A Quick Update

Firstly, I have to apologies for lack of posts over the last several days. As few of you would have already guessed, I am traveling around Asia as I write this. And because I have been accompanied by some good friends, it is very hard… if not impossible… to get any work done. Some great food, lots of alcohol, late nights and many good laughs means there is hardly any time for work (or sleep haha). Typhoon in Hong Kong tried to stop us at our tracks, but it did not succeed.

Over the coming weeks I will be visiting Seoul, Singapore and hopefully even Tokyo if possible (I am not sure about the last one just yet). Email me if you would like to catch up and I can tell you my dates and cities more precisely!

Chart 1: Extremely low stock complacency with fewest bears since 1987 

 Source: Pension Partners

Ok quick update on the markets. Right now I am watching variety of markets, but mainly US stocks, Emerging Market stocks and Precious Metals. Emerging market stocks have been stuck in a range since October 2011, or even since early 2010 depending on how you look at it. These indices are trading at very compiling and attractive valuations. GEMs have been trying to break out in recent months and I have China & Russia closely on my watchlist.

However, the problem is that US stocks are rather very overpriced and sentiment extremely optimistic (refer to Chart 1). Furthermore, US technical breadth keeps deteriorating with fewer and fewer 52 week highs. When we look at Nasdaq and Russell 2000 components, a lot of stocks are already down over 20% and well into a bear market. Breadth is thinning, which to me signals that liquidity is drying up. Caution is advised.

Chart 2: Traders are once again turning very negative on Gold & Silver! 

 Source: Mark Hulbert

It seems that many market participants have been running into USD which has affected prices of all commodities including Gold. My newsletter readers would know that I have been shorting Gold since $1310 and fully hedged my silver core holdings by shorting Silver at $21. This trade, together with long USD – short Aussie has been working very well in recent weeks. However, on the opposite side of the sentiment spectrum, Gold is becoming quite disliked and heavily shorted by traders (refer to Chart 2).

Does that mean I will close my shorts / hedges? I am not sure. I might if sentiment gets even worse. However, I still continue to believe that after a near term rebound in PMs prices, we could keep drifting lower. I am eventually looking for Gold to break below $1190 and Silver below $18.50. My fund remains denominated in US Dollars, which is also benefiting me somewhat, as all the cash I hold is at least not losing purchasing power on relative basis. I guess that just means more quality beer to be consumed in Singapore with some friends!

Not All Stock Markets Are Created Equal!

Chart 1: Recently India has outperformed & Russia has under-performed

Global Stock Markets 1 Year Performance Source: Stock Charts (edited by Short Side of Long)

Not all stock markets are created equal. It is very easy to just summarise the stock market conditions as extremely bullish and posting record highs, but this is only really true for the United States. This posts looks at some of the major stock markets of the world, priced in US Dollars and adjusted for dividends (total return). You will notice that over the last five years, there is a very theme reoccurring here.

Over the last 12 months, Developed Market equities like US and Germany have outperformed pretty much just about any other stock market in the world, with the exception of India. However, it is true that European equities as well as the broad economy is now being affected by the turmoil in Ukraine. The main loser and under-performer has been the Russian stock market and it is the only major global stock market that is down over the last year.

Chart 2: US is the best performer over 3 years, while Russia the worst!

Global Stock Markets 3 Year Performance Source: Stock Charts (edited by Short Side of Long)

The story doesn’t change much when we observe the 3 year rolling performance, including dividends. Essentially, once again e have US and Germany outperforming the whole world and to be quite honest, by a handsome margin too.  On the other hand, Brazilian and Russian equities have been the worst performers and stand out like a sore thumb. Consider the fact that while S&P 500 is up almost 80% over the last three years, Brazilian is down 10% and Russian down 20% in the same time period. Somewhere along the way, we also saw the other two BRICs (China & India) not do so well, however recent rallies have now changed that, with both countries up around 25%.

