Weekend Update (No Not that One)

Some interesting items came out since I last posted and I wanted to update you on them.  First was this weekend's Barron's Roundtable.  The diversity of experience of the members provides for some good back and forth on a variety of issues.  Since most manage money for a living, they are talking their book so to speak, but also have skin in the game.  Felix Zulauf who runs his own hedge fund in Switzerland was particularly bearish.  Aside from that, two points particularly got my attention.  The first was:

They aren't making it up out of thin air. Bond markets in Europe are doing better.

Zulauf: Bond markets in Spain and Italy and Greece were priced for calamity. The ECB stepped in and removed that threat. That made bond markets rally and interest rates fall. The decline in interest rates is just about over. Yields in those countries will trade sideways for a few months and then start rising again.



This highlights how important valuation is in investing.  The situation may be horrible as it was in Europe, but the securities were pricing alot of that in.  So now that investors have gone from pricing in a complete disaster, to simply a recession, those that bought when things were very dark have been able to make a significant profit.  The second point was:

Gross: Can the Japanese government generate nominal GDP? Can it produce inflation of a positive sort that will generate corporate profits?

 

Zulauf: GDP has been stagnant in nominal [noninflation-adjusted] terms for 20 years. The price for generating growth is higher indebtedness. In the past 22 years, the market capitalization of Japanese stocks has fallen by 75%. The capitalization of the bond market has risen by four times. A major reallocation from bonds to stocks is beginning. I would be surprised if the Japanese stock market didn't rally 50% in the next two years. The best instrument to play this trend is a currency-hedged exchange-traded fund listed in the U.S. It is the WisdomTree Japan Hedged Equity fund, or DXJ. It trades for $38.53.



 

While I generally take a contrarian viewpoint to things, in this case it is reassuring to be on the same page as such a successful investor. 



Over on The Reformed Broker, Joshua Brown mentions how Alliance Bernstein, believes equities are about to break out of their bear trap.  The charts on US housing and Chinese electricity production both show nice rebounds from downtrends.



Source:  Alliance Bernstein

Today's post, Why I am worried from Cam Hui of the Humble Student of the Markets blog is a great illustration of the varied components that go into investing and trading.  It also reminds you to keep in mind all of the risk and counterarguments to your own point of view.  As he sums it up at the end:

My inner trader tells me that these sorts of things don't seem to matter to the market until the market starts to pay attention, so I should relax and enjoy the bullish party. My inner investor is watching very closely for signs of weakness, particularly from the US consumer which could derail this rally.

Smart words.