A quick introduction for this week's Outside the Box. This is from my London Partner Niels Jensen, talking about the problems with long only commodity funds. This is something I discuss frequently but have not written about in some time. Quite simply, many of the commodity ETFs do not deliver what they promise and in fact many of the inverse funds can lose you money even when you make the right macro call.
Niels gives us a very good explanation of why this is so. So for those of you who have "diversified" into commodity ETFs (not actively managed funds!) or are thinking about it you might really want to read this.
Your running our the door for dinner in NYC analyst,
This week I am really delighted to be able to give you a condensed version of Gary Shilling's latest INSIGHT newsletter for your Outside the Box. Each month I really look forward to getting Gary's latest thoughts on the economy and investing. Last year in his forecast issue he suggested 13 investment ideas, all of which were profitable by the end of the year. It is not unusual for Gary to give us over 75 charts and tables in his monthly letters along with his commentary, which makes his thinking unusually clear and accessible.
Gary was among the first to point out the problems with the subprime market and predict the housing and credit crises. You can learn more about his letter at http://www.agaryshilling.com. If you want to subscribe, you can call 888-346-7444. Tell them that you read about it in Outside the Box and you will get not only his 2009 forecast issue but an extra issue with his 2010 forecast (of course, that one will not come out for a year. Gary is good but not that good!)
I trust you are enjoying the holidays. And enjoy this week's Outside the Box.
A couple weeks ago in my "Thoughts from the Frontline" Friday E-Letter, I wrote about Mr. Market and potential bubbles (you can view the letter here). Well one particular asset class, commodities, has had me thinking as of late. Despite sound fundamentals initiating the recent boom in the commodities markets, much speculation has also been exerted as evidenced by the resulting volatility in the sector. Stephen Roach has recently weighed in with his take on the situation which I believe will serve well for toady's "Outside the Box."
Stephen S. Roach is Managing Director and Chief Economist of Morgan Stanley, a leading global financial services firm. He has been widely recognized as one of Wall Street's most influential economists. His published research has covered a broad range of topics, with recent emphasis on globalization, the emergence of China, productivity, and the capital market implications of global imbalances. In his article "Commodities as an Asset Class," Mr. Roach questions the recent popularity of commodities as institutional investors around the globe have sharply adjusted their asset allocation strategies to reflect the sector. In so doing, he points out how much of the "bubble-like" qualities prevalent amongst the equities markets may now be exposed to the commodities markets as well.
I have been involved with commodity funds and managers for almost 20 years, and have seen a lot of fads come and go. I am a big fan of well researched traders and funds who have figured out how to find an edge. That edge is going to increasingly be important if you are going to thrive in the commodity world. Long only portfolios are going to be subject to increased volatility and quick movements, both up and down. You need to think carefully about your exposure in these markets.
This commentary should be read with an objective mind in the midst of vulnerable market conditions. I hope that you will find it to be "outside the box" thinking.
My good friends and London associates, Absolute Return Partners, have recently released their monthly letter. The letter consists of two essays with the first by ARP President Niels Jensen and the second by partner Jan Vilhelmsen. Given that the equity sell-off around the world has been far more dramatic than in the US, I thought it might be useful to get a view from "over the pond."
Niels comments on the correlation between commodities and stocks and takes a look at what history can teach us from years past. In light of all of the talk, this is a contrarian's view opposed to the "it's different this time" camp (like we haven't heard that one before). On the other hand, Jan explores a sector of hedge funds that, by definition, do not live up to their name. He concisely summarizes this discovery by stating, "If you pay the high fees that hedge fund managers demand, you would at least expect to get something that you cannot easily create yourself."
With most observers ranting and raving about the "new economy," I trust that you will enjoy this article that bets against the consensus by siding with history and the data. Enjoy the read and continue to think "Outside the Box."
We are almost half way through the year and the markets are providing us with plenty of trends and issues which we must take into account. From 6 year market highs to the cooling of the housing market, from the energy bonanza to China's effects upon globalization, there is no shortage of topics of interest in the financial press. But as of late, I have been receiving several questions from my subscribers focusing special attention towards the recent commodity boom and the dollar with respect to the future of both.
Morgan Stanley's Chief Economist, Stephen Roach, provides us with some valuable insights on both of our subjects at hand. My long-term readers are familiar with Mr. Roach and the independent perspective that he provides on noteworthy economic conditions. This week's Outside the Box encompasses not one but two of his articles, a global outlook on the "Commodity Bubble" and "Dollar Spin." I entrust that you will enjoy Mr. Roach's commentary and seek to glean some wisdom from this wealth of information.
A reader forwarded the following article to me last week and suggested it might make a good Outside the Box. This week's article comes from Rodney Dickens, Head of Research for ASB Bank, New Zealand and I thank him for letting me share his thoughts with my readers. Rodney has been analyzing the fixed income markets for two decades and has some insights into the current trends in global interest rates.
Rodney refers to the US Fed as the "global custodian of inflation" and finds an interesting relationship between the Fed Funds Rate and G7 capacity utilization. He then goes on to look at China's role in inflation and the current trend in commodity prices. These factors all lead to the conclusion that interest rates will continue to go up globally and that is why it was picked for this week's Outside the Box.
This week we look at another interesting essay by Donald Coxe, the Global Portfolio Strategist, BMO Financial Group. He is also the Chairman and Chief Strategist of Harris Investment Management in Chicago, and Chairman of Jones Heward Investments in Toronto. Coxe writes a monthly piece called "Basic Points."
This section of the report looks at what Donald refers to as a Triple Waterfall. This is a similar concept that many readers have seen from me before based on the work of Michael Alexander, Ed Easterling and my own research on secular market cycles. A Triple Waterfall is explained and then a forecast for technology and commodities is made. Enjoy this weeks Outside the Box.
This week we look at another interesting essay by Donald Coxe, the Global Portfolio Strategist, BMO Financial Group. He is also the Chairman and Chief Strategist of Harris Investment Management in Chicago, and Chairman of Jones Heward Investments in Toronto. Coxe writes a monthly piece called "Basic Points" and his latest is this week's "Outside the Box."
This essay explores the current situation with currencies, gold and commodities. Plus I normally don't include investment recommendations, but felt that they deserved to be included this time. Today's letter is excerpted from the December 14, 2004: "Valley of the Dollars."