Rarely, if ever, has a conjunction of weakness in the world’s two main reserve and transaction currencies (the US dollar and the euro), such as is being seen at present, occurred just at a time when natural disasters have also put the Japanese yen under a cloud. It is hardly surprising that at such a time the price of that classic store of value, gold, continues to break new records, at least in nominal or non inflation-adjusted terms while the IMF’s “fiat” currency, the SDR (Special Drawing Rights), is back in fashion. The Business Times convened a panel to discuss what lies behind this unique currency crisis and what the future holds.

PANELLISTS

• Eisuke Sakakibara, former vice-finance minister for international affairs of Japan
• Robert Lloyd-George, chairman, Lloyd-George Investment Management, Hong Kong
• Kenneth Courtis, former vice-chairman, Goldman Sachs (Asia) and co-founder of Themes Investment Management
• Ernest Kepper, president, Asia Strategic Investment Associates, Japan
• William Thomson, chairman of Private Capital, Hong Kong, director of Finavestment, London
• MODERATOR: Anthony Rowley

l to discuss what lies behind this unique currency crisis and what the future holds.

Anthony Rowley: The gold price has soared and there is much talk of a return to some sort of gold standard. Professor Sakakibara, what do you think about the role of gold as a monetary anchor and as an investment?

Eisuke Sakakibara: I don’t think there is any possibility of returning to the gold standard. It is true that because of the (weakness of) the dollar people are holding gold as a kind of reserve asset. That phenomenon will probably continue for some time. But the gold standard is a system we abandoned a long time ago and I don’t think it is possible to return to it. Given the amount of gold that exists in the world and the need for liquidity, it could not serve as an anchor for all currencies. If we restrict liquidity by attaching currencies to gold there will be substantial shrinkage, which probably will lead to deflation the world over.

Anthony: So, will the gold price rise further?

Eisuke: In dollar terms it will. In terms of the yuan or other Asian currencies, I’m not so sure. What we are seeing is a continuous decline of the dollar vis-a-vis gold.

Anthony: Robert, I know you are a “gold bug”. Where do you see it going?

Robert Lloyd-George: My view is that the gold price is heading to US$5,000 an ounce by 2014, at which point there may well be a crisis with the US dollar and a return to the gold standard in some form. What is happening is that many countries that are getting richer at a rapid pace are buying more gold, both at the central bank and individual saver level, in China, India, Russia, Mexico, Indonesia, and perhaps some Middle Eastern countries. This shift in world wealth is going to have a big impact on the choice of gold as an investment instrument in the next few years.

Ernest Kepper: I’m bullish on gold even at its current levels. It could reach US$2,000 an ounce in the next eight months and US$4,000 an ounce in the next few years. Under any scenario, gold will go higher. In the event that there is a return to some sort of gold standard, gold could reach anywhere from US$3000-US$30,000 an ounce, depending on how you configure such a standard. Given plans to increase the debt ceiling in the US by trillions of dollars, I expect there to be a return to a gold standard within five years; and I expect double-digit inflation in the US by early next year.

Kenneth Courtis: Some investors increasingly see gold as a “currency”. The popping of what I call the “Bush Bubble” took the world economy to the edge of a vast catastrophe and it also effectively smashed the global economic and financial equilibrium which had been in place since the Bretton Woods system finally imploded four decades ago. We do not know today what the new equilibrium will be. What we do know is the mushrooming of debt was not only central to the US bubble; it is also one of the dominant characteristics of the Japanese and many European economies. Even then, with the exception of Japan and a few others, public sector debt is a small part of the “Himalaya” of debt bearing down on the world economy. Vastly more problematic for most developed economies is private sector debt – particularly in the banking and household sectors. Private sector debt is above 300 per cent of GDP in many OECD economies. Many investors looking at this situation rationally conclude that the probability of debt of this magnitude being paid back, dollar-for-dollar, is extremely low. The logical conclusion is to invest in hard assets, which will hold their value as paper assets are devalued through inflation. As this process unfolds, there will be an increasing clamour for gold to play a new role in the world monetary system. I would see then gold playing a reference role rather than an anchor to a new global monetary system.

William Thomson: Gold has appreciated steadily over the past decade by about 20 per cent per annum and performed admirably as a portfolio insurance policy. We now see growing interest on the part of emerging economy central banks to increase their low gold reserves given the vicissitudes of the main alternatives – the US dollar and the euro. But I do not see gold having any wider official role than as a reserve asset that cannot be debased by the machinations of central bankers.

