I haven’t written about the market as a whole in awhile, and considering the recent turmoil it seems like a good time to post some thoughts.
I have been admittedly bearish on the markets for some time now, however I didn’t think everything would hit the fan at the same time. While the S&P downgrade of the U.S. credit is more of a symbolic move than anything else, it nonetheless illustrates the potential problems that lie ahead. The situation in Europe doesn’t look much better, and for these reasons Gold and Silver continue to be a safe haven for weary investors.
I find it interesting that investors are purchasing treasury bills/bonds (10 year yield hit an all time low today, implying heavy demand from upper end investors), because I wouldn’t touch our government bonds with a 10 foot pole. Why any investor would choose to tie their money up for such a minimal return is beyond me, especially when the returns logged by Gold and Silver are examined in detail.
I think that everyone (including people that normally don’t invest) should have a minimum of 10% of their assets set aside into Gold and Silver. Even if our country finds a way to elect a conservative President in 2012, I think he will be inheriting such a mess (from the future Senior PGA tour pro who is on vacation as I write this, most likely playing his 5th round of 18 this week haha) that I wouldn’t wish the job on my worst enemy.
Basically, I am predicting a short term rebound if a regular conservative is elected, but those gains will be wiped out once the bigger picture comes back into play. However, if a Libertarian Conservative (my current political stance) like Ron Paul is elected and he chooses to severely cut government programs, I think stocks might be able to have a sustainable run. On the other hand, if the Chief Golfing Officer of the country finds a way to convince emotional and uninformed citizens to vote for him again, I think the markets will continue to plummet.
All of this implies a limited upside to the market, while acknowledging the fact that significant downside is still present. I would not start looking for individual bargains until the DOW average falls below 10K/S&P 500 average falls below 1K.
I have been researching the positives/negatives of short selling, and I think that put contracts are the correct way to play this market. Unlike short selling they only bear 100% downside, however the upside is normally well over 100%. For example, the 2.50 puts on CIGX were selling for a huge discount (around 10 cents) when the company was priced around 4.00. Even though a short seller would have made less than 50% when it did fall near 2.50, the put contracts jumped in value to a bid of 1.00 (implying a 1,000% return if purchased at 0.10)
Overall, the sidelines look like the place to be at this point, and I don’t recommend average investors to try and correctly time this market. There were a couple of dead cat bounces (penny stock term for a short term increase that is unfounded, and undoubtedly will be followed by a pullback) during the crash of 2008, and the same general pattern will follow in late 2011/early 2012. When a manipulated government report comes out saying that it created 15,000 jobs, day traders use that information to run up stock prices. On the other hand, when bad news comes out of Europe (like today) the markets sell off. It is almost impossible to predict the day to day swings in a volatile market, so I recommend anyone that doesn’t work in Finance to stay on the sidelines for the time being. Good luck to all, because everyone needs luck to make money in this market (that is beginning to feel more and more like a poker table with hustlers taking advantage of average players).
