Hi all, I’m just getting used to using WordPress so apologies if the quality of my blog doesn’t look great.

Firstly a quick word on my method of investing. I take a conservative approach that is systematic. In other words I start with the main indices like the S&P, DAX and Nikkei then sectors and industries to find out what is happening and then drill down to opportunities. Coupled with a look at commodities, 8 main currency crosses. and then finally a focus on countries to see if there are any large trade changes or anomalies .

My blog is mainly a stream of consciousness at the moment in time it is written.

My Main Impressions for December

We’re in a deflationary world. That would normally be reason to be concerned: Deflation is considered by central bankers as a destructive force. That is because a reduction in the price of goods are usually associated with a slowing economy and increased unemployment.

Austerity causes disaffection and is not working in Europe. Fueling a vicious circle causing a a rise in separatism and fracturing European unity i.e. Catalan independence in Spain and the Northern League in Italy. This coupled with the crisis in handling the refugee crisis is loosening European co-operation. Especially with the disgraceful attitude of some eastern European countries like Hungary and the US. A move to the right in Poland is exasperating as it is so integrated into Europe and yet votes in xenophobic politicians i.e. the present government has pardoned criminals like Mariusz Kaminski and unconstitutionally removed five judges.

Some History  

What lessons can we learn from the past. In the 19th century there was a rapid technological advance in transport, textiles and trade. Greater access to cheaper commodities then caused deflation (sugar cane from the Caribbean and cotton in pre civil war America).

In the 21st century technology is doing the same thing. The internet is deflationary by its very nature. Not steam engines but digitization. In the 1980’s and 1990’s  we had a period of max consumption. Inflation was constantly on governments minds. There was a bulge in population in the west, the so called baby boom generation that splurged out on cars, houses, holidays. Production was held back by the Cold War and economies like China and India were off bounds. Business had pricing power, the great age of the so called conglomerates like GE that made everything from fridges to nuclear power plants. Nowadays you hardly hear about these types of companies. With technology booming the so called FANG(Facebook, Amazon, Netflix and Google) companies are driving the Nasdaq, this coupled with decreasing demographics even in China spells Deflation for a long time to come.

Oil is now below $40 a barrel from nearly $150 over 7 years ago. It ain’t coming back soon(no brainer for anyone who bought any airline stock), GDP growth is slowing in all developed countries and 10 years bond yields are all below 3% unless you want to take a punt on Ukraine of Greece? Government debt is now priced to guarantee you a loss and the cats are licking it up.

The reality is that an intense struggle is underway where innovation is the new normal. This will stress the old industries that traditionally depend on using their size to make high margins i.e. the oil and commodity industries. The structural change to innovation is overwhelming. Old models are braking, if you want to buy a book or rent an apartment in Madrid for the weekend you use Amazon and Airbnb. When was the last time you saw a teenager going into town to buy a music CD? They download it for free if possible. The important thing to note is that these new models only work for a short time before they are overtaken themselves by newer ground breaking companies. In the past a fish was eaten by a bigger fish, now the big fish are eaten alive by small nimble technology piranhas.

The Markets 

Enough of what I think! the reality is seen in the charts whether anyone agrees the price is always the price, the only real reality.

Take a really good luck at the chart below:

This is a monthly chart of the S&P 500 over 20 years. The big daddy of them all. The biggest 500 companies worldwide are in here. For me it is a measure as to how well the world is performing in simple terms. Below the chart is the MAC-D which measures momentum and trend. In simple terms it is used to time entry into a buy or sell position. When its above the line, its a buy, when its below the line you get out of your trade or go short. Its based on 9,12,26 period moving averages. Most people never look at it using a monthly chart but shorter time periods like daily or even hourly. As I have learnt from Paul Wallace recently (www.fxtraderpaul.com), stand back and look for the big trend to see the big theme unfolding then ride that pony.