Anthony: Let’s turn from soaring gold to sinking dollars. Will the US dollar continue to lose credibility and will there be a third round of quantitative easing (QE3) by the US Federal Reserve?

Eisuke: I think the gradual decline of the US dollar will continue for another decade or so. But there is nothing else to replace it as a key currency. The euro cannot take the place of the US dollar other than in Europe. This is a very unstable situation. There may be a continuation of QE2, so whether you call it QE3 or not, easy monetary policy will continue for some time in the US because the recovery there is recognised to be fragile. The US dollar will continue to depreciate vis-a-vis currencies such as the Singapore dollar, the Thai baht, and the Japanese yen but (the US dollar’s value) will be controlled by Chinese authorities vis-a-vis the yuan.

Robert: The US dollar is clearly losing credibility, but there is no immediate alternative. I believe that deflation is impossible to sustain in a democracy, and therefore we will have a QE3, or further stimulus if there is any weakening in the economy or market. This means the US dollar will continue to be weak, commodities will be strong and there will be more and more upward pressure on other currencies such as the Canadian dollar, Australian dollar, Norwegian kroner, and so on.

William: The US dollar has abused its reserve currency status and has lost much credibility in the past decade. It is always managed with the interests of the US at heart rather than the global community. I don’t believe there will be a formal QE3 unless the US economy deteriorates markedly. But equally I do not expect the Fed to shrink its bloated balance sheet anytime soon. It is quite possible that the US dollar will rally modestly now that QE2 is ending but it remains vulnerable to fresh declines in the autumn and beyond while US fiscal and monetary policy remains broadly accommodative.

Ernest: The trillions of dollars Washington wasted trying to buy jobs have now run out and the illusory recovery those dollars bought is fading, as is growth in jobs, consumer spending, and gross domestic product. The Fed will continue printing money when its quantitative easing programme is supposed to end in June. President Obama is running for re-election, and the only option this president has for the economic recovery is to print money as Congress will not support any new stimulus bills. Since job growth is far too weak to stop printing money now, QE3 is guaranteed and hundreds of billions more US dollars will be printed. This will result in rising consumer prices, a plunge in the US dollar, and increases in cost of living.

Anthony: So much for the US dollar, but the euro doesn’t look to be in exactly robust health either. So, what’s the story there?

Eisuke: I think the euro crisis is structural. It is very difficult to overcome the problem in a short period of time. Since World War II, there has been a steady progress of integration of European countries but it looks as though this trend has been reversed in the course of the past year or so. Weak, peripheral countries like Hungary or Latvia, and now Greece and Ireland, seem to be dropping out of the integrated European Union. Sure, they won’t leave in a short time but the problem is structural.

Anthony: So what has to be done, and could the euro area break up do you think? Also, what of the role of the euro as a reserve currency?

Eisuke: Monetary consolidation has been achieved in Europe and a single currency has been created, so the only remaining integration process is fiscal integration but I don’t think German citizens would like to support Greece and other European nations through fiscal measures. The euro area will not break up immediately but this crisis will linger on and maybe four years from now, or six or seven years, some kind of decision may have to be taken.

Kenneth: At the centre of the European debt crisis, as it currently stands, is a fundamental issue of solvency, by which I mean that Greece, Portugal, and Ireland are incapable of generating enough savings to escape the debt trap in which they are now complete prisoners. It is this combination of a solvency and a liquidity crisis which makes the European situation so very problematic. For now, the wall between Portugal, Ireland, and Greece on one side, and Spain, Belgium, and eventually Italy on the other is holding. But should it crack and others become completely ensnared in this double solvency and liquidity crisis, then the finances of France and of Germany itself would be severely tested.

William: Greece cannot pay its debts as they stand. It should reschedule or leave the euro. The same applies to some degree to Portugal and Ireland. But more likely is there will be more euro-fudge ahead of the French elections in 2012 and the German elections in 2013. Longer term, some of the weaker members will either have to leave the euro or, slightly more likely, there will be moves toward a fiscal union with the EU issuing bonds for its members much as the US Treasury does for the US.

