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| Leeb's Market Forecast | |
| March 25, 2008 | |
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| Dear Investor, ------------------------------------- In this Easter update... ***** A good week for stocks ... and an OK week for us. ***** Why you should treat the pullback in commodities as a buying opportunity. ***** Paper's downfall is good news for precious metals. ***** Our 3 favorite financial stocks lead the sector. ------------------------------------- With the S&P gaining over 3%, last week was good for stocks, but not the best for TCI. While our portfolios certainly posted a net gain, they did trail the market. The reason should not surprise you. In your last update, we warned you that gold and oil could pull back a little in the short-term, and so they did. Gold lost nearly 8% to close at around $920, while oil fell some 6% -- closing nonetheless above $100 a barrel. We admit the pullback was a little more dramatic than we hoped. But corrections in commodity bull markets can often be sharper than a serpent's tooth. Indeed, the current correction might not have ended yet. Gold could potentially fall into the mid-$800 range. But we must reiterate that you should view any meaningful drop in gold as a tremendous buying opportunity. The factors that have pushed gold higher since the turn of the century did not evaporate last week. Nor have the factors driving oil prices, or the prices of commodities in general. Also not surprising to us, the stars last week were the financial stocks. This tells us the massive amount of liquidity the Fed has been pumping into the financial system is starting to have a positive effect. We pointed out in a recent update that shares of home builders were trading well above their low, suggesting the trough in the housing market may be on the horizon, so investors can start to discount it. Similarly, they can also begin discounting the re-emergence of economic growth. Whether or not we are in a recession doesn't matter. Growth is no longer unimaginable, and that's a good thing. Naturally, the resurrection of growth will be accompanied by rising commodity prices, rising inflation, and rising wages, so don't sweat last week's action in oil and gold -- not even one drop. Meanwhile, let me tell you who I met last weekend ...
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THE SYSTEMIC PROBLEM FEW SEE COMING This past weekend, I was on a radio show alongside the well-known Wharton professor, Jeremy Siegel. I was happy to learn that he, like me, remains unconvinced that the U.S. economy has fallen into recession. His arguments that growth is continuing echoed many of our own. He and I also agreed that the government campaign of fiscal and monetary stimulus in the absence of a recession is unprecedented. Where I disagreed with Professor Siegel is that he sees only slight increases in inflation for the foreseeable future. Whereas we see a real chance that the inflation rate could eventually exceed that of the 1970s. Unfortunately, the professor and I didn't have time to debate the issue on the show. But what I would like to add for your benefit is that the biggest difference between today and the 1970s is that inflation in the 1970s was caused by a litany of short-lived events. These included an Arab boycott of oil, the end of the Vietnam war, the Iranian revolution, and other events that did not result from systemic economic factors. What's happening today is far different. We have a squeeze in many resources besides oil. Virtually every metal from antimony to zinc is in scarcer supply in the U.S. today than it was seven or eight years ago. What's more, we now get the bulk of these metals from developing or undeveloped countries. Ditto for oil. This means that, unlike that of the 1970s, today's resource squeeze is a wholly systemic problem. As long as worldwide growth remains strong, there will be massive dislocations and a massive scramble for metals, energy, and other materials. It all comes down to this. One or two weeks of weak commodity action is a common occurrence in bull market shake-outs. But as long as the underlying economic fundamentals remain unchanged, you can expect the long-term commodities bull to continue. The only fundamental change that could possibly end the commodity boom would be a sudden drying up of demand. And the only way that could occur is if a major economic catastrophe arises in the U.S. We don't see that happening. Rather, last week's action suggests to us the approach of a trough in economic activity (i.e. growth should resume nicely). That doesn't mean Mr. Bernanke will start raising interest rates soon. Far from it. He still has much work to do to keep the pumps going and prevent our economic ship from sinking below the waves. The difference is that, a few weeks ago, the market seemed to feel that Bernanke's actions would not be enough, and that the economy might soon start to look like the Titanic, post-iceberg. Now however, the market knows Bernanke is taking his job seriously. We're still sitting low in the water, but the crew is working hard. The pumps are chugging along and the repair effort is certain to succeed. Of course, it may be a while before things are shipshape and
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CASH MAY BE KING, BUT THE PAY IS TERRIBLE One sign the market knows we're not firmly above the water is the fact that the 3-month T-bill is now selling at about 100 basis points. Think about that. If you put your money into these short-term notes, you will earn a mere 1% interest. With inflation growing by more than 4%, these T-bills and other forms of cash are losing propositions in terms of buying power. If investors are selling their stocks to buy T-bills at this rate of return, they must be nervous indeed. We should also point out that such negative real rates of return should prove very supportive for precious metals and gold. After all, if your reward for owning paper is so low, you may as well own gold. Gold may pay no interest, but it generally keeps pace with inflation, so you can expect to lose less with gold than with paper. Since we mentioned financials above, we should also point out that some of our favorite financial stocks led the pack last week. Of course, not all financials have been so fortunate, as evidenced by the sad events surrounding Bear Stearns. However, our feeling is that the financial crisis will be a great opportunity for those investors who kept their heads while others lost theirs. The three financial stocks I just mentioned may continue to lead their sector and the market for a while longer. Nonetheless, don't lose sight of the major systemic factors that continue to drive the world markets -- namely, inadequate supplies of commodities. There's little chance of fixing these problems, so prices will keep rising. You should continue to buy the dips. Don't try to buy at the exact bottom (few people ever can). Just be glad of the bargains. Finally, remember that the long-term commodity boom will only be aided by Mr. Bernanke's on-going action at the financial pumps. If he were to stop anytime soon (i.e. tighten monetary policy), we might start to worry. But we think he's smart enough not to stop for some time.
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