Canadian Business Blogs | Advice on Investment in Canada, Stock Market, Small Businesses Opportunities » commodities

Hedge funds unloading

Larry MacDonald — Thu, 11 Sep 2008 17:14:14 +0000

Some analysts say a big-picture trend presently unfolding involves hedge funds and other players unwinding bets on commodities/foreign currencies and plowing the proceeds into U.S. financial and other stocks. They are doing this for valuation reasons and as a haven against weakening economies overseas.

There is some evidence it at least partly reflects hedge funds scrambling to raise cash to meet redemption requests. Financial stocks have risen for sure but that likely reflects hedge funds buying back short positions to generate cash, not to go long because they think the fundamentals are turning.

I remain somewhat skeptical of the thesis that the U.S. economy is close to coming out of the downturn, and so the places to shift into are U.S. stocks and the U.S. dollar. When one looks at the problems the U.S. has, especially in its financial sector, they would seem to have the potential to inflict more pain on the economy than we have seen to date.

Cash balances in hedge funds rose to a record $155 billion (U.S.) in July. A lot of this could be coming out of the market and going into investors’ hands. It may be erroneous to assume it will all be going into U.S. stocks.

Emerging markets a growth trap?

Larry MacDonald — Sat, 30 Aug 2008 01:03:43 +0000

“Despite their fantastic recent growth record, investors need to be very cautious about emerging markets,” says chief investment officer Eric Bushell in CI Funds’ latest Perspective Online. Their growth momentum is posed to decelerate due to high commodity prices and slippage in export growth as developed economies slow down.

But it won’t be bad news across the board for emerging countries. “The emerging market universe will split into the haves and have not’s,” claims Bushell, with the dividing line being current account positions. Those countries with good surpluses and foreign-currency reserves, like China, will continue to enjoy access to access to capital while those with deficits, such as India, Indonesia, Vietnam and Eastern Europe, will face more difficult adjustments.

Bushell thinks the impending global growth scare will “quell the inflationary storm.” But if governments in emerging countries find inflation fighting unpalatable, growth may maintain momentum longer “and deliver a boomerang back to the U.S.” in the form of greater inflationary pressures. The implication from Bushnell’s commentary in Perspective Online would seem to be that the world could face an unpleasant choice between hyperinflation and a 1982-1983 style deep recession to bring inflation under control.

Canadian banks and commodities

Larry MacDonald — Fri, 18 Jul 2008 17:37:45 +0000

While the position of Canadian banks is improving vis a vis U.S. banks due to the financial crisis (as argued in my previous post), it would be not be entirely accurate to attribute the improvement solely to the more conservative practices of Canadian banks. Their balance sheets and capital ratios are also holding up better because the Canadian economy has been buoyed by the global boom for commodities.

So while Canadian banks may seize opportunities in the U.S. market, there is also a risk they could be blindsided by a cooling off of the insatiable demand for metals, minerals, and foodstuffs. Whether or not the commodity boom goes into remission depends upon the extent of the economic downturn now said to be in progress. If it’s severe and spreads to emerging countries, then Canadian bank stocks will find it tough going regardless of the potential for making inroads into the U.S.