Imminent U.S. Dollar Rally to Create Buying Opportunities in Strong Currencies and Commodities
The U.S. dollar appears poised to rally and rise in the coming weeks, according to a technical analysis. During this period, fundamentally strong foreign currencies, stocks, and commodities could fall in value, heralding a buying opportunity for which we have been waiting. We intend to exploit such weaknesses as “coming attractions” and investment opportunities for clients’ cash. Stay tuned for some changes to our recommendations.
What Does This Mean to You?
Buy on dips and sell part of your position on rallies. Hold core positions as long as you believe there remains enough potential upside to justify the risk of holding it. Volatility can be an ally as long as investors have control of their emotions and use price declines to buy. Avoiding panic selling will be a key to performance over the next few years.
The Guild Guide
For our clients at Guild Investment Management, we routinely and rigorously analyze every investment before actually purchasing. We choose a price objective based upon fundamental and technical analysis, and set downside risk parameters (the percentage decline from the stock’s highest point since purchase that we will tolerate before selling). When the stock reaches the price objective, we again review our analysis and determine if the stock can appreciate a further 30 percent in 12 months. If we determine that it can not, we sell and take the profit. If we see that it can, we continue to hold the position.
Euro Bond Smack-Down Likely in 2011
Overstretched public budgets and unattractive bond markets. Seems like a Western world infection these days. Europe has it bad. The U.S. is similarly ailing. This year will likely witness public service employee strikes and service disruptions in parts of Europe and America. Does this mean major strikes and social disruptions up ahead such as in Greece recently when public employee salaries were cut or in France when the retirement age was raised? Or will it be similar to the 1970s in the U.K. when social service disruptions were fairly commonplace events?
In Europe and the U.S., public employee unions are powerful, and typically resistant to change. Many have work rules that decrease productivity. They protect salaries, benefit programs, early retirement perks, and outsized pensions with existential resolve. Unfortunately for many of their workers, these types of benefits will undergo severe pressure and change in the coming years. We expect to see large cuts in services, higher fees, and more strikes; perhaps even disruptions of basic services such as garbage collection, public transportation, etc.
What Does This Mean to You?
Stay away from European bonds! These bonds need to decline much further before they become attractive to buy.
Turbulence Ahead—Fasten Your Seat Belts!
The strike scene we just described may be a precursor — and perhaps even a comparatively mild one at that — to even more major disruptions when the U.S. dollar loses its reserve currency status, and the government no longer has the flexibility to substantially devalue the dollar. We see serious turbulence looming, similar to the turbulence seen several decades ago when the British pound lost reserve currency status. We will discuss this situation in coming months.
Derivatives Crisis Continues
Long-time readers of the newsletter will remember that for three years or so before the banking crisis and derivative meltdown we started issuing warnings about trouble ahead. Sadly, the current situation is not one of lessons learned. There’s little clean-up of dirty business that we can see. So the banking and derivatives missteps just continue. The over-the-counter (OTC) derivative market lurches forward without any centralized clearing, exchange, or transparent trading.
The Danger
The ongoing failure to reform OTC derivatives clearing and require trading activity through a regulated exchange presents an extreme danger — once again — for the developed world’s banking system. In our opinion, doing nothing to rein in this shabby scene practically ensures more grief ahead.
Coal, Not Price of Oil, is The Key Measure of Emerging World Growth
Respected observers and prognosticators now recognize emerging markets as the big engines of economic growth for the world while developed countries are contributing little. However, we believe that many experts are focusing on the wrong metrics when analyzing the trends in the emerging world economies. Many, for instance, worry about high oil prices. They believe that more expensive oil will destroy economic demand in the world. We see these fret-filled headlines all too frequently. They are wrong.
According to estimates from British Petroleum and Union Bank of Switzerland, oil represents about 28 percent of total energy used in the developing world and in the slower-growing developed economies, 39 percent. By comparison, coal stokes about 67 percent of primary energy consumption in India and China, and only 20 percent in the developed economies. In China and India, the combined other primary energy sources (such as natural gas, nuclear, and hydroelectric) make up only about 11 percent.
