AGCO Confirmation

Agco reported Q3 revenues and profits today far above last year's level and analyst estimates, and guided full-year earnings estimates higher. I take this as confirmation of my assertion that higher food prices will lead to stronger sales of farm equipment. Agco is up 42% since my discussion here in August, CNH is up 35%. I plan to take positions in both sometime in the next 1-2 weeks. I am not jumping into the trade as still think equity markets will trend lower in response to weaker economic news this week, and this may allow me to get a slightly better price. That said, I may set a stop buy in case I am wrong and the market jumps higher.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)

No trading this week

I have decided not to trade this week. There are too many important data releases, and this will probably cause the markets to be especially volatile. I am not good at trading volatile markets. This week we have consumer confidence, the Fed, ISM, GDP and non-farm payrolls, to name a few. If I am correct, some (most) of this data should confirm the slowdown in the economy that I think is beginning. If I am wrong, then I need to seriously re-think my macro outlook.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)

Back to insanity?

Seems that the return to sanity was relatively brief. I did not expect the large fall last Friday to continue, but this week has been bizarre. People on both sides (short and long) are clearly nervous, given the large intraday swings in the equity markets. The bears are nervous that the Fed easing will allow the economy to hold up OK and therefore boost stock prices. The bulls are nervous that corporate profits and the economic data are both weak, and therefore the economic picture might not be as rosy as they imagine. The result is pure noise, very difficult if not impossible to read from a technical perspective.

In such a situation I think it is important to return to the fundamentals. Three factors are key here: 1) the housing market is imploding, and shows no sign of bottoming in the near future; 2) the credit crunch in August has made it more difficult for many households, corporations and investors to borrow; it has also shaken their confidence in the future and made them less inclined to spend and invest; 3) oil has been making historic highs - (even though gasoline is not making new highs, it is still very expensive byt historical standards, as are other oil derivatives). The data also seems to confirm the economy is slowing -- today we had durable goods orders weak and initial unemployment claims moving up (4 week moving average).

The risk is that rapid money growth props up the economy and financial markets for a little while longer. Such a scenario could lead to an upwards "pop" in equity prices that could severely damage my bottom line. I think what is more likely is that rapid money growth will flow into other assets such as gold, commodities, and maybe emerging markets. It is notable that gold is once again testing its highs at $770, despite everyone saying last week that gold was overbought and due for a correction. Could be short covering of course and the correction may still happen, but it is notable nonetheless.

In this situation it is best to wait and practice being patient. In time, the market will reveal its direction, and this will cause me to either add to or reduce my positions.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)

Is sanity returning to the financial markets?

What a change from a little over 24 hours ago. Then, the major European indices were up 0.5%-1%, apparently on the news that Heineken and Carlsberg were interesting in buying rival brewer S&N. The US markets then opened higher following the news that housing starts had declined by a very large number, and inflation was slightly higher than expected.

Now, the european indices are down considerably, bonds are trading much higher, and the yen is rising. What happened to the no-brainer risk trade? Have people finally realised that the Fed cannot save the day? Is sanity finally returning to the financial markets?

It will take several weeks, if not months to answer that question. In the meantime, I hope to start seeing some positive returns from my short position. During the collapse in the US markets yesterday I added to my short position, buying 2 units of SDS at 50.40. After the rally at the end of the day yesterday I thought maybe I was a little hasty, but it looks like today's open will redeem my decision. This sell-off/correction (call it what you will) is starting to feel as if it has some legs, and may continue for some time.

MARKET POSITION: SHORT - EQUITIES (6 units); LONG - GOLD (1 unit)

Some short and longer-term thoughts on the markets

The market is (so far) down about 0.5% today and is farther off its peak last Thursday. I would like to think that this may be the start of a longer-term trend but I have learned to be more careful in my short-term predictions. What I can say with a fair degree of certainty is that all of the elements for a large correction remain in place. The economy is definitely slowing, the credit markets remain glued up (though less so than a few weeks ago) and corporate profits are hurting. The general sentiment is that the situation is not that bad and the Fed is cutting so the economy will be back on its feet in no time. I continue to believe that this looks more like the end of the cycle than a mid-cycle slowdown. Anything else is probably wishful thinking.

I cannot say with any degree of certainty when the correction will take place, but when it takes place it will be rapid and it may not seem that serious at the start. People will believe that it is just another small reversal after a period of large gains. This makes it better to stay short and wait for the correction to come to me.

It is also difficult to know how large the correction will be. There has not been a significant correction (over 10%) in many years, making one long overdue. But whether it will be 10%, 15%, 25% or even 40%, depends on the evolution of the economy.

So in the short-term, I remain short equities, and I think bonds could also do well in the initial stages of the stock market correction. Looking farther out, once the correction looks like it is ending, I think the global inflation trade will be the best bet. Emphasis on 4 areas: 1) commodies / natural resouces (gold, energy, mining, etc.). These have done well over the past five years but there is still a long way to go; 2) emerging markets, especially those that produce a lot of commodities; 3) companies that produce products for commodity producers (e.g. I mentioned the agricultural equipment makers last month); 4) Japan - the return of global inflation should finally cause Japanese prices to rise, and Japanese assets will also reflate in price.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)

Slaying a Bull is a Long Process

Anyone who has ever witnessed a bull fight knows that slaying a bull is a long process. Especially a large and strong bull such as the one currently in existence in the global equity markets. Clearly I was too hasty to declare the start of a bear market in August. Instead of increasing my short position, I should have covered and gone long. I made the wrong move.

But I do not think now is the time to cover. Despite an extremely bullish sentiment, the market is exhibiting signs of getting tired. The rally is being driven by a small number of stocks. Other than the DJIA, other indices remain well below their June/July highs. The Nikkei is still down considerably. Gold is $100 higher, yet the US 10 year is 60 bps lower than its peak.

Similar news on the economic front. It is not as weak as I previously thought. Yet a serious slowdown is evident. Employment, manufacturing and spending are all well down. House prices continue to decline as inventories rise. As I keep saying, I can't imagine people are going to continue spending as they become concerned about keeping their house and their job. But most economic commentators think the economy will avoid a recession. From my perspective, this would be incredibly lucky indeed.

Of course, the economy has not entered a recession yet. Leading indicators such as the ISM and initial unemployment claims are still holding up OK. But once it becomes obvious the economy is in recession, it will be too late from a trading perspective. One must look out and anticipate what will happen. And it appears that the balance of risks is to the downside. The situation is clearly weaker than July, yet the equity markets are at about the same level. I would rather be short than long.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)