Ignore the 'Noise'
The recent market action suggests that the bear-market low is now behind us.
Over the past few days, most of the stronger emerging markets broke out to new recovery highs. Furthermore, over the past couple of days, even the lagging stock markets in the West managed to climb to new recovery highs. It is noteworthy that yesterday, the Dow Jones Industrial Average break through its overhead resistance and closed above the psychologically important 9,000 level. Moreover, both the S&P500 and the NASDAQ also rose to new recovery highs. This is very impressive action and consistent with our view that we are now in the early stages of a cyclical bull-market which could continue for 2-3 years. You may recall that in January's edition of Money Matters, I stated that we felt that we were already in a cyclical bull-market and it seems that our assessment was correct. Yes, it is true that only a couple of weeks ago, we were expecting a multi-week pullback but the markets resolved their overbought conditions via a sideways consolidation instead of another correction. Accordingly, we have now parted ways with our defensive investment position and in the past week, we have re-invested our capital in our preferred markets in emerging Asia and the commodities complex. Our view remains that emerging Asia and commodities remain in a secular bull-market which will probably end in a gigantic bubble in the future.
In the business of investing you must remember that economic news is always the most rosy at market tops and most negative at major bear-market bottoms. This is why we take our cues from the market action instead of the experts. Over the following months, many economists and experts will continue to be skeptical about this rally and this is due to the fact that they are psychologically committed to their bearish outcomes. We suggest that you ignore the 'noise' and focus your attention on the market action which never lies. Remember, all the hopes, aspirations and fears of all market participants are distilled into the price action on a daily basis and for now, the majority of investors seem to be forecasting better times ahead. We are aware that there are no guarantees in this business and there is always a possibility that this is a false dawn, but the odds of this are diminishing by each passing day. Put simply, if you are a bear, time is not on your side. The longer the markets continue to trend upwards, the greater the chances that the central-bank sponsored reflation is working. Look. We have just witnessed the greatest stimulus in the history of capitalism and it looks as though the policymakers have clipped off the final stage of this bear-market. If our view is correct, this is a fantastic time to be investing in the strongest sectors and markets of the global economy. Capital allocated now should see above-average growth over the next business cycle.
Over in the energy markets, crude oil has bounced up from the recent lows and it should strengthen considerably over the following years. As soon as demand picks up again, our world will witness a horrific energy shock due to 'Peak Oil'. Our research confirms that the majority of oil provinces in the world are now past peak production and this will cause the price of crude to spike higher over the medium-term. So, we suggest that you allocate a large portion of your investment portfolio to upstream energy companies and the energy service stocks. Furthermore, in the energy complex, natural gas is still scraping along its crash lows and patient investors should be rewarded over the next 12-18 months. Our advice is to invest in quality natural gas companies. Finally, alternative energy companies are now extremely attractive and we have recently allocated capital to superb solar companies. We recommend that you do the same. As the various governments push towards alternative sources of energy and Mr. Obama introduces the 'Cap & Trade' system, the alternative/clean energy sector should be a big winner.
In the world of metals, the action is also bullish. Recently, copper has broken out to a new recovery high and this is an indication that the global economy may not be as weak as some suggest. Other base metals are also perking up and should rally further. This is a great time to invest in diversified mining companies which are trading at super-cheap levels. Over in the precious metals department, both gold and silver are concluding their usual, lengthy consolidations and if the bull-market is still intact (our view), then both these metals should rocket higher over the following months. We expect gold and silver to resume the next upleg within a month or so and the rally should continue until spring next year. So, this is an ideal time to load up on physical bullion and precious metals mining shares.
Finally, in the realm of currencies, the US Dollar has started to weaken again and this is another sign that reflation is working. Although the private-sector debt in the West continues to contract, various governments are borrowing massive amounts in US Dollars and this is exerting downward pressure on the greenback. Our expectation is that the American currency will continue to depreciate against the commodity-currencies (Aussie and Canadian Dollars) and it should also slide against the currencies of emerging Asia. So, keep your cash in these currencies.
The above "Weekly Update" was sent out to our subscribers on 24 July, 2009.