Weekly Update from Puru

The correction in global stocks came to a halt yesterday on the news that the American economy expanded at an annualised rate of 3.5% in the third quarter of this year. As you are aware, we have been pointing out for months that the economic situation is not as dire as the perma-bears would have you believe. It is worth noting that this is not the first time that America has faced a significant banking crisis; in fact they have occurred regularly since the beginning of capitalism. It is our contention that the stimulus provided by the various governments will result in strong economic growth for another couple of quarters, therefore 'risky assets' should continue to rally into spring next year. If our assessment is correct, after some additional choppy action, we will see a strong year-end rally as under-invested fund managers join the party. Our preferred developing markets (China, India and Vietnam) should continue to provide leadership and we recommend that you hold on to your positions and add more capital during this temporary pull-back. We maintain our position that we are in a bull-market, therefore bull-market rules apply - temporary pull-backs should be bought. In terms of sectors, we love energy (upstream and energy services companies), steel, diversified miners, industrial machinery, healthcare in the US, technology and Asian retail.

Over in the commodities complex, the price of crude oil is staying firm around US$80 per barrel and we expect a serious energy crisis within the next 5 years. 'Peak Oil' is real and wishful thinking or denial will not change the outcome. Once the economic recovery picks up, expect the price of crude oil to easily surpass the all-time high recorded last summer. In this scenario, the upstream energy stocks will catch quite a bid and businesses which provide technical services to the energy industry will make a fortune. We highly recommend a meaningful exposure to both and can safely state that our largest exposure is to the energy sector. Apart from crude oil, the price of natural gas is currently correcting after the recent gains. However, once this consolidation is complete, the rally in natural gas should resume. Accordingly, we suggest that you hold on to your positions in prominent gas producers.

In the world of precious metals, both gold and silver sold off sharply in the past few days and this was due to a strengthening US Dollar. However, the American currency weakened on Thursday and both gold and silver rallied sharply. In our view, the US Dollar is a doomed currency. There is no way the US government can meet its obligations without printing money and within the next few years, we will see a spectacular currency crisis. When the US Dollar takes it on the chin, the price of gold, silver and platinum will surge and the mining companies will be prime beneficiaries. Therefore, we suggest that you keep your positions in precious metals. Over the longer-term, we have no doubt that the US Dollar will crash but in the near-term, there is a possibility of a brief rally. So, if the US Dollar Index closes above the 78 level, nimble traders may want to temporarily liquidate their long positions in precious metals.

Finally, in the forex markets, the US Dollar is desperately trying to rally although so far this advance has not materialised. At present, the entire world is negative towards the American currency and sentiment is at an extreme, so a counter-trend bounce is certainly possible. For now, we suggest that you hold on to your positions in the Australian and Canadian Dollars but if the US Dollar Index closes above the 78 level, nimble traders may want to convert their cash to the American currency.

Greed Is Good

My Comments: Milton Friedman was one of a kind. I wish he was around today to help fight off the Michael Moore's of the world. Here is his defense of greed, which has been misused as of late.

Central Banks Buying Gold

Starting in 1989, the world's Central Banks became steady net sellers of their gold reserves which had been accumulated over the years.

In addition to official gold sales, the banks also began to engage in gold leasing contract with bullion banks such as J. P. Morgan, Goldman Sachs, et al. The gold was leased, and the bullion bank sells it in the market, paying the lease difference in a sort of gold carry trade.

And now for something completely different, it appears that the world's central banks may once again become net buyers of gold, after a twenty year campaign of selling gold from their vaults into the public markets, creating a steady downward pressure on the price of gold, that contributed to its long bear market.

There is some thought that the central bank gold sales had been designed to support the strong dollar as the reserve currency of the central banks. Gold had been viewed as a threat. Documents which have been disclosed and quotations from the transcripts of central bank meetings do support a concern that the price of gold could rise, destabilizing the fiat regime which had been in place since the US went off the international gold standard in 1971.