Finally, we look at the winners and losers over the last 5 years. The theme I’ve discussed through the short and brief article continues, with Developed Market equities outperformance. Once again, the US stock market takes the cake with a staggering outperformance against all of its major peers. Emerging Markets like the BRICs have been serious laggards, apart from India which has performed vert well since the elections late last year. Chinese, Brazilian and Russian stocks remain basically flat over half a decade (up only several percentage points really).

Chart 3: BRICs have under-performed US equites over the last 5 years

Global Stock Markets 5 Year Performance Source: Stock Charts (edited by Short Side of Long)

Market Movers & Shakers!

Here are some interesting charts in no particular order. Market conditions remain quite interesting for both traders and investors in recent months. We have been discussing and trading US Dollar strength, Euro weakness, Treasury yield curve flattening, Grains in a crash mode, reversal in Oil prices, euphoric rise of the US tech sector, Gold and Silver potentially breaking down lower and lack of bears in the stock market as almost no one wants to fight central banks.

Chart 1: Dollar Trade Weighted Index approaching 52 week new highs

US Dollar vs 200 MA Source: Short Side of Long

Chart 2: Treasury 5 Year yield is approaching a breakout on the upside

US Treasury Yield Curve Source: Short Side of Long

Chart 3: Corn prices are going through the biggest bear market since ’96

Corn Performance Source: Short Side of Long

Chart 4: After a failed breakout Brent Crude Oil has started its correction

Brent Crude Oil Source: Short Side of Long

Chart 5: Nasdaq 100 at 14 year resistance from the Tech bubble days

Nasdaq vs 200 MA Source: Short Side of Long

Chart 6: Gold price consolidation might be ending with a breakdown…

GLD vs Physical Holdings Source: Short Side of Long

Chart 7: Silver is trading in a narrow range for more then a year now 

Silver COT Source: Short Side of Long

Chart 8: Bearish capitulation as hardly any one fights the central banks

Investor Intelligence Bears Source: Short Side of Long

Chart 9: ECB starts its money printing program as Euro collapses lower

Euro COT Source: Short Side of Long

Gold vs Big Bad Bears!

I briefly touched upon Gold’s terrible performance over the last 3 years in the article post a few weeks ago titled “Gold’s Performance“. Give it a read and look at the long term performance chart, if you haven’t already. I concluded that over a 3 year rolling performance, Gold was at one of the most oversold levels historically. However, that doesn’t mean the situation cannot and will not get even worse. Let us remember that Gold recorded 12 annual gains in the row into 2012, which was one of the greatest performances by any asset class. The price is now working of those gains by shaking as many bulls as possible, before a sound bottom is made and a new bull market can begin.

Today I want to share with you a different chart on Gold’s price vs its performance. In Chart 1 we have log scale Gold since 1970 together with a 5 Year Rolling Compound Return indicator. A keen observer should be able to notice that during major bull markets, Gold’s corrections are quite sharp and swift, and the recovery is just as quick. For example, look at various corrections during 1970s or throughout early 2000s (including 1976 & 2008). Gold falls sharply and swiftly, and then recovers on a V trough just as quickly, right?

Chart 1: Gold has suffered three major bear markets that lasted 5 years!

Gold 5 Year Rolling Compound Return Source: Short Side of Long

On the other hand, observing Gold’s big bad bear markets, one should be able to come to a conclusion that the magic number seems to be around 5 years  (give to take a few months here and there). Consider the fact that Gold peaked in 1980 and eventually bottomed in 1985. Afterwards, Gold peaked in 1988 and eventually bottomed in 1993. Finally Gold peaked once again in 1996 and eventually bottomed in 2001.

All of these big bad bears lasted 5 years.  Now… does that mean that the current bear market has to last 5 years? No, of course not. It can last 3, 5 or 9 years if it really wants to. Price will decide that and at the end of the day we have to respect the price action. However, my opinion is that it just might get there, or at least close enough to iy. Gold peaked in 2011 and the current bear market is now about 3 years old. The recent price action is viewed as a basing pattern by gold bugs, but I personally think it is actually a consolidation / continuation pattern before more downside.

