WHEN DECIDING WHERE TO INVEST -FIRST LOOK FOR THE GROWTH?

If you are looking for growth, look at India and China and the demand for oil from the aforementioned nations…and from many others.  However, the investment area with the fastest growth in the world is…the available supply of U.S. debt, followed closely by the growth of debt in many European countries.

1. Growth of U.S. and European Debt
The great majority of investors look for growth to identify areas for potential investment.  According to official statements by the U.S. Congressional Budget Office, the investment area with the fastest growth over the next 2-5 years will be the supply of U.S. debt.  This increase in supply may or may not be met with an increase in demand for U.S. debt.  In order to stimulate demand for any product, sellers offer incentives, especially when supply grows rapidly in a short period of time.

What kind of incentives have debt sellers offered historically?  A better yield on the debt is the first and most common offer to sway potential buyers; that means  higher interest rates.

Today, U.S. and European nations find themselves in the unenviable position of  having to sell increasing amounts of debt to increasingly wary buyers.  Many buyers have asked why these governments don’t cut the price of the bonds.  The price of bonds is cut by lowering the value of the currency so that the buyer is not stuck with a high priced product that might decline in value as more debt is floated in coming months and years.  This is an argument that we believe the U.S. Treasury, which is the issuer of U.S. bonds, may wish to implement.  It will solve the problem of selling more debt, although it may anger previous buyers who hold a large amount of U.S. debt already.  Think Saudi Arabia, Japan and China.

A declining dollar also solves the problem of U.S. exports.  With a lower dollar, the US will export more and the economy will recover more rapidly.

Other areas of growth that investors may wish to monitor :

2. Growth of China
Respected economists are predicting 8.2% GDP growth in 2009 and 9.6% GDP growth in 2010.  In our opinion, this makes China a good area for long term investment.

3. Growth of India.
Early indications are for 6% growth in 2009 and we are expecting 6.5% or better growth in 2010.

4. Growth in demand for oil and energy. 
Oil demand is strong from those countries where growth is strong, primarily China and India. Elsewhere demand is slowly growing and we project that demand will continue as we move toward slightly stronger global growth. At $60 per barrel oil is a very good buy in our opinion.

RUSSIA — STILL A DANGEROUS PLACE TO INVEST

Those of you who have read our memos over the years are aware that we have been pessimistic about the investment environment in Russia for some time.

Russia’s court system is corrupt in the extreme as even Mr. Putin and Mr. Medvedev agree.

We have done no investing in Russia recently for this reason and we wanted to bring you up to date on some recent business events in Russia which offer little hope of any return to a positive investment environment in the near future.  An excellent article on this subject appeared in this week’s The Economist titled "Courting Disaster" with the subtitle "Russia’s Dismal Investment Climate."  The following is the last three paragraphs of the article for your perusal.

“The clearest indictment of Russia’s investment climate came a few days ago from IKEA, a Swedish retail chain, whose local operation has grown quickly since it opened its first store near Moscow in 2000. On June 23rd IKEA said it was suspending its investment in Russia because of the “unpredictable character of administrative procedures”, a euphemism for graft. A symbol of Russia’s economic rebound from the 1998 financial crisis has become an emblem of its dire investment climate.

Among 181 countries surveyed by the World Bank for ease of doing business, Russia occupies 120th place, below Nigeria. Transparency International gives Russia barely two points out of ten—its worst performance in ten years, which puts it on a par with Kenya. Until recently the Kremlin had no need to worry about things like property rights and the rule of law. Its oil wealth ensured an economic boom, no matter how it treated investors. Most of the money that flowed into the country came in the form of loans rather than foreign direct investment.

Now the loans have dried up. The Russian economy is forecast to contract by 8.5% this year, an especially dire performance by the standards of the so-called BRIC countries (the others are Brazil, China and India). Russia still blames the global economic crisis for its misfortunes. A closer look at IKEA and Telenor, as well as many of Russia’s own companies, suggests the truth is more complicated.”

