By Michael Lombardi, MBA
I’ve learned many things about investing over a career that has spanned 30 years. One of the biggest lessons is that not a single investment goes either straight up or straight down.
When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.
On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.
As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.
And that brings me to gold bullion.
Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.
Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.
I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.
I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.
Michael’s Personal Notes:
Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?
Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.
But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.
As an inducement, Buffett can buy another 700 million common shares of Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.
Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.
Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.
Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.
Where the Market Stands; Where it’s Headed:
The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.
However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.
The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.
What He Said:
“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. 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.