January blues are not good news

January is over for investors, and few will be shedding many tears at the passing of this month. Only oil and the US dollar have enjoyed a positive month - the latter rallying on winter weather and Iraq, and the former bouncing back from an oversold position.

If you invested in US equities, real estate, or pretty much anything else you ended up losing money.

In the Middle East equities stayed afloat but markets have become more volatile, while even real estate had a quiet month. This could well have been a knock-on effect from the poor performance of global investments, although it may also reflect overbought local equity and property markets.

Even gold-bugs lost out with a 6% slide in the value of the yellow metal, mainly due to the resurgent US dollar. Those who took AME Info columnist Dr. Marc Faber's advice - this time to buy the US dollar - once again stood head-and-shoulders above the crowd of losers.

But if you have not already done so then now is surely the time to bail out of equity markets - and bonds too if you follow Dr. Faber's advice. Likewise real estate in many major global markets is clearly overvalued, and with interest rates rising, prices are falling.

One phenomenon that is going almost unnoticed is the increasing impact of rising energy costs on company profits. This is a pernicious force that will gradually undermine the very foundation of equity values, namely profits. And there seems no early end in sight to high oil prices, for a multiplicity of reasons.

Thus energy stocks might be the natural choice for 2005. But beware a big financial market implosion that would drag down energy stocks along with everything else; basically funds may end up liquidating solid energy holdings to cover losses elsewhere, and this might be the buying opportunity that you need to await.

In the meantime, remember the old maxim, 'In a recession cash is king'. However, you still need to remember that all cash is not equal in a recession. Some currencies will rise and some will fall.

It is very difficult to second guess a genius like Dr. Faber. But this correspondent would humbly submit that at some point this year he will switch from advocating the holding of US dollars to gold. This would be in line with his recent book, 'Tomorrow's Gold' whose title rather says it all.

But the basic principle of guarding cash at this time is almost certainly the right one. For once a real financial market crisis has written down asset values to much lower levels you need to have cash to take advantage, and you can not do that if you have got wiped out along the way!

Of course, you may well have to wait a while for such a downturn, but the longer it takes to arrive the bigger will be the opportunity. In many ways it actually pays to be patient in investing.