Weekly Update from Puru

The bull-market continues to climb the 'wall of worry' and the recent market action has been impressive. Rather than declining sharply in order to eliminate the overbought conditions, global stock markets are simply consolidating their recent gains. Remember; we are approaching the first anniversary of last year's autumn crash and investor sentiment is turning jittery. Nonetheless, stock markets are showing signs of strength by refusing to break down and every near-term correction is being met by renewed buying. In terms of technicals, the market's breadth is impressive with the NYSE advance/decline line reaching a new recovery high, meanwhile sagging volume remains a concern. In our view, if the markets manage to remain steady for another month or so, strong buying will emerge and we will witness rising volumes as traders return from their summer vacations. So, rather than a repeat of last year's horror show, it is probable that we will see a strong advance towards year-end.

Over the past few days, China's stock market has declined sharply but we view this pullback as a routine correction within an ongoing bull-market. Although the Shanghai Composite Index may decline further over the coming days, the downside seems to be limited and long-term investors may want to add to their positions during this period of weakness. Look. Since the turn of this decade, we have maintained that China is destined to become the next great country in the world. Fortunately, Beijing has done a fabulous job of managing China's economy during this recession and the stage is now set for superb long-term growth. Accordingly, every investor must have some exposure to China and now is the time to buy quality businesses in one of the fastest growing economies in the world. Apart from China, our other preferred markets (India and Vietnam) are also performing well and we suggest that you hold on to your long-term positions. If we do get a near-term pullback, consider allocating more capital to these developing markets.

Over in the world of natural resources, our view remains that our planet is sleepwalking into a monumental supply crunch and the end result will be a historic crisis. Whether you like it or not, hard data confirms that the era of cheap energy is over and we will see acute shortages of hydrocarbons over the following decades. It is worth noting that during this severe recession, global demand for crude oil has only shrunk by 2.6% and usage in the emerging world has continued to rise! So, what will happen when consumption picks up again? Who will rise to the challenge and produce the extra oil? Our research leads us to believe that it will be extremely difficult (if not impossible) to significantly ramp up oil production from these levels. Therefore, we expect the price of crude oil to rise exponentially over the medium to long-term. And once the depletion rates accelerate, we will see acute shortages followed by rationing. In light of the above, our recommendation is to allocate a large portion of your investment portfolio to energy (upstream oil/gas companies and oil service stocks).

Elsewhere in the commodities complex, base metals' prices are firming and this is another positive development. Yesterday, copper closed at $2.75 per pound and after a near-term correction, it should rise further. Similarly, other base metals are also rallying and this could be due to a pick up in industrial demand. As China, India and the other developing nations continue to industrialise and urbanise, there will be a huge demand for industrial commodities. Unfortunately, supplies won't be able to keep up and the result will be a big bull-market in commodities. So, our suggestion is to buy and hold on to diversified mining and steel companies as these businesses are likely to produce sound operational results over the following years. As far as precious metals are concerned, both gold and silver are in the latter stages of a multi-month consolidation period. If the bull-market is intact, we should see upward breakouts soon and the rally will probably last until spring next year. So, our advice is to hold on to gold and silver mining stocks.

In the money and debt markets, the US Dollar Index is bouncing along an important support level and it looks as though it will weaken sharply over the following months. The US is running a huge budget deficit and almost half of this hole will be financed by printing US Dollars. So, it is probable that the US Dollar will decline against the more sound currencies such as the Canadian and Australian Dollars. Furthermore, the currencies of emerging Asia should also strengthen against American money. Finally, the action in US Treasuries is choppy with the 10-year Note yielding 3.42% and the 30-year Bond yielding 4.24%. Over the past few days, yields have dropped somewhat and they could go lower in the near-term. However, over the long-term, we expect US yields to rise significantly as America struggles to raise capital from foreign investors.