I have maintained for awhile now that, while I am extremely bullish on precious metals, the current correction in Gold is most likely not finished yet and a retest of $1,000 per once might occur. This is not a target or a trade expectation, this is just an approximate guess based on major physiological level and a round number (similar to S&P 2,000 or DAX at 10,000). If Gold was to fall down by couple of hundred dollars in the next 6 to 12 months, according to the 5 year compound rate of return, we would officially be oversold and a sound bottom could be made.

Disclosure: Let me just say that I hope I am completely wrong and Gold bottoms rather quickly from here onwards and a major rally re-starts. Since I am long PMs, there would obviously be nothing better for my P7L statement. However, hoping isn’t a good strategy in this business, so I am just calling it the way it is…

Russian Stocks Might Breakout

Chart 1: Russian equities might be ready for a breakout soon enough… 

Russian Stocks Source: Bar Chart (edited by Short Side of Long)

This is a market I have been watching closely since the panic sell off in March of this year. Regular readers of the newsletter also know that I initiated my first long position in early March lows, as selling pressure climaxed and most investors capitulated on high volume. Since I have discussed Russian equities a few times over the last several months, I won’t be repeating myself here. However, this is a quick post with a view that there is above average probability that Russian equities have now already bottomed.

This weeks price action saw a huge weekly bullish engulfing candle as Russia-Ukraine geopolitical situation calmed a little bit with a cease fire treaty. I find it even more interesting that despite deterioration in “bad news” over the last several weeks, Russian equities have actually failed to make new lows below March 2014. In other words, it seems that the market has already discounted the worst and could now be posting a higher low instead – a first sign downtrend might be ending.

Price to book valuations are at March 2009 lows, dividend yield is 3% on large caps and 3.6% on small caps, which is much more attractive then the 10 Year US Treasury Note, and definitely a lot more attractive then the 10 Year German Bund. All in all, a technical breakout above the 7 year downtrend line could see Russian equities follow through together with China and rest of GEMs. A rally above $27 on the ETF, would be a very good sign. This one could be a real buy-and-hold for a few years, so if the price confirms my view I will act with a very large position!

Chart 2: Russian stocks are the cheapest and most hated in the world!

Russian Valuations Source: Morgan Stanley & East Capital

Emerging Markets Soon To Break Out?

Chart 1: Could emerging market equities break out in coming quarters?

Emerging Market Stocks Source: Short Side of Long

Emerging Market equities have under performed Developed Market equities for years now. Slowing economic activity, falling export growth, over-leverage, inflationary pressures and geopolitical tensions have plagued various regions and countries within the index. Since early 2010, the MSCI Emerging Market Index has basically gone sideways while US equities have risen to record highs and become extremely expensive on historical basis.

Chart 2: Emerging Asia equities have already broken out to the upside!

Emerging Market Asia Stocks Source: Short Side of Long

The question now is, could global fund managers and asset allocators shift capital from expensive DM equities towards laggards? GEM equities have now approached a major resistance zone, after making no progress since at least 2007. It seems that a breakout could be at hand in coming quarters, especially since Asia is already leading the way higher!

Disclosure: Those that follow the newsletter should already know that I have started buying some GEM equities, such as Russia in March and Chinese equities just recently. Due to overly stretched US equity market, I am not yet buying in full force, however Asian GEM equities are extremely depressed relative to the US and other DM markets.

Pay Attention To Stock Markets Of China & Russia

Usually at the end of every month I summarise sentiment of major asset classes via a newsletter update. However, since the sentiment conditions have not changed all that much since the last month, I thought that it would be appropriate to look at a topic that I get quite a few emails about: global stock markets and which one to buy or sell? In this issue of the newsletter I will look back at several decades of history to see the price and performance of various global stock markets and why I think big moves might be coming in Emerging Markets stocks… particularly Russian, Chinese and various other Asian indices.

