Weekly update from Puru

The stealth bull-market in global stocks is climbing the proverbial ‘Wall of Worry’. Wherever you care to look, there is widespread skepticism and retail investors are still not participating in the market’s advance. Recent data reveals that investors in America continue to withdraw capital from equity mutual funds and this just shows that this bull-market is nowhere near its ultimate peak. On a near-term basis, the markets are over-extended and due for a pullback, however powerful bull-markets can stay overbought for long periods of time. In our view, as long as the monetary policy is accommodative and investors remain skeptical, the primary trend will remain positive. Therefore, we are holding on to our positions in the developing markets (China, India and Vietnam) and may add to our holdings during the next correction phase.

Over in the energy complex, the price of crude recently broke out to a new recovery high and is currently trading around US$86 per barrel. In our opinion, as the economic recovery gathers momentum, the price of crude will rise even further. Furthermore, if our homework is correct, before the end of this business cycle, the price of crude oil will trade above its all-time high recorded two years ago. In this environment, upstream energy companies will prove to be big winners and at current levels, they are on the bargain table. So far in this bull-market, the energy stocks have lagged the broad market but this may be about to change. Accordingly, we are maintaining our overweight exposure to energy and recommend oil producers and the oil services firms.

In the metals patch, the prices of base metals continue to defy gravity and against our expectation, the price of copper has climbed to a new recovery high. As we have explained before, supply and demand fundamentals do not justify this advance, therefore we will not re-invest in this sector. It is our contention that base metals are rising largely due to the easy monetary policy and speculative froth is now rampant. Accordingly, we urge caution and re-iterate our view that better investment opportunities exist elsewhere.

As far as precious metals are concerned, it looks as though gold and silver have recently put in important lows and the spring rally is now underway. If seasonal trends remain intact, both gold and silver are likely to rally until mid-May. Over the past few days, precious metals miners have appreciated considerably and this sector is still inexpensive relative to physical bullion. We are keeping our positions in gold and silver mining companies and suggest that you do the same.

In the world of paper money, it seems as though the US Dollar Index is rolling over. Conversely, the European currencies are now extremely oversold and a sharp rebound cannot be ruled out. Finally, our preferred currencies (Canadian and Australian Dollars) are performing very well and we suggest that you keep your cash in these leaders.

Finally, in the US government bond market, yields are on the rise. At the time of writing, the yield on the 10-Year Note has climbed to 3.9% and the yield on the 30-Year Bond is 4.76%. We maintain our view that the great bond bull-market ended in December 2008 and over the following months, we will see even higher interest-rates. Accordingly, we suggest that unless you are holding Treasuries for income and plan to hold them until maturity, consider liquidating your fixed income holdings.