Dr. Stephen Leeb
Investing in equities has never been an easy game, but today it
has become especially difficult when you consider how much depends
on the decisions of policymakers.
Here in the United States, right now no progress is being
reported on fiscal cliff talks, despite the decidedly short amount
of time remaining before more than $600 billion in automatic tax
hikes and spending cuts kick in. We still think some sort of
compromise will be reached, if only another temporary solution to
our financial problems.
If that happens, corporate America will undoubtedly breathe a
collective sigh of relief, and then - perhaps - put some of the
mountains of cash it's sitting on to work. Together with a housing
sector on the mend and consumers feeling more confident than they
have in the past five years, it could all translate into even
stronger growth here at home, and higher stock market averages in
the year ahead.
Then again, we can't rule out altogether the possibility that
Washington fails to get its act together and we go over the fiscal
cliff. In that scenario the inevitable result will be a contraction
in the economy and the stock market before galvanizing the Dems and
GOP to finally take action.
Europe, meanwhile, is going nowhere fast. Even the strongest
economies across the continent are feeling the pinch caused by
troubles in the southern "Club Med" countries. Greece is being kept
on life support with financial aid.
But the best solution, which would be a real plan for fostering
growth, has yet to materialize. And until such a plan is put into
action and/or Greece's debt is forgiven, the region's overall
economy could continue to struggle. Central bankers are trying to
do their part; they have the monetary throttle open wide and stand
ready for even more asset purchases.
From the valuation standpoint, and considering the marginally
improved regulatory outlook, European stocks are starting to look
attractive. But until there's more clarity on the debt situation,
the risk of investing there will remain high.
Government policymakers' prescriptions for dealing with current
challenges in the economy on both sides of the Atlantic are
analogous to stepping on the gas and the brake at the same time.
That is to say, if and/or when they decide to take their foot off
the austerity brake, the high revving stimulus policies are likely
to cause their economies to spring forward explosively in a cloud
of burning rubber.
Looking further east: Japan, the world's third-largest economy,
contracted by 3.5 percent in the third quarter on an annual basis -
and the fourth quarter is shaping up to be equally bad. If so, it
will mark the fifth time in the past 15 years that Japan's economy
has fallen into recession.
Japan is less concerned with austerity, but still has a tough
road ahead. To combat this situation, Japan's government is adding
more stimulus, announcing a new fiscal package last week worth 880
billion yen ($10.7 billion), while the Bank of Japan expanded its
asset purchase program in October to about 91 trillion yen ($1.1
trillion). Moreover, Shinzo Abe, the presumptive next prime
minister after elections are held in a couple of weeks, has vowed
to take additional monetary measures to drive down the value of the
yen to spur the economy.
One bright spot in the global economic landscape, despite its
many detractors today, is China. That country's economy appears to
be stabilizing and is likely to accelerate in the months ahead. We
learned recently, for instance, that China's manufacturing activity
increased last month for the first time in more than a year. This
is the latest in a string of reports in the last few months
supporting a turnaround in China's economy. The de-stocking cycle
there appears to be ending, and the rebuilding of inventories
coupled with greater investment and government spending on
infrastructure should drive domestic demand higher.
China's stock market today is reminiscent of the United States,
circa 1982. Investor sentiment is in the cellar, and stocks are
trading at extremely low valuations - with blue chip shares in many
cases selling at low single-digit earnings multiples. We can't say
when the bear market will end: it could be tomorrow, or it may take
a year or two. But when it does end, the market is likely to take
off like a rocket.
Still, we would tread very carefully when attempting to invest
there. One need look no further than the disastrous performance
China's solar companies turned in during the past four years, when
even the most successful companies saw their stocks decline by 95
percent - at the same time, their global market share was
The safest way to play this market is with a diversified fund.
Our hands-down favorite is
China Fund (
, a closed-end fund that invests in a mixture of public and private
(unlisted) Chinese companies. It therefore offers an opportunity
for U.S. investors to tap into investments generally reserved only
for Chinese investors. The China Fund currently sells at a 9
percent discount to its Net Asset Value [NAV], meaning that when
you buy a share in the fund, you're getting all its holdings for 9
percent less than what you'd have paid had you bought them
The fund's investment approach, moreover, holds long-term
promise: unlike the majority of other pooled investment vehicles
that are market-cap weighted, China Fund applies a fundamental
growth approach to its portfolio selection. The result: a portfolio
whose 15 largest holdings account for more than half of total
assets, but where
, a healthcare company in which the fund has made a direct
investment, is a position of nearly twice the size of
, the world's largest telecom provider by subscribers.
A more traditional approach is utilized by
iShares FTSE 25 China ETF (
. It reflects the largest and most investable part of the
Chinese/Hong Kong market. The biggest sector is the financials, at
more than half of the ETF's assets, followed by telecoms, including
China Mobile, at 17 percent, and energy stocks, at 15 percent.
Still another way of profiting from China's coming economic
revival (and an avenue for greater wealth even if we're wrong and
the Asian giant merely lumbers along) is with gold-related
China has made no secret of its desire to diversify its vast
foreign reserves with gold. Its actions suggest that China's
leadership is working toward ultimately establishing a yuan that is
at least partially backed by gold. China is mining gold at an
unprecedented pace (none of which is exported), the government's
current holdings are at least several times official reserves
(figures for which haven't been updated in more than four years),
and Chinese consumers can't get enough of the metal, either. Faster
growth will only add to their zeal in buying gold.
And of course, as we discussed earlier there's all that stimulus
being pumped into other economies, which has the potential to spark
inflation on a scale not seen in this country or most other
developed economies since the late 1970s.
The yellow metal has essentially been in a trading range for
more than a year, but that's fine with us, since it has allowed us
more time to accumulate. One day in the not-too-distant future,
however, gold will once again be off to the races. A doubling of
current prices would not be the least bit surprising.
Our top choices for gold investments haven't changed. You can
buy gold itself via the
SPDR Gold Trust (
. For gold shares, our preference is toward the small cap miners
that make up the
MarketVectors Junior Gold Miners Index (
; these companies have the potential to generate tremendous returns
in the coming years as they grow their reserves with pick and
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Estimates For Real QE3 Stimulus: -$5.1 Billion