Chart 1: Over the last 5 years, US equities have returned 20% per annum

S&P 5 Year Compound Return Source: Short Side of Long

However, before I start there needs to be a word of caution. United States is still a global financial leader, with the deepest and most liquid markets. It’s stock market is still one of the main driving forces that impacts many other regional stock markets around the world. Therefore, it is very prudent for investors to understand that the future returns of the US stock market could be very vulnerable from here onwards.

If we observe Chart 1, we should be able to see that the 5 year rolling compound rate of return for the S&P 500 was recently as high as 20 percent per annum. In other words, over the last 5 years, investors have enjoyed on average a 20% return per year, every year. Not only is this rate of return incredible, but it is also a historical anomaly at two standard deviations above a 140 year history.

Using Robert Shiller’s data dating back to late 1800s, this type of rate of return over half a decade has only occurred four other times. These were into 1929, 1936, 1987 and 2000. These dates should all sound very familiar as the stock market experienced a major crash in every instance over the coming 12 to 24 months. Does that mean another crash is coming? There is definitely a decent risk that it is.

Chart 2: Chinese equities have consolidated since the 2007 blow off top

Chinese & Indian Equities Source: Short Side of Long

So now that we have warning massage out of the way, let us look at what is cheap both nominally and relative to the US. Keep in mind that I will not be discussing any in-depth fundamentals regarding countries or regions, as it is your own job to do fundamental research. I will also not be discussing in-depth valuations metrics for various countries, as this is also something you need to do as your own homework. What I will be discussing is the price and performance of various global stock markets, which could be more attractive from the value investing perspective.

If you have been a regular reader of the blog, you most likely would have paid attention to the recent posts regarding Emerging Markets. Previously, I have covered extremely low EM price to book valuations, price breakout and breadth participation improvements. I have also discussed a possibly that Chinese stocks have bottomed out; and even if they haven’t that there is a strong probability of outperforming US equities either way.

Chart 3: Chinese equities are staging breakout from a 7 year downtrend

Chinese Stocks Source: Bar Chart (edited by Short Side of Long)

Assuming you are an investor with a long term perspective, one should definitely look at China as an investment opportunity right now. We should all know a thing or two about China and its future path of becoming a dominant country in the 21st century. And as contrarians we should all participate in this story as it unfolds. However, the best time to buy China is when others are bearish as they are today. This gives us a potential of better (cheaper) entry points as the country continues it secular rise towards more developed economic future.

Gauging sentiment isn’t always easy. Away from the fund flows, analyst recommendations and various surveys, on my last trip around Asia I really got to feel the negativity towards the China’s future economic prospects. Various trades, brokers, analysts and bankers I had a pleasure of meeting were all expecting disappointment from China in coming years (all but a handful I met in Singapore – you know who you are). One trader that works for a major investment bank in Hong Kong even told me that he was afraid that China could crash and end up being more of Pakistan or Zimbabwe, rather then the next great country.

The negative mood has been present all while earnings keep improving. The market traded at forward price to earrings ratio of almost 25 during the 2007 blow off top (please refer to Chart 4). This was one of the most expensive valuations in the last 15 years. At the same time, the 5 year rolling compound rate of return reached 50% (observe Chart 2 closely). In other words, Chinese equities were gifting investors a 50% return on average very year for the last 5 years into 2007. Wow!

These days the valuations are quite low, as the index trades just slightly over 8 times forward P/E. Furthermore, priced in US Dollars, Chinese stocks have been in a downtrend for 7 years now. This is a completely different story to the record breaking run of US equities since March 2009. So could the Chinese market now play catch up? Looking at Chart 3, we can see that some type of change could be taking place as the index attempts a breakout!

Chart 4: Russian equities are currently at incredibly cheap valuations!

BRIC Valuations Source: Ed Yardeni

Russian stocks, on the other hand, are even cheaper and for the obvious reasons too. The crisis in Ukraine continues to escalate, which is putting selling pressure on all Western and Eastern European stock markets. Growth has once again came to a grinding halt in Eurozone, while Russia is now most likely entering a technical recession. Sanctions are currently hurting both sides and for these reasons (and many others) Russian stocks have not entered a recovery mode like their Chinese counterparts (see in Chart 5).

