Weekly Update with Puru

Global stock markets are consolidating their recent gains and this is impressive given the sharp rally since March. Rather than correcting sharply, stock markets are clearing the overbought conditions by grinding sideways. Our view remains that we are in the early stages of a 2-3 year cyclical bull-market which will probably end when central banks tighten monetary policy by raising interest-rates. Until that happens, asset markets should continue to benefit from the massive stimulus provided by the establishment. Now, there can be no doubt that this recession is much more severe that the typical slowdown seen in the past few decades, but the current situation is nowhere near as bad as the depression years of the 1930s. Well, it seems that other people are also coming to the same conclusion and this explains the recent re-pricing of risky assets such as stocks and commodities.

As far as stock markets are concerned, emerging Asia is providing leadership and we expect this trend to continue throughout this cycle. So far, two of our favourite markets (China and India) have led the pack. Over the following months, we expect Vietnam to play catch up. These three Asian economies are growing rapidly and long-term investors should be rewarded by owning quality businesses in these nations. Accordingly, we suggest that you hold on to your positions and perhaps allocate additional capital during temporary pull-backs.

In the commodities complex, the price of crude oil is trading around $70 per barrel and it is likely to soar over the following years. Whether you like it or not, the world's oil production is peaking at a time when usage is on the rise. All other things being equal, this supply and demand imbalance should result in much more expensive oil. If our homework is correct, the price of oil will probably rise at an increasing rate over the following years and ultimately we will see shortages. In fact, the supply situation is so dire that within a decade or two, oil may only be used for aviation and agriculture. Obviously, it is difficult to forecast how high the price of crude will go but last year's record of $147 per barrel should be easily surpassed. Over the past few weeks, we’ve allocated a major proportion of our clients’ capital to quality businesses in the energy industry and we suggest that you do the same. To be precise, we’ve invested in upstream oil/gas companies, oil drilling contractors and businesses engaged in producing alternative sources of energy. Dominant businesses in these sectors should produce satisfactory growth over the following years.

Over in the metals department, copper has shot up to a new recovery high and this is an encouraging sign. It is worth noting that most of the high-grade ore in the world has already been mined and copper companies are now being forced to mine lower-grade ore. This development together with the rising cost of energy should underpin copper’s bull-market. Along with copper, most of the other base metals are also rising and the boom should continue for the foreseeable future. Long-term investors should consider an investment in diversified mining companies. As far as precious metals are concerned, both gold and silver are still trapped in a trading range and if the bull-market is still intact (our view), they should soon commence a powerful advance. Therefore, investors should hold on to their physical bullion and perhaps allocate some capital to precious metals’ mining shares.

In summary, it looks as though the secular boom in commodities and emerging Asia has resumed and investors should focus on acquiring partial stakes in dominant businesses positioned to benefit from resource-scarcity and the urbanisation of China and India. After thorough research, we’ve identified superb companies which boast durable competitive advantages, solid balance-sheets and attractive valuations. If history is any guide, such quality businesses should deliver outstanding returns over the medium to long-term. And we suggest that you focus on the big picture by allocating your capital to the strongest companies in our preferred sectors and markets.

My Comments: Dont fight the charts and they are all pointing up at the moment. As long as you understand that this rally will end (some day) and have a plan to exit, you're okay. Fundementally the rally is bogus and if/when it rolls over we could see a big drop in either real or nominal prices. Pay attention.