Archive for the ‘Equity Markets’ Category

HOGS Poised to Benefit from Rising Food Prices in China

January 4th, 2010 Michael McDonough 1 comment

I mentioned this morning that major snow storms in China could place additional pressure on domestic Chinese food prices. I have since received several inquiries about which companies could benefit from this developing pricing dynamic pricing, and here is one answer: Let me take you back to this article on RealMoney, I published on October 9th, where I introduced Zhongpin Inc. (HOGS). HOGS is a Chinese meat and food products company, specializing in pork products. HOGS is poised to benefit from an anticipated run-up in hog prices throughout 2010, only helped by the recent snow storms. Domestic hog prices fell dramatically in 2009 due to an oversupply of pigs, but have since bottomed. HOGS has already risen roughly 15% since I first mentioned it back in October, and I think it is worth another look.


Chinese Snow to Cause More Than Just Delays

January 4th, 2010 Michael McDonough Comments off

China’s ‘50-year’ snow storm could cause more than just delays in the country; the last time the country was hit with a similar storm food inflation spiked. In the past Chinese food prices have had significant influence over the country’s CPI. It is still too early to measure the full and long-term impact of the storm–if any–but we should monitor local news for early indications. A sustained run-up in inflation could increase tightening rhetoric amongst Chinese authorities, and increase the probability of eventual RMB appreciation. If investors believe the Chinese government is more likely to tighten, then more likely then not equity markets will come under pressure.

I wrote this in February 2008 while living in China, “Starting late January and ending in February China faced a barrage of disastrous winter weather, affecting nearly every aspect of the economy, including crops. This is particularly relevant given that food prices have been the main cause of Chinese inflation.” - (It may be old, but it also explains the dynamic between headline and food inflation in China)

Categories: Asia/China, Equity Markets Tags: , ,

Dell Set to Ride Approaching IT Replacement Cycle

December 30th, 2009 Michael McDonough Comments off

Back in October I mentioned I had a rather bullish view on the tech sector going into 2010, but the only name I mentioned at the time was Apple (APPL).  Recently, I’ve been speaking with quite a few money managers and one name in the sector has been coming up more than most others, and that’s Dell (DELL).  Looking ahead to 2010, low capital costs for businesses combined with increasing confidence will likely lead to increments in business investment and spending on equipment and software.  Investors have already seen hints of this with a 1.5% seasonally adjusted annualized increment in 3Q09 equipment and software investment.  This is likely only the tip of the iceberg, and Dell is well positioned to take advantage of the approaching IT replacement cycle.

Dell 1Y Performance

Dell 1Y Performance

Source: Google Finance

Dell has faced some downward pricing pressure over the last several months after a disappointing 3Q09 earnings report.  However, part of this slack could have been due to the late October release of Windows 7, which likely caused consumers to postpone PC purchases until the 4th quarter.  Additionally, I believe a number of analysts are underestimating the probability and the magnitude of an IT replacement cycle in 2010, giving the stock more upside potential once the cycle materializes.  Roughly 25% of Dell’s revenues are derived from the company’s commercial PC hardware segment, with another 11% coming from server equipment; both segments are poised to benefit from an IT replacement cycle.  According to Dell, PC’s currently installed are on average 9 to 12 months older than the historical average, which should add some fuel to the approaching cycle.

Additionally, as you can see from the chart below, since November Dell has significantly underperformed the NASDAQ’s Computer Index, and I believe it is only a matter of time before Dell begins playing catch-up.  The managers I spoke with fervently believe the stock should be valued somewhere between $20 and $24, and have indicated to me that they have put their money where their mouths are.  The downside risk is of course that the IT replacement cycle does not materialize or is weaker than expectations.

Dell vs. NASDAQ Computer Index

Dell vs. NASDAQ Computer IndexSource: Yahoo Finance

List of my Equity Based Global Macro Investment Ideas:

Trading IdeasSource: Bloomberg

Categories: Company Specific, Equity Markets, US Tags:

A Review of my EQ Based Global Macro Trading Ideas

December 22nd, 2009 Michael McDonough Comments off

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Global Macro Trading IdeasSource: Bloomberg


Dubai’s Downfall

November 27th, 2009 Michael McDonough Comments off

Here is an excerpt from my Real Money column being published this morning:

Burj DubaiIn 1909 the completion of the Metropolitan Life Building—the world’s tallest building—coincided with the beginning of a two year recession in the US.  Between 1929 and 1931 40 Wall Street, the Empire State Building, and the Chrysler Building were all erected in a bid to build the world’s tallest building; the Empire State Building eventually won this title, but again the construction of these grandiose buildings coincided with the onset of economic strife, in this case the Great Depression.  I think you see where I am going, but I should add the construction of the Sears Tower, the World Trade Center’s twin towers, and Malaysia’s Petronas Towers—all vying for the title of world’s tallest building—culminated in similar economic turmoil.

