work against them. Finally, South America, Canada, Australia and the like are all experiencing deep and painful declines in much of their economies, due to the dramatic declines in commodities and the strengthening US dollar. The issues in China appear to be problematic, similar in nature to what occurred in Japan in the 1980's and Southeast Asia in the 1990's. The economy reached an inflection point in 2008, when it appears much of the demand-driven growth slowed. Since then, Chinese consumers, corporations and governments appear to have fueled further growth using debt and building inventories. The debt load to GDP appears to be very high, but, as has occurred in numerous occasions in the past, and it likely could grow further now, unless the market reaction confirms debt deflation is in the cards. European trade appears to have ground to a halt, although the lifting of Iran sanctions will help Airbus immensely. Nothing really has been resolved to repair the treasury/fiscal issues that a complex arrangement as the Euro economies present (multiple budgets and economies versus one currency). Deflation could very well be imported from China and the US over time as currencies continue to be manipulated via quantitative easing and interest rate policies. In the next few months, I will be watching for WTI/Brent oil to fall to the low $20's per barrel, gold to rise to $1,200/oz, the S&P 500 to fall to 1,700 or slightly below, and the CAD/USD to fall to the $0.67 mark. I feel that oil will bottom when the market has a washout fall, while the oil futures do not fall in sympathy (building a more thorough contango). In the meantime, I had established a short position in the S&P 500 ETF (SPY) to hedge my long positions in equities. My major positions are in tobacco, consumer packaging (CCL Industries) and Novo Nordisk, a diabetes drug company. I also hold a fairly large position in Fairfax Financial, a Canadian based, global insurance company that is fully hedged against the market, and is holding deflation hedges (CPI puts) against major global economies.

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