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Based on historical returns, this offers a great entry point...
2004-04-22
It has been a volatile month in the markets. Global stock markets have experienced an overdue correction and one should be on guard for a return of the equity bear. It would not surprise many of the portfolio managers that we speak with, if we were to experience a bear market in equities and bonds, at the same time, after the U.S. election in November.
The fast and vicious pullback in commodities has pushed the CRB index down over 10 percent in April. Silver has fallen nearly 30 percent in the past two weeks, Gold almost 10 percent and Oil has pulled back below US$36/barrel from a high of US$38 plus.
The run of the past few years in the commodities markets has been characterized by the increase in raw material demand from markets such as China and India. The big question (problem) is, will the demand continue and if so, how the west will adapt to a sustained increased demand for resources when these Asian and Malaysian economies become even bigger.
Twenty years ago there were 60 private passenger vehicles in China, a number now that is manufactured, in China, in minutes. Three years ago, China was a significant oil exporter. Today, it is one of the top three oil importing nations and is the world?s second-largest oil consumer. With inventories at record lows, US$38 oil (or higher) should not be a surprise.
It is estimated that the world will need two new Saudi Arabias to satisfy gasoline demand when (not if) the Chinese in the coastal regions (166 million) achieve the same percentage of vehicle ownership as South Koreans have today. Over the next decade there is the potential for 750 million new Chinese and Indian middle-class consumers and little attention has been paid to the resulting effects on the world?s supply of energy and raw materials.
We continue to closely monitor the US Dollar. It has staged a nice rally against most foreign currencies over the last two months. The Madrid bombings helped strengthen the dollar, surprisingly not to a greater degree. U.S. Dollar help has come from Japan?s willingness to sell their Yen at a record pace to date. In the first seven weeks of 2004, Japan has sold half of what it did in all of 2003. In addition to the yen sales, Japan, China and now Russia are buying billions in US treasuries. In 1987, the U.S. dollar plunge sent ripples across worldwide financial markets. The same action today would likely lead to a bigger market meltdown than that of 1987.
Conclusions?
Watch the U.S. dollar for a return to weakness.
The latest increase in rates, albeit from a very low level, could end the next round of refinancings that would to be used for the next cash infusion to U.S. consumers. That would spell trouble for U.S. markets.
World inventories of oil and refined products are at near-record low levels in relation to demand. An act of terrorism involving tankers, pipelines, refineries etc. would send oil prices significantly higher.
Demand for energy and raw materials is climbing. The CRB index (at 270) remains close to its 20 year high, even with the recent pullback. Despite the big advance in commodity prices, consumer inflation indicators remain benign. Asia?s appetite leads us to believe that we will continue to see healthy commodities markets.
We see opportunity in many areas, specifically, China, Malaysia, Japan, energy, raw materials, currencies and selected U.S. equities.
We particularly like the managed futures area as managers, with this focus, are experiencing serious drawdowns. Based on historical returns, this offers a great entry point for those with a 1-3 year time horizon. A correction in a bull market is a good time to allocate to managers focused in these areas.
If you would like information on alternative investments and the managers that we represent, please free to call and/or email us.
Regards,
Howard Lindzon
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