The following is a macroeconomic view of the current market from fellow Canadian investor Nicholas Marriot, who primarily invests based on fundamentals when leading 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 to compare. I think you’ll find that he was spot on in his analysis. Nicholas can be found on twitter as @shlick if you’d like to follow him.

Below are some of the key points he was basing his investments on back in November:

  • Hard assets like gold, metals and to some degree oil …will increase in value as people flee paper money
  • The US stock market will go up because QE will result in asset inflation as people flee dollar denominated investments for stocks.
  • Because QE will reduce rates and drive up the price of bonds banks will suffer.
  • The value of the CDN $ will continue to rise against the US $.

Now for Nicholas’s current market analysis for the next three months (that I received on April 13th). So when he mentions that he’s moving to cash that would have been by the end of the day on Wednesday.

The key event will be the end of quantitative easing by the Fed on June 30th. Currently the Fed and foreigners are the principal buyers of US Treasuries (UST). The US government is running a ginormous deficit of about $100. billion a month and the Fed is creating money out of the air to buy more than 50% of the bonds the US Treasury are issuing. What happens when the Fed stops buying in June is now the big question. The fear is that long interest rates will have rise substantially to attract buyers to UST when the Fed bows out. It is possible that a 200 basis point up move in rates might be required to bring in enough new buyers.

Such an increase in long rates would have a big impact on the market. Stocks, bonds and particularly commodities would be hit hard. That this is a serious matter you can judge by the decision of Bill Gross the head of Pimco (the largest US bond fund) to sell all his billion $ UST holdings a few weeks ago.In fact he is now short $12.00 billion in UST.

The situation for the next three months at least.. is unknowable and fraught with risk. The market may move marginally higher over the next week or two based on good earnings but in my view these earnings are already reflected in stock prices so I dont see a lot of upside and the downside risks are major.

Therefore I am going to the sidelines and will sell all the stocks that I still own by the end of today.  I wish I had done it last week like I said I was.. but I didnt. At least I sold all my names, converted the proceeds to a few liquid ETFs and put stops on everything so the damage has been relatively minor.

The stock market and the US economy are in no position to handle a big increase in rates and I dont want to be in the market when that happens. There is likely to be a tremendous amount of volatility associated with this process, so the US dollar and gold will probably do ok as safe haven trades…but who knows.

I dont think rates will stay high forever but will gradually come down as the US and world economy slow so I am not selling my preferred shares. In fact if there are a couple of good panic days I may by more bank and utility preferreds. but not insurance company prefs..

I also think the Canadian stock market is going to be hit hard. Our market is very expensive compared to others…P/E of 20+ vs a 15 PE on the S&P500 and if commodities get hit watch out below. Goldman has closed the commodity trade they put on in December and right now I am starting to build a position in HXDs which will become larger if and when the TSX crosses its 50 day moving average.

As for everyone swapping Cdn currency for US just becuase were above parity, I think it’s a trap!  Currencies always tend to overshoot. David Rosenbergs morning letter is calling for $1.10 CDN/US in the not so distant future. At that level It might become compelling to scale into a US dollar position.

Related Posts:

Sentiment Charts Not in Bull’s Corner

Investment Theme – Vacation Stocks

Discovering Why Stock Markets Crash

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