The Monthly Newsletter

The monthly newsletter is edited by Dr. Hans Black and is published monthly by our Boston office. It offers insight and analysis of events in the financial sector under different headings. It also includes a select essay written by a member of our staff.

Here are some excerpts of the August issue.

This Month

Portfolio Review

As we have written in these pages over the course of the past several months, we remain cautious overall and are not hurry to be fully invested. In this market environment, it is essential to focus on situations with solid fundamentals that will serve to benefit our clients. We continue to favor Angiotech Pharmaceuticals below C5$, Biogen below 55$ Schering Plough below 25$, Conagra Foods below 23$, Novell below 7$, Incyte Corporation below $10, Sycamore Networks below $4 and UT Starcom below $4. In Europe we continue to favor the Vodafone ADR below $22 and Smith and Nephew ADR below $46. At the moment we would not add any additional positions in Asia or Emerging Markets.

Precious Metals

Precious metals have reacted violently to what has surely been one of the most momentous months that has ever occurred in modern financial history. As discussed further on pages 3 and 4, we have seen major institutions – banks, insurance companies, etc. – either being forced into mergers or declared bankrupt. These actions caused investors to either love gold, on the days that they were truly fearful, or hate it, when they needed the cash. The bottom line is that gold appears to us to be going slightly lower and will likely find good support between $700-800 an ounce. As mentioned in our last newsletter, we would advocate accumulating gold stocks on any period of weakness, which we have certainly seen.

We continue to like both Newmont and IAMGOLD and have also been steady buyers in a number of smaller capitalization gold plays. Stocks such as Orvana, Williams Creek and Gabriel Resources are good examples. At some point in time the herd will once again chase these stocks and propel them to much higher prices.

Currencies

The dollar has behaved extremely well as it has continued to rise sharply in a rally that began in mid summer. From a level near 1.60 the euro is currently at 1.40 and in time, in our opinion, on its way toward 1.20. The crisis in financial markets, which many wrongly perceived to be an entirely U.S. affair, has now spread globally and is involving Europe in a very severe manner. (For more see pages 3 and 4.) In time, we suspect the European central bank will lower interest rates and act in a material way to stem problems in the European banking sector. While the dollar may spend some time near current levels, we believe that within the next six months it should rise dramatically higher. We are continuing our target for the Swiss franc near 1.20 and eventually close to 1.30.

The yen has been much more stable as it has been the object of a great deal of carry trade unwinding. It is our view that this process is largely complete and that in time the yen will weaken materially versus the U.S. dollar, as well as other currencies. We suspect that this has already started and will leave the yen above 110 and possibly near 115 by year end.

Although the Canadian dollar has weakened, grudgingly so with an upcoming Canadian election on October 14th, and certainly understandable attempts by the current government to reassure Canadians that the world financial crisis was born in the U.S.A. and not our fault, things should hold until election time. Past that point, however, it is our suspicion that many participants will realize that the Canadian economy is indeed vulnerable, as are all other G10 economies, to the dramatic weakening that has taken place in global economic trends. Canada’s large trade relationship with the U.S. will inevitably take a big toll on manufacturing and most raw material exports. Even the so-called "strong" oil patch of western Canada should eventually become vulnerable as our suspicion remains that energy prices will drop in the months ahead. We are maintaining our target of 1.15 – 1.20 for the Canadian dollar which we fully expect to see in the next six to twelve months.

Both the Australian and New Zealand dollars have weakened dramatically from levels seen just two months ago, in part due to the unwinding of the so-called carry trade. Both currencies have been vulnerable to their own respective economic downtrends which will inevitably lead to lower interest rates. In addition, the Australian economy, as well as that of New Zealand, have very much also been guilty of some of the very same over consumption and over leveraging that has been so apparent in other G7 economies. In time we expect both currencies to decline further and eventually find a base close to 65 cents for the Australian dollar and possibly 52-55 cents for the Kiwi dollar.