A Hard Rain is Coming

July 22, 2010 - PRLog -- Like abandoned donkeys in the desert markets have moved around aimlessly for quite some time.  Long-term 'buy-and-hold' investors have not much to show for their patience. In real terms, adjusted for inflation, and accounting for dividends (they were higher then) the S&P is now doing worse than during the depression of the 1930s: We are presently down 35% from the peak in march 2000.

And what about the glorified emerging markets? Take Shanghai: it is now trading at about the same index level as it did in 2001. Bonds and gold did rather well in comparison.

What awaits us now? Lacking the oracle powers of Paul the octopus we can't be sure but our gut feeling is captured in the  headline of this column. A hard rain might be approaching as consumers in the West are tired and their governments run out of money to prop up the crumbling edifice.

Printing money could help us for a while but it would end in a disaster. A realistic scenario is perhaps a long sideways-down movement which, in the end, could shave 10-30% from present valuation levels. Not a pretty picture.

The only countervailing force preventing a rapid descent of asset prices is the ridiculously low interest rate level. Old fashioned  people who still save some money are being thrown under the bus on which politicians, bankers and various crooks are riding happily.

Apart from the usual cyclical problems we are caught in the fundamental upheaval of globalisation. Historically the West was a gated, capitalistic community which could draw on cheap raw materials and labor from the Third World which it had more or less colonised.

Now there are more than an additional three billion people who have also embraced a capitalistic market economy and they are competing for resources and amenities with us.

Moreover, they are willing to work for 10% of the wages we have gotten used to. Our exposed industrial sector which has to compete in a borderless world is faced with a nearly impossible task. That's one reason why we have high unemployment rates and deindustrialisation in many places.

At the same time our protected sectors, the government and service industries, are drawing high incomes which can hardly be earned through the remaining productive manufacturing activities. Hence we have been piling up debts, living beyond our means for a long time. The inevitable adjustment process is and will remain painful and dangerous. For the markets this means extended periods of volatility.

In our opinion it is advisable to stick with global winners. Companies which are exposed to the emerging countries, especially the BRIC-type ones. Although we see short-term weakness in resources we still see the sector in a positive light and would use such weakness as buying opportunity.

Apart from resource stocks we also look at pharmaceuticals and high-tech names with interest. Established luxury brands, the likes of Mercedes Benz and BMW, are also benefiting from new demand. A crash is rather unlikely in our view but setbacks will be common. Take advantage of the swings. There's not much else to do right now.

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XAM Capital Ltd. does investments for a small-circle of friends and family and is meant to serve participating investors with current price information and an outline of our investment strategy. For more information, see http://www.xamcapital.com.