Research Watch

Book your profits, the ASX looks stretched but value in small caps, dumping our dollar, Soros and the pound, and a bad bonus tip.

Summary: This week’s Research Watch includes a range of investment snippets, including El-Erian says book your profits, the ASX looks stretched but value in small caps, dumping our dollar, Soros and the pound, and a bad bonus tip.
Key take-out: Pimco’s Mohamed El-Erian says the sharemarket is artificially high, and it’s time to book some profits.
Key beneficiaries: General investors. Category: Portfolio management.

As stockmarkets continue to climb, strategists are worried the enormous gains are becoming unsustainable. This week Pimco’s Mohamed El-Erian advises investors to take a breather, book some profits and wait for a better re-entry point. Indeed, Global Macro Monitors thinks the All Ordinaries is the world’s most overbought market, though Citigroup still sees value among our small caps. Money managers take notice as some of the largest holders of Australian bonds unwind their positions, while George Soros, the man who famously ‘broke the Bank of England’ in the 1990s, is having another look at the pound. Elsewhere, gold is in a death cross, Australia is one of the easiest places to become a millionaire, and Goldman Sachs bankers offer teary tips for breaking news of a bad bonus. Finally, Jeremy Grantham’s excellent talk on managing progress in a world of finite resources.

El-Erian says book your profits...

“‘There are those that believe that high asset prices will pull up the fundamentals, and then everything will go higher,’ [Pimco’s Mohamed El-Erian] said. ‘And then there are those that say, ‘Wait a minute. I’ve seen this move before. What ends up happening is asset prices come down to the fundamentals, so I’m going to take some risk off the table. And I’m going to do it gradually.  Because central banks are not gonna exit any time soon.’ ‘We would be in the second camp,’ he said. ‘We think that prices are artificially high, that maintaining them here is going to be hard as central banks become less effective, and that it’s time to book some profits. It’s time to wait for better entry points’. But this doesn’t mean that he thinks prices will collapse any time soon. ‘This is not a 2008 situation,’ he continued. ‘This is not a Lehman moment. But this is rather that prices have gotten way ahead of what policy can deliver.’” (Daily Ticker, February 15).

The ASX looks particularly stretched...

(Click here for the full-size graph)

“The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price moves. The RSI moves between zero and 100 and is considered overbought with a reading above 70 and oversold when below 30. Note the RSI can sustain an overbought (oversold) reading in a strong up (down) trend.” (Global Macro Monitor, February 15).

Although there’s still some value in Australian small caps...

“The relative underperformance of the small caps in the past month has seen the PE spread between the large caps move back to parity, suggesting some top down value in the small caps again.” (Citigroup, February 19).

Mrs Watanabe is dumping our dollar...

 “Japanese investors are selling record amounts of Australian debt, betting a rout in the yen that sent it to a four-year low against the Aussie dollar has run its course. The biggest investors in Australia’s bonds cut holdings by 652.6 billion yen ($7 billion) over November and December, the most in Ministry of Finance data going back to 2005. … A second reason investors are selling Australian bonds is that the flight to quality caused by Europe’s debt crisis is fading. Australia, which has stable top-level debt rankings from Standard & Poor’s Corp, Moody’s Investors Service and Fitch Ratings, benefited as investors sought havens amid concern one or more European governments would default. … ‘The recent rapid improvement in financial conditions in Europe means “normalization trades” suddenly came back in vogue -- in other words “safe haven” assets were dumped for “growth” assets,” Robert Rennie, chief currency strategist at Westpac in Sydney, wrote in a report this month. … ‘Japanese flows into Australia have historically moved the market,’ said Annette Mullen, Sydney-based head of rates in Colonial First State Global Asset Management’s fixed interest and credit team… ‘There’s still a reasonably wide range of views of what’s going to occur with the BOJ over the period ahead. For me that’s something that we managing money in Australia need to continue to remain on top of, because it can impact a lot of markets in Australia.’“ (Bloomberg, February 18)

And Soros is going after the pound—again...

“Ask some of the world’s biggest hedge funds where they are watching for the next big shift in global markets and many will point to the same place: sterling. Having made billions successfully shorting the yen since November, top global macro traders – funds such as Soros Fund Management, Tudor Investment Corporation, Caxton Associates and Moore Capital – are increasingly looking at the pound. They see compelling similarities in the UK’s predicament to that of Japan. … For hedge funds in particular, it is the imminent arrival of Mark Carney, current governor of the Bank of Canada, as governor of the Bank of England that has pricked real interest. Mr Carney has made it clear that he would be more willing to tolerate elevated inflation in the UK than his predecessor, Sir Mervyn King, and some believe he may even go further when he takes office. Any echoes of ‘Abenomics’ – the policy of aggressive growth-targeted monetary easing being promoted by Japan’s new Prime Minister Shinzo Abe – are being listened for carefully.” (Financial Times, February 18)

Beware gold’s death cross...

“Gold has dropped below the $1,600 an ounce level ... as traders of a technical bent note a potentially significant indicator. The yellow metal’s 50-day moving average (blue) has dropped below the 200-day moving average (red), an occurrence known rather portentously as the ‘Death Cross’. It is supposed to herald further downward momentum.” (Financial Times, February 20)

How long ‘til you’re a millionaire...

(The Economist, February 11)

Bad bonus? Withdraw it and weep...

“If you’re a banker with a bonus of disappointing dimensions, here’s how you can make matters easier for yourself. … Anton Kreil, the ex-Goldman Sachs trader turned trader-teacher, suggested that the best way to communicate a penurious bonus to a spouse would be to withdraw the bonus from the bank and to present it to him/her in bundles of notes. ‘Money always looks like a lot more when you actually see it physically,’ said Kreil. ‘If I had a disappointing bonus, I’d withdraw it all and give it to my wife for her to count.’ If you’re bonus is bad, you should try to evince empathy in your spouse, advised Lex Van Dam, another ex-Goldman trader. ‘Come in with tears in your eyes and look like you’re about to faint,’ he said. ‘She’ll immediately know and you won’t have to explain too much.’” (eFinancialCareers, February 19)

Audio of the Week: Progress in a resource-constrained world...

Jeremy Grantham explains how the increasing costs of resources and climate change will affect the world economy.
Graph for Research Watch

(BBC, February 18)

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