Interesting Article

Tuesday, August 17 2010

There was a very interesting article in The Australian today in the business section talking about the correlation between Oil markets and Equities. I think you could also add Currency and other commodities as well and possibly bonds.

There seems to be a lot of hedge fund money investing in global macro strategies. From what I understand this has traditionally been one of the more difficult areas to consistently make money. The investor needs to correctly predict the direction of economies and the impact this has on relevant markets. I believe the reason a lot of hedge funds are using this strategy is that a small number made an enormous amount of money using the strategy during the GFC. The more money that goes into the trade the less likely a return will be generated.

A number of people are looking at the direction of bond yields and comparing them to equity markets. The bond yields have recently diverged especially in the US since the Fed Reserve highlighted further quant easing. This has raised concerns that the bond market is predicting a sharper slowdown than equity markets. Do the credit markets know something equity markets do not? This is possible but it is also interesting that oil is still over US$70 a barrel, and the A$ is around 90c so not all markets are predicting the slowdown the credit market seems to be.

What is an alternative explanation? The Fed Reserve has highlighted that they will not be moving short term interest rates any time soon and they will also be supporting the long term bond markets.

So it seems pretty rational for hedge funds to gear in the short term and invest in longer term bonds. They might only make a small return but if you gear enough the trade should work. This is really the carry trade at work.  Someone once described it as picking up pennies off a highway in the desert.  It works a treat until a truck comes along.  We also understand the bond funds continue to attract funds so that you are having money squeezed into bonds.

In our view equities look very good value relative to bonds. Why buy a bond yielding 2.5% for 10 years when you can buy a high quality blue chip like Procter and Gamble with a 3.5% yield that is growing.

 

Disclaimer

The website is owned and operated by DNR AFSL Pty Ltd (AFSL 301658) (“Dalton Nicol Reid”) having its registered office at Level 14, 388 Queen Street, Brisbane, QLD 4000.

The content of this website is intended for Australian residents only (RG 162.44).

* Whilst perhaps not strictly an Internet Discussion Site (“IDS”) as defined in Regulatory Guideline RG 162 as investors and or other third parties are unable to leave comments on the site, the information on this site is so provided being mindful of the requirements and intended purposes of RG 162 and Consultation Paper 104.

Information about ASIC IDS guidelines and other relevant information about investing may be obtained from the ASIC website at:

https://www.fido.gov.au/asic/asic.nsf/byheadline/AD09-33+ASIC+reviews+policy+on+internet+discussion+sites?openDocument.

 

Not Investment Advice

Postings are, at best, general information, not professional investment advice prepared by taking into account any individual circumstances and needs of particular investors.Therefore, before acting on the basis of what is said in a posting, you should:

  1. consider consulting a licensed adviser (ASIC’™s website at www.asic.gov.au has a list of licensed advisers); and
  2. visit ASIC’™s consumer website at www.fido.gov.au for general guidance about investing.

GENERAL

Dalton Nicol Reid, its associated entities, and directors and staff, may hold positions in companies, or the debt or derivative securities of companies, either on their own account or for the portfolios of investors, that are the subjects of postings on this website.

Dalton Nicol Reid is a member of FOS (https://www.fos.org.au/centric/home_page.jsp) which is an ASIC approved external complaints resolution scheme (RG 162.46).

The information posted on this site by Dalton Nicol Reid will be maintained and kept by Dalton Nicol Reid consistent with the requirement of RG 162.62 and* Consultation Paper 104* for a minimum of two years and may be made available to ASIC.

 

Accuracy and Currency of Information

Dalton Nicol Reid, its officers, employees, agents and associates believe that the information and material provided on this web site is correct at the time of compilation but do not warrant the accuracy or currency of that information and material. You should carefully check the date of compilation of the information and material (where relevant) to determine its currency. Save for statutory liability which cannot be excluded, Dalton Nicol Reid, its officers, employees, agents and associates disclaim all responsibility for any loss or damage which any person may suffer from reliance on the information and material on this web site or any opinion, conclusion or recommendation in the information and material whether the loss or damage is caused by any fault or negligence on the part of Dalton Nicol Reid (including its officers, employees, agents and associates) or otherwise.

 

Loss or Damage to your Systems

Dalton Nicol Reid will not be liable for any loss or damage from any cause to your system or web site, or to people linking to this material from your web site, caused by or in connection with the use or link to this material. Any such loss or damage will be your responsibility. Dalton Nicol Reid advises you to take your own precautions in relation to protecting your system or web site from malfunction or viruses.

 

Copyright

Copyright in all the material, works, software, design, text, graphics and code contained on or used to produce the web site and in the information and material and in its arrangement or layout, is owned or licensed by Dalton Nicol Reid or its associates unless otherwise indicated. Other than as permitted below, your use of anything in which Dalton Nicol Reid or its associates own copyright is governed by the copyright laws of Australia and its international treaties with other countries.

You are permitted to save or print a copy of the web site solely for your own information, research or study, but only if you do not modify the copy and you include the copyright notice “© Dalton Nicol Reid Pty Ltd. ” on the copy. You may not copy, publish, distribute, create works from or commercially exploit the content of this web site for any other purpose.

Print this article