Situation in Europe – Improving
But economic troubles will
persist for years as they deleverage.
Key: Trading opportunities
and Gold a key to protect value.
We do not believe problems are over in Europe, however we
are starting to see a road map toward a solution – one which involves
governments taking on the responsibility of plugging the asset gaps with new
financial burdens put on stronger countries.
1.) European
counties like Greece,
Italy and maybe Spain’s debts will be restructured or modified by the IMF and
ECB and Finance Ministers likely within 3-6 months. This mountain of debt will result in default
in some cases or restructuring maturities in others. This is a very delicate situation which could be handled badly since there is
not a great deal of recent experience in
managing country defaults.
2.) European Financial Stability Fund has only been a band-aid. They
need major surgery instead. Biggest
loser in the Europe financial crisis- all currencies and Germany and France, which
will be burdened with massive amounts of debt. Investment opportunity amid this mess is gold. We favor GLD and mining companies like ABX
and GG. There is a good chance the Europe entities will have declines in GDP to
the point where new rounds of QE are developed. By the time the full European
crisis has been resolved in 2-3 years, we believe gold could be selling in the
$2,500- $3,000 range.
3.) The proper solution to the Greece crisis should be to let Greece
take on the full weight of their problem. This would teach other counties like Spain,
Italy and Portugal that there are very serious consequences to not managing
fiscal affairs properly. Greece will produce a sharp haircut of 50-60% for bond
holders. This is a critical step –
however Greece will likely spread its problems all around Europe. Moral
hazard is dying globally - sadly. Unfortunately,
we believe the ECB and IMF will take the bailout route, which will spread the
burden among the whole of Europe and possible even the USA and delay a true
resolution.
4.) The domino effect of write-downs from contagion will cause Italy
and Spain and other weak European countries to experience similar issues over
the coming two years. We
expect these problems to hand cuff Europe economies for several years – may
even put Europe into a recession.
5.) Investment Advice: For now avoid banks in Europe and US. Keep
investments in the highest quality companies with strong fundamentals. This is not a time to be taking large risks
in unproven entities. Avoid most
government debt including Treasuries.
Yield may stay low for a period of time – however once the turn comes
large loses will be incurred. Areas of the market where we feel there is
extraordinary value today: gold mining companies, gold bullion, technology
leaders – with cloud focus and internet focus, emerging markets – China and
India favorites, energy companies with growth profiles, and energy efficiency
companies.
Trading Range Expected – Many Opportunities Will Be
Presented For Buying
After a 19 percent correction in S&P 500 Index (May to
Sept) it is likely we will see a trading range develop…. Upper end of range
S&P 500 could be 1,350 and the lower end could be 1,100. For our equity strategies, we’ll consider
buying on dips in the less than 1,150 area and trimming weak holdings in the
over 1,300 area.
Reasons for optimism longer
term:
1.) US economic statistics are
improving gradually. We have
seen many statistics indicating our economy is much stronger then
believed. Does this mean our economy is
fine? No – we have much work to improve
our economy, however some of the roadblocks could be reduced soon. We need new leaders in our government who
know how to make tough decisions and actually apply financial discipline. We think the American people understand this
and we expect a whole new group will be elected in November 2012 which will be
the beginning of a significant change in the way we run our federal government.
2.) Lining Up for ZERO! Hugh Cash Pile/ Retail and Institutional
Investors - 2.65 Trillion dollars and earning virtually nothing. This is coming down gradually. Investors are more defensive than anytime in
the last decade.
This is the fuel for the coming
bullish move in equities.
3.) Whole Country Is Playing
Defense – This is when opportunity is presented. We believe the economy will reward those
willing to take risk today – not many are.
Further YTD mutual fund flows are very defensive – over the last two
years over $400 billion or more has flowed into bond products, while there have
been net outflows from equity funds.
Another sign of incredible defensive behavior by investors.
4.) Governments Globally Are
“Boxed In” – They cannot develop fiscal discipline and stimulate economies
without debasing currencies – We
believe the result will be slow economic growth and more deficit spending. The long term winner of this situation will
be gold. For this reason we believe
GDP Globally could be weak over the next few years and this lends itself to a
trading range market for the next 6-9 months.
