Dear A-Letter Reader:

Asset class inflation dominates the global investment landscape for 2006. For value investors, no asset class is especially cheap as we head into the New Year -- with the exception of some commodities, namely the grains complex, the precious metals and soft agricultural products. Apart from commodities and several distressed global stock markets, 2006 will be a difficult year for the majority of traditional investors.

Stocks, now trading at four-year highs worldwide, offer poor values, especially in the United States. And bonds continue to trade at their highest levels since 1998, offering paltry returns over the last two years and negative inflation adjusted returns in 2005. Even alternative asset classes like art and collectibles, now sell at their highest levels on record. Real estate, the best performing asset class since stock peaked in 2000, is finally starting to show signs of cooling in the United States after peaking in the United Kingdom and Australia in 2004.

With the Federal Reserve still raising short-term interest rates, inflation rising, energy prices still near record highs and the American consumer pulling back from discretionary spending since the third quarter, 2006 will reward global investors over weighted in the precious metals, distressed European and Asian stocks, foreign currencies and undervalued real estate in Germany and Bulgaria.

Over the next six months, the US Federal Reserve will stop raising interest rates as the economy beings to slow. Real estate values, already softening in most major US cities, will force the already indebted consumer to retrench from profligate spending, implying a less vigorous corporate earnings season in 2006. Corporate earnings are heavily correlated to the consumer. Stocks have not suffered more than a 7% correction off their highs since bottoming in October 2002 - unprecedented in market history and implying a serious correction ultimately awaits equities.

Precious metals, already at 24-year highs, will continue to surge next year as the dollar peaks and interest rates decline the second half of the year. A short-term correction, long overdue, should be viewed as an aggressive buying opportunity for gold, silver, platinum and palladium. Foreign currencies offer an excellent entry point following the first positive calendar year for the dollar since 2001. The best values remain in Asia, namely the Japanese yen, Singapore dollar, Chinese yuan, Thai baht and Korean won.

For stocks, look to distressed Italian banking and Japanese large cap stocks, which should benefit from a sharply lower yen this year vis--vis the dollar. For aggressive risk investors, Mainland Chinese stocks offer the best global values this decade following a massive two-year slide but with commensurate short-term risk.

That's the way that it looks to me for 2006.
ERIC N. ROSEMAN, Montreal, Quebec
Editor, Renegade Investor
E-mail: enr@qc.aibn.com
Web site: http://www.eas.ca

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