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Market Commentary January 1, 2011
Investments May not always Bring Happiness, but there will be no Happiness without Investments.
"All blame is a waste of time. No matter how much fault you find with another, and regardless of how much you blame him, it will not change you." Wayne Dyer "The search for someone to blame is always successful." Robert Half "Take your life in your own hands, and what happens? A terrible thing: no one to blame." Erica Jong "One of the annoying things about believing in free will and individual responsibility is the difficulty of finding somebody to blame your problems on. And when you do find somebody, it's remarkable how often his picture turns up on your driver's license." P. J. O'Rourke
Travel writer, Frank Bures recently wrote about the merits of living abroad. According to Bures, “Last year, in one of the first major studies on the effects of living in another country, researchers found that exposure to a different culture may help explain why artists such as Hemingway, Nabokov, and Picasso did their best work either while living abroad or after returning home. Experiencing another culture can, they found, make you more creative.” Bures then explains that William Maddux of INSEAD and Adam Galinsky of Northwestern University ran five studies to gauge how well people solve “insight creativity tasks”. According to Bures, “Maddux and Galinsky not only found a link between living abroad and the ability to solve these problems but also
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Dr. Marc Faber
Market Commentary January 1, 2011
discovered that the more time people had spent in another culture and the better they had adapted to it, the more creative they were…..These experiments are all part of a growing body that shows having a ‘multicultural experience’ can enhance one’s creativity, and that learning a foreign language can benefit the brain in areas ranging from complex thinking to mental flexibility and interpersonal skills. These effects likely have to do with acquiring what is called reflected knowledge – understanding how you look from another culture’s point of view – as well as how much you internalise that view. Once people live abroad and learn how to see themselves and their culture from afar, those things never look the same again.” I am bringing up the article by Frank Bures for three reasons. In the November report, I briefly addressed the question where I would move to if I wanted to leave the US. I further explained that I would persevere in learning the language of the country I would live in (whenever I am in Chiang Mai I go daily to take some Thai lessons). On further thought I believe, that for young people it is less important as to where they move to, than that they as the above studies suggest, make a move to a foreign country (even for just a short duration) in order to broaden their horizons. In addition, translated to the world of investments, the above studies would suggest that an investor should not just focus on one asset class but that he should follow price movements in all asset classes. This is not to say that clear correlations between asset classes exist. However, as an example, the commodity investor who failed to understand the magnitude of the US housing bubble in 2006/2007 and the consequences of its collapse would have incurred tremendous losses in the second half of 2008 when the CRB Index collapsed within six months by more than 50%. Similarly, the investor in NASDAQ stocks in 1999 and 2000 who failed to understand that the incremental demand for commodities from China would boost their prices (from extremely depressed levels), would have missed on a huge opportunity to capitalize on their price increases over the following seven years and the boom in resource stocks. In this respect, it is interesting that even the art market can provide some signals about asset markets and “speculative” activity. A reader of mine recently sent me the stock chart of Sotheby’s, which is a proxy for art prices and transaction volumes (see Figure 1). However, what is interesting is that spikes in Sotheby’s stock price coincided with stock market peaks (2000 and 2007) and lows with stock market bottoms (2003 and 2009).
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equities. Marc Faber Market Commentary January 1. www. people living abroad fosters “the understanding how to look from another culture’s point of view” and seeing themselves and their culture from afar.decisionpoint.com I am not suggesting that Sotheby’s is a perfect stock market indicator but its stock peaks were always signaling heightened speculative activity in the stock market. This also applies to the investment universe.All rights reserved Page 4 of 23 .Dr. 2011 Figure 1: Sotheby’s Holdings Highs and Lows Coincided with Stock Markets Highs and Lows (Sotheby’s Stock Price 1996 – 2010) Source: www.com © Copyright 2011 by Marc Faber Limited . as Frank Bures explains. By traveling and living abroad or by following the prices of all asset markets (real estate. their home countries never look the same again. (As an aside. commodities.gloomboomdoom. Sotheby’s stock recent surge would indicate that stocks are already far along in up trends.) Lastly.
Dr. In gold or silver.gloomboomdoom. Marc Faber Market Commentary January 1.theburningplatform. www. Table 1: The US Dollar’s Loss of Purchasing Power (Cost of Living in 2000 and in 2010) Source: Jim Quinn. an investor will gain more insights into the relative values of asset markets and in understanding economic developments.All rights reserved Page 5 of 23 . in a basket of commodities (the CRB Index) or in a relatively strong currency such as the Swiss franc (see Figure 2). I find it difficult to comprehend why someone would still value his assets in US dollars when its purchasing power is declining so fast (see Table 1). www. The Burning Platform. 2011 bonds etc.com © Copyright 2011 by Marc Faber Limited .).com I admit that I am not entirely sure how assets should be valued. As an example.
