Weekly Update from Puru

Global markets are heating up and the bull-run is gathering steam. This nascent bull-market is climbing the ‘wall of worry’ and this is encouraging.

Look. When it comes to investing, nervousness is your friend, overconfidence your enemy. At present, the vast majority of people do not trust this rally and most believe that this is a dead-cat bounce or a bear-market rally. Somehow, the skeptics are failing to take note of the fact that already, some emerging markets have almost doubled and even the lagging indices in the West have risen by roughly 60%. Such large rallies coupled with the almost universal bearishness prevalent today is an indication that the bull-market has much further to run. In fact, we would not be surprised, if the S&P500 rose by another 20% by year-end.

Yes, we are aware that all is not well in the American economy and several risks persist. First and foremost, unemployment is still rising, Option-ARM and Alt-A loans are coming up for resets and nominal wages are in decline. However, most of this negative news is known by most market participants, hence it may be fully discounted in today’s prices. Remember, stocks are claims on the very long-term cash flows of operating businesses. Moreover, the vast majority of a stock’s present value is determined by what the underlying business will produce over the remaining life of the asset.

Turning to the present situation, even if the economy remains weak for another year or two and business remains sluggish, it is not necessary that stock markets will plummet again. The reason why we say this is because during last autumn’s market panic, most stocks were decimated and were already priced for a long-lasting global depression. Fortunately, the worst-case outcome has not played out and this is the reason why we are witnessing one of the strongest rallies in history. Now, given the steep yield-curve and accommodative monetary policy, it is our contention that the bull-market will continue for several months. In our opinion, the time to reduce risk in investment portfolios will come when central-banks have raised interest-rates and the yield-curve is flat or inverted. When that occurs, we will liquidate our ‘long’ holdings and re-position our clients’ capital. However, for the time being, we are fully invested in our preferred businesses.

In terms of sectors, we are maintaining our exposure to energy, materials, industrial machinery, telecom and Asian retail. Furthermore, a couple of days ago, we have acquired quality businesses in healthcare and agriculture. In our view, the fundamentals have greatly improved for our new holdings and this should translate into solid long-term growth for our clients. As far as specific markets are concerned, we continue to favour China, India and Vietnam. So far in the bull-market, all these markets have been strong and we expect this outperformance to continue over the rest of the cycle.

Over in the commodities complex, the price of crude oil is staying above US$70 per barrel and this should not come as a surprise to our readers. As you are aware, we expect the price of oil to explode over the following years and our biggest investment positions are in the energy sector. Elsewhere in the energy complex, it is noteworthy that the price of natural gas has rallied sharply over the past week and the related stocks have ignited. Long-term investors should keep their positions.

Over in the metals department, the price of gold is finding some resistance at its all-time high. If the bull-market is intact, then gold must break above $1,030 per ounce and it should not fall below US$920 per ounce. In any event, given the rapid advance over the past few days, we have captured some profits and reduced our exposure to precious metals mining stocks. If gold fails to break out to a new high, we will liquidate our remaining positions in this sector. As far as silver is concerned, it has been outperforming gold and this is bullish. For now, keep your positions but if gold struggles over the following days, then consider selling into strength. Finally, the price of platinum has broken out to a new recovery high and this is another indication that auto demand is returning. Those who believe in an economic recovery should take a look at platinum.

Finally, in the realm of currencies, the US Dollar is getting crushed and this shows that the carry-trade is back in vogue. Our preferred currencies (Australian and Canadian Dollars) are super-strong and should continue to rally over the following months.