Paul Dietrich's Global Investing Trends Report

Following The Long Term Trends

Posted July 10, 2008 · 0 Comments

Dear Paul,

 

I know the FOXHALL “DEFENSIVE STRATEGY” in bear markets is made up of (1) bonds, (2) foreign currency funds to offset the falling U.S. Dollar and (3) oil, energy, metals, mining, agriculture and other commodities and basic materials funds. BUT, OVER THE PAST TWO WEEKS COMMODITIES HAVE DECLINED PRECIPITOUSLY.  AGRIBUSINESS COMMODITY FUNDS are down this month 6%.  STEEL FUNDS are down over 9% and METALS AND MINING FUNDS are down over 12%.  It is hurting your FOXHALL performance.  I thought commodities were supposed to go up when the stock market was going down.

 

IN THE LONG RUN THAT IS HOW IT WORKS!  Oil and other commodities have rocketed up over the past few years and the basic LAW OF GRAVITY tells us this cannot go on forever.

 

THIS IS SIMPLY A NORMAL, HEALTHY, GOOD, AND FROM MY POINT OF VIEW, MUCH NEEDED CORRECTION.

 

FOXHALL CAPITAL GLOBAL HARD ASSETS UP APPROXIMATELY 23%

OVER PAST 12 MONTHS

 

Just to put everything in perspective, over the past 12 months from July 3, 2008, the FOXHALL CAPITAL GLOBALHARD ASSETS STRATEGY’S performance is up approximately +23%, while, at the same time, the S&P 500 INDEX is down almost -14% for the same period.  That is substantial outperformance of the overall stock market, but it is also COMPLETELY UNSUSTAINABLE over the long term.  Eventually there had to be a correction.  This is simply a healthy retrenching and a way of purging speculation out of the system.

 

Through the first half of this year, crude oil prices surged 46%!  From April to June, oil prices went up 38% and gained 10% in just the month of June.  If that trend had continued, we would have had $300 a barrel oil by December and $9 a gallon gasoline prices by the end of this year.  That trend wasn’t going to continue at that rate of growth!

 

Besides oil, many other commodities rallied to unrealistic highs this year.  Corn jumped 21% in June; gained 28% in the second quarter and surged 60% since the first of the year.

 

Among precious metals, since the first of January, gold jumped 11%, silver is up 17% and copper rose 28%.

 

DESPITE CORRECTION—THE LONG TERM TREND IS UP!

 

A week ago a major business magazine reporter called me and said, “As part of your FOXHALL CAPITAL “DEFENSIVE STRATEGY” you are heavily over-weighted in all of your investment portfolios in commodities and basic materials.  Yet two months ago you told me to expect a stock market correction in oil, gold, steel and even the U.S. dollar.  If you knew all of this was coming several months ago, WHY DIDN’T YOU SELL OUT OF THOSE INVESTMENTS?”

 

I explained to this reporter that the FOXHALL CAPITAL’S INVESTMENT DISCI-

PLINE AND INVESTMENT PROCESS followed long-term trends and that we were not “day traders.”

 

I said to him, “What are the key longterm trends over the next 18 months?  This is the question every investor has to ask himself.  Which investments will make you sleep well at night knowing that in the long-run, these investments are probably the only way to make money until this bear market/recession is over?  Every investor needs to ask, what should my “DEFENSIVE INVESTMENT STRATEGY” be?

 

LONG-TERM TREND # 1:  THIS BEAR MARKET /RECESSION WILL LAST AT LEAST ANOTHER 18 MONTHS

 

Since 1945 the United States has had a bear market/ recession every 5-to-8 years and the average drop in the stock market, as measured by the S&P 500 INDEX, over those average two years was 34.1% according to USA TODAY.  In the last bear market/recession from 2000 to 2002, the S&P 500 INDEX dropped 49.1% from top to bottom.

 

If history is any guide, this current bear market/recession will last until late 2009 to early 2010.  The FEDERAL RESERVE released a report some months ago that said that the “worst abuses” of the adjustable rate mortgage scandal took place over the past 18 months.  Since most of those ARMs had a 2-year, 0% interest rate, most of those “most abusive ARM’s” haven’t even “triggered” yet.  The FED predicts the peak of home foreclosures will come in late 2009 and early 2010.

 

I agree with Warren Buffett, when he said in a recent FOX NEWS interview that he believed this bear market/recession would be “deeper and longer than a lot of TV pundits were predicting.”

 

As part of the FOXHALL CAPITAL “DEFENSIVE STRATEGY,” we believe that a substantial component of bonds is a key part of a DEFENSIVE INVESTMENT STRATEGY.  THE PRIMARY PURPOSE OF BONDS IS TO PROTECT YOUR INVESTMENT PRINCIPAL OVER THE LONG-TERM.

 

LONG-TERM TREND # 2:  COMMODITIES ARE IN A LONG-TERM “SUPER-

CYCLE” INVESTMENT TREND UP!

 

Despite their recent “healthy” and “overdue” correction, the long-term trend for commodity prices is UP!

 

Yes, there will be periods when commodity prices shoot up like rockets and there will also be the inevitable “normal” corrections like we are seeing now, BUT over the next 10 years, commodity prices will continue to go up over the long-term.

