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FOCUSING ON A FEW SECTORS AND THEMES

FOCUSING ON A FEW SECTORS AND THEMES

OUR OVERALL THINKING IS LEADING US TO FOCUS ON A FEW SECTORS

NEW TECHNOLOGIES

The technology of the moment, as we all know, is the handheld device. It is part phone, part computer, part game console, part camera, part GPS system, and music player, and it is evolving very rapidly. There are several companies that are active in this industry, with more entrants joining all the time. We believe that the rapid evolution of handheld computing through many different devices will remain the most important of emerging technologies that is likely to substantially change the way we live.

We are watching carefully to identify new companies and new developments of this trend that we anticipate will branch off into many new technologies.

IN DEVELOPED COUNTRIES, OUR ATTENTION IS DRAWN TO EXPORTERS OF DURABLE GOODS TO THE DEVELOPING WORLD

In our opinion, it will take years for consumers in the developed countries to rebuild their liquidity after the shock of the recent economic decline. Therefore, we expect the savings rate in the developed world will remain high as these people reign in their spending. However, this is not the case in the developing economies.

Consumers and businesses in developing economies demand durable goods, especially machine tools and electronic products. Many of the manufacturers of the best durable goods are in the developed countries. Who exports these highly engineered goods to China and India? Germany, Japan, and the U.S. all have companies that excel in this area.

IN DEVELOPING COUNTRIES, OUR ATTENTION IS DRAWN TO CONSUMER AND FINANCIAL STOCKS.

In India, China, and other developing countries, our focus is on the consumer and the financial stocks. As we travel on our research trips, we see that the consumer demand is growing rapidly in the developing world. In China, Brazil, and India, we favor banks, housing, insurance, autos, and other consumer areas.

OIL

Many of our readers have inquired about why we have steadfastly remained bullish on oil over the last few months as depressions in business activity have wrackedJapan, Europe, and the U.S.; which are the world’s major consumers of oil. There are several reasons for our continuing bullish stance on oil.

Reason 1: Global conventional oil production has peaked.

As many of you know, according to the world’s most accurate experts on oil production, the peak in conventional global oil production already occurred back in 2007. Moving ahead from that time, there will be new conventional oil discoveries, but they will not be able to produce enough to supplant the declines in oil from existing production and the fields will be expensive to discover and develop.

To put it another way, all of the oil that can be produced and sold profitably for below $50 per barrel has been discovered. New fields will be costly and difficult to complete and bring to production.

The most obvious example in recent years is the major field of oil and gas discovered beneath the Atlantic Ocean off the shore of Brazil. These energy deposits are miles below the surface under thick salt domes, and the technology to bring these fields to production does not currently exist. New technologies will have to be developed to extract the oil, which is far out to sea and deep under the ocean floor. Extracting it subjects equipment to immense pressure, heat, cold, weather, and other logistical and production challenges.

Certainly, non-conventional energy production from tar sands, oil sands, gas to liquids, coal to liquids, and many other technologies will impact the market. But in a strategic and practical sense, these additions to global oil supplies will have a modest influence on the global oil market.

Reason 2: Oil benefits from the continuing global economic stimulus programs and easy monetary policies.

Recently, the central bankers from major countries got together in Wyoming. The message of the meeting was that they agreed to keep the money spigots open. They stated that inflation is not among their immediate concerns. More important, and higher on their priority list, is to stop an economic depression/recession and attendant deflation that seems to be causing severe economic hardship among the middle class in Europe and the U.S.

In our view, the markets will react to this by increasing global demand for assets that will benefit when inflation does return. Oil, along with, gold, real estate, and stock markets of countries with strong economic growth will benefit as investors hedge against the rising costs.

GOLD

Gold prices have performed well if you look over the past five years, but in the last year and a half, gold has not risen…in spite of a banking and financial system crisis in the developed world. Is gold’s period of flat performance due to fear of deflation attendant to a global economic meltdown? Many would have expected gold would fall in price while the global inflation threat temporarily stalled.

Gold has been going sideways. In our opinion, gold’s price is inversely correlated with the value of the U.S. dollar. We believe that the dollar will decline in value in the long term as the U.S. budget deficit rises from over $9 trillion today to an expected $18 trillion in 10 years. Our review of monetary history over many centuries clearly shows that a deficit country will do anything to keep borrowing including let its currency fall in value.

In our opinion, it is simple; as the dollar falls in value, gold will rise. Our experience however, tells us that this can take time.

SUMMARY

When investing in developed countries, we prefer to focus on exporters of durable goods machinery and technology. In developing countries we prefer to focus on consumer related, housing, and banking stocks. We see gold and oil as wonderful long-term stores of value that will do well as global economic growth continues.

Thanks for listening, and we look forward to hearing your thoughts and comments.


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