Timing Is Everything

Lately I’ve been thinking about investors’ perceptions of the stock, bond and commodity markets and how this affects their investing decisions. Most people focus on and invest in the equity markets because that’s what most daily financial news from CNBC, Bloomberg, etc. talks about. Every day you hear about the movement of the Dow, Nasdaq and S&P 500 indices, usually with commentary from stock analysts explaining the reason(s) behind these daily movements.

The only problem of being focused on the equity markets is that I believe stocks are in the early-to-mid stages of a secular bear market, where stocks could go sideways (+ or – break even) or experience minor to significant losses. Investors can make money in stocks and stock options, but only if they really know what they’re doing and do sufficient research.

I believe that most people aren’t true investors because they can’t accurately read a company’s financial statements, and they invest based on a hot tip or the latest ‘booyahs’ from Jim Cramer. Stocks don’t always go up or down in the short-term based on fundamentals – that’s where good technical analysis comes in. Just as in life, timing is everything… especially with regards to investing.

Winston Churchill once said, “The farther back you look in history, the farther ahead you’ll be able to see.” If you look back to the 1970s, you’ll see similar parallels to today: Rising inflation, higher oil and gas prices, a weakening US Dollar and stagnating incomes. These factors fueled the commodity bull market in the Decade of Disco.

When I hear someone say they know of a great stock or mutual fund, to me that’s like someone saying they have a great horse and buggy. It’s a slow vehicle that won’t get you to your destination as quick as a car will. Most mutual funds and stocks will be poor financial vehicles for investors to reach their goals in the next 10-15 years. I believe that physical gold and silver will be more profitable and safer choices than most financial paper assets.

Robert Kiyosaki, best-selling financial author, also concurs in two of his Yahoo Finance columns here and here.

To be a successful investor in today’s investing environment, you need to be financially and economically literate. You must be able to accurately read and interpret financial statements. If you don’t know how, I’d suggest you buy the book Rich Dad, Poor Dad, and play a board game called Cashflow 101. It’s like a real-life version of Monopoly that’s fun to play. It also teaches you how your financial statements (income statement, balance sheet and statement of cash flows) are affected when you take certain financial actions.

Once you get financially literate, you’ve got a good foundation to get economically literate, which will be the topic of my next post – stay tuned.

Why Commodities Aren't In A 'Bubble' Market

Some commentators have described recent action in the commodities market as a mania or 'bubble,' similar to the late 90s craziness in the dot.com stocks. Peter Schiff gives a good explanation of the short-term downturn in almost every asset class across the board.

While the price action has been extremely volatile, and metals prices have corrected violently to the downside in recent days, I believe that commodities are in a long-term secular bull market that will last at least another 10-12 years. Jim Rogers, billionaire investor and former partner of George Soros in the Quantum Fund said this back in early 2005.

"People have come to think [stocks] are okay again. They're not," said Jim Rogers, co-founder of the Quantum Fund and author of three investment books, Adventure Capitalist, Investment Biker and Hot Commodities...Historically, commodities and stock prices have moved in opposite directions. "In my view, we're in that kind of period again where essentially we're going to be having good commodity markets and sloppy stock markets," he said.

Here are my reasons why I agree with the Investment Biker.

First of all, central banks around the world are all inflating their currency, trying to weaken them so it's easier for other countries to buy more of their goods. This helps boost the current account (or trade) figures, hopefully resulting in a surplus instead of a massive deficit like the US currently has. Although the US has promoted a cheap dollar policy, it hasn't worked to generate a trade surplus, and probably never will. That's because we've outsourced our manufacturing base to Latin America and Asia, and it's a structural imbalance where China, Mexico and other countries make and sell more stuff to us than we do to them. If it weren't for agriculture and media exports, America would have an even higher Current Account deficit.

I know some of you reading this are totally in love with your stocks and mutual funds, probably still watch and listen to Jim Cramer's 'Mad Money' show with baited breath, and would almost never consider investing in commodities because they're 'too risky.' You may still believe what Wall Street and your broker tell you, and I can almost repeat it verbatim: "On average over the 'long haul,' the stock market goes up 7-8% a year. Keep dollar-cost averaging into the market, ride out the rough patches, and everything will be A-OK."

Speaking of averages, Mike "Mish" Shedlock at Whiskey and Gunpowder has a great column on averages, and how they relate to current economic conditions.

Back to Wall Street, stocks and averages. If you still believe that the stock market will keep going up 7-8% a year with the insane amount of debt at the government, corporate and household levels, I'll bring the Tooth Fairy and the Easter Bunny to your house for dinner. As Warren Buffett says, "Stock markets are a voting machine in the short term, and a weighing machine in the long term." As more investors bring out the scales on some of these heavily indebted stocks like General Motors, they won't like the numbers they see.