Coincidence or not the Burj Dubai, the tallest man-made structure ever constructed, is preparing for occupancy in Dubai.  With that said credit markets around the globe were shaken this week on news from Dubai.  Dubai World, a state-owned enterprise and primary investment vehicle, asked banks to allow the organization to suspend debt repayments for six months; the terms are still unclear, but could potentially be considered a default.  According to Standard and Poor’s, “In our view, such a restructuring may be considered a default under our default criteria, and represents the failure of the Dubai government (not rated) to provide timely financial support to a core government-related entity.”

Maybe I am too optimistic, but I believe this situation should lead to some good buying opportunities over the short-term, depending on where markets trade today.  Already investors immediate rush to safety, out of what are perceived to be high risk currencies into safe haven currencies, have created an excellent entry point into a trade I pointed out a couple of weeks ago—shorting the Yen.  The JPY appreciated to a 14 year high against the USD yesterday, increasing speculation that the Japanese government may be forced to intervene in the market, potentially creating a floor for the currency.  I still hold a bearish medium term view on the Yen—please see my piece on how to play Japan—and will likely increase my position in The Yen Ultrashort (YCS) or purchase puts in Long Yen ETF (YCL) depending on how the market opens this morning.


Talking Turkey on Agriculture Trends

November 20th, 2009 Michael McDonough Comments off

An excerpt from today’s column on RealMoney…

“In tune with the Thanksgiving spirit–eating–I want to discuss a budding topic that’s garnering more attention lately from a growing number of my clients: food, or more specifically, agriculture. There are many ways to tackle this topic, but what I wanted to highlight today is the growing caloric intake of the developing world, especially China.

Developing-world diets have started a path of convergence with their developed-world counterparts, meaning that as disposable incomes within these countries have risen, consumers have begun to demand more complex proteins: meat. To help put this into perspective, if the present trend were to continue and if Chinese and Indian meat consumption were to converge with that of the U.S., global caloric intake could double by 2050.”

I go on to recommend the ETF DBA as a good play on this theme as well as a good hedge against inflation.  Please see the entire column here.


Andy Xie: Central Banks, Arsonists and Playing with Fire

October 29th, 2009 Michael McDonough Comments off

Here is another article by Andy Xie–always an interesting read–former Morgan Stanley economist, who predicted the credit crisis well before it came to fruition.  In this article Andy highlights how money supply growth is supporting a boom in asset prices, which in turn is bolstering the economy.  He goes on to compare central banks supplying money to ‘arsonists’ who have now ‘been asked to put out the fire’.   In conclusion he says:

A word of caution for all would-be speculators: You’ll want to run for your life as soon as the bond market takes a big fall. And the case for a double dip in 2010 is already strong. Inventory restocking and fiscal stimuli are behind the current economic recovery, and when these run out of steam next year, the odds are quite low that western consumers will take over. High unemployment rates will keep incomes too weak to support spending. And consumers are unlikely to borrow and spend again.

Categories: Asia/China, Equity Markets, LATAM, US Tags:

Positioning Yourself for Japan’s Potential Demise…

October 28th, 2009 Michael McDonough 5 comments

-Strong domestic demand for Japanese government bonds has permitted Japan to keep interest rates at or near 0 despite significant increases to the government’s debt burden, with no significant currency depreciation, and almost no economic growth. But, this model may be coming to an end

-An aging Japanese population will have several negative effects on the economy: 1) Higher taxes to fund the country’s pay as you go social security system. 2) Retirees will begin drawing from savings to fund retirements. & 3) Reduced demand for JGB’s will force the government to seek capital outside of Japan, which should lead to a run-up in rates. Any increase in interest rates should have substantial effects on the government’s ability to finance it’s debt.

-The ‘illusion’ of the YEN being a ‘safe-haven’ currency could soon dissipate. Not to mention the aforementioned issues, the bulk of Japan’s economic growth–and decline–has stemmed from the export sector. A strengthening Yen against its trading partners will add further pressure to this sector, and place additional pressure on Japan’s growth going forward.

Take a short position on the Yen versus USD:

*Buy USD/JPY puts

*Short YEN against USD (ETF: YCS)

Open a position to take advantage of anticipated rise in Japanese rates:

*Buy call options on Japanese yields

**For a more detailed look into this topic please see my column posted on’s RealMoney section.


Sprott Asset Management Raises Concerns Over US Government’s Financial Viability

October 27th, 2009 Michael McDonough Comments off

In a monthly investment strategy letter written by Eric Sprott and David Franklin of Sprott Asset Management titled ‘Surreality Check… Dead Government Walking’ they convey their concerns over the US government’s ability to finance its growing burden.  In the letter they clearly state:

The United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations.

