Predictions and Ideas For the Future

by Daniel R, Homemade Investors
Wednesday, November 12th, 2008

A really good way to end up looking like a dork is to try and predict
the near-term direction of financial markets. Nonetheless, I've been
asked by concerned people over the past few days to give my
opinions on recent developments and to offer some suggestions
as to where markets might head over the next several months.
Keep in mind that I don't have a crystal ball here ("which is
witchcraft anyway", as some of my subscribers might remind me),
so I know very little for certain. But let's start with what we know.

First I'd like to review what I've written recently. In particular, the
last three articles should provide you with a pretty good summary
of my thinking so far. Nothing has changed for the most part. I
might suggest reviewing those if you haven't already, or if it's
been a while. Here's a refresher:

Comments on Recent Developments (10/02/08) - In this article, I
reminded readers that we're in a bear market and that bear
markets go down, which is what happened the following week. I
also suggested that readers: (1) live within their means, (2) create
a savings plan, (3) pay down high-risk debt, (4) understand
themselves (i.e. what kinds of investors they are), and (5)
understand their investments. I also said that I was comfortable
with my cash and physical precious metals position, which I still am.

The World Is Ending and I'm a Buyer (10/10/08) - In this update I suggested that
October 10th (the date it was published) or early the following week might mark the low
point for the bear market, or at least an important bottom. So far this bottom has held
(so I don't look like a dork here!), but I'm skeptical that we've seen the final bottom. I'll
write more on this below. This article is less important than the other two.

474% Since 1995: The Magic of Moving Averages (10/20/08) - In this article I discuss a
mechanical system for timing bear market tops and bottoms, and suggest that a
sustained stock market rally probably won't happen for another 6-9 months. I'm holding
to this opinion, even though we may see spectacular multi-month rallies and declines
between now and then.

With that out of the way, I'd like to discuss some ideas and opportunities that I see
taking shape over the next year.

The U.S. Stock Market

Cyclical bear markets need to bottom several months before new sustainable (multi-year)
rallies can take place. I still think we're in the middle of a secular (long-term) bear market
in U.S. stocks that could last another decade, so I'm not being overly bullish here.
However, it does appear that everything is moving down together, including foreign
stocks and commodities, so it's likely that we'll need to see a bottom in U.S. stocks before
assets worth buying resume their long-term bull markets. In short, I expect the market to
jump around for another 6-9 months before anything really good happens.

I think it's likely that we'll see a real market low in the next few weeks or months that will
be final low of this bear market. Selling climaxes like this are sharp, terrifying, and usually
happen on high volume, meaning everyone is trying to get out all at once. Also, they
generally happen after a horrible week or two of panic selling, just when it looks like the
world is ending and it can't possibly get worse. But then it does get worse. One morning
you wake up to the news that Dow futures are down a massive amount (like 600 or 700
points) and everyone's in a panic. Then you see a sea of red on the stock charts as
everyone tries to get out all at once. And then, at some point during the day (often
early), the market reverses hard and closes the day somewhere near (if not above) the
highs of the day.

Don't be surprised if this happens in the next several weeks. Most people don't play these
reversals well because they don't know what they look like, and they sell when they should
be buying (or holding). Well, now you know what the next big reversal (and possibly the
low of this bear market) might look like. It's on a day like this that I'll be deploying my
capital into the kinds of investments I describe below, since the good tends to be sold off
with the bad. If we do make a new low, I would expect the Dow to bounce
somewhere in the 7100-7400 range. It's just a guess, but it's the bottom of the last
bear market, and there are several other reasons why this would be an ideal target for the
bear market bottom. Always bear in mind that the October 10th lows still might end up
holding, or we could see a break below the 7100-7400 range in the Dow. Anything is
possible.

Gold & Silver Bullion

If you've read any of my articles, you probably know that I'm super bullish on precious
metals, particularly physical gold and silver bullion. Here's why: Gold and silver are an
excellent hedge against inflation, and huge inflation is what we're probably going to get
once all of this newly-printed stimulation money starts moving. Monetary inflation (or the
printing of new dollars out of thin air) always leads to price inflation. Most people don't
know this, and so most people aren't panicking right now, especially since the U.S. dollar
has been rallying quite nicely. Once the newly-minted currency hits the system, and
once the bear market in the U.S. dollar resumes, then inflation will replace
deflation as the primary concern and precious metals should do very nicely. This
could be years away, but I'm willing to wait.

Another reason I'm bullish on precious metals is that there has been record demand
recently for physical product (bars and coins). The paper markets (futures and the like)
have been sold off unmercifully just like everything else, but it seems that investors are
fleeing all things paper and many are moving to physical metal. Shortages are global.
Personally I don't blame these investors. Who wants another person's paper promise at a
time when defaults and bankruptcies abound? Not me. For the moment I prefer bullion to
the mining companies, which have been under-performing the metals recently. If gold
declines further, a logical buy point would be the trend line that has supported the bull
market since 2001 (see chart below). Currently it's around $650.

If you're thinking of investing in precious metals, you really need to learn more about
them. You need to know things like why the spot price matters very little, why silver sells
for a 30-50% premium these days, and why you should be skeptical when companies
offer to hold your metal for you. Here are some websites that regularly post articles on
the metals: www.Kitco.com, www.Silver-Investor.com, and www.Gata.org. A great book
on the subject is Rich Dad's Guide to Investing in Gold and Silver, by Michael Maloney.

Other Opportunities

After the market rebounds, I think that two other kinds of investments should particularly
well in the years ahead: (1) oil and oil producers, and (2) agricultural products.

Oil and Oil Producers: I think that oil and oil producers will perform quite nicely during
the years ahead. Sure, prices are declining now, but there are very strong fundamental
reasons why oil's long-term price will be much higher than where it is currently. These
reasons are increasing demand and slowing production. The world's population is growing
and it's becoming increasingly industrialized. India and China are making very cheap cars,
which means that people who once couldn't afford cars are becoming drivers. And it's not
like the Western world will stop consuming oil either.

Another reason is that world oil production is actually slowing. It could be partly due to
the fact that many companies in oil-producing nations are largely government-run, and
these governments haven't had the foresight to explore for new oil. Another reason is
that we haven't found a major oil find in decades (economical ones where the oil doesn't
have to be pulled out of sand or rock, that is). And believe me, people have been looking!
For these reasons, I think that oil and good oil producers will provide investors
with extremely lucrative returns over the next several years. I would see oil in the
low $50 area as a fairly good buy point, if we're lucky enough to see it drop that far.

Agricultural Products: Everybody needs to eat. Unfortunately world food supplies are
lower than they've been (per capita) in 50 years! With the world's nations becoming more
modern, resources are being diverted from farming and food production to other things.
This trend will come back to bite us. I foresee food shortages in the years ahead, and this
will lead to sharp price increases in just about everything we eat. Add price inflation to the
mix (the result of undisciplined currency printing) and we're going to have a full-blown
crisis on our hands.

There are other opportunities out there (like shorting long-term Treasury bonds - a
subject for another time), but I think I've highlighted some of the better ones. As always,
be sure to do your own research. It's time to be cautious, but remember that it's times
like these that smart and patient investors generate tremendous profits.

474%
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