Marc Faber Market Commentary January 1. If I valued the S&P in gold the performance would be far worse (down more than 80% . which is facilitating the exchange of goods and services. I was kind to dollar holders and valued the S&P 500 in Swiss Franc (down 50% since 2000).2010 Source: www. 2011 Figure 2: Performance of S&P 500 in Swiss Franc. I should add that at some point the US dollar could lose the third function of paper money.gloomboomdoom. since more and more countries trade in other currencies than dollars. Above. 2000 .see Figure 3). www. the one thing I am certain about is that the US dollar has already lost two functions of paper money: it is no longer an useful store of value (at zero interest rates) and it is no longer a meaningful unit of account.decisionpoint.com © Copyright 2011 by Marc Faber Limited .com However.Dr.All rights reserved Page 6 of 23 .
com I am not claiming that to measure the performance of the S&P 500 in Swiss Franc or in gold since 2000 is the perfect indicator of its performance. I believe that measuring the performance of the S&P 500 in precious metals whose supply is limited is certainly better than measuring it in dollars whose supply is unlimited .decisionpoint. Marc Faber Market Commentary January 1.courtesy of the Fed.com © Copyright 2011 by Marc Faber Limited . However. 2000 .2010 Source: www. Many investors fail to appreciate that the oil www. Maybe measuring the S&P 500 against medical costs – see Table 1 – or against insurance premiums would be an equally good indicator.Dr. This takes me to the fundamentals of the oil market.All rights reserved Page 7 of 23 . Earlier I mentioned that investors could benefit by living abroad or by following the fundamentals of different asset markets. 2011 Figure 3: Performance of S&P 500 in Gold.gloomboomdoom.
2011 demand in emerging economies (where 80% of the world’s population lives) is increasing very rapidly from a very low level (see Figure 4).Dr.com © Copyright 2011 by Marc Faber Limited . Stifel Nicholaus Since the per capita consumption in emerging markets such as China and India is still remarkably low.gloomboomdoom. it is fair to assume that the demand will keep on www. Figure 4: Per Capita Oil Consumption in Different Countries during Phases of Industrialization Source: Barry Bannister.All rights reserved Page 8 of 23 . Marc Faber Market Commentary January 1.
All rights reserved Page 9 of 23 .com © Copyright 2011 by Marc Faber Limited . Table 2: Year-on-Year Oil Consumption Growth in Different Countries Source: Richard Berner.Dr. In fact. 2011 increasing for many years. Morgan Stanley The consequence of fast oil consumption growth in emerging economies is that. oil consumption in emerging economies is larger than in the developed economies (see Figure 5).gloomboomdoom. www. At the same time. supplies seem to be stagnating (see Figure 6). currently oil consumption is increasing in India at an even faster rate than in China (see Table 2). as oil demand is increasing rapidly (at close to 10% per annum in India with a population of more than one billion and an extremely low per capita consumption – see Figure 4). for the first time in the history of capitalism. Marc Faber Market Commentary January 1.
Marc Faber Market Commentary January 1. 1965 .com © Copyright 2011 by Marc Faber Limited . 2011 Figure 5: Energy Consumption in Emerging Economies and in OECD Countries. Morgan Stanley Figure 6: World Oil Production by Type Source: International Energy Agency www.gloomboomdoom.2010 Source: Gerard Minack.All rights reserved Page 10 of 23 .Dr.
com © Copyright 2011 by Marc Faber Limited . has created a dangerous situation. as I have explained in the past. Marc Faber Market Commentary January 1. In other words. which could either reduce economic growth around the world or lead to far more money printing in the US in order to combat renewed economic weakness.Dr. rising commodity prices lead to increased international tensions. 2011 Noteworthy is the coming rapid decline of crude oil supplies from currently producing fields. In addition. “China's rapid rise. and America's equally rapid loss of power and influence.gloomboomdoom. Production and Supply Shortfall Source: Mahmoud G. Figure 7: Projected Oil Demand. www. George Soros recently observed that.All rights reserved Page 11 of 23 . it seems that while demand is increasing rapidly supplies are hardly going up. Salameh An oil crunch would likely mean significantly higher oil prices. This implies that some sort of an oil crunch is approaching (see Figure 7).
