Weekly Update From Puru

The long awaited stock market correction seems to have arrived and further declines can be expected over the following days. Although the American market’s internals still look solid, stocks were strenuously overbought and due for a pullback. Remember, no market goes up in a straight line and periodic declines are a part of this business. At this stage, the ongoing correction looks like a routine decline within the ongoing cyclical bull-market. Once this period of weakness is over, stocks should resume their advance.

It is noteworthy that Wall Street’s technical indicators are still strong. For instance, the Advance/Decline line is close to its high, new highs are healthy and new lows are in single digits. Furthermore, the yield curve is very steep and credit spreads are still narrowing. All this data diminishes the probability of a major market decline or the resumption of the bear-market. Accordingly, we suggest that you hold on to your investment positions and consider increasing your allocation towards the end of this market correction.

Over in the commodities market, the price of crude has softened somewhat but the long-term trend is still up. The supply and demand dynamics in oil are so out of whack that unless the world sinks into a global depression, the price of crude will rise. In fact, we are convinced that (under the most optimistic scenario) the world’s production of total liquids will peak within the next 3-4 years and crude oil exports may peak even sooner. Now, if this seems too much of a wait, just remember that the biggest game changer in economic history is only a thousand days away! Whether you like it or not, new discoveries and new oil-fields cannot keep up with the depletion in the existing oil-fields. When this reality dawns upon the public, we will witness an epic energy crisis.

According to our best estimates, the supply of total liquids (including unconventional oil, natural gas liquids, tar sands, ethanol and hydrocarbon processing gains) will never exceed 89 million barrels per day. And if demand grows by 1.5% per annum over the next 2 years, the world will require 89 million barrels per day by 2012. That will probably be the inflection point and the day when the world faces ‘Peak Oil’. In any event, in a post-peak world, there will be big winners and big losers. If our assessment is correct, upstream oil producers and pioneers in the alternative energy sector will be big beneficiaries. Therefore, we are maintaining our exposure to these businesses and plan to increase our holdings during this market correction.

In the metals complex, gold and silver are experiencing a routine correction and this is largely due to the expected rally in the American currency. It seems as though this counter-trend rally in the US Dollar will continue for a while longer, so gold and silver may face some additional selling pressure. We see strong support in gold around the previous correction low and recommend buying more bullion around US$1,070 per ounce. Now, it is conceivable that the price of gold may test US$1,000 per ounce, but even if it does, the downside is fairly limited. In our view, gold and silver remain in secular bull-markets and short-term corrections notwithstanding, their value should increase relative to paper money.

In the base metals camp, last week we advised you to get out of everything related to copper. Well, it looks as though the correction is still in its infancy and we expect a violent decline over the following days. The price of copper has run ahead of the fundamentals and we urge extreme caution. Long-term investors should be out of harm’s way and aggressive traders should be short copper.

Finally, in the world of currencies, our expectation of a dollar rally turned out to be correct. We maintain our position that for as long as the US Dollar Index trades above the 77 level, your cash reserves should be in the greenback. Look; when it comes to investing, nothing is set in stone and market reversals usually occur when the majority of participants are not expecting them. Only a few weeks ago, the whole world hated the American currency, so this rally should not come as a surprise. We re-iterate our view that the US Dollar has already made its lows against the European currencies, however it will probably make new lows against the Canadian and Australian Dollars