At forward price to earnings ratio of below 5, which is usually only witnessed at major bottoms like 1998 / 2001 / 2008, I believe that Russian stocks a great investment prospect. And while we are on the topic of sentiment and negative outlook, Russia probably takes one of the top spots here. While Chinese stocks might be a buy right now, I would probably start purchasing Russian stocks on any future meaningful weakness.

Some of the indicators to look out for would be a further spike in Russian interest rates, as well as a collapse in both business and consumer confidence. Certain investors might question this and wonder why would I want to purchase Russian stocks if these major economic indicators deteriorate? After all, rising interest rates would hurt economic growth via falling profits and slower credit growth. At the same time, a collapse in confidence from both consumers and businesses indicates a major slowdown of economic activity.

Well, my answer to this would be that markets are a discount mechanism, so from a contrary point of view as bad news is becomes more and more priced in, a sound bottom can be made and a recovery eventually restart. And since stocks are the cheapest during times of economic slowdown or geopolitical tensions, just as others are selling you should be buying. In other words, gloom and doom is investor’s best friend.

Chart 5: Russian stock market remains in a downtrend for the time being

Russian & Brazilian Equities Source: Short Side of Long

Stocks vs Bonds: Who Will Win?

In recent years, we have regularly seen market participants argue between two investment assets: stocks and bonds. One camp claims that stocks are cheap as recovery continues and earnings keep growing, which will eventually put pressure on bonds and drive yields higher. The other camp argues that the recovery is very weak and stocks are overpriced. As deflation and slowdown fears set in again, bonds will outperform while stocks disappoint. On both sides of the argument exist perma bulls and perma bears, who have instantly high and low targets for both assets.

Chart 1: Year to date performance of Tech Stocks vs Treasury Bonds

Stocks vs Bonds Source: Stock Charts (edited by Short Side of Long)

Well… guess what? In 2014, both camps are right. As we can see in Chart 1, higher beta Nasdaq 100 stocks are up 14% year to date, while Treasury Long Bond is up almost 19% (both are total return).

So how can that be? Well, we find ourselves in a period which will most likely be known as “the mother of all easing cycles”. Basically, zero percent rates and additional money printing is pushing up both stocks and bonds simultaneously. And since money velocity hasn’t risen yet, high inflation has not been a problem.

So which asset should investors should buy or continue to hold, and which one should they sell? My personal opinion is that this question is a little bit more difficult to answer, because it is not just as simple as choosing between either one. I will try and answer the question in two parts.

Chart 2: US technology stocks have been rising at extra ordinary pace

Nasdaq 100 ETF Source: Stock Charts (edited by Short Side of Long)

First of all, year to date chart does not tell the whole story. Instead let us look at the price action for both assets since at least 2013. As you can see Nasdaq 100 has been storming higher and at faster rate too. It hasn’t traded at or below its 200 day moving average since late 2012. While this index is extremely overbought even now, it seems to be stubbornly shaking off any downside risks as it tries to recapture its 2000 peak in a hurry.

On the other hand, while Treasuries have done better then stocks in 2014, they are only really recovering from the huge drawdowns in 2013. In other words, those who purchased stocks at the beginning of 2013 are up a whole lot more than those who purchased bonds. Therefore, from a  contrary perspective, does this mean that stocks are a lot more extended then bonds?

Chart 3: Bonds have rallied, but its only a recovery from the ’13 sell off!

Long Bond ETF Source: Stock Charts (edited by Short Side of Long)

Well maybe in the US, but not in a lot of other Developed Markets around the world, where government bonds have been bid up to extreme levels (some yields are actually negative) as fear of bank defaults, deflation and recession worries keeps investors in risk aversion mode. For example, certain government bond markets are just extended as Nasdaq seen in Chart 2. All we have to do is look at the recent several years of performance in German Bunds or the last decade in Japanese JGBs. So, this brings me onto the second point…

Chart 4: There is decent probability that both stocks & bonds disappoint

Stocks & Bonds Future Expected Returns Source:  Ray Dalio & BridgeWater

Since we are going through “the mother of all easing cycles”, the other side of the saga could be a disappointment for all investors, both those who favour stocks as well as bonds.  Let me first say that as long as the artificial easing continues, noir just by the Fed, but by all other major central banks, things could stay in the current goldilocks environment.

