gsg_stock discussion

Highlights of Marc Faber's July 10 2006 GBD report- Patience is also Action

1. We are living through a paradoxical situation in which it isn't the Fed that is dictating its monetary policies but, rather, the asset markets.

If S&P 500 moves up to around 1350, a further Fed fund rate hike in August is likely. Conversely, if the S&P 500 remains in a trading range of between 1240 and 1300, a pause is the most likely scenario. And if the S&P 500 were to decline by another 5% or so, rate cuts would be - if not implemented immediately - certainly discussed among Fed officials and, thereafter, implemented within a short period of time.

Marc Faber believes that the Fed is already a total write-off, given that it no longer sets monetary policies; instead, the asset markets guide the Fed's monetary policies.

2. "Really" tight monetary policies are simply unthinkable in today's highly leveraged and debt-and asset inflation-addicted United States.

3. Consequently, the trend towards higher inflation, higher interest rates, a lower US dollar against precious metals, and stagflation will likely sustained for a very long time.

4. Whereas the value of the US dollar (its purchasing power) will remain in a downtrend, other currencies' loss of purchasing power may be even greater. As a result, the US dollar, while weakening further against precious metals, could appreciate against some currencies whose appreciation in the last few years was driven by interest rate spreads- among them the Turkish Lira, the Brazilian Real, the New Zealand Dollar, and the South African Rand.

5. In the present environment of "relative" global tightening, US assets will outperform foreign assets in the intermediate term (3 to 6 months). International investors have reaped huge gains from foreign markets in the last 3 years and significantly outperformed the returns from US assets.

Therefore, no matter how promising some countries' long-term economic prospects may appear (he is thinking of India, Brazil, and Russia here), profit taking could continue to weight on these countries' stock market.

(Interestingly, there is no mention of China.....)

This would also include Japan, whose stock market more than doubled from its April 2003 low to its recent peak at 17,563 in early April 2006. Following a rebound, a further decline to around 13,000 would not surprise him.

6. Marc believes that the period from May to October would be challenging for financial assets. He continue to believe that it will be difficult for the S&P 500 to break through the overhead resistance between 1290 and 1330 for that index. So the upside would seems to be rather limited and not only for S&P 500 but for foreign markets as well.

For equity-dedicated portfolios, Marc would be positioned in relatively depressed big market capitalisation stocks, such as pharmaceutical shares including Merck (MRK), Schering Plough (SGP), Pfizer (PFE), Bristol-Myers (BMY), and Johnson & Johnson (JNJ); as well as Citigroup (C).

Among developed markets, investments in Canada may offer superior opportunities for currency-adjusted capital gains than in the US.

7. Mar is positive towards Singapore economy and its rock-solid financial condition. Its government, while certainly not perfect, is far more enlightened than those in developed world and in emerging markets. Marc also thinks that Singapore is the world's richest country if we consider the quality of its educational system, splendid infrastructure, modern healthcare facilities, perfect security, the diversity of the economy, and its financial reserves.

8. Recently, the Bank Credit Analyst published 2 intriguing figures.

a. One figure showed how Asian real estate prices had underperformed real estate prices in Anglo-Saxon countries.

b. The other showed how the Singapore stock market had underperformed other emerging markets in the last few years.

While Marc do not consider Singapore shares to be the bargain of one's lifetime, he believes that Singapore shares offer relative value for equity-dedicated funds. Singapore shares in a buying range are as follows:
i. Mobile One
ii. Singapore Post
iii. Comfort Delgro
iv. Singapore Press
v. Singapore Telecom
vi. Singapore Telecom
vii. SIA Engineering
viii. Singapore Airport Terminal Services (SATS)
ix. UOB Bank

Marc also favour Singapore REITs such as:
i. Suntec REIT
ii. MEAG Prime REIT
iii.Ascendas REIT
iv. CapitaMall Trust

Most of these REITs have yields of around 6% and have significantly underperformed US and Australian REITs over the last 12 months.

9. Aside from Singapore shares, Marc believes that relatively good-value and high-yielding stocks can be found in the Thai, Malaysian, and Taiwanese stock markets.

10. Given that we recently experienced the highest volatility in commodity markets since the early 1980s, and very frequently such high volatility occurs near market peaks, Marc would be careful in assuming that the uptrend in industrial commodities and precious metals will resume in the immediate future.

(Does the recent volatility in regional stock markets suggest market peaks too?)

In the case of gold, Marc would prefer to see a successful retest of the recent lows and ideally buy gold at between US$480 and US$550.

posted by gsg @ 11:11 AM