— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA
I’m not going to beat around the bush.
I know I write a lot (love it actually) and following my opinions can take time on my readers’ behalf. I’ve been getting calls and e-mails from my readers asking for a short opinion on the stock market for 2010, and I thought, why not just put that forecast in two sentences so it is on the table and open for the remainder of the year?
So here it goes:
“I expect the bear market rally in stocks that started in March 2009 to continue its move upward. However — and as you see I have referred to this advance as a “bear market rally” — at some point in the months ahead, the bear trap will be in, enough investors will have put money back into the stock market, and the bear will bare its ugly teeth again, bringing the market down, likely much quicker than most investors and analysts can imagine (because by then they will have forgotten the mini-crash from November 2008 to March 2009).”
Our biggest burdens and threats to our economy in 2010 will be: a falling U.S. dollar; rising national debt; rising interest rates; contraction in the commercial real estate market; and continued pressure in the residential real estate. I will not include the continued pressure on the unemployment rate here, because I have a hard time believing the actual unemployment rate based on how it is calculated. The shining light in 2010 will continue to be the precious metals, especially gold bullion.
Okay, Michael; so you say that the bear market will eventually set back in and bring stock prices lower. What does that do to my gold stocks?
Firstly, I’d like to say I’m not buying gold to trade it. I’m not buying gold for short-term profits. My opinion is that the U.S. dollar is in a long-term downtrend and that the U.S. has gone from being a creditor nation to being a debtor nation. If our national debt is not brought under control, the U.S. will eventually follow the path of previous world economic powers and will be dethroned (anyone say China?). The U.S. dollar could lose its status as the reserve currency of the world. And I believe only gold bullion can replace the U.S. dollar as the reserve.
The above scenario will not take weeks, or months or even a year. It will take years. I started pushing gold-related investments in 2002. Here we are seven years later and the arguments for getting into gold are only getting better.
Back to the gold stock question, the answer is yes. If the general stock market comes down, gold stocks will also come down in price. But the descent will be slower for gold stocks than the general market. For example, if the general stock market falls 40%, I’d expect gold stocks to fall less than half of that.
Because the trillions invested in mutual funds, investment funds and professional money managers need to be parked somewhere. And I believe they will eventually find their way to gold stocks.
Turn the situation around. If the general stock market moves lower, taking gold stocks with it, fear not the decline in the value of your gold stocks, but recognize the opportunity to add to your gold-related holdings and bargain prices.
Michael’s Personal Notes:
Some thoughts on China, its economic machine and its stock market and how it relates to us here in North America:
First, China’s capital markets got a big facelift Thursday, when China approved the use of stock index futures, margin trading, and short selling. For those investors and analysts that believed China’s Shanghai Composite Index was rising too fast, these added tools will only fuel that market higher.
Unexpectedly, on Thursday, the People’s Bank of China raised interest rates. While the increase was minor, it is the first time in five months that China’s central bank has raised interest rates. The rate increase comes on the heel of recent comments from Chinese government officials that they are concerned about future inflation and developing asset bubbles.
The Chinese central bank is doing something that the Western central banks cannot do: raising interest rates. It would be a political nightmare to raise interest rates in the United States today, because of the high unemployment rate and the battered housing market. But rapid inflation will be a larger problem ahead. That’s why I believe our own central bank should gently start raising interest rates sooner rather than later.
Where the Market Stands:
Well, well, well. What do we have here? Looks like a stock market that just won’t go down to me.
Yesterday, the Dow Jones Industrial Average hit a fresh 15-month high. And no matter where I looked this morning, in the business pages of the major newspapers or on the Internet, I couldn’t find any articles celebrating the Dow Jones’ new high. I saw quite a few articles on why the stock market “should” be going down, but nothing on the fact that it continues to rise.
With the Dow Jones closing at 10,606 yesterday, we are only 394 points away from my 11,000 target. Of course, it will not be a straight line up. Never is. But my bet continues to be that this bear market rally has more steam left in it.
The Dow Jones Industrial Average starts this morning 1.7% above where it started 2010. Not bad for just four trading days.
What He Said:
“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. Government bonds were one of the best performing investments from mid-2006 to 2009, as they rose in price sharply as the Federal Reserve eventually lowered the Federal Funds rate to zero in 2009.