Weekly Update From Puru

Global stock markets are still in correction mode and the pullback/consolidation may continue for another week or two. Thereafter, we expect a strong year-end rally which will probably take stocks to a new recovery high by next spring. We are in a cyclical bull-market and with record-low interest rates in most nations, it isn't difficult to see why the financial markets are going up. Governments all over the world are creating money, taking on more debt and destroying the purchasing power of paper money. This is inflationary and supportive of asset prices. Now, if the governments continue to inflate, it is possible that many stock markets may climb to record-highs in nominal terms, but they may still do poorly in real terms. Given the technology called the printing press, we are inclined to think that new lows in nominal terms aren't likely, although the US stock market may make new inflation-adjusted lows before this secular bear-market is over. If our assessment is correct, this cyclical bull-market will end when short-term interest-rates have risen significantly and the yield-curve is inverted. At that point, we will start liquidating our holdings, however we don't expect this to happen for another two years or so. Accordingly, we are maintaining our country-specific exposure to China, India and Vietnam. Apart from these developing nations in Asia, we also like energy, materials, precious metals, industrial machinery, Asian retail and American healthcare stocks.

Over in the commodities complex, the price of crude oil is correcting due to the ongoing weakness in the stock markets. We expect the pullback to be short-lived and the price of oil is likely to rise significantly over the following years. We are firm believers in 'Peak Oil' and our largest exposure is to the energy complex - upstream companies, oil service stocks and plays on alternative energy. We have no intention of selling our positions and we suggest that you also allocate a large portion of your capital to energy. Supply and demand data doesn't lie and our solid research leads us to conclude that the supply of conventional crude oil is struggling at a time when demand is rising. This supply and demand imbalance should cause an energy crisis and the price of crude is likely to appreciate considerably. Any temporary pullbacks in the oil and gas patch are buying opportunities.

As far as precious metals are concerned, real money is coming back in fashion! Given the irresponsible monetary and fiscal policies, gold has resumed its role as a store of value; an anchor amidst the reckless money and debt creation. Despite the lengthy bull-market, gold seems to be undervalued and should rise over the following years. More importantly, gold is on the verge of an explosive rally which will probably end next spring. Silver is also benefiting from this flight towards hard assets and its price should appreciate until next spring. We have some exposure to precious metals mining stocks and we will look at booking our profits next spring. In the meantime however, we suggest that you hold on to your positions in this sector.

Finally, in the world of currencies, the US Dollar is desperately trying to rally. Even though a short-term counter-trend rally is possible, we don't expect the American currency to stage a sustainable advance. Remember, the US government's obligations are now worth US$115 TRILLION and the only way America can avoid default is by creating money and debasing its currency. Accordingly, we suggest that you keep your cash in Aussie and Canadian Dollars and if the US Dollar rallies, we suggest that you use that as a selling opportunity. If our world-view is correct, US Dollar cash and American government bonds will probably turn out to be the worst assets to own over the next decade.