If you’ve been reading my market musings for years, you know how I love to buy when others are selling and sell when others are buying…a true contrarian at heart. Yesterday was no exception for me.
I’m an early riser. 5:30 a.m. at the office is my gig, so I get PROFIT CONFIDENTIAL in my readers’ hands as early as possible each day. And when I arrived Tuesday at work to see a sea of red ink across North American stock market futures, I saw more opportunity than risk.
A quick review of the various Dow Jones Industrial Indices as the market opened revealed what I expected: Dow Jones Oil & Gas Index down 5.1% (tensions in the Middle East easing, demand for oil in Japan falling) and the Dow Jones Insurance Index down 4.65% (exposure to Japan-related insurance claims). General Electric Company (NYSE/GE) was down about three percent on fears that its nuclear-related revenue might be affected (worth about $1.0 billion a year to GE).
But the Dow Jones Consumer Goods Index, Basic Materials Index, and Consumer Goods Index were holding their own. You know where I’m going with this: I believe that the markets overreacted to the troubles in Japan. And I see market overreaction as an opportunity.
As my colleague Robert Appel pointed out to me in an e-mail yesterday, “While nothing about this (Japan nuclear reactor) situation is remotely good news, let’s remember that, for a considerable time in the last century, both the U.S. and France detonated an entire series of nuclear bombs (tests) above-ground, releasing far more radiation at that time than is likely to arise from this situation.”
And, to answer your question as to what I found attractive on the markets yesterday: I bought gold-related investments. I see a $30.00-per-ounce drop in the price of gold (which happened on Tuesday) as too much of a temptation for this investor to ignore. Sure, I may be wrong. The damage in the markets may continue. But being the gold bug that I am, I’d just be back in buying more gold-related investments again if the price continues to weaken.
Michael’s Personal Notes:
On the topic of gold, some facts my readers will find interesting…
The value of all the world gold sales in 2010 was $200 billion, only equal to about the value of Microsoft.
The official U.S. price for gold bullion is $42.22 per ounce, established back in 1973.
If we take inflation into consideration, the price of gold would need to reach $2,000 per ounce to be at a new record inflation-adjusted high.
In 1979, the price of gold jumped 135%. In 1981, the price of gold fell 32%. Over the past 10 years, we have gotten nowhere near to a 135% annual jump in the price of gold. In fact, 2010 was the best year gold had in 31 years, up 30% last year.
Accumulation of gold over the past decade has been slow and steady, hence why I do not expect a bust. Busts in commodity or investment prices happen after investor euphoria in an asset class takes hold. With gold, we are nowhere near the investor euphoria we had with tech stocks in 1998-1999 or U.S. housing in 2003-2005.
Where the Market Stands; Where It’s Headed:
Despite the next few days of trading being very important in determining whether a new trend is upon us, I do not believe that the bear market rally in stocks that started in March of 2009 is over yet.
The Dow Jones Industrial Average opens today up 2.4% for 2011.
Michael’s Personal Notes:
“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.