Thursday, August 11, 2011

Markets are in Free Fall - here's a brief Review of our Forecasts:


January 2011:
"You can still buy the next 7-10% correction, but be prepared for a larger decline into the Summer or late Autumn".  (Part of our annual outlook, published in January 2011) http://www.compass-capital.ch/20110124_Annual_Outlook.pdf
 
 
July 14th:
"Markets do not look healthy. We have exited all equity positions" (also posted on my Twitter Account)
http://twitter.com/#!/Compass_Capital  (see post from July 14)
 
 
 
July 28th: Message to Advisory Clients:
"Medium-term, more weakness ahead! Privately, we have opened a small index short position". (sent to clients only)
 
 
 
 
We remain pretty sceptical about the current market situation, as there seems to be no catalyst around for a sustained upmove.   
 
Nevertheless - we have covered our small index shorts on Monday and will try a small speculative tactical long position around these levels (August 11), but with pretty tight, staggered stops to the downside.


Thursday, April 28, 2011

Oil Prices - the beginning of a bubble or shortly before a major correction?

Some observations on Crude Oil - interestingly enough, since November 2010:
a) Oil prices have risen by about 35%

b) the global number of oil tankers underway has fallen by around 8%
c) the active oil tanker fleet's average travel speed has also fallen by about 5%,

d) at the same time, net speculative positioning in Oil futures has reached historical proportions.
e) OECD oil storage figures are acatually at the upper end of their seasonal bands! 

What does it all mean? 
1) It looks like the biggest part of the oil price increases is induced by geopolitically motivated speculation and most likely from self-reinforcing trendfollowing of investment bank clients' (through structured products, etc.).
2) We remain structurally bullish on Crude Oil for the foreseeable future due to the long term supply constraints and a structural and price-inelastic increase from the industrialization of Emerging Markets.
3) Due to an obvious temporary weakening in demand as evidenced by slowing-down tanker-activity and rising US inventories, we believe that the crude oil market is now becoming increasingly vulnerable in the medium- to short-term for a hefty correction.
4) As we remain structurally positive and the current upleg could still be the beginning of another oil investment "Mania", we would not at all recommend to sell crude oil short, but to remain engaged for the long run. 

But in the short run, it looks like the thing is getting a bit overstretchted. Investors who entered some long positions a while ago could start to lighten them up (e.g. reduce by a third, into further strength) and take some profits off the table, but only to increase their exposure again at a later stage - hopefully from better prices.





Monday, April 18, 2011

Equity markets: slowly deteriorating?


Out indicators signal that after the post Japan-Crash-Rebound, short-term equity market risk has rebounded quickly and - despite recent weakness - is approaching the February 20 levels again.

US Earnings reports have started OK so far, but do not seem to provide massively positive surprises (yet?). At the same time, people start to ponder about the consequences of QE2 ending - on both the stock market as well as the bond market (which would of course produce spillover effects into the stock market).

Therefore, stock markets are likely to have entered into a new phase, which might be characterized by higher volatility and less smooth uptrends going forward.

Important to note that for the first time since the November 2010 correction, aggregate medium-term Institutional sentiment is deteriorating, while indecisiveness and irritation among investors has risen quite a bit over the past 5 days. This builds potential for a sizeable move into either direction.


Bottom Line: a second downleg in the correction which started around February 20th could be developing and we advise caution.


On a side note: Market Cycles (experimental technology):
A possible upcoming turning zone could be around April 25-28.
In addition, our cycle forecast highlights the time window of Mid-May as an area of potential instability.

Friday, March 18, 2011

Japan Reactor Incident - a Brief Risk Assessment


“U.S. government nuclear experts believe a spent fuel pool at Japan’s crippled Fukushima reactor complex has a breach in the wall or floor, a situation that creates a major obstacle to refilling the pool with cooling water and keeping dangerous levels of radiation from escaping.” http://www.latimes.com/news/nationworld/world/la-fg-japan-quake-wrapup-20110318,0,2262753.story


But wait a Minute – isn’t there Relief ?
The current media coverage and yesterday’s and today’s market bounces in Japan and Asia suggest that the Fukushima situation is starting to come under much better control. This assessment is mainly based on the fact that finally a power cable has been installed which will help to run cooling systems and real water pumps, and based on the alleged fact that radiation levels have come down over the last couple of days.

