A Few Numbers That Say a
Thousand Words About 2012

What a few numbers are saying about the Dow Jones Industrial Average and the stock market in 2012.If today were the last trading day of the year, the stock market would have been up 5.4%, the smallest gain of the past three years. But we have 15 trading days left until December 31, 2011. And I continue to be in the camp that believes the Dow Jones Industrial Average will end the year higher than it opened for the third consecutive year. (See: Stock Market: Where It Will End 2011.)

Let’s take a quick look at the opening and closing numbers for the Dow Jones Industrial Average since 2009:

—         Started 2009 at 8,776 and ended 2009 at 10,428; up 18.8% for the year.

—         Started 2010 at 10,428 and ended 2010 at 11,557; up 10.8% for the year.

—         Started 2011 at 11,557 and currently at 12,184; up 5.4% for the year so far.

The “easy money” with the Dow Jones Industrial Average was made in 2009. That year, the world’s most widely followed stock market index fell to a 12-year low of 6,440 on March 9. The year 2009 was marked by investor fear. Investors flew away from the 30 big stocks that made up the Dow Jones Industrial Average…a classic contrarian mistake; you want to buy when others are selling, as opposed to selling when the herd sells. The smart money was buying stocks in 2009 amid general investor panic.

The year 2009 was the biggest moneymaker for the Dow Jones Industrial Average and the stock market in general subsequent to the 2008 credit crisis. Now notice how, in 2010, stocks returned about half of what they made in 2009, again according to the Dow Jones Industrial Average.

When we look at 2011, we see the same pattern: stocks are returning about half of what they returned in 2010. The annual gains for the Dow Jones Industrial Average over the past three years have been 18.8% in 2009, 10.8% in 2010, and 5.4% so far in 2011. What does this tell us?

The bear market rally in stocks that I have been writing about since March of 2009 is getting tired and “long in the tooth,” as they say. If the pattern continues, 2012 could be flat year for stocks, at best. But we mustn’t forget: 2012 is a presidential election year in the United States. Over the past 60 years, the Dow Jones Industrial Average has gained in every presidential election year except for 2000 and 2008 (Source: Lombardi Financial).

Yes, past statistics (such as stock performance during presidential election years) are important as a guide to where the stock market is headed. But we must keep it in perspective that the rally in the Dow Jones Industrial Average has (not just in my mind, but in the mind of many hard-money economists) been kept alive by increased government debt and money printing—two events that cannot go on indefinitely.

Michael’s Personal Notes:

The year 2011 will mark the 11th consecutive year that gold bullion prices have closed the year higher than they started the year. Here are the raw numbers, the closing numbers of the price of gold bullion per ounce every year since 2000:

2000 – $273.00

2001 – $279.00

2002 – $348.00

2003 – $416.00

2004 – $438.00

2005 – $520.00

2006 – $638.00

2007 – $838.00

2008 – $884.00

2009 – $1,092

2010 – $1,405

2011 – $1,680 (current date)

When we look at raw gold bullion price data, we see that the big price gains in gold bullion started in about 2009, after the Federal Reserve responded to the credit crisis of 2008 by significantly increasing the money supply.

Each year that passes, I hear the same story from a group of my readers: “I missed the rally in gold bullion prices, it’s too late, and I’ve lost out.” In my opinion, nothing could be further from the truth.

I still believe that the biggest price gains for gold bullion lie ahead. Why?

The impact of the Fed’s actions in respect to increasing the money supply has yet to hit the “official” inflation numbers. After spending $2.3 trillion to buy U.S. government Treasuries, a survey of the biggest U.S. bond dealers by Bloomberg (11/28/11) says that the Fed will buy an estimated $545 billion more in mortgage securities in the first quarter of 2012.

Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser have both publicly come out against the Fed printing more money to solve the country’s economic problems, as money printing leads to inflation.

As I have written many times, the prices of quality gold producing stocks have lagged the price performance of gold bullion. I’m looking to 2012 as year the price of gold bullion rises sharply, as the impact of a greatly expanded money supply results in rapid inflation.

When President Obama took office, the national debt stood at around $10.0 trillion. When Obama’s first term has expired, the national debt will be in the $15.0-trillion to $16.0-trillion range. In four years, the Obama administration has increased the national debt by 50%. Doesn’t this action of increasing our debt so aggressively send down the value of U.S. dollars? Doesn’t this lead to inflation? The answer is “yes” to both questions, my dear reader.

When dollars go down in value, gold bullion rises in value. When inflation rises, gold bullion prices rise in value. If you think increased government debt and multi-trillion-dollar increases in the money supply will not create inflation, then you shouldn’t be in gold bullion. If, on the other hand, like me you see the significant increases in government debt and the money supply as inflationary, the shares of quality gold producing companies look quite attractive for 2012. (Also see: Top Five Reasons Why Gold Bullion Prices Will Move Even Higher.)

Where the Market Stands; Where it’s Headed:

Fifteen trading days left for the year…and the bear market rally in stocks that started in March of 2009 will celebrate its 33rd month.

We are confined to an aging bear market rally in stocks. The year 2012 may produce the final blow-off to the upside in stocks that I have been waiting for…the retirement party for the bear market rally. Then it’s on to the unpleasant Phase III of the bear market.

What He Said:

“‘Home sales down 8.4%, could be the bottom,’ read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.