Therefore, these warnings do not necessarily mean that both stocks and bonds sell off tomorrow, but they do imply that returns over the next decade could be very low indeed. According to Bridgewater Hedge Fund, Chart 4 shows that when adjusted for inflation (if you believe the government data), risk-weighted average expected return for both stocks and bonds could be just 1% per annum. That is not only below average, that is actually at the lowest level in modern history.

I think none of us are exactly sure how the end game will play out, as central banks pull back on their easing programs and credit gets tighter, but one thing is for sure. A wise man once said that on Wall Street, there is always a bull market somewhere. Since returns have already been superb, the question is which asset class will benefit next?

Explaining My Portfolio

I have received quite a lot of questions regarding the newsletter portfolio as well as my major holdings. In this article I will try and explain some of the basic points of what my asset investments are, as well as what is and what isn’t on my watch-list.

However, before I continue I would like to say to all those who subscribe and follow my portfolio: you shouldn’t do what I do. You shouldn’t listen to me or anyone else on the internet / tv / radio. There is a particular reason why I hold various assets and these reasons might not make any sense to you. You should buy and sell assets which make sense to you. Therefore, do your own research so that you can win (or lose) your own money. That is always the best way.

Chart 1: Where does one see value in current global macro environment

Source: Internet

The question I recently receive is why do I chose to invest into “strange” assets such as Silver and Sugar? Wouldn’t it be just smarter to own the SPY ETF? Well, there are variety of reasons. Firstly, they are not strange. I believe these assets are extremely cheap on historical basis, unlike the SPY ETF, particularly when adjusted for inflation. And with the on going global currency devaluation, eventually the price of everything will rise and these raw materials will not be an exception.

Away from the fundamentals and the price valuations, I chose to own Silver and Sugar because these assets are some of the most volatile in the world. Historically, both Silver and Sugar tend to move up and down with incredible buying and selling pressure. You see, I am young and therefore my risk appetite is high. I want to get rich and that is why invest.

I understand the risks involved, therefore I am prepared to live with the volatility and huge drawdowns. I understand that its very common for Silver or Sugar to experience bear markets of 50% or more every several years, the same way it is just as common for Silver or Sugar to rally 3 to 4 fold in a very short space of time (sometimes even more in only a couple of years).

Chart 2: Silver’s bear market is now ongoing for almost 3 and half years 

Silver Source: Bar Chart (edited by Short Side of Long)

I started to accumulate Silver once again as it sold off about 50% from its record highs in April 2011. Initial purchases were conducted in late December 2011 and July 2012. However, a bear market follow through occurred in 2013, as Gold crashed. That did not stop me, as I continued to accumulate Silver first in May 2013 and later in July 2013 and January 2014. Silver is by far my largest holding, at times reaches over 80% of my NAV. Therefore, keep in mind that my other positions are at times, almost irrelevant.

Despite the fact that Silver’s bear market is now almost 3 and half years old, and has declined by more then 60%, my average entry is only a few dollars above the current level. However, I am not so sure that the final low is in as of right now. Therefore, I’ve recently placed a hedge on my overall long position. If I am wrong and Silver starts to take off above $22, I will immediately take the hedge off.

Chart 3: Sugar is one of the most disliked agricultural commodities… 

Sugar Source: Bar Chart (edited by Short Side of Long)

Sugar is the other commodity I also favour in coming years. It is not as easy to buy-and-hold Sugar as it is with Precious Metals. The commodity tends to fluctuate from a backwardation to a contango and back again. Nevertheless, I started to accumulate Sugar around 50% sell from its recent 2011 highs as well. Initial purchase was conducted in early December 2012. Not the best of purchases I must admit, as the price just slowly rolled down for months (haha!).