Ernest: I’m not sure that extending loans to Greece would avert a crisis of the euro. If Greece leaves the EU, I think the euro would get stronger. I think both Greece and the EU would be better off if Greece did default, because a “haircut” (shaving of debt obligations) of 20-50 per cent is required to achieve debt sustainability. Bailing out countries is really just a backdoor way to bail out banks on the back of taxpayers and the currency. It might have a chance if it was just Greece, but it is a case of Portugal and Spain too and Spain is too big to save. This is the biggest bubble of all time, the bubble of government debt, and I think that the bubble will burst.

Anthony: Let’s move to Asian currencies. What role do you think the yuan might play in future?

Robert: I think the yuan is moving toward a key position in the world monetary system and that it is an unstoppable and important trend. I am fascinated by the accelerating pace at which it is internationalising for trade, and also for savings and investments. Everyone I know in Hong Kong has a Hong Kong dollar account and now a yuan account also.

Kenneth: Over the longer span, the yuan will play a significant role – in trade and investment, and once the yuan becomes fully convertible, as a reserve currency. There is already a vast appetite for yuan assets. Think of the so-called dim sum bonds, the offshore yuan bonds which have started to come increasingly to the market in the last year or so. It is virtually impossible to get your hands on them, so aggressively do yuan bulls grab them at issue. After the baby steps of the last two years, China is taking bigger and bolder measures to internationalise its currency. But there is still a long way to go before it has a fully convertible currency.

William: It is inevitable and desirable that the yuan’s use as a trade and reserve currency should expand. This is beginning to happen with bilateral trade arrangements and internationalisation can be expected to grow rapidly in coming years. I expect China to increase its gold reserves (officially only 1,000 tons but probably much higher) substantially over the next decade or so to match those of the US (8,000 tons) or the ECB (12,000 tons) and thereby boost the currency’s credibility further. The yuan will eventually be a reserve asset and its usage, especially in Asia, is bound to grow.

Eisuke: Maybe in 10 or 20 years from now the yuan will play a crucial role but in order for that to happen, China has to establish convertibility and to relinquish various currency restrictions. It will take time but I think China is probably thinking in terms of the next 10 to 15 years (for this to happen).

Anthony: What about IMF Special Drawing Rights (SDRs), do you see this as the global reserve currency of the future?

Eisuke: The SDR cannot be a reserve currency. This is a man-made currency and it could not replace either the US dollar or the euro. The IMF could allocate SDRs so that countries that have been given an allocation could convert those SDRs into US dollars or euros. That would increase liquidity in some countries but (the SDR in itself) could not serve as a reserve currency.

Anthony: If the SDR is not a viable alternative reserve currency, what is the alternative to the US dollar?

Eisuke: A multi-currency system of the US dollar, euro, and possibly some Asian currencies. But some kind of volatility or disruption could take place (under such a system).

Anthony: What of the yen? Will it sink into relative obscurity as the yuan emerges alongside the US dollar and Europe?

Eisuke: East Asian economies are being integrated quite significantly and I think that in 20 or 30 years it is not impossible to have some kind of Asian currency (based on) the yen, yuan, and other Asian currencies – an Asian version of the euro.

William: By 2060, the UN expects Japan to be only the 20th-largest country with a population of 94 million. Faced with problems of managing demographic issues, Japan is going to face incredible challenges to stay competitive. It also has a gigantic outstanding debt. This does not argue for the yen being a significant player in global markets.

Kenneth: The yen has never been a significant international currency. One of the conditions to having a significant international currency is that there is a local money market that is active, dynamic, large, and open. Japan has pretty much missed the boat on this one. It had the potential to be the Wall Street of Asia, generating for itself vast income from financial services. That chance is now gone.

Anthony: What role in future for emerging market currencies?

William: The Singapore dollar is probably the new Swiss franc. Other than that, maybe the Brazilian real, the Indian rupee, and (less likely) the Indonesian rupiah. The Australian and Canadian dollars will remain interesting – well-managed currencies of well-managed economies.

Kenneth: Some emerging market currencies are already playing a regional role. For example, the South African rand serves as a reference for parts of Africa. Brazil also plays a similar role for part of Latin America. Some emerging market currencies are also sought for diversification away from the major currencies and for regional investment plays – the Brazilian real, the rand, Turkish lira, Singapore dollar, Malaysian ringgit, and the Taiwan dollar. Thailand and Malaysia appear to be intervening heavily in markets in an attempt to hold markets at current levels. But should flows of funds to emerging markets continue to increase, then it will become difficult not to allow currencies to adjust in a way that reflects the shifting fortunes of the world economy.

