POTC thanks Simon Jester for submitting this forward looking piece. We first published a piece from Simon in October of 2009 (link). The piece was spot-on correct.
There is a rift between what the U.S. government reports regarding inflation and what the investing public experiences, a disparity not covered enough by the mainstream media. Identifying a long-term investment strategy that will outperform, during these times of experimental economic models, is the goal of my piece.
'Wealthy' Americans, who had more than $1M in liquid assets in 2010, grew their wealth by about 9%. But I found that 9% number to be unimpressive when I dug deeper: official inflation numbers.
The Fed's quantitative easing (QE) rounds I & II forced investors away from traditional growth vehicles. Bonds outperformed stocks and commodities outperformed all since October of 2010.
If the Fed goes with Q3 III, I expect the same investor behavior. I do not think Q3 will occur as a new dawn in GDP growth is about to begin since this is an election year in the United States and China. And fiscal move to the center should work to loosen the stranglehold of fear and invite risk appetite back to the equation.
When the so called wealthy have experienced modest gains to slight losses versus real consumer inflation, this must change soon or the current Administration will have little chance to win another term. I feel something will be done in the Energy sector to stimulate jobs. I like natural gas business models as mounting pressure of national unemployment weighs. We could find out within a week if the Obama Administration is ready to stop over-regulating and begin creating jobs in the green pasture that is U.S. natural gas.
Since the wealthy Americans have lost a good chunk of their net worth with the value of real estate, some government action in this area would bring back some confidence. The monetary side has been exhausted so now the fiscal side must begin to act or a second term has no chance. The wealthy are the job creating engines in the private sector, so the long-term market strategies that they legislate in the next few months should work for the wealthy first.
Short term market fluctuations will always allow active traders the opportunity to make money, especially if you use strict trading parameters: Psychology of the Call's (POTC) 11 Commandments are a good example.
However, if you followed my advice after POTC published my first piece on October 27, 2009 you did wonderful. I outlined a value argument defending gold, silver, and farm commodities. Even corn beat real inflation numbers. The combination of those assets have outperformed every Holy Grail S&P money manager and mutual fund. I look forward to sending POTC more articles as this economic cycle develops and as my time permits.
Today I am backing away from the wealth retention / value argument of owning commodities and predict that we are in the early stages of witnessing the gold bubble burst. The next boom cycle will cause a bust in most commodities as investors jump from wealth retention to wealth generating vehicles. But I cannot tell you with certainty if this shift will occur gradually or suddenly. But I believe it will still be associated with better than expected global growth rates in GDP as fiscal stimulus measures take center stage.
Where should you place your bets now, CDs, Treasuries? Both still offer negative rates of return versus inflation but they are a way to retain wealth over what I think will be the worst place, gold and silver.
History shows us that commodity markets unwind with great passion, fervor, and volatility. Commodities are great when they work, but when they begin to rust, they are like a love story gone bad.
POTC has stated that the unwinding phenomenon in commodities often causes whipsaws in prices that destroy the most seasoned trader. 4%+ intraday swings in gold and silver will occur and impact the stock market (S&P) similarly. When we witness this volatility in metals, that could be a sign that money is moving out and will start being reallocated into stocks.
I envision money will flow out of commodities and stream into great businesses / stocks. For all looking to increase wealth, stocks should be the best show in town through 2012 at least.
My favorite sectors are technology and select energy, specifically natural gas. So what to buy?
Well, in a fearful economy there is always greater reward for risk. You have to be patient and not sell when everyone else is and vice verse. My strategy is not short-term, I do expect jaggedness along the path. I will not panic as market scares repeat and offer opportunity.
Look for depressed industry leaders that experience a spike down in share price following quarterly earnings. In Technology, look into chip makers such as Intel (INTC) or Micron (MU). The financial health of a company is not tied to a single quarterly earnings release, it is tied to R&D and manufacturing capacity. So look for companies that are investing in the future, companies that have strong cash reserves. And then if they suffer a fall after a supposed 'bad' quarter, you should buy and hold them.
Caterpillar (CAT) had over a billion dollars in revenues last quarter and Wall Street was “disappointed.” Did you buy it when it dipped?
The emerging bust of commodities and the eventual “boom” of the stock market means that you must be looking around for bargains now. Buy like POTC suggests, incrementally in equal dollar amounts over a 3-week or even 6-month period. I am not a trader but an investor, but you could apply the way you build long-term positions to trading as well.
I cannot 100% predict what inflation will do or will not do, nobody can. But I know that if I invest in businesses with great management and competitive advantages when the cycle turns their way, I will make money. Countless “experts” are torn whether the commodity bubble will burst. So while they are debating, I recommend you should be building positions in my favorite stocks that could be up big by 2012.
Whether you like or hate Warren Buffet's politics lately, remember that he did have a vast majority of his investments in Coca Cola (KO) at one time. So the notion of buy quality when it dips and do not get discouraged; let the others get discouraged. Buy when they give up and are confused.
I consider favorable demographic winds continuing from the East, but especially China and India. If you can buy under one standard deviation from the historical average and sell one standard deviation above the historical average, you will guarantee yourself success. The key to this strategy is identifying long-term value stocks and using them as tools for creating wealth over time. Now is that time.
Over the last several weeks history was made with almost day to day 4% stock market whips, this was due to massive uncertainty. This massive uncertainty has created some real bargains in my opinion. I continue to suggest buying stocks for the long run. Right now I am very impressed with the R&D coming out of IBM for example.
Simon Jester's bottom line:
Buy innovative technology businesses and energy companies in the natural gas industry. If you accept my strategy of buying slowly and holding great businesses, you will be rewarded throughout the upcoming 2012 political / election year. Lastlt, I thank POTC for editing this piece as I work overseas and have limited computer access.