COMMODITIES AND FOREIGN MARKETS REMAIN THE WAY TO INVEST IN 2006.
As we said in our 2006 forecast written on December 27, 2005, we see promising returns in 2006 for gold, Europe, Japan, India, Hong Kong, energy service and other stocks connected with commodities. Thus far, this has been the case, and should continue to be the correct approach for the remainder of 2006. To review our timely investment suggestions, go towww.guildinvestment.com, and look up the December 27, 2005 article in the archives.
ECONOMIC GROWTH IN VARIOUS PARTS OF THE WORLD
Recently I have been listening to and speaking with many economists about economic growth in 2006. Here are my opinions about growth in various parts of the world.
EUROPE — 4% growth as labor markets tighten and corporate profits rise due to the rationalization and cost cutting of the last 4 years.
U.S.— Slowing down. We look for about 2.5 to 3% growth in the U.S. Most of the growth will be in capital goods, transportation and export industries.
JAPAN — Good growth, with corporate profits and GDP rising as companies begin to expand after paying off $2 trillion in debt over the last 6 years. The Japanese have cleaned a lot of debt off their balance sheets and are now ready to grow again. GDP will rise nicely in 2006 and 2007.
ASIA — Continues chugging along with 8% growth. While 8% region-wide growth is about flat with 2005, it is still very impressive. China and India are growing at a rate well above 8% as a result of growing domestic consumer demand.
Exports from China and India will grow at a slower rate in 2006. This is fine. These Asian economies can grow on domestic demand, and they do not need to export as much as they have in the past to continue to grow rapidly.
Ten years ago it was a different story; exports to the U.S. were the engine of Asian growth. Today for India and China, the growth of exports to other parts of the world, and the growth of domestic demand far outstrip growth of exports to the U.S.
ONE CAN ENJOY THE HUMOROUS SIDE OF HUMAN SHORTSIDEDNESS
When we hear from the uninformed that energy prices will collapse, it is hard not to laugh. We first began investing in energy companies in the 1970’s, and then refocused on the group as energy prices began to rise 3 years ago. For the last 3 years we have been attending many energy conferences and visiting with a lot of energy and energy service companies’ CEOs. These executives have been uniformly bullish about their business and uniformly convinced that global demand for energy will grow while supply of energy shrinks.
Recently I have heard from many speculators and traders that energy prices will collapse, and that the demand for energy services will collapse simultaneously. I continue to be skeptical about this view.
OIL PRICES ARE HEADED HIGHER, NOT LOWER
The companies in the energy industry disagree with the energy price collapse scenario. Moreover, the collapse is definitely not corroborated by common sense. I have consistently stated that energy supplies are vulnerable. We have mentioned Venezuela, Iraqi shortfalls, Iranian potential disruptions and Osama Bin Ladin’s promise to destroy Saudi Arabia.
Why do all of these traders forget the long-term, when in the very short term, warm weather in the U.S. created a temporary decrease in demand for natural gas? There is no logic to ignoring the potential problems from many quarters of the global energy supply chain. Even ignoring them in the short run, has created unpleasant consequences. The traders who have sold energy short have lost a lot of money recently.
CRUDE OIL LIGHT SWEET (2005-2006)
RECENTLY OIL PRICES HAVE FALLEN AS THE OUTLOOK FOR LOWER NATURAL GAS PRICES FRIGHTENED INVESTORS. LAST WEEK’S NIGERIAN PROBLEMS, AND A TERROR ATTACK IN SAUDI ARABIA CHANGED THAT PATTERN
WE HAVE AN ADVANTAGE
Many professional investors today are former traders. We are economists and analysts, not traders. We look at fundamental economic, social, political and company facts and the probability that one scenario or another may unfold. We visit companies to understand the details of their businesses and to determine the probability of them experiencing a specific outcome. We do not glance only at charts and trade on rumors, half-truths and emotion. We believe that a fundamental understanding of the economic, political, societal and company background gives us a substantial advantage in the long run.
That is why we have been successfully managing others peoples money since 1971.
WHAT WE ARE DOING FOR OUR CLIENTS
We continue to focus on the same themes that have provided good results thus far in 2006. Starting with the areas where the majority of our investments are located and following sequentially where lesser amounts are located. Our clients own energy service companies, precious metals and mining companies in Europe, U.S. and Canada. We own financial and industrial companies in Japan. In India, we own infrastructure companies. In Europe, we own insurance companies. In the U.S., the investment focus is primarily on medical services and equipment.
I AM CONSTANTLY REMINDED BY EVENTS TO KEEP THE BIG PICTURE IN MIND. WE MUST AVOID BEING GRIPPED BY THE LAUGHABLY SHORT-SIGHTED EMOTIONS OF THE MOMENT.
GOLD, 100 TROY OZ., COMEX (2005-2006)
SILVER, 5000 OZ., COMEX (2005-2006)
GOLD AND SILVER ARE UNDER ACCUMULATION AS ARE OTHER METALS
JAPAN’S NIKKEI 225 INDEX
JAPAN CONTINUES ITS RECOVERY. GDP GROWTH IN 2006 AND IN 2007 WILL BE THE STRONGEST IN MANY YEARS
PRIDE COMMETH BEFORE THE FALL
I recently read The Histories, which was written by Herodotus in about 2500 BC. It is a thick book and I have read it before, but I greatly enjoyed re-reading it. There is no book like it, yet I can’t recommend it to most readers. However, if you are a history nut, and you believe that the lessons to be obtained from human existence are well illustrated by the fortunes and foibles of those eminent individuals of the past, you will enjoy it.
The book deals with the same old human projects; war, politics, statecraft, the building of wealth and power, and the same old human failings; anger, obsession, ego, and the corrupting influence of power.
THE MESSAGES OF THE HISTORIES
One message is played out over and over again. Risk taking leads to greatness if well managed. A second frequent message is how an inflated ego and an outsized sense of ones self -importance and ones ability, can lead to the rapid decline of individuals and of states. It is interesting to examine the fortunes of nations in the context of these histories.
The old testament of the Bible said it well: “pride commeth before the fall”.
Speaking of human failings, what do we call these memos I write anyway? A few names come to mind: blogs, memos, babblings, and unrestrained idiocy? Perhaps a little bit of all of the above.
As some have said, I like self-deprecation. This is true at times. At other times, I too let my ego get carried away. One of my personal goals is to avoid getting too puffed up. Fortunately, I have a good profession for that, the market is a brutal teacher and it does not tolerate egocentricity for long. Egocentricity is expensive; it may cause you to think that you know more than the markets. In the final analysis, the market is the arbiter of who knows, and who does not know.
Thanks for listening.
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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.
Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.