Vad's Best Ideas

Continued from the previous post

US Dollar
The above opinion also suggests that fears of further dollar declines are greatly exaggerated - Dollar is still a "safe heaven" currency and in combination with potentially more stable interest rates in the US in the short term I don't see much downside for USD here. I am not sure if a sustained rally could be in the works for the greenback, but I certainly believe that the period of severe decline is over for immediate future. USD- long

Oil and other Commodities-short
If you believe in the recession outcome- Oil is a clear "sell" here, so is copper and other basic metals. Gold could hold up slightly better because of the fact that many use it as both an inflation and recession hedge.

China-short
I still think that China is a "bubble" and that it is going to burst sooner rather than later (6-12 months is my best guess). Overinvestment in capacity, obscene prices for real estate assets and equities, as well as the inefficiency of governance structure in general are almost certain to lead to an eventual severe slump. Chinese banks balance sheets are overloaded with bad assets and the simple fact that vast majority of the newly created Sovereign Wealth Fund will go towards shoring up the capital of the three large state banks, should have given all rational investors a pause. We have seen what happens when loans go bad en masse before (Japan fiasco) and while Chinese currency reserves could help protect the banking system from the complete eventual collapse they could also trigger a massive inflation spiral with potential social unrest as an outcome. FXI-short, FXP-long

India-selective buys
I think that India will hold up better than most of other emerging markets because of lesser reliance on the resource sector and higher dependence on the tech sector that should hold up better in the downside scenario. Banking sector here is of a higher quality but is more concentrated with only few solid names to play with. I

Russia- selective buys
My grim view of Russia turned slightly less bearish due to the fact that D. Medvedev has been in effect named as a "heir" to Putin. This is by far the BEST possible outcome for the West/Russia and will go a long way to supporting the equity markets. Real assets are certainly still way overpriced here, but assuming oil prices do not go back to $40 per barrel overnight - Russian consumers will hold up ok and thus eventual emerging market capital outflows from China could end up supporting Russian markets.

Brazil and Latin America- selective buys
These markets have lagged the other emerging market economies until recently and thus on the surface are less prone to severe declines. But it is also obvious that the leftist governments of Venezuela, Bolivia and Co will end up destroying what's left of their economies relatively quickly, so I would stick with more stable countries like Brazil or Chile. Mexico is likely to under perform due to its heavy dependence on the US in general and housing related industries in particular.

Japan-short
I don't know what can help Japan in the next 10 years unless some dramatic shift in popular sentiment occurs- population is on the decline, regulatory environment is not friendly to investors etc... The era of Japan is over and the economy will continue to contract in lock step with population decline.

Canada- short
Our neighbors are likely to be punished because of the deep dependence on US. Inflation has been held somewhat in check by stronger currency but that run is over now. I would look for stable/higher rates there combined with lower commodities prices.

In the next few days I will comment on my portfolio and continue describing my investment principles...

Trade safe and cheers,
Vad

Comments: View Comments |  Tuesday December 18, 2007