King Cash

|
Includes: ERY, EUM, FXP, GLD, GREK, RUSS, SPXS
by: Box Investment Group

Summary

Plunging oil prices, rising market volatility, surging global debt: they were all here during 2008 crisis.

As the Federal Reserve raises interest rates, dollar will strengthen up and emerging economies will suffer.

Worldwide equity markets are entering in bear mode.

Headwinds for commodities will be intensified.

Risk reduction is the major investment priority.

2016 is making a noisy entrance, by pushing financial markets downwards and bringing uncertainty to investors. Concerns are rising in several markets which are monitored by Box Investment Group. In this essay, I will share my approach to these markets as well as my investment thesis on each segment.

US stock market

  • Dow Jones moved from lows of 7.000 during 2009 crisis to 18.000 in 2015 without facing any major correction.
  • From December 2015 on, lower lows and lower highs appear for Dow Jones.

A definite bearish sign.

Sentiment indicators (that is, the mood of investors toward a market) darkens as the market started to tumble. Additionally,

  • FED appears decided to continue raising interest rates, although in a slow pace.

Interest rate raising will result to a stronger dollar. Taking into account ECB's decision to continue easing and the fact that EU problems are far from being resolved, a strong dollar seems like a sure bet. Increased debt costs and reduced value of global sales in dollar terms will lead to:

  • Lowered earnings for US companies

US stock market is not a place to be in 2016. (Way to profit: Direxion Daily Large Cap Bear 3X Shares: SPXS)

Rest of the world

Strong dollar brings us to the next chapter, national debts. Most of the world is heavily indebted, in US dollars. In case of dollar appreciation, capital requirements for debt repayments will appreciate, too. Especially for emerging countries. This is an alarming signal.

A slowing US economy means fewer imports by Brazilian, Canadian, Argentinean and other companies based in emerging countries. In this case, less trade means continuous depreciation of commodities, their main export product. As commodities, the engine of emerging economies, will head lower, emerging markets will follow. (Way to profit: ProShares Short MSCI Emerging Markets: EUM)

  • Commodity producing emerging markets will suffer

Chinese stocks have been a successful bet for the last two years. As Chinese government was dedicated to boost its rising economy by openning the market to international investors, as well as, by the recently earned capitals of the increasing local middle class, it undertook several initiatives which supported an upward trend for Chinese stocks.

Between impractical circuit breakers, weaker economic data, stronger capital controls, and renewed currency confusion, China has turned global investors, uneasy if not nervous, initiating a panic selling of Chinese stocks.

  • The latest reports confirm China's economy is slowing.
  • More downside is likely for yuan.

And until China explains its intentions, we can't know for certain how far these moves will go... or how long this turmoil will last.

While I still believe Chinese stocks have incredible upside over the next five to seven years, managing risk is the best option for the moment.(Way to profit: ProShares UltraShort FTSE China 50: FXP)

A slowing Chinese economy means fewer imports by Chinese companies, and less trade with Australia and New Zealand. This hurts their currencies, as China's demand for Australian and New Zealand dollars decreases.

China's pain will continue to strike in places that might not be the first to come to mind. Investors will do well to keep this Chinese relationship in mind when investing.

Europe

The ECB's program has benefited Europe primarily through the weakening of the Euro to improve competitiveness. But the improvement in European exports may be unsustainable.

First, weakness in emerging markets affects around 25% of Euro-Zone exports with the greatest effect on Germany, France, Italy and Spain. China's slowdown and rebalancing towards services and consumption will be detrimental to European exports of capital goods. Second, the Euro-Zone has a current account surplus of 3.7% of GDP, the largest in the world. This is unsustainable because it is fuelled by insufficient domestic demand and high unemployment. It requires trading partners to run equally large current account deficits. Other nations are unlikely to accept European neo-mercantilism and continue to indefinitely absorb European surpluses.

• European equities & Euro to stagnate

Russia

Syria and Ukraine were certainly in the center of geopolitical chessboard. Both under the prism of questioning Russia's sphere of influence. Ukraine turned towards EU and Assad's regime went to fire after warfare with ISIS and West imposed sanctions.

Additionally, US took no initiatives when OPEC decided to open the oil pumps and kill US fracking. All this looks like aiming to Russia.

Putin responded by invading Crimea, entering to battle with ISIS and challenging oil smuggling Turkey. Oil (Russia's key export product) is below 30$ p.b. Adding sanctions to our considerations, we conclude that

  • Russia's economy and ruble are heading down.

Nothing points that we are close to any solution in the geopolitical field or any angel kiss in economy. (Way to profit: Direxion Shares Exchange Traded Fund Trust: RUSS)

Oil

It first started with falling demand. China. Afterwards, it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

Slowing investment and construction in China, the world's biggest energy user, is "sending an enormous deflationary impetus through to the world, and that is a significant part of what's happening in this oil-price collapse," Turner, former chairman of the U.K. Financial Services Authority, said on Bloomberg.

The largest oil producer in the world, Saudi Arabia is in financial distress. For the first time ever, it introduced austerity measures. Russia is in distress, Venezuela is in distress. Iranian oil is also flooding the markets.

I year ago, I was talking about 30$ p.b. by 2015 end. Pretty good prediction. Maybe,

  • Oil is heading towards 20$ p.b.

Who knows. (Way to profit: Direxion Shares Exchange Traded Fund Trust: ERY)

Commodities

No need to say a lot. As the already discussed scenario begin to unfold, which means increasing producer needs (mainly to service debts) and reduced demand will be key headwinds for commodity prices. An an exception could be wheat as less acres are going to be planted in US at 2016.

Gold, SPDR Gold Trust: (NYSEARCA:GLD) and silver usually move opposite to dollar. However, for the last couple years, this correlation does not seem to be the case. I would simply put it that way. Precious metals are surely commodities, but its also a hedge against turbulence of any kind. In the past, the dollar value, as the major currency used in most business transactions in the world, and as the currency of the major industrial country, was representing the global economy. Today US is representing global economy in lesser extend as EU and China have larger share. Additionally, Euro is increasingly used in international transactions and yuan has been recently granted the reserve currency status. Today's uncertainty in geopolitical level might balance gold downtrend.

  • No move for precious metals is expected

Greece

Greece, Global X FTSE Greece 20 ETF: (NYSEARCA:GREK) has been in full-blown crisis mode for most of the last five years. The country continues to find ways to kick the can down the road. But it hasn't solved any of its long-term debt problems. This has resulted in weak market returns and cheap prices.

Newly elected leftist Greek Government kept the country within Euro currency through a negotiation frame which included hostilities from Troika side. One of the results of these hostilities was the massacre of Bank shareholders. Banks, flooded with non payable loans, were sold for pennies to new Investors. Bank equities' values remain evaporated. Although there two categories of equities that I see as great businesses exporters (excellent businesses pushed down by the overall trend) and refineries (which are enjoying an increasing spread between crude and final products), I still believe that

  • The Greek Stock market has not reached its lows, yet.

Cash

From the above, it is easily concluded that the main investing direction should be Risk reduction.

By far the easiest, safest, most certain way to reduce risk in an equity portfolio is to hold plenty of cash. The optionality of cash isn't priced in a large, liquid market. Right now the market is telling us to be careful... Making sure you have plenty of cash on hand is the best way to prepare.

Cash is a strategic asset that can be unleashed on any asset you desire. Its option value is substantially greater than the intrinsic value of Treasury bills or cash-savings accounts.

Disclosure: I am/we are long FXP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here