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SOCIAL SECURITY REFORM IS DEAD

SOCIAL SECURITY REFORM IS DEAD

President Bush’s plan to reform Social Security is dead. The huge expenses connected with the wars in Afghanistan and Iraq plus the 2 big hurricanes, have used up all of the money that the administration wanted to expend to restructure the social security system and Medicaid.

US GOVERNMENT SPENDING: TAKE YOUR PICK–REPUBLICANS BRING BIG DEFICITS, DEMOCRATS BRING BIG DEFICITS

The European media of the moderate and conservative stripe is used to lambasting President Bush. The US media appears to be gearing up to do their own critique.

In Europe, recently the Financial Times newspaper and The Economist magazine have blasted the US President as a big spending, crony promoting, and pork barrel vote buyer. Many on the fiscal conservative branch of American economics have been saying the same thing for quite a while. The difference is that the foreign media has been more vituperative and less frightened of repercussions than the US media. However, the US media is getting their courage up, and looks ready to attack the President and Republican Party as the 2006 election season starts to heat up.

Unfortunately for the Democrats, their ideas are as out of date and ineffectual as those of the Republicans. They want to spend in different ways, but their spending will still run deficits. This should send the dollar lower. They will be destroying the currency, hurting the US investment markets, and mortgaging the future of coming generations of Americans. In any case, we are in for a big political name-calling year in 2006. A big political name-calling contest can be neutral or negative for the stock market and the currency of a country. It is almost never positive.

U.S. STOCKS—FUNDAMENTALS ARE DETERIORATING, BUT MARKET IS PROVING TO BE HIGHLY RESILIANT

Higher interest rates, higher energy prices, and probably higher taxes are in the cards for the future. None of these is salutary for the US stock market, yet it continues to hold up better than many had expected. Some stocks are in favor, especially those that benefit from major global trends, such as higher energy prices, an aging population, lots of government spending on reconstruction, a weaker US dollar and rising inflation.

Industries that look like beneficiaries to us are: natural gas, oil, gold mining, oil service, coal, healthcare (except pharmaceuticals), heavy construction and construction related engineering. We would avoid those companies connected to home finance and construction and discount retailing.

REAL ESTATE PRICES ARE PEAKING IN HIGH END AREAS OF THE U.S.

According to various sources, real estate prices in many high-end resort areas of Florida and the New York area have already peaked. The resort, second home and retirement market is the most vulnerable to higher interest rates. These purchases are discretionary and can easily be deferred. Next, we expect to see prices falling in overpriced metropolitan areas like New York, San Francisco, Boston, Orange County California, San Diego and Los Angeles.

This remains a good time to sell speculative real estate, if you can find a buyer.

WE SEE THE ENDING OF THE REAL ESTATE BUBBLE AS GOOD FOR COMMODITIES AND STOCKS

As we have mentioned many times in the past, the world is awash in liquidity, which is sloshing around from speculative vehicle to speculative vehicle. Real estate was the hot speculative vehicle for the last few years, and as high interest rates bring an end to that game it is certain that a new game will develop.

THE QUESTION IS WHERE WILL THE LIQUIDITY GO NEXT?

Commodities will continue to get a larger share of capital than they have historically. China, India and other developing countries will continue to demand a larger share of raw materials than they have in the past. This alone will cause raw material prices to rise. These games fascinate the observer because they highlight the naiveté and lack of knowledge of the participants in general, and the sophistication of the big players. The big players get in first, and after a while the mid level players, and finally the small and unsophisticated players enter the market.

It may well be, that the next big game, is commodities and the stocks of countries which can grow their economies fast, even with higher commodity prices. I am not yet certain that this will be the next opportunity, but I am becoming more certain as time passes. I will keep you updated. Let us just say that new opportunities in global markets may await us.

JAPAN IS JUST BEGINNING TO DO WELL

The Japanese stock market is rising on very high volume, with financial and construction stocks leading the pack. Economic rationality has begun to reassert itself in Japan and politics is taking a back seat. We own Japanese stocks and we will be adding on corrections. By the way, Japanese stocks are rising on both foreign and domestic buying, which could accelerate as people see that the stock market bandwagon is moving again after 15 years of disappointment.

INDIAN STOCKS

In general, Indian stocks are not cheap today, but there are some good long-term investments. We have recently made money in Indian value stocks and we are interested in Indian LNG importers and processors. India will need a lot more energy to continue their rapid economic growth curve.

CHINESE STOCKS

Thus far, Indian stocks have been benefiting, while Chinese stocks have not. This is due to the fact that Chinese stock brokers made absurd promises to investors who were expecting a communist model where losses in the Chinese stock market would be reimbursed. This has caused the bankruptcy and near bankruptcy of many Chinese brokers. Now, the Chinese government is allowing foreign brokerage firms to come in and take over Chinese brokers 100%. Next, the Chinese will have to start to develop accounting transparency as opposed to the non-transparent financial statements now provided in China. Then and only then, can the stock market of China be an attractive investment.

CURRENCIES AND GOLD

The Canadian dollar is stronger and most other foreign currencies are weaker versus the US dollar. The markets view the Canadian dollar as a petro currency, and we see no reason for this to stop. Canada, through their Athabsca tar sands, has the world’s second largest supply of oil after Saudi Arabia. They also have many major natural gas fields, coal in abundance, coal bed methane and other energy resources. They have timber, gold and many other natural resources. They have a reasonably rational government. Canadian stocks continue to do very well attracting substantial foreign investment.

Other major currencies have been weak as investors focus on the fact that the US continues to raise interest rates to stop the inflationary expectations and to compensate for big government spending after the recent hurricanes.

Gold is acting like a petro currency, which it should, given its ability to act as money in any circumstance, be it inflationary or deflationary.