01.12.09, 3:00 PM ET
Slimming down should be our goal for the next couple of years in the stock market and the economy. We are undergoing an important transition, and things are simply not going to be the same as they were … not ever again.
Count on a new paradigm on the part of the public. There will be caustic erosion in trust, especially trust in the government's ability to solve problems and in financial institutions' ability to serve the public. There will be more Ponzi schemes exposed, and more corrupt actions on the part of officials will be uncovered.
Investigating Goldman Sachs'
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Corruption, manipulation and insider trading is bad enough, but the long-term effects of past excesses on the behavior of the public are yet to be fully felt. The public is going to be forced to be more conservative going forward. Consumer loans will be all but impossible to attain, and this includes credit card debt, auto loans, etc. Economic activity is going to slim down to a "pay as you go" pace.
The separation between the "haves" and "have-nots" will widen.
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Corporate profits will decline, and the stock market will struggle while the public finds it increasingly difficult to believe the pap they are fed by the media. Distrust will grow, but the long-term reliable market motivators will not change. Fear and greed will continue to run the markets. The "have-nots" will struggle, but the "haves" must be careful. Bear market rallies are not bull markets.
We are currently engaged in a bear market rally. The averages are coming off the bottom of trading ranges that will persist for another five to seven years. The long-term range is bonded by 800 on the down side and 1,500 on the up side for the S&P 500. The Dow industrials will be confined between 8,000 and 14,000. At first glance, a 75% to 85% move from bottom to top is not a bad profit.
The rub is that the moves from the bottom to top of the trading ranges will not be linear or pleasant. Currently, the Dow faces stiff overhead resistance at 9,000, and the S&P 500 is facing strong winds at 1,000. Journeys in the trading range will be choppy and volatile. The outside trading limits are not solid, but general. We will see dips below the lower limits and failures to meet upside expectations, but most of the time, trading will be within these confines. The overall theme is contraction--slimming down--and that is not bullish. Declines will be quicker and steeper than the rallies will be strong. Fear and greed will put folks out at the lows and in at the highs … as always.
The popular averages are going to be fertile farming for those with a trading strategy, but they will not provide much for the typical long-term investor looking for growth.
What do I want to own in January 2010? Not dollars, not bonds and not stocks, unless they are advantaged by higher commodity prices. Gold and crude oil will remain at the heart of my investment philosophy, along with other tangibles.
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I look for the commodity market and the stock market to decouple in 2009. However, that may not appear to be the case over the next few weeks. Near term, gold needs to correct for its own technical reasons. The point to be watching is $743.40 basis the April futures. That is the next Critical Price Point for gold, and if prices break that level, it would be a negative. Frankly, I don't expect that to happen. More likely, we will see a period of profit-taking push prices back to about $800 or so. A sell-off here would be an excellent opportunity to add to positions.
The dollar topped at 89.74 March basis in November, and although it may take a shot here at the 85 to 86 level, it will resume its long-term down trend soon. I have held to a downside target for the Dollar Index of 60 since early in the decade, but with all the government is doing on the financial front, that target should be re-evaluated. I think the index can easily reach 48 to 50, and this decline could end up being amazingly fast.
You might take a look at buying some euro exchange-traded funds (nyse: FXE) if you have an opportunity to snag some at 132.50 or better.
A brief attempt on the upside in the dollar fits with some profit taking in gold over the next few weeks. I continue to recommend that you put new money in the major producers. The juniors have been looking better, but the best risk to return will be found in the majors like
The downside buy price for Yamana is now $5.50, and I am raising Kinross to $12.50. I am raising Goldcorp to $22.50. These are my favorite majors, but
I think all gold portfolios should hold some of the
Crude is setting up to be a big winner in 2009. Crude has overshot on the low end, as have many other commodities that are now selling for less than the cost of production. Production will not continue at a loss, and you can rarely go wrong investing at prices below production costs.
Take a look at the ING Risk Managed Natural Resource Fund (nyse: IRR). It is moving to the upside very well in this rally, but it should meet some overhead resistance soon. If it pulls back to $12.20, it looks like a good buy with a stop at $11.33. The indicated yield at that price should be just shy of 14%.