Thoughts from Victor Sperandeo

After a large bull movement like the one we have just had, the odds for further price appreciation decrease. However, that does not mean that one immediately needs to sell – investors need only become increasingly more critical of positive news, and more watchful for negative news.

In the words of Victor Sperandeo:

“…the median extent for an intermediate swing in the Dow during a bull market is 20 percent. This doesn’t mean that when the market is up 20 percent, it’s going to top; sometimes it will top earlier, sometimes later. However, what it does mean is that when the market is up more than 20 percent, the odds for further appreciation begin to decline significantly. Thus, if the market has been up more than 20 percent and you begin to see other evidence of a possible top, it’s important to pay close attention to that information. ”

– The New Market Wizards, Schwager, 1992

After a 30% up year for the S&P 500, this market move is growing old. Though there are no immediate signs that the move will end, going forward into 2014, investors will need to be cautious and wary of signs of a top.

The Two Sides of the Taper

If the “taper”, i.e., the tapering of the Federal Reserve’s Quantitative Easing program, occurs soon, it has positive implications for the USDJPY. This is because Japan is the probably the only country out there that is using quantitative easing with the express goal of lowering its currency, and it is doing so on a scale that much larger than any other country. Coupled with those two factors, the belief of traders that Japan will be successful in driving down the yen, is further driving down the yen.

If the taper does not occur soon, however, it will mean that Hong Kong will come under greater pressure to release its peg to the U.S. dollar. While inflation is slowly rising here, it is rampant in Hong Kong. Eventually, Hong Kong will need to break this tie. But that time will come sooner rather than later if the US continues to devalue its currency via Quantitative Easing.

More signs of shipping rebound

All signs are pointing towards a shipping rebound. This has become my most attractive investment idea. I will have to find shipping companies that are:

a) trading at significant discounts to book value

b) profitable, or have a high chance of converting from unprofitable to profitable in the near future

c) Geographically distributed. Unless I can get some kind of edge in determining in which areas the rebound in trade will be most pronounced, I may be best suited to distributing my picks to reduce my downside. For example, I could go with an Asia bias in the shipping portfolio. However, this would leave me with too much exposure to a pop in the Chinese and Hong Kong real estate bubble (which would decrease local shipping for Iron Ore). I would likely have to do hours of research to reduce these kinds of risks in my stock selection.

A Victory at Doha?

The Doha round has reached a successful negotiation. Though the agriculture issues have NOT been sorted out, this IS a momentous occasion. 

Until now, there has been no central arbiter of globalization. Globalization was allowed to proceed more or less unchecked during the 2000’s. This culminated in a level of interdependence that allowed a bubble in the American real estate and stock markets to have profound implications worldwide. 

In the years follow 2008, we have seen a total collapse of world trade. In an effort to restart their economies, many (most?) of the world economies are now printing large sums of money. However, this may spark protests of a “trade war”, and indeed, the direction I had expected this to go was a more and more protectionist stance in the major world economies. 

Now that the WTO has some credibility as an international arbiter, there is hope that this will be averted. In addition, there is more reason to believe that global trade will resume the growth trajectory that it has been on for the past 20 years. 

Thus, a speculation on the global shipping industry looks like a solid proposition to capitalize on the resurgence of global trade from the doldrums of the 2008-2012 period. Dryships, (DRYS), a company that has suffered immensely during the downturn, is my initial consideration, though I will have to do much more research over the upcoming days to find ways to best take advantage of this trend. Following a rationale of “invest first, investigate later”, I have already begun to build a position in DRYS, and I am investigating the financials of several shipping and ancillary businesses.