However, I continued to accumulate the soft commodity in August 2013, December and January 2014; and once again only a couple of days ago. Keep in mind that while my average entry looks pretty decent in the chart above, Sugar has been suffering from a contango in recent quarters, so the drawdowns are a little bit bigger.

Chart 4: Uranium is one of the most oversold industries in the world… 

Uranium Source: Bar Chart (edited by Short Side of Long)

With the global stock market screaming ever higher, mainly thanks to the S&P 500’s record breaking run, it is very difficult to find value in shares. I know a lot of “experts and gurus” on CNBC and Bloomberg will disagree with me, but I’m in charge of the capital and I judge value my own way.

I also understand that certain investors single out various European or Emerging Markets opportunities with low valuations. Others focus on Taiwan and Japan after a prolonged secular bear market, and a few are even nibbling into Chinese & HK shares despite the potential property cycle risks.

Personally, I have chosen to invest into the Uranium sector during the recent sell off in May of 2014. Down more then 75% from peak in early 2011 and on track for a forth consecutive annual loss, this is probably the most oversold and least liked industry.

Chart 5: Australian economy has not suffered a recession for 23 years!

Australian Dollar Source: Bar Chart (edited by Short Side of Long)

Australian economy has been in a mega-boom since the early 1990s, when the country saw its last official recession. After 23 years of constant growth, we have a whole generation of young people who believe that “property prices can never fall” & that “good jobs and highs salaries come easy”.

Could they be wrong? Could Australian growth falter after a 23 year record run? Could the Australian property market finally correct? And if any of those occur, would the RBA “stimulate” the economy through global monetary policies by following the likes of Bernanke, Yellen, Draghi, Kuroda, King and the crew. You know the drill… cut rates, print money and devalue the currency!

This is what I have been betting on since late 2012, when I initiated my first large Aussie Dollar short. It was quite a big contrarian bet at the time, as hedge funds held record net long positions believing in further currency appreciation. Several weeks ago I opened another smaller short, adding to my existing position.

To be quite honest, despite a strong USD rally in recent months, Aussie has held up well so far and I am not happy with my new position. Therefore, I’ve put a tight stop loss at 94.00 cents for the 2nd trade, initiated recently.

Chart 6 & 7: I do not want anything to do with US stocks or US bonds!!!  

Future Expected Stock Returns Future Expected Bond Returns Source: Ray Dalio & BridgeWater

There are many other trades that I hold and have held in my portfolio over the years. But they are very very small compared to my NAV and therefore quite irrelevant for this article.

Now, let us focus on some future prospects. Let me just say that since you are smarter then I am, you probably see more opportunities around the world then I would. While I could sit here and number variety of trades I am currently looking at, I will just focus on a few existing and new ones.

Let me first say that I do not see any value in the broad US stock market or the US government / junk bond market right now (refer to Chart 6 & 7). This could change if the prices were to decline meaningfully. However, with a recent powerful bull market in both of these assets, future expected returns could be a real disappointment in the coming decade… at least according to Ray Dalio and his BridgeWater team (thanks for the charts).

Chart 8 & 9: I am closely tracking Russian stocks & Gold Mining Juniors

Gold Mining Stocks 

Russian Stocks  Source: Bar Chart (edited by Short Side of Long)

Personally, I continue to hold both Gold and Silver in high regard. If prices do eventually go lower, my plan is to add to my current positions and start a new position in Gold as well. I will use new cash inflows as well as profits from the current hedges. On the other hand, if the price breaks out on the upside, I will still continue to add positions as I build my overall portfolio around the PMs theme. The same can be said with Sugar, but just on a much smaller scale.

Two assets I have not yet purchased in a meaningful way are Gold Mining Stocks and Russian Stocks (I do own a small position in Russia equities from early March of this year). Both of these indices are extremely cheap and could outperform in superb fashion in coming years. However, I am still waiting patiently on both, because further selling and lower lows could be in the cards. I believe the main catalyst will the end of the US Dollar bull market and we are just not there yet.