 

It is simply the LAW OF SUPPLY & DEMAND.  China, India and several other govern-

ments in Asia have budgeted over $3 Trillion (that’s Trillion with a T) over the next 10 to 15 years.  Never before in the history of the world have we seen this level of infrastructure spending over a 10 to 15 year period.

 

China alone is building 45 nuclear power plants, another 50,000 miles of super-highways, almost 1,000 miles of a massive waterway system to bring water from the south of China to the north (many engineering experts say this may be the largest single infrastructure project in history).  China is also building or rebuilding scores of new ports, building or rebuilding at least 8 hydro-electric dams and in order to build housing for the 5 million Chinese left homeless because of the recent earthquakes, the government has to build a new city bigger than the size of New York and all of it’s suburbs.

 

After the engineering studies are complete, investors actually know how much steel, copper, concrete and other basic materials and commodities will be needed to complete these projects.

 

The world has never seen infrastructure spending like this!  All of these Asian countries have the surplus U.S. dollars to complete these projects, and these projects WILL BE completed because they create millions of jobs and more importantly, infrastructure creates the foundation for these counties to move to the next level of economic development.

 

As part of the FOXHALL CAPITAL “DEFENSIVE STRATEGY,” we believe that a substantial component of commodity and basic materials funds are crucial.  In the long-term, commodities do usually run counter-cyclical to the stock market, so they are an integral part of a DEFENSIVE INVESTMENT STRATEGY.

 

However, from a long-term supply and demand perspective, commodities and basic materials will also be part of a long-term investment trend over the next 10 to 15 years because of the unprecedented infrastructure spending in Asia.

 

LONG-TERM TREND # 3:  THE U.S. DOLLAR WILL TREND DOWN FOR THE FORE- SEEABLE FUTURE

 

Since 2002, the U.S. dollar has fallen 40% against its major rival the euro.  It dropped over 10% last year.

 

Just like commodities, the dollar may rally over the next few months.  It is probably oversold at the moment.  BUT THIS WILL JUST BE A SHORT-TERM CORRECTION.

 

In the long run, the U.S. dollar will continue to decline.  We have a war in Iraq and Afghanistan.  We have a congress of both Democrats and Republicans who continue to spend like there is no tomorrow.  No one in Washington believes that the wars can be ended in any of the time frames promised in the primary debates.  And no matter who is elected, either Senator McCain or Senator Obama, the deficit will continue to go up.

 

There are only two ways to deal with the U.S. government deficit.  You can sell long-term U.S. government bonds to China and Saudi Arabia, etc.  But they are no longer buying like they used to, because the bond yield doesn’t even cover inflation and the U.S. government has a history of devaluing the dollar so that the money they get back in 15 or

30 years is less in “buying power” than the U.S. dollars they have now.  Most of these governments think spending their U.S. dollars on their own infrastructure is a better investment than investing in U.S. government bonds.

 

If foreign governments do not buy up all of our bonds, then the only way for our government to fund the U.S. deficit is for the U.S. government to print more money.  That is what the government is doing, and that is a major reason why the dollar continues to fall.

 

I do not know of a single economist who believes that any of the underlying fundamentals mentioned above can be reasonably turned around any time soon.  That is why the long term trend in the U.S. dollar is going to continue to decline.

 

Even though gold and some foreign currency funds have dropped in recent weeks and the dollar has rallied, as part of the FOXHALL CAPITAL “DEFENSIVE STRATEGY” we will continue to hold asset classes like gold and foreign currencies, when it is possible, in order to hedge against what we believe is the long term decline in the U.S. dollar.

 

THE RECENT STOCK MARKET CORRECTION IN COMMODITIES

 

Over the trailing past 12 months, almost all of FOXHALL CAPITAL’S INVESTMENT

STRATEGIES have substantially out-performed the S&P 500 INDEX.  At some point, there had to be a correction in the soaring prices of commodities as we have witnessed over the past few weeks.

 

We at FOXHALL CAPITAL strongly believe this correction in commodities was “GOOD” and “LONG OVERDUE.”  We understand that the long-term trend in commodities, simply because of long-term trends in supply and demand, is up and we believe this short-term correction will end over the next few months.

 

There is no “PERFECT” investment strategy THAT ALWAYS GOES UP.  If there were, everyone would use it.  However, we at FOXHALL CAPITAL believe that our clients sleep well at night knowing that the FOXHALL CAPITAL DEFENSIVE STRATEGY is primarily invested in principal protecting bonds, “real assets” like oil, gold, steel, other precious metals and agricultural commodities, as well as funds that help protect your “buying power” as the U.S. dollar declines.

 

OVER ANY 3-YEAR PERIOD, SOME OF THESE FUNDS WILL CORRECT AND GO DOWN—sometimes substantially.  However, we firmly believe at FOXHALL CAPITAL that the best way to protect your retirement savings and keep your long-term buying power in tact during a bear market/recession is through a diversified DEFENSIVE INVESTMENT STRATEGY of bonds, hard assets and non-U.S. currency funds.

 

Until next week…

 

—Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053

 

Disclosure: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of similar future performance.

 

 

 


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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