subject: Managed Discretionary Accounts Purchase Of Bsl And Market Update [print this page] Herd mentality EVERYONES thinking the same thing
Im sure any of you who have read the newspaper lately have read about the impending second round of Quantative easing (QE2) from the US Federal Reserve, which the market would have you believe will happen any day. It would seem that the market also believes that this will be catalyst for the next leg up in equities. As a result equities have been very buoyant in anticipation of QE2, even in the face of poor-ish jobs numbers in the US.
Our experience of the market is the herd is rarely right. When was the last time everyone in the market believed something was going to happen and it actually did? Perhaps you can remember a time, but we cant. What we are cautious of now is being caught up in the herd of bulls, who are running hard; there is now amazingly little talk of the problems that have plagued our markets for the last two years and all this is (apparently) being sustained on the back of the US Fed printing even MORE money! A solution which didnt work the first time round however is being wheeled out for a second go.
Were not outright bearish right now though, far from it. However as we commonly say, markets go up and down, and right now the market has been going up for quite some time.
I wanted to propose a couple of what if scenarios just to get you thinking.
What would happen if the Fed decides, at the end of this month, that reporting season has been surprisingly strong and that they are going to hold off on QE2? Its the final weapon in their financial arsenal, and they want to hang on to it and use it at just the right time.
The second thing to consider is that EVERYONE also believes in the continuing de-valuation of the USD against every other major currency. By way of illustration, net SHORT positions in the USD increased by US$16 Billion in the last 2 weeks alone, an increase of 144%. That brings the total short USD position to US $30 Billion dollars.
The one thing about short positions is that, at some point, they must be covered. If the Fed delays QE2 or announces perhaps a smaller program than the market expects (perhaps on the back of stronger economic data) then that might just be the catalyst for a short covering rally in the USD.
Given that we are holding a large proportion of cash in the managed discretionary accounts we have been actively seeking places to deploy capital; needless to say we have really struggled to find value at these levels in the market.
We discovered one large cap stock which has been lagging in the current rally, and which is trading just off the bottom of its current range. That stock is BSL. Given it is slightly more volatile than the overall market we invested 10% of the portfolio in the stock at yesterdays intra-day low of $2.16. Much like the USD, BSL has been a favourite of short sellers and we believe that should the USD strengthen, BSL will look more attractive and the short sellers will look to cover their positions in BSL quite quickly.
We are actively watching quite a number of stocks for a level which we feel represents value. In this market we still plan to be a little more aggressive, especially given the exceptional local economy strength. In the meantime we are well positioned should the market continue to run and we are holding stocks that should benefit from sector rotation and USD strength should the market start to ease off.
As always, if you would like to discuss the portfolio please call the desk.
