Posted 4:45 PM by Dil
11-Jun-03

Long Asian Stocks - Short US Stocks
Marc Faber

(Since 1985, the dollar has declined from around 250 Yen to 116 Yen, but what about an improvement in the trade balance with Japan??) And a revaluation of the Asian currencies of such a magnitude isn't likely to occur for the time being.

At the same time, costs for insurance, healthcare, depreciation charges, and pension funds are rising rapidly in the US and could, therefore, continue to squeeze corporate profits.

So, while the corporate sector is slashing its capital spending, it is the least desirable adjustment for the US economy, since long term growth and profits in an economy can only come from net additional capital investments and not from consumption. Just consider that in 2002, merchandise imports rose by 11% against a GDP growth rate of just 2.4%. In other words in 2002, imports rose almost five times faster than GDP.

Any increase comes from soaring depreciation charges. What has happened to business savings net of depreciation charges is an outright disaster that most observers have yet to notice. Until the latter 1970s, they equaled on average 2.9% of GDP. In the late 1980s, that was down to 1.8% of GDP. Lately, however, it is zero for business as a whole" (emphasis added). According to Dr. Richebacher, "retained earning have not only disappeared, but they have turned heavily negative because the companies are paying dividends increasingly in excess of their earnings. In other words, a sharply rising part of dividends is met with borrowed money."

. In particular, the Taiwanese stock market, which is at the current level significantly lower than during the Asian crisis of 1997/1998, would seem to have strong rebound potential. Investors may consider the purchase of the Taiwan Fund (TWN) and the Korea Fund (KF) both of which are listed on the NYSE and sell at a discount of more than 15%. An alternative would be to buy the exchange traded South Korea (EWY) and Taiwan (EWT) funds, which respectively track the MSCI indexes of these countries.

As I have explained repeatedly in the past, Japan, Taiwan and South Korea will increasingly be squeezed by China, where production costs are far lower. Conversely, South East Asia with its large natural resources is in many sectors complementary to China. As a result, I still like Indonesia where the economy is performing satisfactory and where we find numerous inexpensive companies. We still like P T Telekomunikasi (listed on the NYSE: TLK), and smaller companies such as Indofarma (INAF.IJ), Ciputra Surya (CTRS.IJ), Enseval (EPMT.IJ), Mayora Indah (MYOR IJ), Lautan Luas (LTLS.IJ) and London Sumatra (LSIP.IJ).
For an exposure to Thailand, we continue to recommend the purchase of Bangkok Dusit Medical Services (BGH TB), Thai Union Frozen Products (TUF TB), Banpu (BANPU TB), Ocean Glass (OCG TB), and GFPT (GFPT TB). An overlooked and by foreigners shunned market is the Philippines. However, it has been my experience that the stock market frequently follows the Latin American markets and, therefore, given the strong performance in South America, a strong bounce could occur in Philippine stocks as well. There we still like Ayala Land (ALI PM), Jollibee (JFC PM) and ABS-CBN (ABS PM) In Hong Kong, we like Swire Pacific (19 HK), TVB (511 HK), Next Media (282 HK), Shangri-la Asia (69 HK) and Hong Kong & Shanghai Hotels (45 HK), and in Singapore, Singapore Telecommunications (ST SP), Singapore Airlines (SIAL SP), Singapore Technology Engineering (STE SP) and Capitaland (CAPL SP). I should like to stress that I have a high degree of confidence that diversified portfolio of Asian equities can be sold sometime within the next five years with a significant capital gain, while in the meantime one is paid for waiting because of the high dividend yield Asian equities provide (I own directly or indirectly some of the equities mentioned).

Incidentally, I also believe that we have just made a major low in the Japanese stock market. Blue chips and religious stocks like Sony have totally broken down, which is usually a sign that the bear market is approaching its end. I maintain my earlier recommendation that 2003 is the year when investors must go long Japanese equities and short Japanese bonds. It is only a matter of time before investors will pull out money from the ridiculously priced bond market (yielding less than 0.6%) and buy equities.

At the same time, I have less confidence that the purchase of the S&P 500 above 950 will produce satisfactory returns over the next five years. Still, I continue to like oil companies, whose earnings in the first quarter were superb, oil servicing companies and gold mining companies. Stocks like Royal Dutch (RD), Chevron Texaco (CVX), Exxon (XON), Woodside Petroleum (WPL AX), Schlumberger (SLB), Diamond Offshore (DO), Newmont Mining (NEM) and BHP Billiton (BHP) should be accumulated.

Posted 4:20 PM by Dil
COMMODITIES WILL RULE OK

02-Sep-03

"Get your chips into play!"
Marc Faber

So spoke Larry Kudlow, of CNBC fame, in a recent "Cramer and Kudlow" show. However, what Kudlow failed to specify is precisely on which number or color we should place our chips.

Thus, today, the ownership by foreigners of U.S. Treasuries, corporate bonds, and equities is more than twice as large as a percentage of GDP as it was in 1984 - not an insignificant point when appraising the future of bond prices amidst a U.S. dollar bear market, as Bridgewater seems to forecast. It is, to my mind, doubtful that foreigners will continue to increase their already very significant exposure to U.S. bonds, which are now offering very low yields, if the dollar is going to weaken much further.

Another point I believe to be relevant when comparing the 1984-1987 bond bull market and the present situation is that, at the time, Paul Volcker was Fed chairman. By contrast, we now have monetary policy makers such as Alan Greenspan and Mr. Bernanke at the helm, who are much more likely to tolerate higher inflation rates than Paul Volcker would ever have done.

As a result, I believe that the risks in U.S. financial assets remain high and that the U.S. dollar, U.S. bonds, and U.S. equities are vulnerable to a large number of potential negative factors, which could disappoint investors, if not in the second half of this year, then in 2004.

I continue to believe that commodities including gold, silver as well as industrial commodities are the place to be. I would, therefore, buy mining companies (Newmont Mining, Placer Dome, Inco, etc), oil and oil servicing stocks (Exxon, Royal Dutch, Diamond Offshore), and even some basic stocks (International Paper, Dow Chemical). Rising commodity prices will also be favorable for countries like Indonesia, Malaysia, Thailand, Russia, Brazil and Argentina. All these purchases could be hedged to some extend by shorting the sectors, which will suffer from rising interest rates and commodity prices. These sectors include the interest rate sensitive financial sectors (banks, sub-prime lenders, consumer finance companies) and US homebuilding stocks, which are up fivefold since 2000!

A word of caution: The September to November period is seasonally a weak period. Expectations in the US are now an extreme and reflect a very optimistic sentiment about an economic recovery and higher stock prices directly ahead. Any disappointment could lead to a sharp sell-off or even a crash, which would temporary strengthen the bond market. A new high in the bond market appears, however, to be most unlikely.