Scope either way, still suggesting be a bit defensive
Victor Hugo
Last month it looked like time to take some off the table. A Katrina hurricane and its costs and pressures on the US - as well as a $10 oil price spike -- as well as natural gas and heating oil costs rocketing in the US - seem not to deter the markets yet.
Pity South Africa has not come forward with aid to Uncle Sam as far as I have heard. Even South Korea and other poorer countries have contributed gestures. One never knows when we have to help each other. And the US has been generous to others in the past.
Ask almost any market professional and you'll still hear expectation of dips on the JSE and world markets in the next month or two, perhaps longer. It's interesting that thorough analyst research generally seems to assume there are no market crashes around the corner and that the only useful debate is how big or whether a dip next. That can also be a warning, if you are one of those odd contrarians like me.
Notice the typical logical qualifier the no-crash investors and dump sceptics have to add though …They say that if there are more Katrina- style hurricanes -- or there are more supply pressures on the oil price- markets can sell aggressively as global slowdown or recession spectres rise. Emerging markets can typically fall even harder than the ones in developed countries e.g. 40% compared to a typical 25% when a dump comes. But that will be despite reasonable value in p/e terms - not because of blatant "overbought" vulnerability.
Yet the next 7 weeks are still big-hurricane season for the Gulf of Mexico. I have also mentioned questions about US growth prospects before -- and the situation in Iran and its oil-nuclear leverage. And bottom line, even before the Katrina damage to some 25% of US oil supplies, there are global oil shortages -- as refining capacity fights with increasing appetite for cars in India and China. Until new supply and refining capacity increase - demand exceeds supply.
A $100 oil price? Feasible. After all, I heard from a research team yesterday that the price of oil at $64 is only at about $50 in 1960 inflation- adjusted terms - not that high relative to its peak at about $80 in 1981. So a $100+ oil price in today's dollars is feasible, even if not likely short- term. Yet $100 is not just for doomsday prophets and timid market watchers any more. I remember calling charts counting to a $58 oil price in a year in May 2004, then in May this year I revised this up to $90 in 2006. I was called a doomsday prophet.
Anyway - here we are at the $63- $71 Brent IPE (NYMEX Dec futures) range. The US$ first weakened after Katrina and has rallied as the G7 countries look after their own and US interests and traders jump aboard a short-term stronger dollar view. Watch the Euro 121-126 range - the momentum profile may just be setting up for some more short term US$ strength e.g. to Euro 115 on a break of 121. A stronger dollar for a while would help the confidence game that the US has become a master at playing. Vice versa, above 126 though, lookout just a little more carefully for signs of a US$ and global market shock.
So what to do? Sit on hands a bit longer before adding to the table. One is either defensive wary and has some cash on hand looking for buys now. Or one is worrying and bullish and full weight in the markets now. The defensive wary don't want to miss the next leg up that seasonally often happens late in Q3 or a bit into Q4 and they are also wondering what will justify getting more defensive. The blissfully bullish, risk losing some of their gains. Well - investing has never been worry-free.
The best I can say is don't expect a dump until it yells instead of whispers. But if a dump comes - have a plan to protect some profits, make cash or ride it through. Just don't sell at the bottom of dip. That's what hurts the most. Almost as much as having to hold- and wait- and hope - in a multi-month or multi- year bear if a surprise madam bear comes again.
But perhaps it may be wise to wait a bit before adding back to full weight. Markets may still be susceptible.
There are plenty of positives though: the three- and six- and 12- month trends of industrials, financials and resources are up until they turn. It's seductive to argue dip yes, dump or bear no. And for now, the US and Asia game muddles on, debt and property froth and deficit and Katrina and all. And it looks that even if US and global markets dent the JSE painfully, basic growth prospects for SA are okay - so the JSE can be resilient from dips or dumps.
There'll always be risks. But while major trends are intact, strategy has to be buy the dips and hold value through the worry, provided the swings and portfolio structure stay within your risk tolerance.
Trying to avoid bears and dumps is useless to those who don't have a consistent proactive strategy. A superior risk/ return proactive strategy can be bought in the right fund and in the right mix of investments.
To turn to brighter subjects, weary gold share prospectors are noticing the $Gold price higher now at $446.60 even though the US$ is tap-dancing and looking to go stronger or nowhere much. Yes, I am seeing some quite good technical evidence for a gold run soon - as long as $Gold London PM Fix holds above $433.20. Traders will yell breakout bull above $448.70, counting $470.00 or $502.50 in the seasonal candidate for a run to Christmas. And if the Rand fades a bit with a US$ rally - the fun could be on as fund managers scrabble to buy a few more gold shares, recently out of favour.
Before gambling with the piggy bank and buying only gold shares, remember that there are powerful interests keen to protect the US$ and dump gold. Credibility for gold is the last thing they want.
Yet as $Gold trends higher as recently and the US$ is stable or stronger - it is often an early warning signal for a gold run. Have a look at the start of the 2001 run - $Gold anticipated the weaker US$ by some two months. $Gold London PM went from $255.95 to $455.75 in 44 months. Also, cycle evidence and technical count patterns argue that any US$ rally will not last long.
Before a breakout and trending, it's too soon to say for sure - but there is tentative evidence in recent weeks of yellow metal buying, not just US$ weakness fuelling the higher $Gold price.
Notice the message for broader markets that just maybe $Gold is giving an early hint of a confidence dip or dump. Be careful though. As suggested in the heading, there is scope either way. Markets are in uptrend but are maybe susceptible.
Forecasts are entertaining - but don't invest in a forecast without a jolly good return/ risk strategy.
10 September 2005
Victor Hugo
Vega Asset Management
vhugo@vegacapital.co.za
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