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.