We remain cautious
Of course, we hope for the best, but we remain skeptical whether the response will be timely enough.
So far, we have observed the following:
  • TEPCO management has responded to the crisis in a slow and apparently incompetent way, e.g. it did even initially not inform the government about the true degree of the problems.
  • Japanese pride and honor and its bureaucracy apparently stood in the way of initially and quickly accepting outside help, something that might have helped to bring the crisis response up to speed. Allegedly, a Russian team with Chernobyl Veterans apparently was refused to enter the country (story not verified).
  • On television, we have seen two Chinook helicopters and a couple of fire brigade water pump lorries. It is obvious that the dropping of sea water by the choppers had to be an act of desperation, as it was spreading the water around and the water shots could not be targeted due to radiation exposure.
·         If one compares the potentially devastating consequences of the problem for the Tokyo metro region with the visible amount of technology so far deployed, one wonders what exactly is going on – is this one of the leading technology nations of the world, theh leader in robotics? In such a situation one would also possibly expect a much larger globally concerted operation, given what is at stake.


Systematic Analysis of Problem Components
Please find a link below that provides a systematic overview of critical components on the Fukushima Reactors. This is especially helpful, as the media is filled with conflicting and/or tainted information and it is often not clear which piece of information dates from when.  This link from JAIF (Japan Atomic Industrial Forum) gives an excellent analytical overview of the various problems, let us just hope it is based on honest information and not TEPCO spin any more. It is most useful as it is also date-stamped, so one at least knows from which time the different assessments are:

To us, this table looks like we are a long way from a sustainable solution of this crisis, and there are two spent fuel rod pools that are in a “severe” condition.  If it is true what US experts suspect (that the spent fuel rod pools are leaking), it might be very difficult to cool the fuel rods down substantially.


The Worst Case Risk
Apparently, the highest risk problem are the “spent fuel pools”.
There, old fuel rods are being stored, usually submerged in water.

Some of these pools have lost their water. This might result in an increased exchange of radiation between the fuel rods which in turn could result in extreme heating up and then a fire or explosion, which in turn would irradiate the entire complex even more. This would make any further recovery work in the complex very difficult or even impossible, and might in turn lead to further loss of control and dramatic problems to avoid a catastrophy.

The Tokyo metropolitan area is only around 200km away, and holds around 35 million people.

Here is a map with Japan’s population density:





















The Tokyo Metro Area encompasses more than 35 million people and will be very hard to evacuate. It is also clear that a big part of the countries' industries are located there.

Of course, we hope that the Japanese authorities will be able to get the problem under control over the next couple of days, as the consequences of failing to do so could be catastrophic. Our compassion goes out to the Japanese people and all who are suffering from those horrible and combined catastrophies.


But what does it all mean?
After the market sell-offs over the last couple of days, global stock markets have become strongly oversold and “had” to bounce at least temporarily.  What started as a correction (which we actually had already forecasted in our Annual Outlook for February/March) turned into a real crash in certain markets.

It is well possible that technical buyers and bargain hunters will continue to push prices back up a bit more on any slightly positive news, but we remain very cautious, at least for the next couple of days or 1-2 weeks, until it becomes clearer if the catastrophy can be truly contained and not only “medially”. 

If this reactor crisis cannot be contained sustainably soon, the fate of the Japanese people and its most important metropolitan region, and therefore its economy would truly depend on the direction of the winds. 

The last solution which is now being discussed would be to bury the whole installation in sand and concrete, but I would suspect such a solution brings with it some major operational difficulties, and it currently doesn't seem like this option is being prepared.



Usually, to profit in the markets, one has to buy when everyone else is fearful. As this time around, we are dealing with forces that are very hard to control and which could still escalate any day. Therefore, I doubt this is the time to be overly courageous and/or greedy right now, so caution is advised.  The ripple effects could be substantial.