Investment update - May 2009

There is undoubtedly a strong rally occurring in global stock markets. This is down to two things, one Government spending ala infrastructure/stimulus and central banks flooding the world with liquidity, namely the Federal Reserve which is buying everything and anything from the private markets and allowing the private markets to borrow and dump liabilities onto the Federal Reserve balance sheet. More importantly (regarding stock market gains) is the Commercial Paper market for relatively healthy businesses so they can borrow and finance operations. This has helped recapitalize huge losses that have devastated balances sheets. A return to profit has become a priority, this includes restocking inventories and sacking staff. This has brought some confidence back to market, hence the recent rallies

Pharmaceuticals have been a good buy for my portfolio, bought in late 2008 when they were cheap stocks, especially smaller biotechnology stocks. I bought these stocks in speculation that bird flu or SARS would return instead an unknown influenza popped up called A H1H1 (or as the media call it 'Swine Flu). Within a day after the WHO lifted the pandemic gauge to Stage 5, any biotech or pharmaceuticals that produce or are developing flu vaccines doubled in price; it was quite incredible. Pharmaceuticals are largely ignored stocks, expect when a merger takes place, when the Stage 5 alarm was raised these stocks traded in massive volumes in a short period of time. However there is a speculative buy, especially smaller biotechs ( although watch for mergers), until the Northern Hemisphere gets the all clear, this won't be till next year when their winter finishes. September 2009 is when the WHO, Center for disease control (CDC) will be watching how the 2009 flu seasons takes hold in the Winter months of 2009. Still there is restocking of flu drugs which will add profit to companies.

Gold and Silver are still solid hedgers, I am looking for more inflation protective buys. But that this point with the US dollar declining, Gold looks solid, Silver is relevantly cheap. So its a buy between physical silver/gold, ETF's or Gold warrants.

Oil and oil exploration stocks are attractive, this is not because the world is going to return to speed anytime soon (economically speaking). But inventories and oil exploration problems could occur, namely financial, war/geopolitical issues, output problems. Again oil can be bought with warrants. A good hedge for inflation, especially against the USD.

Food stocks, such as well placed food companies or market brands such as Supermarkets. Inflation on food and oil is still with us, as prices haven't retreated after this spike in food prices middle 2008. Depending how the 2009 winter for the Northern Hemisphere fairs up, if they go through a drought period, we may see food prices further increase.

I hold puts on the last of high yielding currencies, such as the EURO, AUD, NZD, CAD. Commodity producing countries with massive deficits may have a hard time to retuning to surplus, especially if the countries currency is too high for exports to be competitive (in a depressed market). Europe is a whisper away from joining the UK and USA in printing money, so I would expect the EUR to reflect this once Quantitative Easing takes place. Germany may struggle as support for the EURO, so a sell on the EURO is possible; could see a major decline.

Commodities may boom out from a depressed currency market, as currencies weaken further into 2009.

I still believe valuations are far too high, for European, China and of course US stocks. The bounce in global output is very minor, China needs to consume it's own produce on the scale as the US consumer once did ( a leading global consumer); this is an impossible notion. China now (with government stimulus/market intervention) has a stock market bubble forming, as it also has an over capacity with inventories. Deflation looks very real for the Chinese economy.

If the current rallies continue on Wall Street we may see a bubble form, as mentioned there is now an over valuation occurring and the volume of trade is showing that older positions are being held with new ones forming. So in other words a lot of money is being pumped into the Stock markets on long positions (this can also be seen with the VIX option index as risk is being played down). It won't take much for a major sell to take place, when? Is very hard to say, but with a stock market that just came out of one of the biggest declines in history to suddenly rally almost into a bull market makes one wary. We have yet to have a 'graveyard market' form.

Straight from bear to bull - that's overbought signal right there.

*morbius glass does not give investment advice. Trade at your own risk