Are You Ready for The “Blue” Year?

Ok, I’m not usually the type to be negative or pessimistic on any given issue. But hey, where there’s crisis there’s opportunity! As an investor I’ve come to realize that the truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom. It goes along with many other mainstream misconceptions such as trying to drive against a hydroplaning car, trying to eat less to lose more and speeding in order to get to the next gas station faster.

Many of you know that but how many people act as they know? How many people realize that trying to go 80 on the freeway instead of 70 will get them there only 3 to 4 minutes faster along with a good chance of getting a speeding ticket and ticking off the guy you just cut off? How many analysts follow their own advice?

The attempt of the investor is to perceive that data and move in a logical form to act rational under all situations no matter how unconventional it may appear. Would you buy a nice piece of real estate in Baku or Carson City right now, or say, how about buying a bank? From the rational point of view these make perfect sense, but no one would do them and that’s my point.

To be a contrarian doesn’t require you open a op-ed section in the Wall Street Journal and do the opposite (buying the U.S. Dollar long-term was never a smart move). It is however to go against the very mainstream logic held by investors and speculators the world over (how many Starbucks-goers actively invest in commodities?).

Anyway so here are a few things to think about for the New Year

The first of the vast US baby boom generation goes into retirement in January.

This is a significant fact. Remember all those articles about the boom of prime-real-estate-buyers and social-security-check-demanders? It’s now!

Oil at $150? When oil rises at the end of the year, albeit after hitting its highest price ever, and the U.S. government is stockpiling over 50 days of supply and inflation is a major concern, I think oil has more to run. Goldman Sachs says $105, but many other say $150 or even $200 before the next year is out. (Hint: Charlie Munger once said that there will be fortunes to be made in Canada if oil rises to $200).

…This will benefit all commodities, as well as gold (The Street says gives a $1000 projection). Gold is the best indicator of Obscurity. When investors are unsure of what tomorrow may bring (or which financial institution will need bail) they buy gold. Of course Silver has much further to rise as it regains some historical ratio.

China in 08′: People think China is overvalued and I have news for you it definitely is. But we are not economists, we are investors. I always say that economists predict what should happen while investors must predict what will happen. China’s bubble will blow over, but not before the Olympics. Its an economic phenomenon and everyone has to gain from it. Everything from sales to plane tickets will be up. After that I suggest you get out, especially if USA Today is announcing record high stock prices.

AP Forecasts No Recession in 2008. Whether or not their right, expect some sort of ‘flation.

Housing Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

Small Banks and Homebuilders? I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.

Let The System Reverse! Remember all those articles this year of overvalued scenarios? The China Bubble, The Negative Savings Rate, Low Interest Rates. Expect to see many of these corrected at least somewhat over the next year. Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow.

With that… expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat.

Long Plays. Cody Tafel suggest going long Gold – GLD (the financial fear indicator), Yen – FXY (hedge against credit crisis/unwinding of carry trade), and Water Resource stocks – PHO (world facing severe water shortage?).

Shorting 2000? Imagine if someone would give you an option to short the Dow from 1999 would you buy it. Of course you would! Stocks then went on to slide 25-35% (depending on when you shorted). But is that a good return? If you think it is you can short the Dow with the DOG ETF, or even double your exposure with the DXD.

Investing in HOGS? There’s an old line on Wall Street that goes “Bulls make money, Bears make money, Pigs get slaughtered”. How true! No matter what happens on the stock exchange people will always be eating and when people want food, prices rise. (Although now that the whole financial arena knows maybe I’ll be a contrarian and sell! jk).

For All Ye “Long-Term” “Investors” (yes, two euphemisms):

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

In short bears make more money than bulls, because they seek downside, while perma-bulls just throw their money into stocks regardless of value or rationale.

Quote of the Day

“It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.”
– Gordon Gekko, Wall Street

And again… Happy New Year!


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