THE FOLLOWING ARTICLE DOES NOT CONSTITUTE A SOLICITATION TO INVEST IN ANY PROGRAM OF CERVINO CAPITAL MANAGEMENT LLC. AN INVESTMENT MAY ONLY BE MADE AT THE TIME A QUALIFIED INVESTOR RECEIVES CERVINO CAPITAL'S DISCLOSURE DOCUMENT FOR ITS COMMODITY TRADING ADVISOR PROGRAM OR DISCLOSURE BROCHURE FOR ITS REGISTERED INVESTMENT ADVISER PROGRAMS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Our eleventh month of trading ended up strongly with a positive return of 1.77%, our best monthly number since inception as a result of some well-timed trades in the currencies. We like to think this bodes well for the holiday season and hopefully none of our clients’ children will be left without presents due to poor performance!
Jokes aside, market conditions and perceptions continue to diverge from the reality embedded in the economic data that is doled out each week. At the very least the data picture is mixed with the ISM Manufacturing number, released on December 1st, unexpectedly shrinking for the first time in more than three years, while the ISM Non-Manufacturing report, released December 5th and which reflects activity in the service sector, showing evidence that US economic growth was not slowing.
The various business news outlets are also emitting conflicting interpretations on economic data. Take a look at Forbes.com on November 29th and the spin is decidedly favorable. In an article entitled “Better Than It Seemed,” the author writes positively “Fed Chairman Ben Bernanke may be on to something. A day after he indicated the U.S. economy was stronger than investors appeared to think, government data arrived to support his argument.” This is posited on the same day Bloomberg reports that “The U.S. economy may head into 2007 in weaker-than-expected shape after reports showed October new-home sales fell for the first time in three months and stockpiles at companies jumped last quarter.”
Who is right? I guess it depends if you are looking at the stock market or the bond market, or how deep you want to dive below the headline numbers to get at the economic undercurrent. Either way, in our opinion more and more evidence seems to validate our long held idea of a substantial slowdown (that is, recession) in 2007. At the very least it would seem to indicate a cyclical peak in corporate earnings. Not only are economic statistics pointing in that direction but it would seem that even the inside corporate players, the ones supposedly with the best knowledge of future profitability of their corporations, are also beginning to be heavy sellers.
In the meantime, world headlines are filled with negative stories: a civil war brewing in Iraq (at least according to one channel I watch), ever growing current account deficit financed by China and oil exporters, and continued rumblings about the supply of energy from Russia. Yet in this volatile and risky world investors in the equity markets will point to soaring oil prices and a nuclear test by North Korea as “exogenous events” which the markets have barely responded, and then blithely focus their attention on mega mergers and private equity acquisitions that are taking place.
The result is that S&P 500 options have only priced in a 1% move up or down over the next month. Yet, markets have never been good at spotting and pricing political risks and at some point expectations of low volatility will turn out to be wrong.
I would argue that the massive complacency of market players, measured by one of the lowest level of volatility (VIX) in more than 10 years, is certainly misplaced. The bond market seems a bit more worried about future growth and so are forex players who have pushed the dollars to new lows for the year. Gold is following a proven inverse correlation to the greenback as it becomes more apparent that no matter who is going to be right, the bullish pro-growth camp or the bearish recessionary club, that should be negative for the currency of the world (USD) and a solid, yellow hedge (gold) may be in order. Certainly the Chinese, the Arabs and the Russians (when they are not too busy poisoning or shooting anyone who doesn’t see it their way) have all indicated a desire to diversify their foreign reserves away from the dollar.
Should a recession indeed occur next year and possibly weaken crude oil and other energy sources, I would view such a price break as a great opportunity to accumulate serious positions. After all, over the long term the world demand of more and more of a commodity of which there is less and less of is normally a characteristic of a buyer’s market… at least until we find out how to use anti-matter like they do on Star Trek.
Overall my investment tactics don’t change: look for cracks in the thesis of the majority, use common sense, diversify your plays.
Arrivederci!
-Davide Accomazzo, Managing Director
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