The Big Picture For The Week Of June 4, 2006

This week's Barron's was chock full of articles that tie in with some of the content here regarding gold, broader commodities and emerging markets.

Michael Kahn believes gold can top its all time high of $850 but that this correction currently under way may take the metal down to $600 first. He does not believe there is a bubble in gold because, as he sees it, gold is not getting the same type of main street coverage that stocks had in 2000.

One point I have made along these lines is that throughout history, true bubbles simply do not occur so close together. Also the run up in gold price-wise is nowhere near what the Nasdaq did in its bubble.

This does not preclude gold from being in a mania which is a word I have used previously. Gold could easily correct 30% from its recent high without being the all encompassing, ruinous calamity that tech stocks were.

There was also a bearish article on emerging markets. It did not really dwell on whether emerging markets are a bubble, here again I would say no. The focus was more on the history of declines in this asset class averaging 34%. The iShares Emerging Market Fund (EEM) is down 13.1%. So could EEM call another 20% from here? Clearly it could but the part of the numbers in the article I find more compelling is the time length of emerging market corrections which, according to the article, averages 32 weeks. So far we are only four weeks in.

Since I discount the likelihood of a 75% drop and my concerns are for long-term money I am unlikely to try to cherry pick a bottom in the asset class in the next few weeks with some of what I pulled off the table in April.

As a side note Jim Rogers made a comment in passing toward the end of the Cavuto show that he thinks emerging markets have a lot further to fall.

When I post about this sort of thing I usually get a comment or two about whether to sell here. It seems like this question comes from someone who owns too much. I have been very consistent in saying reduce now if this decline has taught you that you have too much. Another aspect of this is that some people will say they can tolerate a big decline because it will come back. While there has not been a bubble there has been a mania resulting in outsized returns and while most declines will in fact be made up there is nothing that says they will be made up quickly. The Singapore market is below its 1998 high, as an example.

I have been overweight emerging markets for a while (but not 15-20% of portfolios mind you) but perhaps being overweight will become the wrong thing to do. I don't believe in zero but perhaps being underweight will be the right thing. No matter how much you like the theme, you need to be open to the idea that you may want to have much less exposure than you currently have.

The final article to mention was the cover story on Jim Rogers and his views that the commodity run has eight to 14 years left. He notes that many commodities are below their all time highs which makes the chance of a bubble balderdash. The article does not use that word but it is a word he frequently uses.

I am absolutely a believer that the commodity run will last quite a while longer (corrections notwithstanding) but I do not have a lot of client money in the asset class. I view commodities as a way to add diversification to an equity portfolio. For now I do not want to expose clients to commodity portfolios with a little equity exposure.

The take here should be all things in moderation.