Russia RTS Index (last 5 years)

SHORT SELLING

Short selling without an uptick
There is a secret of which most of the public is unaware.  The secret is how much money trading operations at major brokerages have made shorting stocks during the recent bear market.  There is no doubt that the removal of the uptick rule (after much lobbying by the financial services industry) exacerbated the decline in U.S. stocks.  In our opinion, it hurt the American people and their retirement savings and caused the U.S. market to fall farther than it would have otherwise and there is some evidence it may have caused many small companies to suffer when they could not access the markets for capital.

The SEC is now considering whether to bring back the uptick rule. In our opinion, It should be brought back as soon as possible. Financial thinkers like Jim Sinclair, Jim Cramer and many others agree with our position and want the uptick rule reinstated.  Arrayed against a reinstatement are the traders who find it easier to make large sums of money by bullying stocks down when there is no uptick requirement. If your wish to write the SEC to register your support for the uptick rule we suggest that you do so soon.

Naked Short Selling
Naked short selling is widely used to force small and undercapitalized firms to refianace on very unfavorable terms, profiting the naked short seller handsomely.  In our opinion, naked short selling is at least as dangerous as the short pools of the 1930’s that the then head of the SEC, Joe Kennedy, worked to stop after he had profited greatly as a principal of short pools of his own.  President Roosevelt appointed Kennedy because as one of the short pool operators he knew exactly how they worked.

Today much of the naked short selling takes place outside of the U.S. by foreign brokers who are not supervised by the SEC, but some of it takes place in the U.S. and it is definitely responsible in our opinion for much of the battering that stocks took in the recent bear market.

CHINA, INDIA, FRANCE AND BRAZIL JOIN RUSSIA IN COMPLAINING ABOUT THE U.S. DOLLAR’S ROLE AS THE WORLD RESERVE CURRENCY

In recent pronouncements by high government officials all of these countries have suggested that a new arrangement be concluded to handle world reserve currency duties.  Some suggest a group of currencies should share the duty; some suggest the gradual removal of the U.S. dollar.  All agree that more trade should be done in bilateral currency agreements directly between nations without transiting through U.S. dollars in the process.

Currently, many bilateral and multilateral trade agreements are being undertaken omitting the dollar as a clearing currency.  In addition, many trade loans in other currencies by-passing the traditional dollar role are taking place.  These facts indicate the beginning of a multi-year process through which the U.S. dollar will decrease in influence and eventually be replaced by a new world reserve currency. The change will not happen this year, but it will happen.

The G-8 meeting will reaffirm the dollar as the world reserve currency.  Japan, Saudi Arabia, the Philippines and many others for whom the U.S. provides a defense umbrella, will not take kindly to the idea of losing the U.S. dollar as world reserve currency.  They feel a debt to the U.S. for military and/or humanitarian support so they will do what they can to delay the removal of the U.S. dollar as world reserve currency.  The tug of war will proceed for some time.

A TRIP TO CHINA

Monty Guild, Tony Danaher and our analysts frequently visit companies and analysts in countries where we have invested or many be interested in investing. Over the years we have prioritized travel to Europe, India, China, Hong Kong, Southeast Asia and Latin America.  In recent years, trips to China and other parts of Asia have been made about twice a year by Monty, Tony and other company analysts.

Monty and an analyst associate will be traveling to 2 cities in China and to Hong Kong from the 10th through the 20th of July and will be reporting to the office daily on the companies and industry analysts that they are meeting.

SUMMARY

We continue to believe that buying India, China, oil and gold on dips will provide excellent long term returns.  One curiosity is that while China has been in a bull market, U.S. based ETF’s focusing on China have not participated as much as they should have based entirely on the appreciation of their underlying components.  Currently, there is the largest discrepancy in history between the value of U.S. based Chinese ETF’s and their component values in China.  We believe that this is either due to the fact that U.S. and European speculators are ignorant of the underlying values of the components of the Chinese ETF’s , or because they expect the Chinese market to follow the U.S. and European  markets lower, which has not happened.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com