Weekly update from Puru

The stealth bull-market continues and the price action remains solid. Although trading volumes have been weak over the past few months, the market's breadth is very strong with the advance/decline line breaking out a new recovery high. Moreover, the number of new 52-week lows on the NYSE have dried up to 1, whereas the number of stocks breaking to new 52-week highs have increased to 60. Remember, during last October's crash, over 2,200 stocks on the NYSE dropped to a new 52-week low on the same day! That selling panic marked the internal low for the bear-market and ever since, we have seen an improvement in the market's technicals. Furthermore, it is good to note that the Volatility Index (VIX) has now declined to 24.5 and the TED Spread (difference between 3-month LIBOR and yield on the 3-month US Treasury Bill) has plummeted to well below the historical average. This is a good indicator and confirms that the banking system is no longer stressed.

There can be no doubt that we are likely to see more foreclosures over the following year as a second wave of Option-ARM and Alt-A resets hit the US. However, we are of the view that with the steep yield curve and 'free money' from the governments, most banks will be able to withstand any credit losses which may arise from defaults. Therefore, we may see some more jitters but we'd be extremely surprised if the bear-market lows were violated over the following months. At present, our clients' capital is fully invested in our preferred businesses and markets and we would suggest that you hold on to your existing positions. If we do get a pull-back, consider allocating more capital to resources and emerging Asia. If you are good at selecting individual companies, then you can also allocate capital to quality businesses which are outside the resources complex.

For our part, we have identified superb companies which are dominant businesses in their respective fields. Before we allocate capital to any business, we carefully evaluate the financial statements of the past 10 years and we prefer to see consistent earnings growth, growing market share, high returns on equity, low debt levels and most importantly; a reasonable price tag. At present, more than 60% of our clients' capital is invested in the resources complex, but we have also selected superb businesses in the telecom, industrial machinery, retailing and consumer discretionary sector. Remember, last year's bear-market severely punished all stock prices and even the good companies weren't spared. In our view, this represents a fantastic opportunity to acquire partial stakes in outstanding businesses. Now, I must confess that I don't know where the market will be in a few weeks time, but I can say with certainty that this recession will end and and good businesses will continue to thrive over the medium to long-term. The best time to buy assets is when everyone else is nervous. Uncertainty is an investor's best friend, over-confidence is his enemy. So, we would sincerely recommend that you ignore all the 'end of the world' forecasts and convert your temporarily powerful investment dollars into sound assets. Make no mistake; monetary inflation is a fact, deflation is a theory. Over the past century, cash has lost almost all its purchasing power via inflation and this trend will continue for as long as central banks control the monetary levers. So, there is no point in hoarding cash over the medium to long-term.

Over in the commodities complex, the price of crude is trading around $72 per barrel and it should rise exponentially over the coming decade. So, allocate capital to quality upstream companies and oil services stocks. We would suggest that you avoid investing in the oil majors as they are struggling to maintain reserves and production. Instead, independent exploration and production companies should produce more growth over the medium to long-term. Over in the metals department, copper is staying firm and other base metals are also appreciating in value. This is due to an explosion in Chinese imports and perhaps due to the debasement of currencies.

Wherever you care to look, in the entire commodities complex, we are dealing with rising demand and struggling supplies. A few years ago, we entered an era of resource scarcity and this problem will intensify over the coming decade. Put simply, our planet's resources cannot sustain the emergence of an Asian middle-class. Asia has over 3 billion people and you can imagine the drain on the planet's resources even if a third of this population (1 billion) demanded a better quality of life. Fortunately, for the commodities investor, this will translate into mouthwatering profits.

Finally, in the world of currencies, the US Dollar Index is bouncing along an important support level and in our opinion, it will decline over the medium to long-term. Our preferred currencies (Aussie and Canadian Dollars) are strengthening and we expect this trend to continue. Over in the US government bond market, interest-rates have declined somewhat and we expect them to stay range-bound for a few more months. Over the longer-term however, we anticipate US interest-rates to rise dramatically as the American government struggles to raise capital.