Financial Professionals


61 days remain in 2010


Let's look at the components of the capital markets, see where we stand ,and where they could be headed.

Back in early February, the equity market reversed a four week selloff and initiated a rally toward the S&P 500 Index high for 2010 at 1219.80 on April 26.  A reversal back in early September has initiated a similar rally that is targeting the April high.  Much of the rally's ability to extend the advance depends on the path of U.S. dollar.  Of particular interest, sentiment remains slightly more bearish now than in April. Long dated volatility in the VIX remains elevated, relative to the April levels.

Technology  - remains favored

  1. Void of concerns for rising input commodity costs
  2. Favorable exposure to the falling U.S. dollar
  3. Strong balance sheets

Financials - remains undesirable

  1. Loan demand growth absent; L shaped housing recovery
  2. Hoarding cash
  3. Put back mortgage and Basel 3 headline news risk   


Source: Bloomberg

The ten year U.S. Treasury peaked on April 5 at 4.0095%. Subsequent strong capital flows into Treasuries have pushed the yield well below 3%, to a low at 2.3302% in early October.  In recent weeks, a rebound in yields has unfolded, technically working-off oversold conditions while fundamentals suggest the creation of inflation will warrant higher yields.  I remain of the opinion that Treasuries are overvalued with the risk toward further yield rise.  However, I do not believe it is a Treasury bubble.

The Corporate Bond market remains the winner in an easy monetary policy, low Treasury yield environment. Corporate earnings remain resilient and balance sheets are in much better shape than governments and consumers.  The strategy "who is currently categorized as high yield but looking forward will move to investment grade" - those are the bonds to own.


Source: Bloomberg

Capital flows into commodity currencies (Canada, Norway, Australia) continue, as well as to emerging economies. G-3 nations are currently engaged in competitive currency devaluation war in which the winner will be the United States.  I expect the Bank of Japan to attempt to weaken their currency once again in the coming month.  The Chinese yuan is not appreciating fast enough to export growth from Asia to the developed world. The November 12 G-20 will have to address the Chinese currency issue in some way.

Keep in mind that over the past three years, the U.S. dollar has experienced its yearly high or low during the period of November 21 to November 26.  A trough for the dollar in the near term will stall the current S&P 500 Index rally.


Source: Bloomberg 

Recently, commodity prices have broken out to new yearly highs on the strength in rising soft commodity prices. That strength is driven by global supply challenges and robust emerging world demand for cotton, coffee, and sugar. Copper prices have remained strong, as well, and, looking forward, supply constraints are very likely in 2011.

I believe a sustainable longer term investment theme is to be where the potential supply challenges are structural, not just benefitting from paper asset investment demand.  Supply challenges remain in the near term for cotton, copper, and sugar.  Coffee and agriculture supplies may benefit in the coming months from a bump in inventories.

Energy prices are not challenged yet, but are most correlated with a faster-than-expected global GDP growth story.  I favor energy over gold, longer term.

Natural  gas prices remain at the lower end of this year's trading range.  A turnover in Congress may support renewed interest in utilizing natural gas as a bridge fuel.

The gold story remains one of the few valid "buy and hold strategies" left.  Emerging economies are protecting themselves against inflation in a similar fashion to what we did here in the United States in the late 70s.  However for gold investors, the hardest component is remembering it is an investment, not a trading vehicle.  

CRB Index Year to Date

Source: Bloomberg 

GOLD January 2009 to November 2010

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.