I'll concede that the major indices have recovered from the 2002 lows and gotten almost back to even. I'll take a guess that most American's 401(k) and IRA statements haven't been much to write home about over the past 5-6 years.

Compare this performance to gold over the past five years. It was trading around $260/ounce, as of this morning it's at $571/ounce, more than doubled. The factors that supported this have been a weakening US Dollar, plus increased gold demand from China, Russia and the Middle East. Dubai even has it's own gold and commodities exchange. As investors and central banks lose confidence in paper assets, such as stocks, bonds, mutual funds (and even some currencies), they will (and are already starting to) reallocated their assets from US Dollars and Treasury notes into tangible assets such as gold and silver.

Will commodities keep going up forever? Of course not. No market ever does. For the forseeable future, (I'd say the next 10, possibly 15 years) commodities will be in a solid bull market, while paper assets will disappoint most average American investors.

Why I'm Still Bullish On Commodities

Gold and silver markets were downright ugly today with gold plummeting $40 an ounce, and silver taking a $1.40/ounce haircut. Even with this short-term correction, I still like commodities over the long term. Here are my reasons why:

1) Commodities are still in the early to mid-stages of a secular bull market. Stocks and commodities run opposite of each other, and Wall Street had its days in the sun from 1982-2000. Historically, commodity and stock bull/bear markets run about 16-18 years in length. Gold was trading around $260 an ounce back in 2001, and is still at $560 after today's bloodletting. Silver was around $4-5 per ounce in '01, and trades today around $9.80.

2) The short-term correction is due to contraction in money supply by the Fed and Japanese Central Banks, and won't go on forever. I believe that American and other central banks are working together in coordinated actions to help out the US. Bernanke wants to skip a rate hike at the next meeting, but can only do this if inflation is perceived to be under control. The latest inflation numbers were a little higher than the Fed and other experts wanted to see, but with the recent plunge in commodities, they may be able to claim to Congress and the American people that inflation is in check and don't need to hike rates another quarter point in the short term.

3) America's glorious Empire of Debt. The US is swimming in government, corporate and household debt, and will need to inflate the money supply in the long run to attempt to pay this debt down in cheaper dollars. The problem with this is that American's purchasing power will be significantly decreased, and foreign central banks will accelerate their flight from dollar-denominated investments - namely stocks and Treasury notes.

4) The supply of commodities is finite, the supply of fiat-based money can be almost infinite. The world is entering the era of Peak Oil, where supplies and production of cheap, easily-accessible Black Gold are declining. Same goes for gold, where new discoveries of high-production mines are declining. However, the Federal Reserve - and other foreign central banks - can print money on a whim, and increase the supplies of their currency as much as they want. With more dollars in circulation, it'll take more of these dollars to buy commodities such as gold and silver.

5) Decreased confidence in financial paper assets. Stock markets around the world have been in decline, especially Dubai and Saudi Arabia. I believe we're entering a time where investors and governments will be more confident in tangible assets such as precious metals, and less confident in stocks, bonds and certain currencies. History shows that when confidence is lost in paper assets, it takes a long time for that confidence to come back - if it ever does. Couple of prime examples are shares of Enron or MCI/Worldcom stock. I don't think any prudent investor would think about investing in either of these stocks.

It may take a while for gold and silver to resume their bullish trends in earnest, you'll still be much safer investing in gold than in shares of Google. I also believe that long-term (over a year) call options on certain commodities are a good speculative play as well. Consult with a competent commodities professional before investing any money or executing a trade.

Here are a few good sources of investing news and articles online:

www.InvestmentRarities.com
www.Kitco.com
www.TheBullionDesk.com
www.DailyReckoning.com
www.321gold.com
www.PrudentBear.com

If you don't have or know of a good commodities broker, check with Nell Sloane and NS Futures: www.NSFutures.com. They're good people that know their business well.

Investing in commodities does carry risk, but will give investors a hedge against inflation and potentially good rewards for being patient. Don't just throw your money blindly into ANY investment. Take the time to do your research, talk with at least one (and preferably several commodity brokers) and know what your short, medium and long-term investing goals are.

I'd recommend buying physical gold and silver with 15-25% of your investment portfolio, holding some in non-US Dollar cash, a portion in gold stocks, and another small portion in well-selected (longer than a year) commodity options. Options are a way to use more investment leverage with minimized risk.

Again, this blog post is solely my opinion and may or may not be applicable to your investment situation. Conduct your own due diligence and consult with one or more investment professionals before making ANY investment decision.