2005 Equity Prospects

[Paul MBMG]

THE BIG PICTURE …

In the global asset allocation game it is easy to get carried away with all the short-term noise. Those familiar with MBMG International’s philosophy will be aware of our 3 level approach to core asset allocation. The second two, business/economic cycles and technical analysis, are vital to long-term successful asset allocation and investment returns but getting the first, "big picture", correct is what allows certain investment professionals to survive over numerous market cycles. Investors such as Warren Buffet, George Soros, Richard Russell and Jim Rogers are good examples and we should listen to their free advice.

Jim Rogers is regularly on CNBC and has just written a new book entitled "Hot Commodities". There is no secret where he has his vast fortune invested at present and he had these snippets this week. "Buy low and sell high are the only rules. CNBC has no commodity commentators, which proves that there must be value. There are not enough bright 29 year olds for 10,000 hedge funds. Copper is dumb and never heard of Alan Greenspan, but commodity stocks have management, gearing, regulations, etc etc which can distort value."

Soros and Buffet make no secret of their dislike for the USD and "The sage of Omaha" reiterated his view this week that he finds common stocks expensive at current levels and is not buying any. We concur that the big picture remains one where the western hemisphere equity bear market has not finished, all paper currencies have problems and that trendy hedge fund, whilst are a core in any portfolio, warrants caution at present.

Richard Russell has been publishing his views for many decades and whilst his short calls can be wayward, there's a lot in his current big picture view for everyone.

AFTER THE BUBBLE — When the stock market bubble burst in the year 2000, Greenspan (having watched the bursting of the Japanese bubble and the deflation in Japan that followed) realized that the US too could sink into deflation. With the sky-high levels of US debt, Greenspan realized that deflation in the US would be an unmitigated disaster. Greenspan decided that the strongest possible measures must be taken to ward off potential deflation in the US. Thus, the Fed drove short rates down to generational lows while flooding the system with liquidity. The Fed’s frantic anti-deflation policy succeeded in driving both stocks and real estate prices up to "bubble" valuations (which is where they are today). Now we’re facing the next chapter in this zany series. The latest is that the Fed is now openly worried about inflation. Short rates have been below the inflation rate for months on end (and they still are), meaning that the money can be borrowed literally on a "no cost" basis — money is still literally being "given away." Realizing that rates must be brought back to something approaching "normal," the Fed has been raising short rates at a "measured" pace. Amazingly, although short rates have been rising, long rates have actually been coming down. The rate on the bellwether 10-year note is now below where it was last September. Thus, the bond market is clearly unworried by the Fed’s action in boosting short rates. This has caused bond experts to ask, "Is this the bond market’s way of saying that we’re heading for recession? What is the bond market ‘thinking’ when bond yields actually decline in the face of a Fed tightening?" The markets now appear to be at a crossroad. If the Fed holds off on boosting rates, inflation could heat up, and the twin bubbles of stocks and real estate could become even more dangerous. On the other hand, if the Fed raises short rates to the point of pain (which is what they’ve always done in the past), the US economy could sink into unmanageable deflation. In the meantime, an increasing number of "unknowns" are creeping into the picture. The Iraq war is not turning out the way Bush and Rumsfeld thought it would. The debts and deficits continue to build, and the Iraq war is simply making the situation worse. It seems clear that the war will add at least $100 billion in annual expenses to the budget, assuming war expenses are even included in the "regular" budget. The consumer has become a deepening mystery. Up to now, US consumer spending (much of it based on rising real estate values) has gone a long way toward keeping the US economy afloat. But now we hear that consumer credit in November took its biggest drop since the statistics were first made available in 1943. Are America’s debt-laden consumers finally ready to turn stingy? It doesn’t seem likely, but then again — every excess has its limits

Staying the course is the most difficult, especially with short-term pressure, but the most rewarding.

[Braccobaldo]

...as in another thread I'm about to reply to you, Paul...

QUOTE:"Investors such as Buffet,Soros,Russell,Rogers..we should listen to their free advice"...

Nothing of personal with you, Paul but I have to disagree...

...I think is better don't listen to noone, make our choices using one's brain and allow a proper margin of risk on that.

If it don't work...buy bonds and wait for their expiration.

[Harmonica]

>>>>>>On the other hand, if the Fed raises short rates to the point of pain (which is what they’ve always done in the past), the US economy could sink into unmanageable deflation.<<<<<<<

Could? .... the curse of Deflation has been aborning for some time now -- that's where we're headed! Alan will become the most despised economist in history.... pity, I like him.

[OldAsiaHand]

Well written and thoughtful. While I certainly don't agree with everything you say, it's good to hear at least one intelligent voice getting through the nitwit prattle that usually overwhelms this forum.