Robert: History tells us that political and military power account for the domination of a currency. For the past 200 years, the leading currency in the world has been based on a democracy and open trading system. This “imperial” character of the major currency indicates that we cannot expect any single emerging market currency to dominate. Therefore, gold may, by default, come to occupy a much more central role, as it has in past history, but we need a major crisis to affect that transformation.

Anthony: On that note of gold’s continuing ascendancy, we must end.

William R. Thomson
Chairman Private Capital Ltd.,
Hong Kong
wrthomson@private-capital.com.hk

Ed Note: Recently, in his Trading Service Mark has gone from Bull to Bear to Neutral, now Bear in Stocks. Much more analysis contained every day in Mark’sVRTrader Silver or Platinum Service

Stocks – BEAR

We’re headed down, folks. Will it end in 30 days or will it carry into the Fall. Is there a ‘Crash’ ahead much as we saw on May 6, 2011? I cannot say, but momentum builds on momentum and the news environment now (forget any ‘outlier event which really could trigger a panic) is really poor. But, it’s funny, isn’t it? All you had to know was ‘Sell May and Go Away’. I was on a plane to Edmonton, Canada a couple of weeks heading to Michael Campbell’s Money Talks Resource Investment Conference and I spoke to several common sense passengers who said the same thing. Wall Street thinks too much. When you see Goldman Sachs imploding with the U.S. Government now trying to save face having dealt (and, frankly, likely co-conspired) with them for years, when she the embattled U.S. Congress, a misdirected and misguided ‘Marxist’ U.S. President, an employment and real estate crisis possibly approaching levels not seen since the Great Depression and the world attacking the second greatest democracy on earth, Israel, you know it’s time to pack up your bags.

Gold – BULL

As you know, Gold is now in the process of retesting its May 2 record high of 1578 touching 1551 this past Wednesday. From a pure fundamental perspective with all the financial turmoil ahead this summer with regard to raising or not raising the debt ceiling in the U.S., the imminent ‘double-dip’ U.S. recession (or worse), sagging unemployment and an ongoing erosion of home prices. The end result will have to be more monetary and fiscal stimulation which is bullish for Gold. The real question is whether it comes now (probably not) or later perhaps after Gold experiences a bit of a correction. With ongoing and likely true rumors that the U.S. Gold reserve at Fort Knox either doesn’t exist or has been severely compromised is probably true and that owning physical Gold and storing it where you can gain quick access to it is overall a very good idea! We should all be grateful if Gold corrected a couple of hundred of dollars only because it affords us an opportunity to accumulate more for the big, big, big move ahead to 3000, 5000 or beyond!

Bonds – BULL

Bonds unexpectedly saw some heavy selling on Thursday only to recover a bit on Friday. Though I traded out of my long position (and eager to get long again), I steadfastly remained on my ‘Bull’ signal. It’s all too clear. Money will be seeking safety and though the U.S. has significant problems, I don’t see a default anywhere in the intermediate horizon – though long-term it is likely

The above is just a portion of Mark’sVRTrader. Much more analysis contained every day in Mark’sVRTrader Silver or Platinum Service

Mark Leibovit’s Special Trial Offer: Use this month to kick our tires. Pay 50% for the first 30 days (No refund) and sample our Silver or Platinum service and then decide what works best for you. If you aren’t 100% ready to move forward, simply email us to cancel one week before your 30 day 50% off trial subscription ends and it will be canceled and you will not be charged ANY FURTHER, no questions asked. Just send an email to mark.vrtrader@gmail.com or call 928-282-1275 to cancel. You will receive an emailed confirmation of your cancellation a

Heading into the June to August period, many commodity markets should experience their typical seasonal summer weakness. That means possible pullbacks in many commodities, including gold, silver, and oil.

Don’t be phased by it. It will be nothing more than a healthy pullback that will lead to substantially higher prices for nearly all tangible assets and resources over the next few years.

For one thing, the sovereign debt is clearly picking up momentum. Not only in Europe, but also in the United States where the debt ceiling, despite all the political jaw-boning, will likely be increased, and where the Federal Reserve will continue to print money to keep the debt juggernaut going.

For another, the U.S. dollar remains weak at the knees, hardly able to bounce, and terribly weak against the Swiss franc, the Australian and Canadian dollars, and even weak against the Euro.

And for yet another, Asia’s economies continue to build momentum for further growth. Take it from me, here on the front lines in Asia; I see no evidence of slowdowns whatsoever, whether it be here in Thailand, or Singapore, China, Indonesia or Malaysia.

