Portfolio Update
January 1, 2000 - December 31, 2007
From January 1, 2000 through December 31, 2007, $1,000 invested in our hypothetical Model Portfolio would now be worth $3,183.76 while that same amount put into the S&P 500 would have been worth only $999.33. And that is before factoring out lost purchasing power due to inflation.
Our December 31, 2007 Model Portfolio
We believe investors are at great risk from an impending deflationary depression, in which case gold is the best asset on the face of the earth to own if you wish to preserve your wealth. That explains why at December 31, 2007, we had 42.27 percent of our Model Portfolio in Progress “A” Gold Producers and Speculative Mining Shares. In addition, we had 10.90 percent in gold and silver bullion, and still more exposure to gold through the Prudent Bear Fund, which has approximately 15 percent of its portfolio allocated to gold shares.
We own the Prudent Bear Fund because it shorts the equity
markets, and as noted above, we believe equities will perform poorly in the
years to come (except for gold and silver shares). Gold shares and a declining
stock market should boost the value of the Prudent Bear Fund significantly
and thus help retain wealth and thus help to retain wealth.
Another bear market strategy we have employed is to own technology companies we have labeled "Essential" Technology Stocks. In this category we have companies that can reduce the cost of producing essential items, such as water, energy and food. We believe that during a devastating deflationary depression, these kinds of companies can survive and even thrive.
Though we fear deflation over the longer term, we are well aware that energy is a hot commodity now, and for various geopolitical reasons and given increased demand from China, energy prices could remain strong for quite some time. As a result, we have approximately 10 percent of our portfolio devoted to Energy Stocks, including a couple of Canadian issues that provide strong cash yields. In that same vein, we have a considerable portion of our portfolio in uranium stocks. We feel uranium prices will remain strong for the foreseeable future given shortages in this essential metal used for nuclear power plants and given the demand to build more such plants, especially in China and other rapidly developing countries. So we have a sizeable portion of our portfolio in uranium stocks as well. We have added another 8% of our portfolio to the Global Resource Fund which invests in oil and gas as well as base metals companies. Although we anticipate a recession or worse, assuming China and other developing countries continue to grow we believe raw materials as well as food will continue to rise in price even as the U.S. economy contracts.
A Recession Could Derail Energy and Commodity Stocks
The one factor that could abruptly change our bullish view for energy and other commodities is if we enter a recession/depression in the near future. If that happens we could witness an abrupt decline in oil and gas prices as well as base metals. For that reason, we insist on holding the best asset of all for protection from deflationary chaos, namely gold and of course cash. Our Model Portfolio as we head into 2008 reflects these global macroeconomic views.
To help us determine which way the economy may tip, we have constructed J Taylor's Inflation/Deflation Watch, which is comprised of 17 leading indicator variables. From January 31, 2005 when this "Watch" was created, all signs at least for the moment point toward higher rates of inflation in 2008. From its starting point of 100, J Taylor's Inflation/Deflation Watch has risen to 136.84. Because the items in our Watch are leading rather than trailing indicators, we anticipate rising levels of Consumer and equity price inflation, but at slower rates than in the past few years.
Note : Our Inflation/Deflation Watch is calculated daily. Any major change in the Watch will prompt an Alert to the paid subscribers to J Taylor's Energy & Energy Tech Stocks Newsletter.
Our Low Budget/Low Maintenance Model Portfolio
Our hypothetical Model Portfolio assumes subscribers will choose among the asset categories we recommend (but not necessarily exclusively our stock picks) to invest in. We also assume investors will use our research reports only as an introduction to those companies and that they will conduct their own due diligence before investing in those companies.
Some investors have neither the time nor inclination to follow a number of stocks on their own. For investors who are not interested in following and studying a number of stocks on their own (we recommend investors never invest more than 5 percent in any one stock), we have devised our Low Budget Low Maintenance Model Portfolio (LBLMMP) which is a Fund of Funds. In our LBLMMP we select asset funds in asset classes that mirror the sectors we have in our Model Portfolio as best we can. We recognize that our LBLMMP can't perfectly imitate our Model Portfolio, for various reasons. For example we do not know of any mutual fund devised that tracks “essential technology” stocks. But at least this fund provides exposure to most of the asset classes we think will do well over the longer term, during this secular bear market for stocks and secular bull market for gold and raw materials.
In general, our approach to investing requires first that we identify long-term
secular as opposed to cyclical trends in markets. Having identified secular
trends, we position ourselves in our choice asset classes in either a long
or short position, accordingly. So for example, we believe the equity market
is in a very long-term secular bear market. As such we are short equities,
via the Prudent Bear Fund. On the other hand, we are confident we are still
in the early stages of a secular bull market in gold, so we invest on the
long side of the gold market in both gold and gold stocks. With respect to
our Model Portfolio, once we have identified a secular trend, we then invest
in particular stocks within those asset classes that we believe are undervalued.
Despite our efforts to pick individual stocks, it is worth noting that our Model Portfolio has outperformed our LBLMMP only marginally. The message therefore might be, buy our LBLMMP and go fishing or do what you enjoy best rather than picking individual stocks. But that's your choice. Many of our subscribers are good at picking individual stocks and outperform our Model Portfolio which is geared toward a spectrum of investors from the most risk averse to the most speculative.