Schultz: Worldly Wisdom

07/22/2005 12:00 am EST

Focus:

Harry Schultz

Editor, International Harry Schultz Letter

Harry Schultz, who will also be appearing at the London Money Show, has a legendary style of combining finance, geopolitics, and philosophy with wit and wisdom. Here's a glimpse into his unique world view, and his comments on China, currencies, gold, and some favorite stock picks...

"China now surpasses Japan as 2nd largest oil consumer, after the US. By 2025, it’s estimated China will consume 13 million barrels of oil per day, double current levels, and most of it will have to be imported. China’s growth, internal stability, and survival depend heavily on quenching its insatiable energy thirst. Masking itself as just another emerging Asian tiger, China is really a hungry giant saber-tooth in our living room. CNOOC’s bid for Unocal will force the US government to decide if China is a 'friend or foe,' and the decision must ultimately take into account unintended consequences of blocking CNOOC’s bid, as China owns over $200 billion of US bonds, making it a major financier of US debt. If China decides to liquidate part of its US bonds, we would see a plummeting US dollar and rocketing interest rates.

"When I first mentioned oil was going to $100, it was scorned, but now you see others are joining the club. But I have moved on to a long-term forecast for $200. Yet you can’t just buy any oil stock, any more than buying just any tech stock. There’ll be big setbacks, as there is with gold, as both are emotional markets. The best strategy is to trade them. You can milk each cow several times this way. This is true for all stocks. And remember, selling is the key to profits, not buying. Always has been.

"The big picture for gold gets brighter every day as, gradually, people in all walks of life and income levels are turning to gold as a safe haven currency in a world where there is no paper currency one can fully trust. The US dollar is distrusted because of US debt and deficits. The euro was, until a few weeks ago, seen as an alternative to the US dollar. But two European constitution referendum votes brought that notion into question, and the euro has since crashed. The yen has been in free fall. The £ was another alternative to the dollar, but London bombs sent it into the cellar. No other currency is liquid enough to compete. And politicians themselves add to the lack of public faith. Meanwhile, gold, by standing still, is the winner. It has risen in price not just against the US dollar, but most other currencies as well.

"The bond market has a terrible record at predicting recessions or deflation. Another long-term capital management squeeze could trigger a system implosion, as could a derivatives confrontation. The US Conference Board LEI (Leading Economic Indicators) is currently the best economic forecasting tool. US utilities recently hit a four-year high, mainly because dividends are back in fashion after a long vacation. US CPI index continues to provide useless numbers as it excludes the leading inflation factor: rising house costs. Not to mention exclusion of gas, which rises steadily.

"The 'secret' source of money pumping is bank credit growth, which has soared from $600 billion to $1 trillion so far this year over last year. It will likely be $1.2 trillion by year-end, up 100% in 12 months. This is a global bank credit bubble that dwarfs the housing and high tech bubbles. The US is likely to raise interest rates to 4.5% by early 2006. The Fed does this to get rates to a level from where it can cut rates when the next recession starts. Based on 3% annual inflation, we have seen a 93% loss in US buying power since 1920. It adds up fast! Commodities are up 50% in four years, but still at 1930 lows adjusted for inflation.

"Short-term, the US dollar has risen to a heavy resistance level. Chart logic says it’s overbought and will move sideways, and maybe dip to build a right shoulder of a possible reverse head and shoulders pattern. Long-term, the US dollar is still in a major bear market, so I’m long on US dollar futures and forwards. The Canadian dollar has been the second strongest currency, so consider C$ for a safe haven. Uncertainty rules, so be prepared. Own some energy, defense and gold stocks, be selective in Far East stocks, and gradually diversify out of the US dollar.

"As for the US stock market, odd lot short sellers are at high levels and they have the worst record for market success. Conversely, the highly regarded NY specialists have shorted abnormally little. And public bullishness has continued to shrink. These three ingredients make for continued life force in the US stock market. Public bearishness is clearly wrong footed. The NYSE Advance Decline line has continued to push to new highs. And all this in the face of lots of bad news. Open your mind to commodity stocks, nuclear power, and coal stocks, along with natural gas and the various oils.

"In the US, our top picks are McDermott (MDR NYSE) and Precision Castparts (PCP NYSE). McDermott is in the oil/gas and nuclear power industries, and is a buy on a one day close over 22.65 with a stop at 19.75. Gamblers can buy it at market. Precision Castparts is in the aerospace and defense sector. Buy at market, with a stop at 72.90. In Canada, our top pick is Pan-Ocean Energy (CA:POC.SVB Toronto), which is in the oil and gas exploration sector. The stock is a buy on pullbacks to 27.65; stop: 25.30. Gamblers can buy it at market. Also in Canada, we like Endeavor Silver (CA:EDR Vancouver). Buy on a one day close over 1.95, with a stop on a one day close below 1.62. We also like Ivanhoe Mines (CA:IVN Toronto). Buy at market with a stop at 8.50. And, as a play on uranium, we like Western Prospector (CA:WNP Vancouver). Buy on a one day close over 3.36, with a stop at 2.68."

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