The sum total of Asia’s growth means rising demand for commodities on a long-term basis — as nearly 62% the world’s population is Asian. That’s three out of every five people in the world.

Plus, we are already beginning to see the evidence of supply shortages in select commodities, from peaking oil supplies, to strains on agriculturals, to supply constraints in iron ore, copper, and more.

All of this is why one should not be very concerned about any commodity weakness that may develop in the short term.

So that you keep your eye on the long-term view, today I am going to reveal my long-term price targets for commodities, which were first published, of course, for members of my Real Wealth Report in last month’s issue.

But I also want you to keep fully in mind that you will not see such prices for a while. All of my work indicates that the extreme inflation that so many analysts now embrace and expect to see almost immediately will not come right away.

Indeed, I do not see inflation getting out of control until at least 2015.

Between now and then, we will continue to see massive swings in all markets, and oscillations between deflationary and inflationary psychology. We will also see some markets, assets classes and sectors inflate, while others crash and burn. It will be a wild ride, to say the least.

Three additional key points to keep in mind …

First, there will be another round of massive money printing from the Federal Reserve. There’s no question about it. Only the timing. The economy is showing signs of weakness and the only real buyer of U.S. debt right now — and in the future — is likely to be the Fed.

Second, the inflation you will see building over the next few years will be different from past inflations. The chief difference is that we will not see massive wage inflation.

There will be some wage inflation, but the bulk of the inflation I see going forward will stem — unequivocally — from dollar devaluation … from  commodity shortages … and from rising emerging market demand … and not from the typical wage-price inflation.

Third, inflation is very complex. So complex that for most, it’s hard to grasp how we can have rising inflation even while the economy remains weak and may even be falling back into a recession, if not a depression.

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$15 loaf of bread, and more …

Heading into the June to August period, many commodity markets should experience their typical seasonal summer weakness. That means possible pullbacks in many commodities, including gold, silver, and oil.

Don’t be phased by it. It will be nothing more than a healthy pullback that will lead to substantially higher prices for nearly all tangible assets and resources over the next few years.

For one thing, the sovereign debt is clearly picking up momentum. Not only in Europe, but also in the United States where the debt ceiling, despite all the political jaw-boning, will likely be increased, and where the Federal Reserve will continue to print money to keep the debt juggernaut going.

For another, the U.S. dollar remains weak at the knees, hardly able to bounce, and terribly weak against the Swiss franc, the Australian and Canadian dollars, and even weak against the Euro.

And for yet another, Asia’s economies continue to build momentum for further growth. Take it from me, here on the front lines in Asia; I see no evidence of slowdowns whatsoever, whether it be here in Thailand, or Singapore, China, Indonesia or Malaysia.

The sum total of Asia’s growth means rising demand for commodities on a long-term basis — as nearly 62% the world’s population is Asian. That’s three out of every five people in the world.

Plus, we are already beginning to see the evidence of supply shortages in select commodities, from peaking oil supplies, to strains on agriculturals, to supply constraints in iron ore, copper, and more.

All of this is why one should not be very concerned about any commodity weakness that may develop in the short term.

So that you keep your eye on the long-term view, today I am going to reveal my long-term price targets for commodities, which were first published, of course, for members of my Real Wealth Report in last month’s issue.

But I also want you to keep fully in mind that you will not see such prices for a while. All of my work indicates that the extreme inflation that so many analysts now embrace and expect to see almost immediately will not come right away.

Indeed, I do not see inflation getting out of control until at least 2015.

Between now and then, we will continue to see massive swings in all markets, and oscillations between deflationary and inflationary psychology. We will also see some markets, assets classes and sectors inflate, while others crash and burn. It will be a wild ride, to say the least.

Three additional key points to keep in mind …

First, there will be another round of massive money printing from the Federal Reserve. There’s no question about it. Only the timing. The economy is showing signs of weakness and the only real buyer of U.S. debt right now — and in the future — is likely to be the Fed.

Second, the inflation you will see building over the next few years will be different from past inflations. The chief difference is that we will not see massive wage inflation.

There will be some wage inflation, but the bulk of the inflation I see going forward will stem — unequivocally — from dollar devaluation … from  commodity shortages … and from rising emerging market demand … and not from the typical wage-price inflation.