[Braccobaldo]

Well written and thoughtful. While I certainly don't agree with everything you say, it's good to hear at least one intelligent voice getting through the nitwit prattle that usually overwhelms this forum.

<{POST_SNAPBACK}>

...about me, I give a look also at the nitwit prattle...people like me, not so intelligent , also can express their nitwit opinion...I'm lucky that for access on this forum don't need a high QI otherwise I would not stay here.

[OldAsiaHand]

...I'm lucky that for access on this forum don't need a high QI...

<{POST_SNAPBACK}>

I do see your point.

[njdesi]

I am not so bearish on US stocks. During the bubble in 2000, tech stocks in the S&P 500 were trading at 90 times their earnings. Now, the P/E ratio is closer to 28. I think investors have gotten away from using ridiculous pricing models, like website hits per month, and are pricing stocks based on profitability and earnings growth. With blue chips nearing 3 year highs, US companies are turning a healthy profit. And if Bush is successful in implementing private accounts for Social Security, demand for stocks will go up and those who are already invested will get a nice bump in their portfolio.

Edited March 8, 2005 by njdesi

[Braccobaldo]

..I am on your side...

[Khun ?]

Hedge funds are in a bubble and work against each other many times.

If you listen to Buffet the worst thing for a fund is its cost ( expensive loads and operating cost and second and third parties are definetly the worst of it all).

If you are second hand posters of others advice, (what someone else is saying) you are most likely a follower and will be in at the tail end of an investment theory which is those that are buying from those that are getting out with the profits. Never get into managed investments that you cannot get out of without a cost when you want out, they have got their comission soon as you get in and their performance will show it plus the third party 1% or more added annual comission which you never hear about. They end up being all talk (salesmanship) and low performance.

Do your own research or use licensed professionals in regulated investment countries, not these people

trying to run investments from 3rd countries ie; your from one country and your broker is in another country such as Thailand and your investments are in yet other countries. These are mainly unregulated investments and only create middlemen fees. If you cannot get into offshore investments directly with the firm

doing the investments don't bother with them.

[Khun ?]

I read the first couple paragraphs and thought this may give a look at the other side of things. If you can't decide on your own how the market is and what to buy stick to mutuals. Any investment companies that did not have a decent % of your investments in natural resources the last two years, time to get rid of them.

Most brokers are high cost middlemen and if they are operate out of 3rd world countries they are normally hatchet men. Most hedge funds are under performance, very expensive investments so be cautious!

Jubak's Journal

Why the market will dodge a dollar disaster

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Things may look bad for the U.S. economy, but things are worse overseas. This means the euro and the yen won't replace the greenback just yet.

By Jim Jubak

First the bad news: The U.S. trade deficit hit a record $666 billion in 2004, and the euro is up 47% against the dollar since May 2002. The dollar’s decline means slower economic growth, higher interest rates, a stagnant stock market and a slippage in the U.S. standard of living. All of which is enough to make me a pessimist.

Now the good news: The dollar isn't going to crash, and those market pundits urging you to short everything except gold and silver are wrong.

I don't buy the extreme scenarios because they underestimate the feedback mechanisms in capitalist economies that kick in when a trend swings too far in one direction or the other. In the current case, these mechanisms will help limit the damage to the dollar -- and to the U.S. and global economies.

Better off than Europe, Japan?

And what are these mysterious mechanisms? Nothing more complicated than this: You think we've got problems now -- just wait until the global financial markets latch onto the even bigger mess that the Europeans and the Japanese face. Sure, you may not want to own U.S. dollars because of trade and budget deficits, our aging population and the huge financial obligations they impose, not to mention our inability to agree on meaningful fixes for anything. But, hey, do you really want to own a lot more euros and yen when everything is so much worse in those economies?Need a broker?

Go to MSN Money's

Broker Center.

Let’s do a comparison of the dollar and its main global competitors, the euro and the yen, on the crucial points.

Government budget deficits. Ours is huge: $412 billion in fiscal 2004. That came to 4.4% of gross domestic product, one measure of the size of the U.S. economy. In France, the budget deficit in 2004 was 3.7% of GDP and in Germany, 3.9%, according to the Organization for Economic Cooperation and Development (OECD). Better but not hugely better. If you prefer euros to dollars, though, what's important to you is the projected trend in future deficits. According to the OECD, the budget deficit will drop to 2.9% of GDP in France in 2006 and to 2.2% in Germany. But it will stay almost steady at 4.2% in the United States. Score a point for the euro -- but definitely score one or more against the yen. Japan ran a government budget deficit of 6.5% of GDP in 2004, and the OECD is projecting the deficit will drop just a smidge to 6.3% in 2006.