I have outlined 3 periods over the last 20 years when it went negative, they were June 2000(Dotcom Bubble/Collapse), January 2008(Subprime Mortgage Crisis) and today as of July 2015. We can all argue about the value or relevance of technical analysis but one thing for sure is ignore this signal at your peril. I checked the DOW in 1929 and its monthly MAC D went negative in October 1929!

To anyone who got my previous email type blog I have been very clear that I believe since July of this year that we are at a very dangerous moment in history. When this indicator goes positive I will put my hands up and say my belief in this indicator in incorrect but until this happens I cannot see any value in investing in any company. As Jesse Livermore said in Reminiscences of a Stock Operator, “There is only one side of the stock market; its not the bull side or the bear side, but the right side.” Don’t forget the last time the MACD monthly chart went negative blue chip companies worldwide traded at a discount of nearly 60%.

That is why I see showed a picture of a ‘Dead Cat Bounce’ on the cover of this months blog. The bounce worldwide in indices’ on 30th of September looks to me like this.

World Transportation

The Baltic Dry Index (BDI) was in the past considered a leading indicator like Dr. Copper. It measured raw pre production material like coal, iron ore and grain. Its now at its historical lowest level since records began in 1985. When you read the business press they exhort you to believe that they are no longer relevant which I would probably agree with but you never hear what has taken its place.

I started to see lots of articles saying this is not so important anymore but then I said to myself how can you get a handle or feel for world trade other than how busy freight companies are by sea, air or truck. So scratching my head I built the portfolio above to give me a feel. I based all prices on January 02 2015, the year so far. Wow, all of the components are down on average nearly 40%.

SEA is a very interesting Exchange Traded Fund(ETF) that is made up of the worlds biggest sea transporters. Overseas Ship Holding Group(OSGB) and International Shipping Corp(ISH) are the 2 biggest shipping companies in the world.

Air transportation is mainly covered by UPS and Fedex.

Train, Union Pacific Corp(UNP), the largest one is owned by Warren Buffet so this is number 2.

Trucking World leader is Deutsche Post(DPW.DE) of Germany. Note I put all the market cap of all companies in the description above.

Transportation ETF’s, iShares Transportation Average ETF(IYT) and SPDR® S&P Transportation ETF(XTN)

I don’t know any way that anyone can look at these figures and make a positive out of it. Again it proves the point again that the high tech Facebooks, Googles and Netflixs don’t use usual shipping methods, so are these the stallworths that are keeping this market going?  Another nice leading indictor is the art market but thats for another day. But yes you guessed it overall its down nearly 50%(Note:not the really high end Modiglianis’)

Indices, Sectors and Industries.      

I won’t bore you all anymore with the indices because you know how I feel about the S&P. I see the same for the DOW and DAX. The Nikkei is a pure currency play, just weaken your currency and see your exports fly. So the Yen is nearly 40% cheaper against the US Dollar since the end of 2011 and the Nikkei is up over 125%. Nothing particularly smart here but a smell of desperation comes off this chart. The Nasdaq should perform best as its members are cash rich and are using the new technologies as mentioned earlier.

Sectors: As we all know by now Energy and Materials are being crushed at the moment. Its like standing in front of a train and traditional safe havens like Utilities and Healthcare with those nice juicy dividents should be outperforming but they’re not?

Based on a daily chart the following sectors have nearly perfectly formed double tops: Consumer Discretionary, Financials, Health Care, Industrials and Materials.

Industries: Pharmaceuticals and Semiconductors look the strongest. With a rate rise in the US imminent, Banking and Insurance should do well in the future. Traditionally homebuilders do well from now to early spring.

Currencies:

As talked about in the past, countries with oil as their main export will suffer as this commodity reduces in value. The Saudis have admitted  repatriating $73 billion(bn) over the last year however there are rumours that the real amount is significantly higher. The Saudis were never ones to assist anyone but themselves. With over 60% of their population under 21 it will take more than play stations and car racing to satisfy youths hunger for progress. The Saudis main managers of their funds are BlackRock, Franklin Templeton and Legal & General while holders of their funds are mainly State Street, Northern Trust and BNY Mellon. With the easy oil money going, a war in Yemen and Syria on fire something has to give with this country ruled by medieval thugs.

