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Buy GOLD, SILVER and CHINA
After a spectacular month of November where global equities saw their best month since 1996 and investors’ bullishness reached extremes unheard of.
Double figure returns for a month are rare. They happened in April this year, during the post-Covid rebound, but never in the rebound from the global financial crisis. There was a double-figure month in October 2011, as the market recovered from the shock of the U.S. Treasury downgrade; another in December 1991 (investors were excited about what was predicted to be a speedy recovery from the recession of that year, which had come with Operation Desert Storm, and were also relieved that the Soviet Union was about to wind itself up without bloodshed); and in January 1987 (Black Monday lay ahead).
November was actually more impressive outside the U.S. Dredging through the terminal, November seems to have been the best calendar month on record for the FTSE’s rest of the world index, and for the MSCI EAFE index, which covers the developed world outside the U.S. and gained 15.4% in dollar terms. That’s a heck of a lot for one calendar month.
This week will also see an anniversary. Alan Greenspan made his famous warning about “irrational exuberance” in the stock market on Dec. 5, 1996. This prompts some more worrying signals about today.
The former Federal Reserve chairman was famously right about the irrationality, but got his timing badly wrong. The bull market would rage on, and form a bubble, for three more years after that speech (in part because Greenspan lost his zeal for puncturing the excess). The following chart shows the price-sales and price-forward earnings multiples (as calculated by Bloomberg) for the S&P 500, starting at the point of his speech. Both rose far further in the next three years, before spending the better part of a decade below their level of December 1996 once the internet bubble had burst.
Now, thoroughly alarmingly, the P/E ratio is almost as high as it was at the dot-com peak, while the sales multiple is at a record. This is at a point where vaccines have still not been cleared for use, and the Covid pandemic continues to subject most of us in the Western world to lifestyles that cramp economic activity.
Moreover, US unemployment and US public deficits are at records not seen t any point in the past.
With only one exception, it is hard to see any fundamental justification to pay more for stocks now than in December 1996 (when all appeared set fair for years into the future).
But the exception is important. Bond yields are far lower than they were back then.
Could we be in for an equity melt-up driven by low or negative interest rates ?
Well our view is that we have actually seen that melt-up phenomenon in the leaders of the secular bull market – the FAMANGS – and they are losing momentum… The speculation in TESLA shares is another omen that the melt-up has actually happened.
What is driving the indexes higher now is rotation into cyclicals and emerging markets.
The SPX and NASDAQ made marginal new all-time highs and the Dow Jones reaching a major landmark at 30,000, the synchronized signals from the index side look strategically bullish.
However, with the marginal new SPX high, the technical internals have started deteriorating, with initial divergences in short-term breadth is reflecting rising selectivity. Together with the aggressively overbought status of cyclicals/value and sentiment in outright contrarian territory, we are sticking to our view and see the SPX/global equities near to a minor trading top.
So globally we have not reduced our hedges on US equities and shorts on technology stocks but are increasing markedly our China exposure .
However, we are now having considerable BUY signals in Chinese equities, with the CSI 300 making new highs, the HSCEI having broken above its downtrend channel, the CHINEXT index ready to fly and the SHANGHAI COMPOSITE INDEX painting a positive picture.
We also have many individual stocks delivering strong BUY signals individually.
We have de-hedged our Chinese portfolio yesterday and added positions in CHINA MERCHANTS HOLDING, a major beneficiary of a global recovery in trade yielding 9 % dividend yield, China MinSheng Bank a medium size bank that also pays 9 % dividend yield and added two ETF’s on the CHINEXT and the SHANGHAI COMPOSITE Indexes ion addition to our 2X ETF on the main CSI 300 Index bought yesterday evening in New York.
Taking more profits on Cryptos
Bitcoins set a new record high Monday, and came close to topping $20,000 for the first time ever.. It is three years since its last peak, in December 2017, which followed a frantic binge of speculation and where we shorted them in December 2019.
After the previous big spike, in late 2013, it also took about three years for the cryptocurrency to make a new high. Amid ridiculous volatility, some patterns are emerging.
Following 2013, much money was poured into ways to use the new technology, and new tokens and cryptocurrencies arrived on the scene. Many were more or less blatant scams. But there was a sense, rather like the laser in an earlier generation, of a solution in search of a problem; now, people are finding problems to solve with it.
Bitcoin is not really being used more as a currency but it continues to have appeal for anyone who wants to bet that central banks will debase fiat currencies. And some big institutions, desperate for anything that might produce a return in current conditions, are beginning to dabble in it.
The problems with it remain: Bitcoin has no intrinsic value, and governments may fight hard to keep their monopoly over issuing currency. But for the time being bitcoin is showing some signs of growing maturity as an asset class — and it has endured far longer now than the average tulip.
We made a great profit on our Bitcoin expsoure and again on our ETHEREUM positions. We juts took some more profits today wanting to keep our exposure to Cryptos below 10 % of the portfolio.
Gold and Silver wash-out creates an opportunity
With last week’s breakdown below the obvious key support at $1848, gold delivered a short-term negative surprise. With the breakdown of classic macro correlations, the yellow metal could not profit from a weaker USD and lower yields, where the November breakdown was effectively the consequence of the reversing summer COVID trade and a classic position washout.
Generally, with the exhaustive rally in cyclicals/value in equities, we see the current sell-off as an exhaustive and classic capitulation in gold.
Together with reaching our worst-case correction target range, we see gold near to a significant trading bottom. We reiterate our underlying bullish view on gold, where the recent sell-off represents a big buying opportunity (multi-month cycle low) for gold/silver/platinum/gold mines for another significant rally towards new highs into H1 2021.
After having added to Gold Miners, Silver and Platinum last week, we increased our exposure to Platinum today and will probably start investing in Palladium very soon.
New Asset Allocation
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