Economic growth. We all feel that the budget deficit is out of control in the United States, so why doesn't the comparison with Europe (let alone Japan) look worse? Growth. Economic growth in the United States is significantly higher than in the rest of the developed world -- and faster economic growth covers a multitude of financial sins. Again using OECD projections, the U.S. economy will grow by 3.3% in 2005 and 3.6% in 2006 (in real terms, that is, after subtracting inflation). The French economy will grow by just 2% in 2005 and 2.3% in 2006. Germany will struggle with even slower growth of 1.4% in 2005 and 2.3% in 2006. For the euro zone as a whole, growth will come in at 1.9% in 2005 and 2.5% in 2006. Japan, the home of the yen, is projected to show economic growth of just 2.1% in 2005 and 2.3% in 2006.

Demographic burdens. In the United States, we've got a Social Security crisis, to use President Bush's word, because the ratio of workers paying into Social Security to the retirees receiving benefits has fallen to 3.4 workers to one retiree in 2000, from 16.5 workers to one retiree in 1950. And it's headed to a 2-1 ratio by 2030. Paying for the pensions and health care of those retirees when the number of workers is shrinking is enough to bust any budget. Well, then, think how much worse the financial squeeze is in countries where the population is aging more quickly than it is here. In the euro-zone countries right now, there are 35 people of retirement age to every 100 of working age, according to the United Nations. (In the United States, the ratio is about 15 to 100, by my calculations.) By 2050, the ratio in euro-land will be 75 people of pension age to every 100 workers, and in countries like Italy and Spain, the ratio will be close to 1 to 1. German workers already pay almost 30% of their wages into the state pension plan. In Europe those demographics will, I think, make the OECD forecasts of falling budget deficits wildly optimistic because they’re founded on the assumption that European governments will be able to get the huge pension liabilities for their huge force of government workers under control. In Japan, where the population is aging even faster, the budget problem is even worse. Fully one-third of Japan's population will be 60 years or older within a decade, according to Phillip Longman's book "The Empty Cradle."

A floor for the dollar

OK, so let's sum up. The United States is faced with a huge budget deficit that makes foreign investors nervous about holding dollars. But as a percentage of GDP, that deficit isn't that much worse than those in Europe and better than the one in Japan, the homes of the two major competing global currencies. In addition, the U.S. economy is growing faster than those of Europe and Japan, and our budget-busting demographic burden isn’t as serious as those faced by the Europeans and the Japanese.

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To me, this situation puts a limit on how far the dollar will fall against the euro and the yen, the two other major international trading and investing currencies. The current decline of the dollar against those currencies comes as foreign central banks decide to diversify their holdings of foreign exchange. For a central bank like the Bank of Korea, for example, that means reducing the current 60% to 65% of the bank's $210 billion in foreign-exchange reserves now in dollars by adding investments in euros, yen and a few other currencies. Globally, the U.S. dollar made up 64% of central bank reserves at the end of 2003.

If foreign central banks stopped buying dollars entirely, Wall Street estimates, the dollar would have to drop another 30% and U.S. bond yields would have to climb by 4.5 percentage points to attract enough private capital to fill the gap.

That's a worst-case scenario, and you'll note that it's still well short of the end of the world. And because you can't just sell a dollar without buying some other currency, the weaknesses in the yen and euro economies mean that the move away from dollars will stop well short of that. For example, even today, the yen makes up only 5% of central-bank reserves because Japanese government bonds yield almost nothing and because the attractiveness of the yen is dampened, shall we say, for anyone who understands Japan's impending budget meltdown. The same with the euro, where euro-denominated bonds yield less than U.S. Treasurys, making diversification out of dollars and into euros prudent in the long run but painful in the short run. Closing that dollar/euro yield gap doesn't seem to be in the cards, either, because raising interest rates in Europe would slow those slow-growing economies even more.

Asian banks' message to the Fed: Raise rates

In fact, you can see all the talk about diversification from Asian central banks as just a signal to the U.S. Federal Reserve. The message? If you want us to keep holding dollars, keep raising U.S. interest rates so that holding dollars will produce more income for the world's creditor banks.

And as my comparison of the economies and budgets of the dollar, euro and yen economies should tell you, the United States, thanks to its faster economic growth rate, has more room to raise interest rates -- without producing a recession -- than the economies of its currency competitors.

So, yes, the U.S. dollar is headed lower, U.S. interest rates are headed higher and U.S. economic growth won't be as fast as now projected, but all this decline will stop well short of the dollar disaster that might produce a domestic or global financial meltdown … all because the economies of Europe and Japan are in even worse shape than ours is.

Now, doesn't that make you feel better?

