Weekly Update From Puru

It looks as though global equities are in the early stages of a cyclical bull-market. Most emerging markets in Asia and Latin America formed higher lows in March and they've now gone past the January highs. So, in technical terms, nations such as China, India, Brazil, Taiwan and South Korea are already in bull-markets. Now, the sceptics will argue that this isn't possible, that stocks shouldn't be going up! However, in this business, you take what the markets give you and at present, the markets are saying that the worst was discounted last autumn. Although it is possible that we may see new bear-market lows, current market action doesn't feel like an abrupt and swift bear-market rally. Rather, global stocks are rising gingerly and most importantly, not many believe that this advance is sustainable. So, perhaps the new bull-market is doing what it always does - climb the wall of worry!

In the near-term, most markets are overbought and a correction can't be ruled out but so far, the overbought conditions are being relieved by sideways consolidation. At present, stocks are rising despite negative news and horrendous investor sentiment. This is a good sign and with a record-high level of short interest in the emerging markets, we may get an explosive rally as the shorts are forced to cover their positions. Accordingly, we suggest that you hold on to your positions in China, India and Vietnam. Should the markets correct over the following days, perhaps consider allocating additional funds. In terms of sectors, energy, materials and infrastructure plays are likely to provide leadership and technology should also be amongst the winners. In terms of losers, we recommend that you stay well clear of financials (most are cooking their books), utilities and healthcare companies in the US.

Over in the commodities pits, crude oil is rallying nicely and we expect it to rise significantly over the following years. Global oil supplies have peaked, production is in a terminal decline and this may be the last chance to load up on cheap energy. According to the IEA, global depletion is running at roughly 5% per annum and 580 out of 800 of the world's largest oil fields are now past peak production. This doesn't bode well for oil production and as soon as demand stabilises, we'll see sky-rocketing prices followed by shortages. The IEA estimates that we'll see a serious energy crunch by 2012-2013. Our guess is that US$147 per barrel achieved last year will be easily surpassed within the next 4-5 years. So, this is a great time to allocate more capital to the energy sector. Furthermore, the price of natural gas has taken a big hit since last July and it is trying to put in an important low. In our view, the downside is now very limited whereas the upside is huge, so consider allocating some funds to gas.

As per our expectations, most metals are currently correcting. After a sharp rally, copper and platinum have given back some gains and they should decline further in the weeks ahead. So far, gold hasn't declined much but we suspect its price will weaken over the summer months. Same applies to precious metals mining shares. So, our advice is to wait for a pullback before committing additional funds.

Finally, in the currencies markets, the US Dollar Index is weakening and major world currencies are likely to rise over the following weeks. If we get a good bounce in the Euro and British Pound, our recommendation would be to sell into strength. The European economy is in a terrible condition and their currencies should reflect this over the medium to long-term. If we were forced to select some currencies, we'd pick the Aussie and Canadian Dollars which are currently depressed.

My Comments: I agree with just about everything. We need to see a pull back and then consolidation in equities, before attempting to buy. With a market that has dropped as much as these have the odds are against a v shaped bottom and lots of indicators are signaling caution. Doesn't mean that we can't rally further.

It is also rather early to call this a new bull market. I'm not ready to say that yet.