My Comments: Interesting data. If the central banks that had been selling gold into a bull market are now close to becoming buyers, what does that mean for the price of gold??? This might explain the recent rise over $1,000. Once price broke out of its wedge, it took off. This reminds me of what Jesse Livermore wrote…(I’m paraphrasing)…Price usually reacts and the “why” comes later. The insiders start the buying and then let the public in on it.

That is why price is the best gauge of markets. Price reflects all information at a given period of time. It might not reflect all available information to you or I, but all available information given to “someone”.

Full article Here...

Weekly Update from Puru

We want all our readers to remember that nasty bear-markets are usually followed by powerful bull-markets and business conditions never remain the same. When it comes to investing, the truth is that the financial markets always lead the economy and this is why the vast majority of economists aren't good investors. And this is precisely the reason why we don't pay too much attention to the econonic data. Remember; the economic news is always very bullish at major market tops and it is always negative near market bottoms.

For example, consider the ongoing rally in global equities. Now, nobody can disagree that we are seven months into a powerful market advance, yet most people continue to view this bull-market with skepticism. In fact, not a single day goes by without an apocalyptic forecast explaining why this 'bear-market rally' won't last! It is interesting to note that despite a huge advance in prices and extremely strong market breadth, the bears continue to call this a sucker's rally! We tend to disagree with their assessment and maintain our view that we are in a bull-market. Of course, this bull-market will be punctuated by intermediate-term corrections (reversion back to the 200-day moving averages) but the overall trend is up. Over the past few weeks, China's stock market has been immersed in such a routine correction and at some point, the other markets will also experience a healthy pullback. However, given the ultra-loose monetary policy all over the world, we have no reason to doubt our bull-market hypothesis. Our advice remains the same - hold on to your positions in the emerging markets and after a pullback, acquire more holdings in China, India and Vietnam.

Over in the resources complex, the price of crude oil has climbed to a new recovery high. This morning in Asia, crude oil is trading around US$78 per barrel and we expect this rally to continue for several weeks. Our initial target is US$100 per barrel, however, over the longer-term, we expect a new all-time high. If we don't discover gigantic oil-fields very quickly, then the price of crude oil may reach US$200-US$250 per barrel within the next few years. Whether you like it or not, 'Peak Oil' is real and it is here. Accordingly, we suggest that you maintain your exposure to upstream energy companies and the energy services stocks. Yesterday, the vast majority of our energy holdings broke out to a new recovery high and we expect much bigger gains over the course of this bull-market.

In the precious metals sector, gold and silver are consolidating their recent gains. The longer the price of gold stays above US$1,030 per ounce, the higher the probability of an explosive move over the next 5-6 months. It is our contention that the price of gold will rally to US$1,300-1,400 per ounce by next spring and the price of silver will go past its high recorded last year. During the upcoming rally, precious metals mining stocks will perform well and we are holding on to our positions. Remember, given the recent surge in gold and silver, the mining companies have become very profitable and this is why we suggest that you allocate some capital to dominant, unhedged miners.

In the world of 'monopoly' or fantasy money, the American currency is taking a serious bashing. It is noteworthy that the US Dollar Index has recently fallen below an important support level and this suggests further weakness. Our preferred currencies (Aussie and Canadian Dollars) are performing exceptionally well and we suggest that you hold on to your positions. Finally, over in the US bond market, the yields on the 10-year and 30-year maturities are rising again and we expect higher interest-rates over the following days. Therefore, we suggest that you cover your 'long' positions in US Treasuries.

The Best Investment In History...258,449% Return

The single best investment — in terms of greatest return on invested dollars — has been the lobbying efforts of the major banks and finance firms.

They spent $114.2 million dollars in contributions toward the 2008 election, according to the the nonpartisan Center for Responsive Politics. The companies that have been awarded taxpayers’ money from Congress’s bailout bill spent $77 million on lobbying and $37 million on federal campaign contributions, the Center finds.

These firms political activities have yielded them $295.2 billion from Recapitalization, TARP and other assorted bailouts.

