Time For a Holiday?

By: Puru Saxena | Thu, Jun 11, 2009
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The below 'Weekly Update' was sent out to subscribers on 8 June 2009.

Global markets are overbought and due for either a correction or consolidation. We're now in the seasonally bad time of the year and the best outcome here would be a mild correction. From a sentiment perspective, most investors have factored in the 'green shoots' and they've positioned themselves for a near-term economic recovery. For sure, certain economic data is pointing towards some improvement, however (so far) nothing has been done to help the distressed homeowners. The West is dealing with a massive debt overhang and policymakers are only transferring private-sector liabilities to the state. These gigantic losses are real and politicians have decided to distribute them amongst the unsuspecting public. Unfortunately, a second wave of foreclosures is now creeping in and we may not get a swift and robust economic recovery. If the housing situation worsens, then all bets will be off and the financial markets will probably face a sharp decline. At this stage, we think any correction will end above the March lows and we're sitting on a large cash position to capitalise on such a weakness. After the horrendous crash last autumn, it is unlikely that the markets will continue to head higher without a rest. Look; market risk is currently high based on technical and sentiment indicators and we'd recommend that you keep roughly 50% of your investment portfolio in cash. This way, if the market moves higher, you'll still benefit but if we get a correction, you'd be able to re-invest at lower prices.

Over in the energy complex, crude oil reached $70 per barrel last week and is giving back some of its gains today in Asia. Over the following days, we're likely to witness a correction in crude oil. On a different note, natural gas is still trying to carve out a bottom and should be accumulated by long-term investors. The price of natural gas is extremely inexpensive and should rise significantly over the coming year. So, we'd suggest that you buy into physical natural gas or the producing stocks on any near-team pullback.

In the currencies markets, the US Dollar Index is finding some support around this area and a sharp rally wouldn't surprise us here. Most people are now bearish about the US Dollar and sentiment is at an extreme, so a rally of 5-7% can be expected. On the other hand, most major currencies are now overbought and due for a correction. If our assessment is correct, the next few weeks should coincide with strength in the US Dollar and pullbacks in the Euro, British Pound, Aussie Dollar and Canadian Dollar. So nimble traders may want to act accordingly.

As far as precious metals are concerned, both gold and silver are likely to correct over the following weeks but we don't expect a major decline. During the correction phase, silver will fall more than gold but both should be bought later this year. Same rules apply for precious metals mining stocks. Our recommendation is to wait before adding to your positions in this sector. If a rally in the US Dollar materialises, precious metals will correct and you'll be able to buy into real money at lower prices.

Finally, in the fixed-income sector, US government bonds are now very beaten down and the next phase of credit contraction should usher in a big rally. At the moment, everyone is convinced that the US will enter hyperinflation and US government bonds have suffered accordingly. However, in last week's speech, Mr. Bernanke made it clear that the Fed wasn't going to keep monetising debt by printing money. So, we may not get hyperinflation in the near future and the 30-year US Treasury Bond should appreciate over the summer months. Make no mistake; as a result of all the bailouts and stimulus packages, the cost of living will probably double within the next decade, however we don't foresee huge inflation over the next six months. When others come to the same conclusion and there is another flight towards 'safety', US Treasuries will probably rally in tandem with the US Dollar.



Puru Saxena

Author: Puru Saxena

Puru Saxena

Puru Saxena

Puru Saxena is the CEO of Puru Saxena Wealth Management, his Hong Kong based SFC regulated firm which offers discretionary portfolio management and research services to individual and corporate clients. The firm manages two trend-following strategies - Discretionary Equity Portfolio and Discretionary Fund portfolio. In addition, the firm also manages a Discretionary Blue-chip Portfolio which invests in high-dividend world leading companies. Performance data of these strategies is available from www.purusaxena.com

Puru Saxena also publishes Money Matters, a monthly economic report, which identifies trends and highlights investment opportunities in all major markets. In addition to the monthly report, subscribers of Money Matters also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

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