Weekly Update From Puru

The stealth bull-market is gathering steam. Despite widespread skepticism and disbelief, global markets are staying firm and over the past week, a number of stock indices have climbed to a new recovery high. It is noteworthy that the market’s breadth is very strong and an increasing number of stocks are now breaking out to a new 52-week high. Moreover, the Volatility Index (VIX) has dropped to below 25 and the LIBOR has plunged to 30 bps. These are all positive developments which suggest that the market’s advance is likely to continue. There can be no doubt that on a near-term basis, the markets are overbought but so far, every pullback has been met with strong demand.

Even though the stock markets have risen significantly over the past few months, most people do not trust this rally and many are expecting another autumn crash. In our view, that time is running out for the bears and the longer the markets stay firm, the lesser the odds of a significant plunge. On the contrary, if the markets do not collapse over the next month or so, we could get an explosive year-end rally.

Please bear in mind that our investment strategy does not depend on the short-term price fluctuations and we cannot be certain as to where the market will be in a month or even six weeks from now. Instead, what we do know is that interest-rates are at record-lows in most nations, central banks are creating money and in this environment, stocks offer a formidable competition to cash and fixed income investments. Accordingly, we suggest that you hold on to your positions in quality businesses which are likely to increase their earnings in the future. As far as sectors are concerned, we prefer natural resources, infrastructure, industrial machinery and Asian retail. Yesterday, we have also added a quality health care business to our equity portfolios. Remember, millions of baby boomers all over the world are approaching retirement. As they age and their health deteriorates, dominant businesses in the health care industry should thrive. So, consider allocating some capital to the dependable medical industry.

In terms of markets, we continue to favor the emerging nations in Asia and have exposure to China, India and Vietnam. All these markets have done exceptionally well over the past few months and we expect this out performance to continue over the entire business cycle. Therefore, we suggest that you keep your positions and deploy more capital during pullbacks.

In the world of commodities, the price of crude oil is trading around US$72 per barrel and it should rise over the following years. At present, our biggest investments are in the energy complex and we suggest that you maintain your exposure to upstream oil companies and the oil services stocks. As far as metals are concerned, several base metals have climbed to new recovery highs and this is a good sign for the global economy. Investments in diversified mining companies should produce good growth over the following years, so keep your positions.

Furthermore, in the realm of precious metals, market action is heating up. Gold is currently flirting with the psychologically important US$1,000 level and the renewed weakness in the US Dollar suggests that gold may be on its way to an all-time high. For now, keep your positions in bullion and the precious metals mining stocks but if the price of gold falls below US$920 per ounce, then consider liquidating your precious metals related investments. Based on the recent market action, it seems to us that gold will climb to a new high. So, if a multi-month rally materializes (our expectation), then the precious metals mining stocks will be big winners and silver should outperform gold. Under this scenario, we will hang on to our holdings in precious metals and will probably sell into the euphoria next spring.

Finally, in the currencies department, the US Dollar has broken below important support and its weekly chart looks awful. This weakness in the American currency is a clear indication that the central-bank sponsored reflation is working and the US Dollar is again being used as a carry-trade currency. We suggest that you keep your cash in the Australian and Canadian Dollars.