The return on investment: 258,449 percent.

My Comments: This doesn't surprise me one bit. What does surprise me is how cheaply they sold out. They bought our Nobel Prize winning president for only nine million a year! Professional athletes sign bigger contracts than that! More proof of politicians incompetence. They can't even negotiate proper bribes!

I hijacked this from The Big Picture by Barry Ritholtz. Great site...I recommend it.

Full article here...

Credit Crunch Continuation

Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.

My Comments: Good article by Meridith Whitney. The contraction of credit is deflationary. The Govt. has handed out a ton of money to the banks but its not circulating (yet). Banks are mearly soaking this cash up. Or at least that's my take.

Full article here...

Weekly Update from Puru

After the big rally since March, global stock markets are correcting their gains. This pull-back was expected given the fact that we are now approaching the one-year anniversary of last year's autumn crash. Psychologically, investors are becoming nervous and we are certain that many market participants are now expecting a repeat of last year's horror show. Well, anything is possible in the investment business, but in our view, another crash is not on the cards for the following reasons:

Remember, last year's crash was brought about by the sudden collapse of Lehman Brothers and the subsequent global margin call. When Lehman failed, all banks panicked and they pulled back their credit lines. This total freeze in credit forced the leveraged market participants to sell all 'risky' assets at any price. Today, the banking system is in a much better shape (thanks to the government guarantees and bail-outs), confidence has been restored and banks are lending again. Therefore, we do not see any imminent credit-related catalyst which may trigger a near-term market crash.

Furthermore, another reason why we are not fearful is due to the very fact that so many investors today are expecting another crash! To our knowledge, market crashes usually happen when not many are expecting them and it is unlikely that we will get a massive panic when so many are already nervous.

It is our contention that after a wobbly October, the markets will gather their poise and a powerful year-end rally may occur. So, our suggestion is that you hold on to your long-term investment positions and add more capital towards the end of this month. We continue to favour the emerging nations of Asia and recommend exposure to China, India and Vietnam. Out of our preferred markets, India and Vietnam have broken out to new recovery highs, whereas China's stock market is still caught in a medium-term correction. Based on sentiment and technical data, we have no reason to doubt our view that stocks are a few months into a cyclical bull-market which will continue until central banks start raising interest-rates. If our assessment is correct, this bull-market could go on for 2-3 years.

Over in the forex market, it is worth noting that the US Dollar is holding steady and it looks as though it may be on the verge of a rally. Yesterday, the US Dollar Index closed just below its multi-month downtrend line and if it manages to close above 78, we could see a sharp reversal in the currency markets. If that happens, the American currency will rally and all other types of paper money will decline in value. Should the US Dollar Index close above the 78 level, you may want to convert all your cash reserves to the American currency. Longer-term, we expect the US Dollar to decline against our preferred currencies (Australian Dollar, Canadian Dollar and Chinese Yuan) but nothing goes up or down in a straight line and the American currency may be about to rally over the following weeks.

Moreover, if the US Dollar strengthens, gold and silver will come under pressure. For now, we are holding on to our positions in gold and silver mining companies, but if the price of gold falls below US$925 per ounce, it will be a bad omen and we liquidate our positions. As long as gold stays above US$925 per ounce, a strong multi-month advance is possible and we will stay with our holdings but if the market becomes bearish, we will not hesitate to sell.

Elsewhere in the commodities markets, the price of crude oil is range-bound and some weakness can be expected over the following weeks. Longer-term, we expect the price of oil to sky-rocket and we are holding on to our investments in this sector. Nonetheless, we suggest that you wait for a pull-back before adding more capital to upstream energy companies and oil services businesses. Finally, it is noteworthy that the price of natural gas has zoomed in the past few weeks and it looks as though an important low is now behind us. We suggest that you hold on to your positions in this sector.

My Comments: This seems in line for now. The Demand Indicator has signaled me short/defensive as of 9/28 which seems to be good timing so far.