How to make money in this mess

In January of 2007, we made macro predictions about how to allocate assets for the coming 5 years in “Our Investment Calls for 2012.” Overall, our recommendations were pretty spot on as you can see from the table below.

One glaring area though where we were totally off is with interest rates. Boy, were we certainly way off in judging Bernanke. With inflation at ridiculous levels and the Fed hell bent on cutting rates even further, real rates of interest are currently negative and getting worse. Another speculative and large bubble is forming in “risk free” and other bonds largely due to the fact that institutional investors are focused on principal protection and have limited other options. Ironically, these “risk free” bonds are getting riskier by the day with the massive government nationalization/intervention effort.

Amazing today with gold breaking the US$1,000 barrier and oil at $111, S&P comes out and says that the “end of writedowns are in sight.”

Definitely some interesting plays can be made with this total disconnect. We are still very short US financials including investment banks, commercial banks, mortgage insurance companies, rating agencies, and select other targets.

January-07 March-08 % Change
Precious Metals
Gold $625.00 $998.10 59.7%
Silver $12.53 $20.73 65.4%
Energy
Oil $44.00 $109.79 149.5%
Natural Gas $6.50 $10.21 57.1%
Soft Commodities
Corn $408.25 $574.75 40.8%
Coffee C $121.65 $157.85 29.8%
Lean Hogs $64.97 $72.65 11.8%
Soybean $714.75 $1,418.00 98.4%
Cotton $54.92 $80.81 47.1%
Live Cattle $94.18 $90.98 (3.4%)
Wheat $464.75 $1,240.00 166.8%
Sugar #11 $10.91 $13.59 24.6%
Orange Juice $200.45 $118.50 (40.9%)
Cocoa $1,606.00 $2,922.00 81.9%
Interest Rates
Federal Reserve Target 5.25% 3.00% (42.9%)
3-month Libor 5.36% 2.80% (47.8%)
Prime Rate 8.25% 6.00% (27.3%)
15-year mortgage 5.51% 5.28% (4.2%)
30-year mortgage 5.74% 5.95% 3.7%
3-month Treasury 5.10% 1.33% (73.9%)
5-year Treasury 4.78% 2.45% (48.7%)
10-year Treasury 4.74% 3.48% (26.6%)
30-year Treasury 4.83% 4.40% (8.9%)
Source: Bloomberg
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It’s So Much Worse Than You Think

March 3, 2008 (Motley Fool) – Right now, things look bad. Every day, the economic news looks worse. Unemployment has been creeping up. The service sector is shrinking for the first time in half a decade. Consumer confidence is declining.

The stock market’s performance of late reflects this news. The S&P 500 is down nearly 9% year to date, and some stocks have been completely mauled. It’s just a couple of months into 2008, and InterContinental Exchange (NYSE: ICE), Garmin (Nasdaq: GRMN), and Baidu.com (Nasdaq: BIDU) have already all been clobbered by more than 30%.

You might expect that sort of monthly volatility from small caps, but these are well-known companies that had market caps of $10 billion or more. And none of them has really announced any bad news.

Things look so bad that you might think that there’s nowhere to go but up. But I think this crisis has just begun. Continue reading