UNITED STATES

Are the Fed’s warnings about lurking inflation justified? I wonder whether further rate hikes will not result in the kind of “overkill” with which the Federal Reserve plunges the economy into recession in every cycle. In my view, inflation risks are fairly benign in the US and Europe, as well as in many of the emerging economies, In Asia, most notably, risks of deflation still loom larger than the possibility of an inflationary outcome. In the meantime, of course, Fed rhetoric has sent stock markets falling. For the first time in eight years, I’m viewing the broad stock market with optimism.

U.S. STOCKS

In the last issue of Perspectives, I was beginning to view US stocks more positively. Is it now time to buy? Yes, I do think the most recent correction leaves many quality equities at compelling valuations. The chart below, reprinted with the courtesy of ISI, shows the drastic improvement in multiples during the past six years. Seasonal patterns should help, too: a rising market during summer is not unusual.

COMMODITY STOCKS

I repeatedly warned of a setback in commodity stocks, but I expected it to come sooner and be less brutal. On the other hand, the correction has restored attractive valuations in several key sectors. Base metals inventories remain near critically low levels and supplies should stay in deficit for longer than expected a few months ago. That should help the stocks of copper, zinc, nickel and aluminum producers to a retest of recent highs. In the energy area, similar bargains can be found. Given the fact that earnings and cash flow for many energy producers keep growing, this is remarkable. And finally, there is room for gold producers to rise. Many gold stocks did not participate meaningfully in the yellow metal’s climb past $700, but got badly hammered on the correction. What is perhaps most noteworthy of the commodity complex is that there is no reason to go outside the universe of highest quality companies. Unlike their junior counterparts, the seniors generate strong cash flow, are priced reasonably and offer strong diversification. Even so, further consolidation will probably be required after a correction of this magnitude. The important thing is not to lose sight of the big picture: the macro commodity theme remains intact and is likely to stay with us as the predominant investment theme of the next 10 to 20 years. That’s why I think long term investors should hold a permanent 20%-25% of their equity portfolio in energy and mining stocks.


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!