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The Political Season Heats Up

The Political Season Heats Up

The Political Season Heats Up

U.S. presidential elections are a year away, while France and many other countries will be staging elections within the next twelve months. We can expect continued volatility as politicians around the globe say things to benefit their re-election chances which can have a negative impact on stock prices globally over the short run. This has made and will continue to make the tried and true method of buying and holding specific stocks for the long term a difficult road to travel anywhere in the world.

It is our opinion that, the best approach is to invest with the long term performance as your major goal. We do not however agree that this means buy stocks and hold them through thick and thin. Global volatility does not allow this to be an effective method and it has not been effective since the year 2000 in the U.S. technology stock market, since 1990 for the Japanese markets and since 2007 for much of the rest of the developed and developing world.

Our view is that long term planning is best established and accomplished by avoiding major draw downs in values of portfolios during very difficult market environments that occur due to short term volatility. We believe in a plan to make money while it is easy to make money, and not lose money when it is easy to lose money. This is the best approach for protecting assets and building capital over the long term, and the approach that we at Guild strive to take for our clients.

We believe that at certain times the best investment vehicle for a client may be cash, even if it is earning modest interest; when the alternative is losing money as markets fall. We are not perfect, and accounts that Guild manages can fall in value, but the declines are historically less than the market’s declines during the same period.  In our opinion, having cash during declines gives us a better chance to outperform over the long term.  Making money in good markets and cutting losses quickly in bear markets is our historical approach and we recommend it to others.

 

A Bit Of Levity

The futures merchant MF Global failed this week.  The Commodities Futures Trading Commission (CFTC), the agency in charge of futures trading, had the regulatory responsibility.  As one wag put it, the regulators should have noticed and stopped MF Global from employing 40 to 1 leverage, but they were too busy in Washington creating new regulations to wreck the economy.  They had no time to enforce the regulations already on the books.

This is not far from the truth. Governmental incursion into the business world has been huge over the last few years with new regulations being promulgated by federal, state, and local governments all the time. The regulations are being put in place by people who are mostly lawyers and very unaware of the difficulties in starting or running a business. We have written about this before and we will write more about this in the future as we see this making it very hard to employ new people and very hard to compete in a world where many non-U.S. companies do not have to deal with such regulatory hurdles and expenses. If the U.S. is really serious about creating millions of new jobs and getting the economy back on track, regulatory burdens should be lessened.

 

The Beat Goes On And Spreads To New States And Municipalities

Jerry Brown, the Democratic governor of California, is proposing raising the retirement age to 67 for new employees who are not public safety employees.  His proposal ends pension spiking, where employees bump up their retirement by working a lot of over time their last year before retirement so they can retire at a level well above their normal salary for the last three years’ work. Gaming the system like this is causing the fiscal deterioration of America’s public sector, and it must be reined in…unless of course we want to go Greek. To read the article about California’s Governor, Jerry Brown, click here.

 

The End Of Cheap Chinese Goods

We have mentioned this a few times over the past couple of years, but it looks to us like the great Chinese-led deflation in the price of manufactured goods has come to an end.

For much of the past twenty years, low cost Chinese goods have helped keep inflation down in the developed world. Recent data shows that the prices of Chinese goods rose in the last year, especially in the last 6 months.  While labor costs in China have been rising for some time, it is now showing up in significantly higher prices of goods exported from China.

 

Demand For Commodities

Commodities in investment portfolios have been rising for a decade and regulators want to get a handle on it.  More and more regulatory agencies are establishing position limits on commodities for traders, speculators, and investors.

The Dodd Frank legislation has many different rules and regulations that deal with derivative use, and in our opinion, it is a mess.  It is filled with complicated inconsistencies and has caused disagreements between the commissioners at the CFTC and the individual commodity exchanges, which used to regulate futures transactions.  Further, many commodities trade on European exchanges, and there is no assurance that they will go along with the Dodd Frank’s approaches.  In short, it will be a long time until regulations on futures contracts passes from the exchanges to the CFTC.  Nonetheless, government officials are trying to reign in commodity speculation.

Institutional and retail figures on commodities under management in second quarter of 2011, if you include exchange traded products, medium term notes and commodity index swaps exceeds over $440 billion dollars.  This is up from the less than $100 billion in 2005 according to Barclays Capital and Thompson from a Financial Times article on October 20, 2011 entitled “CFTC push on speculators faces legal threats.”  The article’s author, Gregory Meyer, points out that agriculture makes up $103 billion, energy $132 billion, base metals $21 billion and precious metals $192 billion.  Does anyone wonder why gold prices have risen in the last five years? Click here to read the full article.

 

How Political ‘Good’ Intentions In 1990’s Came Back To Bite

On the front page of the November 1st edition of the Investor’s Business Daily is the article “Smoking-Gun Edict Shows Gov’t Behind Housing Meltdown.”  We have discussed several times in our letters that there is no shortage of culpability for the housing and banking crisis in the U.S.  Real estate professionals, appraisers, accountants, rating agencies, bankers and government all share responsibility for the bubble and collapse.

While the politicians rev up for another election season, and banter about how they are going to fix the economy, let us not forget that their track record is poor. To read the article on the “Smoking-Gun Edict”, please click here.

