Tuesday, September 25, 2012

Risk Assets becoming more risky again...

We have advised our clients to scale down equity exposure on Friday of last week (Sept 20) due to the following factors:

1) Increasing divergence between the slightly worsening macro figures and equity market performance. 

2) Lack of "Risk On" follow-through after the ECB and Fed announcements.

3) Total complacency in the market as measured by a big portion of our Contrarian Indices.

4) Unexpectedly rising Geopolitical Risks -  which in our opinion have not been properly priced in yet.

5) Various cycles and indicators pointing to a high probability of a potentially strong correction between Sept 25 and Oct 15.

The Japan-China "conflict" has clearly been orchestrated by the Chinese side, and we suspect it severs to distract from internal problems and to create a sense of national unity among the populace.  This means that the current "leadership transition" is not going as smoothly as many China Bulls might have hoped. This is also what the continuously falling Shanghai Index is signalling:  the Chinese Growth engine is stuttering, and currently, nobody there seems to be able to take courageous decisions to deploy massive stimulus and risk renewed inflation.  By the way, has anybody noticed that Iron Ore prices have fallen by about 35% from their March peak?

We also suspect that the Anti-American uprisings currently taking place throughout the entire Muslim world look a bit too spontaneous, given the dubious nature of their alleged "trigger": a video which has a very strange history of origin and most probably has not been seen by a lot of people at all.  Meanwhile, a third US navy battle group is approaching the Persian gulf. 

While everything still looks fine, we prefer to err on the cautious side. The markets currently behave as if the ECB and Fed announcements were cases of "buy the rumour, sell the news" - so far quite contrary to the stimulus rallies that ensued in the previous 2 instances.

Could it be that the markets start to smell out that money printing might possibly help to avoid the big deflationary liquidation, but does little to actually "stimulate growth" ?

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