- Apple has become the world's largest company by market capitalisation... ever. It has now eclipsed Microsoft's market cap peak in late December 1999 during the technology bubble in nominal terms (not inflation adjusted terms). Amazingly, the parabolic run has created gains of 81 times over the last 10 years. Disclosure: I have started shorting Apple with OTM 2014 Puts.
- The Nasdaq Composite approached March highs on the back of some of the weakest and narrowest breadth I have ever seen. When we look at the number of tech stocks making 52 Week New Highs and smooth it out over an one month time frame, the results are flashing warning signals as majority of the tech companies are failing to confirm the rally.
- A few weeks ago I wrote about how the British Pound was a good short. I still believe this to be the case, as I think the Pound's major consolidation pattern will resolve to the downside. I believe that the UK is going to enter a more serious slowdown but I seem to be in the minority, as many traders turn very optimistic towards future prospects of the British Pound.
- Precious Metals are breaking out from their technical pressure points. We saw Platinum start the move, followed by Silver and finally Gold has now joined the party too. While gold bugs are celebrating, I think the real test is ahead of us. PMs need to prove that they can rally even if volatility rises, risk assets including stocks sell off and the US Dollar starts to rally again.
"China, the primary fundamental driver of the global copper price, has reported record-high semi-manufactured production rates, and a corresponding large drawdown in inventories. Now short copper, China’s likely to buy throughout H2, supporting the metal’s price."So UBS is bullish on Copper, one of the main barometers of global growth. I am in no position to argue for or against USB, as they have large team studying ground conditions regarding various Copper fundamentals, as well as in-house expert technical analysts. Nevertheless, I thought I would investigate matters further, but before we begin, it is important to understand that even though we are in a secular commodity bull market, there are periods when bears take over cyclical fundamental forces against the overall bullish price trend. One could say that we have been in a cyclical bear market for commodities for about a year now (chart below).
Now, I am sure all the investors want to know if the bear market over?
Well to answer that question, one has to start paying closer attention to economic activity in Asia. This is most important for US-centric investors, who tend to hold a narrow minded vision towards the US and Europe (old world economy). You see, while the majority of investors are constantly focused on Europe and discussing Greece or Spain, it is China together with the rest of Asia that holds major upside as well as major downside risks to both the price of Copper and therefore the overall global economic activity.
- "We forecast global copper demand growth of 3.2% to 20.6mt in 2012, driven by +6% in China (8.1mt), with only +0.4% in the G7 (5.3mt).
- China’s record-high semis production rate has resulted in a sharp drawdown in metal. As such, we should expect some price-supporting buying in H2.
- Policy easing in China, aimed at promoting economic activity, would also be price supportive events for the credit-driven trade of copper.
- UBS forecasts a deficit of 167kt in 2012 and market should then return to equilibrium in 2013E.
as already written about in the last post. It is difficult to judge the current true growth in the Chinese economy with official data saying 7.6%, while some well respected analysts say it is closer to 4%.
- Note: A genuine supply response to the prolonged strength in the copper price is underway, mainly out of South America."
A proper break out (no reversals) would establish a bullish foundation in a sign that the Chinese economy, together with rest of Asia, is not crashing with demand remaining strong. Global economic activity would therefore pick up across the globe and Copper prices would rise into new highs. This would stimulate the global mining sector, which is currently experiencing a severe downturn.
For example, in the chart above we can see that hedge funds have been shorting Copper for weeks, which tends to be a contrarian buy signal and yet Copper prices have failed to stage a proper recovery from June lows. Compare that to the likes of US or German equities (Nasdaq or DAX) which seem to be rising vertically, and you can safely assume not all is well within the Copper market.
In summary, one can conclude that Copper is now at decision point and its technical break in either direction could tell us more about the future direction of the global economic activity than any analyst on CNBC or Bloomberg. Therefore, make sure you keep your eyes on the price of Copper over the coming weeks and months. As for my own view - I'm bearish and expect Copper to eventually break down before we bottom.
- Outlook: I am of the opinion that the risk asset bear market is upon us and that the global economy continues to slow rapidly into a recession. United States GDP has grown 5 out of the last 6 quarters below 2%, which tends to be stall speed. German GDP is also at stall speed, similar to 2008. China and India are slowing meaningfully and could experience a serious hard landing. At the same time US corporate earnings and gross profit margins are at record highs, so I expect a mean reversion unlike so many stock analysts. Cash levels with mutual funds, retail investors and money market funds are at extreme lows, financial stress is starting to rise, volatility is at very complacent levels and credit spreads are very narrow relative to fundamentals, so I expect a risk off scenario in due time.
- Long Positioning: Long focus is towards secular commodity bull market, with Precious Metals and Agriculture offering the best value. Largest commodity position is held in Silver, as central banks will eventually print money as the global economic activity deteriorates. Since Silver has broken out recently, hedges have been removed and a small purchase was made. Any negative reversal, as global risk asset volatility rises, will call for hedging again. NAV long exposure is about 100%.
- Short Positioning: Short focus is towards secular equity bear market, with cyclical sectors and credit offering best selling opportunities due to deteriorating global growth. Mild to modest exposure is held short in the Junk Bond market, as well as various economically sensitive cyclical sectors like Technology, Discretionary and Dow Transportation. Recently, the Apple parabolic has been shorted with long dated 2014 OTM puts. NAV short exposure is about 60%.
- Watch-list: Commodity currencies like Aussie, Kiwi and Loonie are also on my watch list of potential shorts right now, as negative surprises await with China slowing dangerously. With Euro being the most hated currency, a better risk off trade could be selling the British Pound. A major short in due time will be US Treasury long bonds, as they are extremely overbought and in a mist of a huge bubble mania, but first we have to wait for the Eurozone dust to settle. Finally, while Grains have exploded up, Softs still present amazing value for long term investors, with Sugar being my second favourite commodity (after Silver).