 

Why We Are Sanguine About US And Emerging Markets, Gold, Wheat, And Oil.

While many investors have been pessimistic about the European bailout (and continue to be negative because the details of the bail out and of the continued political negotiations continue to be messy), we think it is wise to buy when we encounter one of the panic filled decline days that we are periodically experiencing.

Europe has no choice but to pursue QE and print money to recapitalize European banks. In the final analysis, we do not see any other alternative to solve Europe’s problems than for Europe to engage in a lot of QE, and that is exactly what has been happening; from the UK, from Switzerland, and now from European Central Bank itself.

Whether it comes from the various European central banks, some institution/fund backed by European taxpayers, or if it comes from individual countries who have to nationalize their banking systems, it will be QE. Others may quibble about the individual events on a day to day basis; we liken this to focusing on the trees in the forest. We are focused on the forest itself and we are confident that in the name of self interest, Europe will act as we suggest.

In our view, there is no other alternative that any politician would find even remotely palatable.  Letting the banks fail is not an option.  Doing so would be the end of a prime minister’s political career, the end of their party’s influence, and possibly the end of their party’s role in government for years to come. Since it will be QE, we believe that the reaction of world markets will be much like the last time QE was introduced on a grand scale (by the U.S. in early 2009). At that time the U.S. did the QE; this time it will be Europe and European nations. After the U.S. QE in 2009, developed market stocks, emerging market stocks, commodities, commodity (Canadian, Australian, and Brazilian) currencies, and especially gold went up and stayed up for over a year.

We expect a similar outcome this time.

Gold (1 Year Chart)

Courtesy of Bloomberg

 

Oil (1 Year Chart)

Courtesy of Bloomberg

 

S&P (1 Year Chart)

Courtesy of Bloomberg

EEM (1 Year Chart)

Courtesy of Bloomberg

Wheat (1 Year Chart)

Courtesy of Bloomberg

 

Thank You To Our Readers

It has been 40 years that we have been managing investment portfolios for clients.  We hope the newsletter serves to sharpen your investment perspectives and strategies.  Please feel free to forward our commentary to friends, family, colleagues.

To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email us at guild@guildinvestment.com.

 

Recommendations

Date

Date

Appreciation/Depreciation

Investment

Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations
Gold

6/25/2002

Open

+443.2%

Oil

10/24/2011

Open

+7.7%

Wheat

10/24/2011

Open

+0.6%

Corn

4/20/2011

8/3/201

-6.3%

Oil

2/11/2009

8/3/2011

+157.1%

Corn

12/31/2008

3/3/2011

+81.0%

Soybeans

12/31/2008

3/3/2011

+44.1%

Wheat

12/31/2008

3/3/2011 

+35.0%

Currency
Recommendations
Long
Canadian Dollar

10/24/2011

Open

-0.1%

Long
Singapore Dollar

10/24/2011

Open

+0.7%

Long
Canadian Dollar

9/13/2010

9/21/2011

+2.2%

Long
Chinese Yuan

9/13/2010

9/21/2011

+5.8%

Long
Swiss Franc

9/13/2010

9/21/2011

+12.1%

Long
Brazilian Real

9/13/2010

9/1/2011

+6.4%

Long
Singapore Dollar

9/13/2010

8/3/2011

+10.9%

Long
Australian Dollar

9/13/2010

6/29/2011

+14.1%

Long
Thai Baht

9/13/2010

6/22/2011

+6.5%

Short
Japanese Yen

4/6/2011

7/27/2011

-9.7%

Short
Japanese Yen

9/14/2010

10/20/2010

-3.3%

Equity Market
Recommendations
iShares MSCI Emerging Market Index

10/24/2011

Open

+6.7%

U.S.

10/24/2011

Open

+1.8%

U.S.

9/14/2011

9/21/2011

-2.3%

India

4/6/2011

9/21/2011

-21.6%

Malaysia

6/29/2011

8/3/2011

+0.1%

U.S.

6/29/2011

8/3/2011

-4.6%

Japan

2/15/2011

8/3/2011

-9.5%

Australia

2/15/2011

6/22/2011

-0.9%

Canada

3/24/2011

6/22/2011

-7.1%

Colombia

9/13/2010

6/22/2011

+2.6%

Malaysia

4/6/2011

6/22/2011

+0.8%

Canada

12/16/2010

3/11/2011

+7.9%

U.S.

9/9/2010

3/11/2011

+18.1%

South Korea

1/6/2011

3/3/2011

-2.9%

Colombia

9/13/2010

2/2/2011

+3.9%

China

9/13/2010

1/27/2011

+5.0%

India

9/13/2010

1/6/2011

+7.9%

Chile

9/13/2010

12/16/2010

+8.9%

Indonesia

9/13/2010

12/16/2010

+9.5%

Malaysia

9/13/2010

12/16/2010

+1.3%

Peru

9/13/2010

12/16/2010

+32.2%

Singapore

9/13/2010

12/16/2010

+4.8%

Thailand

9/13/2010

12/16/2010

+11.9%

Bond Market
Recommendations
 30 YR Long Term
U.S. Treasury Bond

8/27/2010

10/20/2010

0.0%