Mid 2010 Investment and Economic Thought
Stock-Markets / Financial Markets 2010 Jul 25, 2010 - 02:52 PM GMTBy: David_Urban
It was my mantra at the beginning of the year that long-term investors should stay in cash and wait for attractive buying opportunities to come along.
Price-earnings ratios are once again becoming attractive. While they may seem high and nowhere near lows that sparked past bull markets investors would be wise to begin putting together lists of favorite stocks and begin monitoring prices in anticipation of putting cash to work.
We may take 6 months to a year to find a bottom but for investors it is better to well prepared in the event a buying opportunity comes along.
At this moment, we are in a stock pickers market and you should act accordingly.
Globally, markets will likely take their cues from the US and investors should proceed with caution.
Until the US government makes a serious effort to reign in spending investors should have money in Gold and Silver as a hedge against currency debasement and loss of purchasing power relative to the world.
Gold should move to new highs later this year but will likely see some sideways to lower trading action in the near term as we move through the historically weak summer period.
Gold stocks are less attractive to me. They should be trading higher based on a higher gold price but there are some factors restraining stock prices.
First, you have rising costs at mines partly related to the depreciation of the dollar. While we point to the USD Index, the truth is over 50% of the Index is made up of the Euro and I believe approximately 90% is European currencies with little or no exposure to Asia and South America.
Second, gold stocks are aggressively acquiring the remaining low hanging fruit in the exploration area, in many cases with stock. The problem with these transactions is the effect of dilution since the acquired assets have zero revenues.
Personally, I am waiting for a bit of a pullback to the 1175-1150 area with an absolute floor at 1065.
Investors in gold equities should slide down the exploration curve, as there appears to be value at the far low end in the prospecting and drilling areas.
Silver is attractive at the current price but given its volatility relative to Gold and the chance for Gold to pull back, Silver may trade lower over the short-term.
In fact, Silver is completing a very rough and ugly head and shoulders pattern leading me to believe that we may see some weakness in the coming weeks and months.
If commodities in general pull back over fears of a slowing economy both Gold and Silver will find any potential gains limited.
Canadian banks are showing value but again prices may get cheaper over the next six months. The TSX looks oversold as do most Canadian banks.
Asian economies look to continue their recovery and growth. A slowdown in the Chinese economy will defuse talk of a large currency appreciation. Non-correlated Asian markets should do well over the second half of the year but I expect problems in the US to overshadow the growth story and mute any potential large gains.
Stock prices in China and Hong Kong should continue to struggle as IPO’s and bond sales are absorbed.
Avoid South American equity markets over the near term as the difficulties facing individual countries may spill over into neighboring countries causing problems. Some of the problems include the reconstruction efforts in Chile, government and trade problems coming out of Argentina, and a Brazilian economy firing on all cylinders.
While the oil spill in the Gulf continues to provide tremendous amounts of speculation on the ultimate size of liability for BP there are some factors to consider.
Did Exxon go out of business after the Valdez spill? No.
Did any of the cigarette companies go out of business after the government settlement? No.
Does BP have attractive assets worldwide? Yes.
Will they survive? Yes.
No doubt, there will be additional regulation, massive fines, and increased scrutiny over oil and gas operations in the Gulf, Alaska, and all over the lower 48 states but the industry will survive and move forward for the future. As a high-risk investment, BP does look attractive under $30 but remember that this is a high-risk investment. The stock could trade lower if the broader market moves lower over the second half of the year.
***Disclosure note: I own BP stock in my personal account. This is not an endorsement to buy or sell nor should it be taken as such.***
The recent decline was due to portfolio window dressing as I noticed that Gold and certain Asian markets where I trade (which are up for the year) held up and saw buying as the US market (which is down) fell as portfolio managers rushed to tweak portfolios ahead of the mid-year reports.
The rally last week in the US was not met with a similar rally in the markets I follow which, in addition to weak volume, leads me to be very cautious.
It is my opinion that we are still in a topping formation and look to see lower markets through the end of the year with the major indices ending up down for the year.
Personally, I am putting together a buy list of stocks with good dividend yields and earning bases and plan on waiting for the right moment to allocate capital.
In the coming weeks and months I will expand more upon the themes touched on during the first and second parts of my commentary.
Note and partial disclaimer: My political thoughts are not my personal views (politics especially) but how I see the world unfolding based on the past year and historical trends. My personal views often clash with my investing views but as I learned long ago, you should not invest with your emotions but rather invest with conviction based on what is actually happening in the market.By David Urban
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