” In both cases. 2011 With the exception of the peaceful transition of world leadership from Britain to the United States after World War I. SU. such global power shifts have always involved armed conflict. www. Figure 8: Energy and Basic Material S&P 500 Weighting Likely to Increase Source: Chris Puplava.financialsense. UEC.All rights reserved Page 12 of 23 .gloomboomdoom. which drive both countries to take intransigent positions.Dr. U CN.com In earlier reports I recommended the accumulation of energy and energy related investments (XOM. CHK) and of the stock www. CCJ. an outperformance of energy stocks is very likely (see Figure 8). HES. more quantitative easing or increased international tensions (or most likely both).com © Copyright 2011 by Marc Faber Limited . Marc Faber Market Commentary January 1. The deterioration in US-China relations is particularly troubling because it takes place against a background of global imbalances and serious internal political divisions.
natural gas prices are extremely volatile and only suitable for high-risk accounts and aggressive traders.see Figure 9).com © Copyright 2011 by Marc Faber Limited . a commitment could be highly rewarding over the next two years. I recommend individual investors to accumulate energy companies (including natural gas) and the Gulf States ETF (MES). given my positive stance toward energy prices. (Spot. I should attract my readers’ attention to natural gas which. that is today lower than ten years ago and which was the worst performing commodity in 2010 (down 30% . 2011 markets of countries that would benefit from rising energy prices including Russia (TRF). $ per mmbtu).gloomboomdoom. Marc Faber Market Commentary January 1. I www.Dr.thechartstore. In particular.2010 Source: Ron Griess. As I have pointed out before on numerous occasions. 2000 . Kazakhstan and Middle East (MES).All rights reserved Page 13 of 23 . along with palladium is the only commodity. www. Figure 9: Natural Gas. Once again. However.com As can be seen from Figure 9.
2011 do not like the Natural Gas ETF (UNG). For longer-term investors Chesapeake Energy (CHK) is probably the best play (see Figure 10). if Mahmoud G. I should mention that activist investor Carl Icahn just added to his stake in the company.gloomboomdoom. Salameh is only half way correct with his projections about the coming oil supply shortfall in the next few years. Marc Faber Market Commentary January 1.All rights reserved Page 14 of 23 . uranium and coal www. except for short-term trading (high rollover costs make it a poor long-term investment).com Moreover. Figure 10: Chesapeake Energy – a High Risk Perfect Contrarian Play Source: www.com © Copyright 2011 by Marc Faber Limited .decisionpoint.Dr.
Peabody Energy (BTU) and on the more speculative side South Gobi Resources (SGQ CN – see Figure 12). www.2010 Source: www.com © Copyright 2011 by Marc Faber Limited .com In terms of coal stocks. 2003 . I would invest in a basket of several uranium companies such as Cameco (CCJ).Dr.All rights reserved Page 15 of 23 .decisionpoint. Uranium Participation Corp (U CN). Figure 11: Uranium as a Play on the Potential of an Energy Shortfall! USEC. Uranium Energy Corp (UEC – on a correction) and USEC (USU – see Figure 11). Marc Faber Market Commentary January 1. 2011 could be big winners.gloomboomdoom. I would consider a basket consisting of Arch Coal (ACI).
I feel that a correction is imminent. Bullish sentiment is at historical highs.decisionpoint.gloomboomdoom.com Finally. 2009 .Dr. With respect to the overall position of stock markets.2010 Source: www.com © Copyright 2011 by Marc Faber Limited . I should add that a very smart and contrarian investor friend of mine likes currently battered geothermal stocks (I shall write about them in future).All rights reserved Page 16 of 23 . Marc Faber Market Commentary January 1. which is a condition that is common at intermediate or longer-term market tops (see Figure 13). 2011 Figure 12: South Gobi Energy Resources. www.
equity mutual fund cash is at an historical low while insider selling is at historical highs – both negative indicators for the stock market.pragcap. 2008 – 2009 Source: Pragmatic Capitalism. the number of stocks hitting twelve months highs has been contracting rapidly and has never approached the April high in the rally that followed the July 1 low at 1010 for the S&P 500 (see Figure 14). Moreover.All rights reserved Page 17 of 23 . Marc Faber Market Commentary January 1. the S&P has tended to peak out when unemployment reached a low (see Figure 15).com © Copyright 2011 by Marc Faber Limited . volume has been declining on the latest upward move and more importantly. an outstanding analyst at Stifel Nicholaus shows. 2011 Figure 13: The American Association of Individual Investors’ Bullish Sentiment.com In addition. www.gloomboomdoom.Dr. However. I would be reluctant to become overly negative about stocks. As my friend Barry Bannister. www.