What if there were no more oil? Well, India and China would have to replace over a quarter of their energy supplies. This certainly represents a significant sum, but much less than the amount of oil that would have to be replaced in the developed world. The primary issue is that oil is not scarce. It is just getting more expensive to find new deposits. Most of the cheap oil has already been found and consumed. In our opinion, the availability of coal is the more important metric for investors to monitor when attempting to gauge global growth trends. For the big engines of India and China, coal availability and pricing exert a much greater impact on growth than the price of oil.
What Does This Mean to You?
Investors should not worry that high priced oil will stunt economic growth Recent history shows that increases in the oil price often coincide with an acceleration of growth in emerging markets. Oil prices can continue to rise without suffering significant demand erosion. Oil and oil related stocks continue to be attractive in our opinion.
Good Signs of the Times: Large Companies Raise Capital Spending
The Obama Administration’s new tax approach to capital spending and research & development is beginning to produce positive results. We have noticed in the few weeks since the bill was passed that several large companies expanded their capital spending plans for 2011 and beyond. Economists generally regard such activity as a good indicator of future growth in employment.
Summary of Recommendations
Gold
Continue holding gold for long-term investment. We have been bullish since June 25, 2002, when gold was selling at about $325 per ounce. We see gold moving to $1,500 and then higher. Traders should sell spikes and buy dips.
Food and Farm-related Stocks
This remain a favorite investment target of ours We have been bullish on grains and farm-related shares since late 2008.
Oil
We believe that oil-related investments hold promise. Our bullishness dates back to February 11, 2009, when oil was trading at $35.94 per barrel.
Currencies
For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro. Since September 14th of last year we have been favoring the Singaporean, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies. We continue to do so. Use pullbacks in these currencies as an opportunity to establish long-term positions.
Global Stock Selections
For stock investments throughout the world we base our recommendations on careful studying of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth. In developed countries, technology, precious metals, and commodity producers (food, oil, and base metals) will all benefit from an improving economy and a developing back-to-work trend in the U.S. and Europe.
Since September 9, 2010, we have believed that U.S. stocks can rally further. The reason: over the longer term, liquidity formation through QE (money printing) will create demand for many assets, including U.S. stocks. A correction of 5-7 percent could occur at any time. We would use the correction as a buying opportunity.
As we mentioned last month, we also recommend Canada for investment. Within both the U.S. and Canada, we favor technology, metals, auto and auto- related, agriculture- related, and energy, including oil and coal.
We are also bullish on China, South Korea, and remain bullish on Colombia. In Colombia’s case, it is due to the very low valuation of Colombian stocks.
In summary, investors should continue to hold shares of growing companies in China, South Korea, the U.S., Canada, and Colombia.
A summary of our current recommendations can be found in the table below:
|
Investment |
Date Recommended |
Appreciation / Depreciation in U.S. Dollars |
|
Commodities |
|
|
|
Gold |
6/25/2002 |
326.7% |
|
Corn |
12/31/2008 |
55.0% |
|
Soybeans |
12/31/2008 |
44.4% |
|
Wheat |
12/31/2008 |
26.3% |
|
Oil |
2/11/2009 |
156.2% |
|
Currencies |
|
|
|
Singapore Dollar |
9/13/2010 |
3.7% |
|
Thai Baht |
9/13/2010 |
7.3% |
|
Canadian Dollar |
9/13/2010 |
4.2% |
|
Swiss Franc |
9/13/2010 |
4.3% |
|
Brazilian Real |
9/13/2010 |
2.3% |
|
Chinese Yuan |
9/13/2010 |
2.2% |
|
Australian Dollar |
9/13/2010 |
6.4% |
|
Countries |
|
|
|
U.S. |
9/09/2010 |
16.5% |
|
China |
9/13/2010 |
7.6% |
|
Colombia |
9/13/2010 |
26.5% |
|
Canada |
12/16/2010 |
4.1% |
|
South Korea |
01/06/2011 |
1.8% |
Readers can view our current and past recommendations in our commentary archives, and see how our past recommendations have performed by going to our Commentary Archive and Recommendation Tracker at our web site: www.guildinvestment.com.
Best wishes.
