Markets are queasy all over the globe but there is no reason for us to be losing sleep and feeling unsettled. There are many options to protect you from the global bear market in stocks. May we suggest a few options?
BUY ON DIPS
As we have written for months now, inflation is becoming a worldwide problem. We do not believe in the traditional U.S. centric wisdom that as the U.S. economy slows, U.S. and world inflation will moderate. In our opinion (and based upon a great deal of research by ourselves and others), inflation will rise for several reasons.
- The money supply globally has been growing very rapidly for at least the last 2 years.
- Inflation has been held in check in the developed world by lower cost imports from the developing world replacing high priced manufactured goods. This cycle has now ended. Manufactured goods are rising in price, especially in the developed countries due to a rise in costs in the manufacturing countries and the lower U.S. dollar.
- Every solution currently being employed and/or contemplated to solve the current world’s financial woes (especially, the so called subprime crisis) will breed inflation in the longer term, and cause the rate of inflation to accelerate. I could waste a lot of your time going into this in detail, but I realize that I may already wearing out my welcome by mentioning these points so frequently.
- Historically, inflation has continued to rise for at least a year after the economy turns and begins experiencing a recession. Does this mean inflation combined with economic recession, or stagflation, is in our future for at least a year? I am afraid that it does.
- The question of will the U.S. dollar’s decline continue to feed inflation remains to be seen. I certainly hope that the powers that be in the U.S. have realized the unwise nature of the weak dollar policy. Soon the U.S. should start to do more to strengthen the dollar. Of course, this will have to wait until the Fed stops lowering rates to solve the financial crisis, but taking a strong dollar policy is essential.
B) FOOD GRAINS
Food Grains will rise in price for a number of reasons:
- Wheat inventories are at their lowest in 60 years.
- Corn inventories are at their lowest in 34 years.
- The developing world is adding more meat to their diet.
- High food prices have not caused consumption to decline. Consumption is holding steady, even two years
- after food prices have risen in China, India, Russia, Brazil, and many other countries. If demand was
- going to decrease we would see indications of that by now.
These are two areas that may be the best areas for investments for a few months. Sure, market rallies will come, even big rallies, but the underlying problems are serious, and the markets have finally realized it. Why they took so long I don’t know, but they are now aware of the problems and will look at the world through negative glasses for a few months to come.
HOW WE ARE POSITIONED
THOSE WHO READ OUR COMMENTARY REGULARLY KNOW THAT WE HAVE BEEN CALLING FOR A RECESSION FOR MANY MONTHS.
We are mostly out of stocks, with the exception of some gold, a small amount of energy, and agriculture shares. We are holding the vast majority of clients’ portfolios in cash. For those clients who are able we have sold shares short in the past few months.
HOW WE PLAN TO COPE WITH THE PANIC
- We are honing our buy list, we have a list of several hundred companies and industries we like worldwide and we are setting price targets and entry points.
- Monitor stocks closely to find buy points. We do not see stocks as yet ready to buy, but the current panic has made them a lot cheaper and we have a large amount of cash to spend when the time is right.
- In our opinion, knowing when to sell is just half of the task, the second half of the task is to buy when the time is right. Although we do not believe that the time is yet right, the current panic means that it is probably fairly close at hand.
LONG TERM…WE STILL LIKE THE SAME INVESTMENT THEMES. Greed has retired temporarily, and fear has taken the stage.
We plan to wait until the current market corrections end before buying the Russian, Indian, Brazilian, and Chinese stocks we have selected. All of these markets have risen in the last few years and even the greatest investments need to rest periodically before heading higher.
Many countries will enjoy very good growth during and after the recession. The current period is one of waiting and preparing to buy as the markets find their footing. Thus, we hold a large part of our portfolios in cash.
Holding cash has 3 benefits:
- In addition to preserving assets during a decline, your psychology is better when you have not had to watch your stocks fall for months on end.
- If new countries or industry groups lead the next bull market you have cash to buy them, and you do not have to sell the stocks of your old favorites to raise cash.
- Cash earns interest while you wait to reinvest.
Obviously, recent events prove that human nature and the human tendency to oscillate between greed and fear is still alive. The more I watch the markets, the more I think that human emotion is as wildly out of control as ever.
MAY WE INTRODUCE SOME OF OUR STAFF DEDICATED TO SERVING OUR CLIENTS
May I take this opportunity to introduce the department heads at Guild Investment Management, Inc. We always encourage clients to feel free to contact us or any of our department heads to answer questions.
(Marketing / Client Relations) – Aubrey Ford is assisted by the entire staff and will help existing clients and prospective clients with their new account inquiries handled in a timely manner.
(Client Accounting) – Kyle Beard is eager to help you with your portfolio accounting and account opening related inquiries.
(Operations) – Tim Shirata can assist in many areas such as new accounts, information changes, and custodial questions.
(President) – Tony Danaher supervises the above departments and is assisted by Barbara Reams.
Investment Management and Research – Monty Guild heads the department and is assisted by Tony Danaher, Prabhat Arora, Swati Guild, and a team of other part-time and contract analysts covering countries, sectors, industries, and companies worldwide.
Guild Investment Management, Inc. is a service business and we are at your service. Thanks for listening.
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