Comments on Foreign Investment and Steven Leeb

Jake, I read the Leeb letter you sent me. Looks like it was from year end 2006. I will be happy to share my newsletters with you if you can send me this one whenever it comes out. Even though I don't care for the style of his advertising bulletin that you sent me, I like his thinking (most of these newsletters use an over-the-top style to get people's attention). You have sent me other of his newsletters that are written more subtly and I agree with his positions. I would be very interested to receive his alerts.

Leeb does have a good track record and he did make some good observations on the direction of the global economy. The growing power of Asia (China and India) is fairly well known and I have been positioned for that for several years, though have been afraid of the big China runup recently. Looks like a stock market bubble to me. I just have a very little exposure to China with FXI and to India with IFN. Both will probably get hit hard if there is a global correction, which I think has already started. I will move more into those two funds after we go through this bear market. The place of India and China as the top two economies on the planet is just a function of their populations. India has not yet had the will to push its infrastructure along to keep pace with China, but I am sure it will do so in the next few years. Engineering companies like JEC and FLR are a good way to play infrastructure, though overpriced right now.

I see where you may be getting the signals to go all cash. It looks like Leeb has a timing service to recommend that. It will be interesting to see how that turns out. All investment books I have read say that timing doesn't work, but that modifying allocations to a more conservative posture has a good track record.

Investech is a newsletter written by Jim Stack and is more conservative than Prudent Speculator to which I also subscribe. Check out his "Housing Indicator". It is amazingly like the internet stock bubble (well not really amazing since EVERY bubble looks like that which is how it gets that name). I also subscribe to Fred Hickey's High Tech Strategist. He is also VERY bearish, especially on tech and retail stocks, and has been for several years (much too early). He and Doug Kass, another big bear, reference each other's work all the time in their letters.

Jim Stack is making the same calls as Stephen Leeb, although he is still invested in his fund, but defensively. Stack's negative calls are based on more traditional investment indicators including stock fund flows and the new "housing indicator". I have not been as aggressively bearish as Stack, but probably should have (and have changed my thinking). Now I am trying to get my portfolio in line with his allocations, which include a 10% bear fund exposure (I am only at 5% bearish right now). Prudent Bear (BEARX) is how I am doing it, since it outperforms the inverse market index funds like Proshares inverse S&P (SH). BEARX has a lot of precious metal and mineral exposure in addition to shorts on the weaker stocks. As you know, I like the protection of the precison metals, even at the already high prices.

I have more work to do to get my portfolio squared away. I will need to take some big hits on those financial stocks I picked up too early and allocate the proceeds to BEARX. I can probably keep my portfolio positive for the year if I get that done before any more damage. Too bad I didn't take the more aggressive approach along with Stack. I was up 20% for the year on my overall portfolio at the end of June.

I have also attached David Tice's most recent letter to shareholders of BEARX. It was probably written at the end of October, but is dated November 2007. Everything he warned about the financial stocks has come to pass in November (though, it had already started at the end of July). We made a double top in the broad market with the 14,000 peak in July and then again in mid-October. Double tops that break down like this one has (fast), can signal a long term (secular) high in the market. That is why I am thinking 12,000 is likely soon, if not lower. Tice is the most credible bear that I read, though Kass also has been accurate.

I don't really buy into Leeb's total gloom and doom for the American market. The inflation story at 12-15% would be no worse than the 1970s (as he himself referenced). We have had the repeat of "guns and butter" in the past 5 years and have deep financial deficits, both public (government) and private (hedge funds, banks, many underwater homeowners), which is why a period of high inflation may be on our doorstep. People did not go broke in the market during the 70s, though it was tough to break even on a "real return" basis, after inflation was netted out. The way to do well in the market in the 70s was the same as now: stay invested in hard assets. Bonds and financial stocks are deadly. We have been agreeing on this strategy, but we should not bail out on the "hard asset" investments right now.

I am staying in the Canroys because I believe as Leeb does, that oil will get more and more precious, and the US dollar will continue to weaken (it won't crash becaue our trading partners / creditors can't afford it to). The Canroys are one of the best ways to take advantage of those trends. I will take the tax uncertainties in Canada over the political uncertainties over the other big sources of global oil (Mideast, Africa) or the high cost of deep sea oil. When you buy the big oil companies like MRO, CVX, XOM or BP, you don't know how global politics might affect their ability to pump oil. They may have their assets nationalized (like in Venezuela and Russia) or the royalties jacked up (even higher than Alberta). I am staying in gold (through BEARX and other funds) because I think gold is a store of wealth while the currency situation gets sorted out. I don't trust any of the paper currencies. If there is global inflation, as Leeb su ggests, then all world currencies will devalue in relation to gold (or oil for that matter).

I don't know about this end of the American economy story-line in his 2006 letter. Like I wrote a couple days ago, China and other big American creditor nations need us as much as we need them. They can't walk away from buying Treasuries or some other American assets. They want to and need to export their consumer products to us in order to employ their huge urbanizing populations. When they export product, they get back dollars in return. They have to put those dollars to work, so they buy our Treasuries or some other financial instrument (including the CDOs and other junky stuff they now own). The other option, which I think will happen and which will eventually support our stock market, is they can recycle their dollars by buying American companies. The oil sheiks have been quietly doing this for years. The only time we hear about it is when they try to buy something that has some possible national security implications, like Dubai trying to buy our ports and China trying to buy Unocal. Then, our Congress shoots them down (unfotunately, in my opinion).

I like the idea of having every creditor country recycling dollars by buying our companies. It props up the stock market and stabilizes the global economy, and global politics by extension. For example, Germany and Japan were at war with us in the 1940s, but now are our best friends. Why? Because they own a big chunk of America (we helped make them powerhouse exporters in the 50s by rebuilding their economies with the best new manufacturing plants and then let them export their cheap products to us without tariffs or duties). When foeign companies own our companies, they send their citizens to live here and help manage their investment (I now work for a German company and just left a company that was sold to the Japanese, so have first hand experience with this).

America has the chance to be a literal United Nations (much better than the fake figurative one in New York). So, I want the Saudis, Chinese, Russians and Iranians for that matter, to take a big stake in America. That is the future I see, not America as some long-forgotten, has-been nation, as perhaps Leeb sees it.