Third, inflation is very complex. So complex that for most, it’s hard to grasp how we can have rising inflation even while the economy remains weak and may even be falling back into a recession, if not a depression.

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In fact, there are actually eight specific kinds of inflation, ranging from credit inflation … deficit inflation … scarcity inflation … to trade inflation … tax inflation … and more.

Not to mention one of the worst forces of all, currency devaluation, which is outright inflationary, period.

My longer-term price
projections for a variety
of select commodities.

Some caveats …

First, below are my MINIMUM price projections. I expect them to be reached by 2016, over the next five years.

Second, prices will not go straight up. There are bound to be inevitable pullbacks.

Third, none of the price projections below factor in an all out rout in the dollar, a complete collapse in its value. Nor do they factor in natural disasters that could further impact supplies or supply chains in key commodities.

Having said that, over the next several years, I expect to see …

• The price of corn rise at least 383%, to more than $36 a bushel, or as much as $1.50 for one ear of corn.

• Wheat soar at least 482% to over $52 a bushel, or $15 per loaf of bread.

• Soybeans climb at least 333% to more than $62 per pound.

• Sugar skyrocket at least 522% to more than $2.49 a pound.

• Coffee soar at least 330% to $15.40 a pound.

• Cocoa jump 486% to more than $11.32 a pound.

• Aluminum jump 240% to more than $4.25 a pound.

• Copper rise to at least $7.08 per pound.

• Zinc soar 357% to $5.63 a pound.

• Palladium rise 249% to at least $3,000 an ounce.

• Silver climb to at least $135 an ounce.

• Oil hit at least $185 a barrel and probably soar to over $250.

• Unleaded gasoline rocket higher to at least $7.00 a gallon, and most likely $9.00. Maximum, $11.00.

• Gold jump to at least $7,700 an ounce.

Natural Resources — The Smart Inflation Hedge

You might think that stockpiling certain basic necessities might be one of the best things you can do right now. And indeed, there are many pundits who do recommend that. I am not one of them. There will come a time for that, but it’s not here yet.

The smartest thing you can do — right now and going forward — is to protect and grow your wealth with smart investing. By doing so, you can not only offset the loss in purchasing power that your dollars will experience, but also make huge profits from inflation.

Therefore, I believe it would be foolish not to take the following steps:

First, make sure your gold portfolio is up to snuff! My long-standing position has been to invest up to 25% of one’s liquid assets in gold and gold-related investments. It has, and will continue, to pay off nicely.

If you’re already fully invested here, great. If not, the best thing you can do is become a member of my Real Wealth Report to get my timely signals and the specifics on my recommendations. You can do so by clicking here now.

If you are a member already, wait for my signals before buying or adding to your gold positions.

Second, stay out of ALL bond investments. This means municipals, U.S. Treasuries, and even foreign bond markets. All bond markets are vulnerable to the sovereign debt crises, money printing, and rising inflation. Don’t be fooled by any short-term rallies on bond prices. Use them to bail out of bonds.

Third, follow my monthly recommendations in the additional columns inside of Real Wealth, including Natural Resources Riches, Real Income, and Resource Speculator. They give subscribers a nicely rounded selection of resource-based investments for capital gain potential and income.

And they are all designed to protect your wealth — and grow it — as inflation starts to roar higher by investing in tangible assets — assets that cannot be printed at will like the U.S. dollar.

Best wishes, as always …

Larry

P.S. Any upcoming weakness in commodity prices will be an excellent time to position yourself for the next round higher in inflation. So be sure to become a member of my Real Wealth Report now, in advance of it. Click here now to join and enjoy savings of up to $189.

After the sharp sell off that took stocks down to their lows in March of 2009, we have seen pretty good gains in stocks. However….

Click here to read more…

Market Buzz – Four Strategies for Shaky Markets

While the S&P TSX Composite has come off around 5% since reaching its year-to-date highs in April, the index remains up over 20% since July of last year, which was the genesis of the rally that pushed stocks to post crisis highs. The gains have come despite a rather shaky recovery which continues to draw on negative data points including the recent report that the S & P/Case-Shiller index of property values in 20 U.S. cities hit its weakest level since March 2003 and a warning from Moody’s Investors Service that “if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government’s rating under review for possible downgrade.”

So the question becomes, for those who believe in equity investing long term but are bracing for a rocky period over the next three to nine months, what strategies should investors employ over the course of the summer investing season and into the Fall?

