By Yaser Anwar, CSC of Equity Investment Ideas
In the first Monday Edition for 07, I’d like to talk about 1) US Markets- Recession, QQQQs 2) Commodities- Gold, Mining & Uranium 3) The NYX & NDAQ Pair Trade and 4) Asia & Germany
The 07 Take- Recession, QQQQs & Industrials
- The fear of recession has been a common theme in recent quarters. As some of the spillover from housing’s downturn drags on broader activity in 07, markets will need to look past some areas of weakness, as they reflect the lagged impact of a housing downturn that has already transpired.
- We have seen few confirming signs of recession, despite the inverted yield curve. As you know an inverted yield curve has often signaled that economic contraction is on the horizon. In fact, every recession since 1970 has been preceded by an inverted yield curve.
- However, prior yield curve inversion have occurred at much higher levels of interest rates and with a much higher bond default premium. Hence, we can derive that economic growth is still possible in the midst of an inverted yield curve provided that long-term rates and corporate default risk remain low.
- The Nasdaq has tended to register January highs in every year since 01. The Jan highs have either been the high for the whole year (01-02) or lasted for a long while (03-06). Furthermore, since 04, the QQQQs made a high in Jan, then corrected somewhat aggressively. Some of this was likely due to 1) profit-taking of the tech exposure that big investors had established during the preceding year’s 4th Qr rally.
- Moving forward, I see risk for companies most tied to industrial activity, especially machinery companies and materials producers. Given my expectation that the ISM will stay generally weak in the first part of the year, we can also expect weakness in Materials stock prices (thanks to commodity price concerns over ISM weakness) if history is any guide (see image below).
- Net investment demand for all forms of physical gold in 2005 was only $12 billion and a similar figure is expected for 2006. A healthy jobs report came out Friday and gold dropped $14+, testing the $600 level during the day. One of Wall Street’s best technical analysts sees gold surpassing $730 per ounce this year and $3,000 within the next ten years.
- However, Investors should keep in mind that Central banks’ gold holdings are the equivalent of about nine years’ worth of industrial and jewelry demand. Furthermore, Indonesia’s director general of mining said that the government hopes for a law forcing the mining industry to process concentrates in the country. Thanks to rising costs (analysts predict rising mining costs to continue in 2007) it has been difficult to find stocks with attractive valuations.
- Lastly, according to the Australian Uranium Association, nuclear power capacity is expected to increase by tenfold over 2006 due to the startup of five new reactors in India this year.
The NYX & NDAQ Pair Trade
On Dec. 29th, I analyzed NYX for my blog. A few excerpts-
- The roll out of Hybrid continues on track (to be completed by the end of December) and should enable incremental volume growth in 07 and 08. From the stock price it is clear that The Street’s confidence continues to grow in management’s ability to generate higher than initially expected cost savings as it integrates Archipelago and Euronext and further rationalizes its own business.
- The Trade: If I was an institutional trader I would- short NDAQ debt & hedge myself with credit derivative swaps. Furthermore, put on a pair trade comprising of a long position in NYX & short NDAQ (70-30% long,short) with a couple of LEAPS on NYX and buy NDAQ 27.5 March puts. NDAQ will come under pressure to make a bid for LSE, now that NYX is successful with its merger. With the recent positions taken in LSE, by HFs, being higher than NDAQ bid, NDAQ will be forced to pay up. Furthermore, With its deteriorating debt (recent debt rating cuts, tx to FITCH, vs. NYX hardly has any) NDAQ price will come under pressure, especially if we see a correction.
To read the full analysis click here
Global Macro- Asia & Eurozone
- Retail sales in Hong Kong accelerated by 7.4% in November. Low unemployment and a strong stock market caused consumers to increase their spending. Also, Hong Kong’s purchasing managers’ index rose to 57.4 in December vs 56.3 in November (highest level since April 00).
- The IFO business survey continues to surge to new cyclical highs. Germany’s strength is boosting optimism that the Eurozone will not be affected from slowing global growth. While I think growth in Eurozone will not be adversely affected, I do believe the appreciation of the Euro this year will weigh on export demand and restrain profit growth.
** Note: Global Macro opportunities are mentioned for my weekly institutional newsletter audience (which caters to analysts, fund managers, traders, bankers etc.) and this blog’s institutional readers who can take the risk and have the means of investing in foreign countries.
These opportunities cannot always be played by ETFs or any other funds, so if you’re an individual investor you can either 1) Invest in that foreign country by buying mutual funds there 2) Ignore it if you don’t have a broker that allows you to invest in foreign companies.
Please note investing in foreign countries is subject to currency, political and unforeseen risks- use your own discretion when doing so. Thank you