In a similar letter in 2007 Sprott warned of the eventual bankruptcy of GM along with the risks associated with Fannie, Freddie, and Citi.  Now, however, the company claims the risks have shift from the private sector to the government as it continues to assume more and more  financial liabilities.  As Sprott put  it:

It’s time for another surreality check, but this time it isn’t the publicly traded companies that deserve attention, it’s the governments that have saved them. Make no mistake-–the dead men are still walking-–they’re just a lot bigger now than they were two years ago, and they don’t generate earnings-– they print money and tax their citizens.

See the full letter here


A Brief Global Macro View on the World’s Markets

October 12th, 2009 Michael McDonough Comments off

This is a very short global macro overview of today’s markets. I do not recommend any of the trades mentioned in this report, but hope they help reinforce your own view or help you generate some news ideas.

Monetary policy around the globe remains easy, providing ample liquidity and room for credit growth. Additionally, fiscal policy remains expansionary, and in some regions the full benefits have likely not yet been realized.

In the U.S., I believe we’ll discover that growth returned in the third quarter this year, primarily due to a turning in the inventory cycle (I will go into more detail on this topic in my Economic First Look when GDP is released). While the U.S. is only just returning to positive growth, some developing nations never experienced contraction or have already returned to growth mode. The trend of developing nations outpacing the developed world should continue and provide some potentially profitable investment opportunities, especially in Brazil and China.

But the punch bowl won’t last forever. An eventual resurgence of inflation and massive government deficits will eventually lead to higher rates and limited room for new fiscal stimulus. In fact, on Tuesday the Australian central bank surprised the world by announcing a rate hike to 3.25% from 3.00% on the back of perceived economic strength. Nevertheless, it will take some time — six to nine months — for other governments and central banks to catch up to Australia’s policy stance, leaving markets around the globe ripe for further appreciation.

As market conditions remain favorable for asset appreciation over the next six to nine months, developing nations — especially Brazil and China — will continue to outpace developed nations — especially the U.S. — in terms of economic growth and equity market performance. Therefore, you should consider long positions in ETFs based on the countries; those include iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI) .

Both of these countries have strong consumer stories:

* In Brazil, personal consumption has been leading its recovery. The country experienced 2.1% sequential growth in consumption in the second quarter, and the metric is generally anticipated to remain robust into 2010 on the back of easy monetary policy. The Brazilian unemployment rate has already fallen to 8.1% in August from 8.8% in May, and it’s widely anticipated to move between 7% and 8% over the coming months.

* In China, if you are a believer of the burgeoning middle-class story, you may want to look at companies like Zhongpin (HOGS) . Zhongpin is a Chinese meat and food products company, specializing in pork products. Additionally, expected increases in the caloric intake of the Chinese population could provide some opportunities in the global fertilizer and agricultural sector. I view China as a more volatile Brazil, with higher return potentials but also much more downside risk.

Additionally, I am bullish on the currencies of commodity-producing economics, including the Australian dollar, Brazilian real, Mexican peso, Chinese renminbi and Korean won. At the same time, I believe the Japanese yen, which has experienced significant appreciation over the past several months, may be overvalued due to deteriorating fundamentals. One way to play this view is taking a long position in Proshares UltraShort Yen (YCS) ETF.

Domestically, I am somewhat overweight on the U.S. technology sector via ETFs or Apple (AAPL) as a single name. It will also be interesting to monitor whether Verizon (VZ) is able to end AT&T’s (T) monopoly on the iPhone. Apple’s contract with AT&T is set to expire in June, and analysts are mixed over whether Verizon can expect to add the product to its line.

I am still somewhat bearish on the U.S. housing sector as foreclosures and mortgage delinquencies across all types of loans continue to weaken the sector. Moreover, the first-time homebuyer tax credit program is set to expire at the end of November; that incentive doubtless had an impact on recent home sales. Continued weakness in the housing sector may place some downward pressure on U.S. REITs.

The show won’t go on forever. A return to growth coupled with fears of economic overheating will cause central banks around the world — likely starting with emerging markets that have already returned to growth — to tighten monetary policy. While at the same time, developed nations will face the repercussions of swelling budget deficits. In Brazil, like in the U.S., monetary policy is expected to remain unchanged for most of 2010, which should provide further support for domestic assets.

In the near term, the biggest downside risk to this investment the possibility that central banks may tighten monetary policy prior to current expectations. But tightening is inevitable; rates in the U.S. will not remain at 0% forever. Once it becomes clear that central banks are approaching a tightening cycle, investors should consider taking profits on their equity positions. Ultimately, higher budget deficits in the U.S. combined with potentially momentous health care reform could lead to higher taxes and rates, coinciding with a period of subdued growth and elevated unemployment.

For more please see my column on