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“We see euphoric buying of stocks and the U.S. dollar and panic selling of bonds, oil, gold & commodities”
Chua Soon Hock, chief executive at Asia Genesis Asset Management Pte. in Singapore.
As US troops make their final push into Baghdad and British troops finally enter Basra, it is clear that the financial markets are focusing on a post-war economic recovery. To be sure, last weeks economic reports, including payrolls, jobless claims, and ISM’s manufacturing and service reports, were weaker than expected, yet the markets rallied. Moreover, corporate earnings estimates, on the whole, have been declining for weeks, yet the markets are rallying.
Don’t Blame the Hedgers
As an investor there are a few things I do not like. First and foremost, I dislike footnotes, which turn what should be reliable GAAP into manipulated works of corporate art. Furthermore, I am not fond of execs that point to these manipulated numbers as being proof that they are doing a great job (i.e. in Annual reports CEOs regularly refer to improving debt/equity readings without mentioning that D/E is only declining because goodwill levels are escalating, and some boast about EPS improvements without mentioning the escalating costs associated with stock options, pension deficits, etc.). Lastly, I don’t like gold producers who blame the hedging activities of other producers for poor financial results and/or the slumping price of gold…
Here is a quick note to anyone who has ever mocked or ridiculed the likes of Barrick for hedging – Barrick shareholders are currently thrilled that their company had the intuition to hedge future production! To be sure, gold is languishing at $320 this morning and Barrick will be selling current production at roughly $340. Call it dumb luck if you want, but Barrick has been successfully using hedges for more than a decade, and the company has a balance sheet to prove this.
As for the price of gold itself, which has now fallen back to the level it was at before the metal began to price in any war premium ($318 an ounce on December 2, 2002), I would speculate that hedging activity has had nothing to do with this decline. Moreover, unless (more likely ‘until’) the US dollar embarks upon its final death fall gold will likely remain weak and/or below its previous (Feb 5) high of $391 an ounce.
Who will be right?
Stephen Roach is predicting a global recession, Paul Desmond thinks stocks have put in the ‘strongest bottom in the last three years’, and Barton Biggs believes the markets could potentially rally by 50%.
For the long-term thinker – meaning someone looking past today’s open – the BIG question is whether or not the global economy can recovery quickly and/or whether or not interest rates are headed higher or lower. To be sure, if Greenspan is readying to cut interest rates a few weeks or months from now this will likely mean that the US economy is in a recession. By contrast, if the Fed is considering raising interest rates a few weeks/months from now the unthinkable will have happened: the long awaited recovery will have stuck.
Unfortunately, neither Roach, Desmond, nor Biggs focuses explicitly on the correlation between interest rates, the economy, and the stock markets. Rather, Roach focuses on the economy (not stock prices), Desmond focuses on stock prices (not the economy), and Biggs hedges his bets (says it could be a bear market rally). As for ‘interest rates’, each analysts’ opinion, while implied, is not mentioned (i.e. Roach is a deflationary hawk but doesn’t come right out and say the Fed will cutting rates again anytime soon). How convenient.
In short, all of the opinions being offered by analysts today could, in fact, end up being ‘right’: The stock markets are in a great bear market rally and the economy will temporarily regain some traction, but soon afterwards the markets will plunge and the economy will be in recession. Strangely enough, what this type of logic means is that Iraq and SARS are hurting the economy and Iraq and SARS are helping the stock market.
I don’t buy all the analyst hedging that is going on. However, what I would consider buying soon after a successful regime change is gold and Treasurys (deflation is not yet licked). This speculation is based upon the assumption that the Fed’s next move will be to cut interest rates.
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