Euro v US Dollar: For me the floor is 1.046. It looks quiet solid at the moment but with Dragi beginning to loose his cool and stumbling with statements, who knows? Based on the history of the Euro since the start and its max of 1.60 in July of 2008, we are on its 61.8% fibonacci correction level of 1.12.  Don’t plan a trip to the states anytime soon.

British Pound v US Dollar: Heading down slowly to 1.45

Euro v British Pound: If 0.69 is broken it seems headed to 0.65

US Dollar v Renminbi:

The US Dollar is still the big daddy. It is leaving no currency in its way. The Chinese currency the Renminbi is also weakening. This suits the Chinese exports, they don’t need more US Dollars, their foreign currency reserves are very large anyway and it suits them to settle their trades ie they pay in US Dollars and sell out in Renminbi more and more.

Commodity Currencies:    By these I mean the big commodity exporting countries such as Canada, Australia and New Zealand. Without boring you more with talk of the mighty US Dollar, the real weak pin here seems to be the Canadian ‘Looney’ or as some people are now calling it the ‘North American Peso’. This looks nasty with no end in sight. The pirates are pushing them off the gang plank. The Australian dollar is staging a run since September but I believe that will not last much longer, its 0.73 at the moment but looks like it will drop to 0.6 by the end of February. I have more faith in the New Zealand dollar than either of the above.

This hasn’t come out too well but if your going on your holidays may I suggest going to Brazil(-31%), Turkey(-24%), South Africa(-22%). These are against the US Dollar.

Commodities:

Metals and Energy:

This is about 2 weeks old and the big one to drop since then is oil which is now below $37, I see nothing to stop oil dropping below $19.50, back to where we were in 1 January 2002 at $19.50. A lot of pain coming specifically to Saudi, Arabia, UAE, Kuwait, Iraq, Venezuela, Nigeria, Angola, Qatar, Iran, Algeria, Libya and Ecuador. To put into perspective, the Saudis export about 280 billion dollars in oil every year, number 2 the UAE produces 100 billion $ and Kuwait about 90 billion $. So you see the Saudis are the biggest by far. The next time you hear the words ‘Existential Threat’, I think it will increasingly refer to these countries.

I have always found Copper a most interesting chart and followed it avidly since 2011. Its $2.03 a pound(lb) today and its only support left is $1.25/lb. Its record low was $0.61/lb on 19 March 1999. With all its peers thundering southwards, paladium, platinum, lead, and zinc. There is no way that Australia can continue to take this kind of pain that doesn’t seem to have hit the system yet. There is definite divergence between a company like BHP and the Australian economy. Bottles of wine won’t fill this trade gap. I see that BHP has aptly named its spinoff calling it South 32. Since its floatation on 18 May losing over 45%.

Soft Commodities:

This is where I am really positive and see a great opportunity. Corn, Oats, Soybean Meal and Oil, Sugar, Cocoa and Lumber. Coffee Arabica and Robusta may take some time though.

For a passive way to invest in these areas Teucrium and iPath have introduced an interesting set of ETF’s which follow these commodities, they have names that are instantly recognisable as to what they follow i.e. CHOC(cocao), SGAR, CANE, CAFE, WEAT, CORN, SOYB, WOOD and CUT.

 I am happy to report that feeder cattle have halved in price from a year ago($247 to $163 today). Down 31% since January alone and Lean Hogs down 33%. To all you vegetarians out there like myself I see a silver lining in these bad commodity figures!

Hope the stream of consciousness wasn’t too heavy, all the best and hope everyone has a great xmas and a well deserved holiday, regards, Pearse.