Here are a few simply strategies we employ when our outlook is mixed to negative or we are facing significant uncertainty in the near term.

Layer into Positions: We suggest investors set the total dollar amount they wish to invest into any new stock and purchase half that amount, with the strategy of adding the remaining half if or when a correction has hit. For instance, while we continue to like the long-term business Glentel Inc. (TSX: GLN) and still consider it a BUY for those looking greater than one year out, the stock appears fully valued at present in the near term after a very sharp appreciation in its shares. By layering into this stock, an investor could buy half their initial purchase in its current range ($19.00) with the goal of adding the remaining position if the stock drops in a broader market correction over the next six months. In the event the stock does not drop, at worst, we are left with a half position in a solid company and can consider buying more when the dust settles.

Buy Strong Balance Sheets: Again, this is a theme we consistently hold tight to as it is a core strategy we employ regardless of the market conditions, but it is always a healthy reminder. We continue to like companies with limited to no debt positions, good working capital, strong cash positions, and continued solid free cash flow generation. A great example of this is type of company is our current top technology (software) small-cap, which was updated in last month’s edition for our clients. Again, this is just an example; our research universe contains a number of additional names that meet this criteria at present.

Enter Positions Gradually: If you are either re-adjusting your portfolio or just beginning to create your own personal Small-Cap Fund (eight to 12 Small-Cap stocks from our or other analysts recommendation list), we feel it is prudent to make sure you purchase individual companies at different points in the market cycle over the course of a given year. This will ensure that you do not make a market high your sole entry point on a company. Be patient and enter positions gradually to build your diversified Small-Cap portfolio over time.

Diversify by Sector: A strategy we employ regardless of broader market conditions, but one that can never be stressed enough. Having said this, we do not believe in over diversification, or the purchase of 30-75 individual companies within the average sized portfolio (something we have seen all too many times in the portfolios of a surprising number of investors, wither by themselves or with the help of an advisor). When you have individual equity diversification within a market (such as the TSX) coupled with the ownership of several broad mutual funds, in most cases you have basically “bought the market” and your returns will proxy the index itself.

“Remember, you cannot beat the market if you are the market.”

In this case, one is better off buying one or two low cost, TSX Exchange traded ETFs to save significant fees and the inevitable headaches of managing a portfolio that complex overtime. What we suggest rather is a “focused” diversified strategy that is designed to invest in winning businesses in a range of sectors and has the ability to weight itself towards one or more sectors that you are particularly bullish on within the next six to 18 months. The reverse would be true for those sectors which we hold a negative outlook on over the same time period.

Looniversity – What is SEDAR?

SEDAR (the System for Electronic Document Analysis and Retrieval) is the system used for electronically filing most securities related information (i.e. quarterly financial results) with the Canadian securities regulatory authorities. Filing with SEDAR started on January 1, 1997, and is now mandatory for most reporting issuers in Canada.

SEDAR’s framework was established by Canadian Securities Administrators (CSA) and is carried out by each provincial securities regulatory authority. The CSA has appointed CDS INC. (CDS) (a subsidiary of The Canadian Depository for Securities Limited) as the filing service contractor for the SEDAR system. In this role, CDS administers and operates the system, provides assistance to the filing community, and works with both the regulators and the filers to plan future enhancements to the system.

The SEDAR system is an innovative link that enables industry to file securities documents and remit filing fees electronically — saving time and money. The SEDAR system allows users to gain immediate and intelligent access to public companies and mutual fund information in the public domain, and provides an important communications link among issuers, filers, and the securities regulatory authorities. It’s an excellent place to help you research your investments.

Put it to Us?

Q. Can you explain the difference between “Bottom Up Investing” and “Top Down Investing”?

– Donald Harknes; Edmonton, Alberta

A. A. Let’s see, “top down,” “bottom up” kinda sounds like terms you’d hear at a spring break party. But in the investment world, both refer to specific styles of analysis. A bottom up approach de-emphasizes the significance of economic and market cycles and instead focuses on the analysis of individual companies (stocks). This approach assumes that individual companies can perform well despite being in an industry that is not performing very well.

Top down investing involves careful analysis of a region’s economic health before considering a sector to invest in. Proponents of this approach determine what industries or sectors will return well, based on overall economic conditions, and then buy stocks that are attractive within that industry.

While both hold merit on their own, you are probably better off using a combination of each approach. So relax, keep your “top down” and we say “bottoms up” to your investment future.

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