All rights reserved Page 18 of 23 . www.com Figure 15: Real S&P 500 and Unemployment Rate. 2011 Figure 14: S&P 500 and NYSE 12-Months New Highs. 2009 .2010 Source: Barry Bannister. Marc Faber Market Commentary January 1.com © Copyright 2011 by Marc Faber Limited .mcoscillator.2010 Source: Tom McClellan. 1948 .gloomboomdoom.Dr. Stifel Nicholaus www.
in the third year of the Presidential Cycle the most speculative stocks perform best (see Figure 16). AIG (AIG). which is likely to unfold in January. However.All rights reserved Page 19 of 23 . Marc Faber Market Commentary January 1.com © Copyright 2011 by Marc Faber Limited . a further upward move in stocks should follow the correction.Dr. That is probably correct. Figure 16: The Third Year of the Presidential Cycle Favors Speculative Stocks Source: GMO In the US the more speculative stocks are companies like Eastman Kodak (EK).gloomboomdoom. under the assumption that the unemployment rate will at some point decline (Barry thinks it will decline more rapidly than the consensus expects). In recent months. stock market pundits have repeatedly emphasized that US large market capitalization stocks are far more attractive from a valuation point of view than small market cap stocks. Xerox (XRX). 2011 Therefore. Citigroup www. Nokia (NOK). Boston Scientific (BSX).
Dr. US equities could continue to outperform the more traditional emerging markets (see Figure 18).com Needless to say. www. 2011 (C). Masco (MAS). I do believe that for a while at least. Marc Faber Market Commentary January 1. investors need to determine for themselves if these companies meet their investment objectives. these stocks and the prices of energy companies would also come under temporary pressure were I to be right about a correction in January. However. Figure 17: Homebuilders as a Contrarian Play Source: www. Bank of America (BAC). Louisiana Pacific (LPX) and homebuilders such as Toll Brothers (TOL) and KB Home (KBH – see Figure 17).gloomboomdoom.com © Copyright 2011 by Marc Faber Limited .decisionpoint. Moreover.All rights reserved Page 20 of 23 .
It is now at a favorable entry point.com In last month’s report. Although I think that the Thai stock market will come under some near-term pressure. I reiterate my view and recommend the purchase of Mizuho Financial Group (MFG).All rights reserved Page 21 of 23 .Dr. Marc Faber Market Commentary January 1.gloomboomdoom. 2008 . I initiated a position in Chiang Mai Ram Medical Business (CMR TB). The Vietnam Fund has retreated from over $30 to around $25.com © Copyright 2011 by Marc Faber Limited . I made the case for accumulating Japanese equities. 2011 Figure 18: The S&P 500 has Begun to Outperform Emerging Markets S&P 500 Compared to Emerging Markets.decisionpoint.2010 Source: www. Mitsubishi UFJ Financial Group (MTU) and Nomura Holdings (NMR see Figure 19). www.
I continue to accumulate gold and silver.decisionpoint. 2011 Figure 19: A Leveraged Play on the Japanese Stock Market: Nomura Holdings. As I have explained in the past.com © Copyright 2011 by Marc Faber Limited . 2008 .com As always.Dr. I doubt there is a gold bubble given the low exposure investors have to gold (see Figure 20). www. Marc Faber Market Commentary January 1.2010 Source: www.All rights reserved Page 22 of 23 .gloomboomdoom.
Marc Faber Market Commentary January 1. www.gloomboomdoom. the bond market is oversold.com © Copyright 2011 by Marc Faber Limited . Moreover. never decides. 2011 Figure 20: The World’s Financial Wealth Source: McKinsey & Company Whereas the US stock market is at present over-bought and technical indicators suggest the onset of a correction. I hope my readers had a pleasant festive season and I wish them a good start in 2011. I do not comment on individual stocks. Longer-term however. I hope my readers will remember the words of the Great historian Will Durant who said: “The man who insists on seeing with perfect clearness before he decides.Dr.” As I have explained before.All rights reserved Page 23 of 23 . Trading accounts should buy longer dated Treasury bonds for a rebound (TLT) or short the TBT. as I said before. I shall not be able to answer any emails until January 15. I remain very negative about long-term US government bonds.
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