COMMODITY STOCKS

Investors are asking themselves whether they should hold on to natural resource stocks or take profits. Both viewpoints can be justified. From a valuation viewpoint, commodity prices appear unsustainably high, but the prices of most commodity stocks already discount a meaningful correction. That makes the group a solid long-term hold, a view that is also supported when looking at the global economic outlook for the next one or two decades. That outlook, I firmly believe, is for increased demand and sporadic shortages of many commodities. Still, some analysts propose that for this business cycle, some mining and energy stocks have already seen their highs. I take that possibility seriously, especially with the mining stocks, which have been propelled by unsustainably high base metal prices. Gold and oil stocks concern me less. The energy complex should benefit for some time from supply uncertainties and robust global demand. Gold, meanwhile, provides an effective hedge against the looming possibility of a dollar crisis and a resurgence of inflation. In short: if you want to stay with the long-term trend, hold your natural resource stocks. If you feel you want to trade the sector, sell part of your holdings. The base metal producers may be a good place to look first.

CURRENCIES

I am retreating to a neutral position on the currency front. The commodity currencies and, more recently the Japanese Yen, have served us well. But I believe a more turbulent period lies ahead, which is why I advocate a neutral stance. The Canadian dollar is likely to feel the slowing US economy, although I believe a correction will be mild. I’m more worried about the Yen. With China trying to rein in its run-away economy, a key export destination for Japan will be diminished. In addition, interest rates in the US and Europe are high when compared to Japan’s, which may fuel speculation against the Yen. Given these realities, I believe it’s best to be cautious.

US STOCKS

In June, I turned more optimistic on US equities. The market has been weaving a schizophrenic pattern since, on balance ending up with a small gain. My view on stock valuations is unchanged: multiples of many high quality companies are very reasonable, which justifies them as long term holdings. But a number of negatives are back at work too: it’s now late August and fall can be a rough time for stocks, geo-political tensions are high, and bond yields are once again rising. The bottom line: accumulate quality equities on setbacks, but make sure you keep a decent cash reserve.


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!