New developments on past columns

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A portfolio for gloom, not doom

If someone -- say, the U.S. Senate -- does something really stupid, all bets are off and maybe we should run for the hills. And stupid is a pretty good description of what the Senate did on March 17. First, the senators stripped out savings of $32 billion over five years from the proposed Senate budget. The savings, already $19 billion less than President Bush had proposed, would have come from reductions in entitlement programs including Medicaid. Whether you call those cuts fiscal responsibility or balancing the budget on the backs of the poor, the Senate's next act has to leave investors of any political persuasion in despair. For its second act, the Senate added $5.4 billion to the budget for education and then added a new $64 billion in tax cuts. Credit, if that's the term, goes to Sens. Edward Kennedy, D-Mass., and Jim Bunning, R-Ky, respectively. Bunning's $64 billion in tax cuts comes on top of $71 billion in tax cuts already in the proposed budget.

Editor's Note: A new Jubak’s Journal is posted every Tuesday and Friday.

E-mail Jim Jubak at [email protected]. At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

[sbaker8688]

<<In the United States, we've got a Social Security crisis, to use President Bush's word, because the ratio of workers paying into Social Security to the retirees receiving benefits has fallen to 3.4 workers to one retiree in 2000, from 16.5 workers to one retiree in 1950.>>

To be a little more specific - the reason the ration of workers matters at all is because Social Security is a ponzi scheme. You have no account with your money in it. It was stolen, spent, or just never there to begin with. The reason banks don't have to adjust your account balance due to "number of people paying into the bank" is because it is illegal to run a ponzi scheme in the private sector. You have an account at the bank, that account has your name on it, and your money in it. Of course, someone could get highly technical here and retort that the money is really "not there" in the bank either. But that misses the point that, either way, the bank is not running a ponzi scheme.

Social Security is a fraud. That's why we have a crisis.

(Not disputing anything you say above - merely adding to it is all.)

[ArtfulD]

...as in another thread I'm about to reply to you, Paul...

QUOTE:"Investors such as Buffet,Soros,Russell,Rogers..we should listen to their free advice"...

Nothing of personal with you, Paul but I have to disagree...

...I think is better don't listen to noone, make our choices using one's brain and allow a proper margin of risk on that.

If it don't work...buy  bonds and wait for their expiration.

<{POST_SNAPBACK}>

I agree, these people know their word carries weight, however they are out to make money for -themselves-, not you. They can talk down an asset to get its price lower so they can buy in bulk for cheap or talk up an asset they have bought and looking to unload. Steve Cohen and his motley crew do the same type of thing selling off a stock knowing that people will take notice and sell off too before buying up at bargain prices. Trust no one but yourself!!

[MikeWill]

Great stuff guys, really enjoy reading all the posts here...

...  And because you can't just sell a dollar without buying some other currency, the weaknesses in the yen and euro economies mean that the move away from dollars will stop well short of that...

Asian banks' message to the Fed: Raise rates

In fact, you can see all the talk about diversification from Asian central banks as just a signal to the U.S. Federal Reserve. The message? If you want us to keep holding dollars, keep raising U.S. interest rates so that holding dollars will produce more income for the world's creditor banks.

<{POST_SNAPBACK}>

I have 2 questions on enbolded quotes above:

1. Why the commodities for example can't be considered as an alternative to currencies in long/medium term investments?

2. What about Chinese? The US is their major trading partner, after all, and US pushing hard to reevaluate the Yuan (from 1 USD=8.27 CNY to maybe 1 USD=6.15 CNY).

A quote from another topic:

Finally, a story was printed in the Beijing Daily yesterday which said:

China will change the yuan's peg from the dollar to a basket of eight

currencies and widen the band in which it is traded starting in May.

The Beijing Daily said, citing unnamed financial sources, that the

government will allow the renminbi (yuan) to fluctuate in a range of between

.6% to 1%. Currently the currency is only allowed to fluctuate .3%

above and below the pegged currency rate. This is what we have thought

China would do all along; ease the currency upward on a slow but steady

appreciation using a basket of currencies to regulate its value. The

timing is all that is left. We still think investments in other Asian

currencies such as the Thai Baht, Singapore Dollar, or Japanese Yen are

going to perform just as well if not better than investments in the

Renminbi. I haven't been able to find any other stories on this, so take

it as just another indication of what will eventually happen. As Chuck

likes to say, where there is smoke, there is fire!

If China does this, allowing it to fluctuate up to 1% isn't going to make much difference nor generate much profit for speculators, is it?

But if they peg it to a basket of currencies, does that mean that there will be a sudden, significant shift in value? And that that NEW value will then be allowed to fluctuate up to 1%?

If anyone can explain this, I'd appreciate.