This is a guest post from Nicholas Marriot who has recently been on a trip throughout Europe and offers a unique perspective from a macro trader.

Value can be had by peering inside another trader’s mind to see what they are thinking and that is what you’ll find here. Nicholas can be found on twitter here, @shlick. Please give him a warm welcome.

Investment Thesis…..

The US will very likely embark on a program of “quantitative easing” or QE at the next Fed meeting in early November. What QE entails is printing a lot of money and using it to buy long instruments…ie ten and twenty year treasury bonds, mortgage backed securities etc. The purpose of this program is as follows;
1. To drive down long rates, particularly mortgage rates to help clear the housing inventory …or at least to prevent prices from falling further.
2. To increase the attractiveness of loaning money to/by consumers and small business so as to increase consumption and business activity.
3. To discourage savings (and encourage consumption) by reducing rates on deposits to zero across the curve
4. To try and get some asset inflation going to offset deflation in the consumer price index.
5. To drive down the value of the US $ by debauching the currency.
6. To give them negotiating leverage with the Chinese by devaluing China`s enormous holdings of US Treasuries

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This weekend there was a meeting in Seoul of the G20 at which there was an attempt to prevent a currency war from really getting going. That meeting failed…there were pretty words spoken but the surplus countries. China, Korea, Germany etc would not agree take concrete steps to increase the value of their currencies against the US dollar. Currently the US is running a humongous trade deficit. If exports and imports were in balance the US would have more than 3% additional GDP…so that there GDP growth rate would be around 5% rather than less than 2%. They cant reduce unemployment with a sub 2 % GDP growth rate. Nor can they reduce their fiscal deficit. So they are going to do what they have to do which is drive down the value of the dollar against other currencies by flooding the world with US dollars.
In order to have any impact QE will have to be huge….at least a trillion $s and probably more.
So what is the impact of this program on the stock market
1. Hard assets like gold, metals and to some degree oil …will increase in value as people flee paper money. So stocks like BHP, RIO, G, GLD,TCK.B,  XMA etc should benefit
2. Interest rates will fall and any investment having a good safe return will go up. Oil unit trusts like AET.UN, COS.UN or ZAR.UN look attractive because the underlying commodity will rise and interest rates will fall.
3. The US stock market will go up because QE will result in asset inflation as people flee dollar denominated investments for stocks. Further a decline in the dollar will flow through to the bottom line of the big multinationals like IBM, MCD, INTL, CSCO,JNJ etc etc.when the repatriate their overseas earnings.
4. ETFs of foreign stocks priced in US dollars will go up as the value of the US$ falls so ETFs like EWG, EWZ, FXI and EPI should benefit
5. Because QE will reduce rates and drive up the price of bonds banks will suffer. Instead of lending US banks are investing their deposits in US treasuries and are doing OK by paying the depositors next to nothing. QE will reduce their return on the bonds they buy. So US banks should be avoided as should CDN banks with big US banking operations like TD and RY.
6. The value of the CDN $ will continue to rise against the US $. This will hurt CDN manufacturers…if we have any left, but Interlisted stocks like BCE, T and TRP with good returns should benefit because the currency gains plus the capital gains plus the dividends will make them more attractive to US buyers.
I expect to go to a 90% long position over the next few weeks. I’m looking for dips to layer into a portfolio of solid blue chip yielding names….no high beta small cap stocks. I fully expect there to be a wash out at some point in November. Possibly with the SPY returning to its 20 moving average. This is to be viewed as an opportunity to buy assets similar to the ones listed above..

5 Responses to “Inside the Mind of a Zentrader Reader”

  1. Ben Says:

    Thanks for the insights on the macro picture… great summary!

  2. TraderStewie Says:

    great read! thnx nicholas!

  3. Jason Says:

    Always nice to see someone else call a stock attractive when its been on your mind for a while. Thanks!

  4. nicholas Says:

    Jason…which stock???

  5. Tips to stock trading » Blog Archive » Ending of QE2 Will Have Consequences Says:

    […] stocks incur a significant pullback. Before we get to that, I want to revisit his previous post Inside the Mind of a Zentrader Reader that I posted back in November, to see how accurate he was in his forecasts so you have something […]

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