Stock Market & Gold: An Opportunity Like We’ve Never Seen Before?

By Michael Lombardi, MBA

I’m so excited this morning; I can hardly control my excitement.

Being the type of person who looks at the glass half-full as opposed to half-empty, I see yesterday’s sell-off in most investment categories as presenting investors with huge opportunities for profit.

Let’s start with the stock market: Since August, there have been five breakdowns by the Dow Jones Industrial Average to the 10,500 level. Subsequent to each of the downside moves, the stock market has rallied. As of last night’s close, the Dow Jones Industrials are selling at only 12.2 times this year’s earnings! The Dow Jones Industrials offer a dividend yield today of 2.9%—trumping most other forms of investment in respect to income.

The stock market is severely oversold; there is great value in stocks.

Moving to precious metals, the big correction in gold and silver I have been predicting and warning about is on! Finally, gold’s back under $1,700 an ounce. Finally, silver is back under $33.00 an ounce.

If you believe that the world’s financial problems will go away, if you believe that the U.S. will get out from under its mountain of debt, sell your gold.

On the other hand, if you recognize that gold bullion has risen $397.00 an ounce in the past 12 months (31%) and investors are finally taking some profits off the table, if you believe that the world’s economic problems will only get worse, that the U.S. will continue piling on the debt, that U.S. dollars will continue to be printed at a rate that spurs inflation (all the stuff I believe), then you might want to take this opportunity to buy more gold investments (like I am).

Global Stocks Enter Bear Market,” said the headline on a Bloomberg news story yesterday. Investors are panicking again and stock advisors are at the most bearish level in months. When you see this amount of negativity, stocks usually go the other way and climb the wall of worry higher. Stock market rallies end when investors are most optimistic, not when they are as pessimistic as they are today.

Michael’s Personal Notes:

Shares of Warren Buffett’s Berkshire Hathaway Inc. (NYSE/BRK-A) are trading at $100,000 for the first time since the beginning of 2010. I believe there are two reasons this is happening and I don’t believe the price action of Berkshire stock is indicative of the future of general stock prices.

First of all, the company’s reinsurance units have taken a hit. Japan’s earthquake in March and the U.S. windstorms this year have resulted in Berkshire Hathaway Reinsurance Group taking a loss in the first half of 2011.

Secondly, as the company has grown so much, it’s just getting tougher to make deals with big returns. Most of Buffett’s bets have been secure ones: buying preferred shares of big companies and getting a small of amount of warrants as a bonus. The bigger Berkshire has become, the more difficult it has become to make deals where the eventual returns are substantial. Berkshire will be hard pressed to find a deal like Coca-Cola again.

Where the Market Stands; Where it’s Headed:

Despite yesterday’s sell-off in stocks, I believe we continue to be in a bear market rally in stocks that started in March of 2009. Yes, the rally has been long and is getting tired, but I believe the bear market rally has more upside potential left.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Gold & Silver Setting up for an Attractive New Entry Point

By Mitchell Clark, B.Comm.

An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.

The price of gold has, in my mind, been worthy of a correction for quite some time now. In fact, I think it would be a very healthy development for the long-term trend. It wouldn’t surprise me if the spot price of gold were to retreat and consolidate around the $1,600 level. It’s trading around $1,700 now and $1,600 should provide a good base.

Perhaps an even better commodity to concentrate on would be silver. This precious metal is more useful in terms of its industrial uses and many argue that it hasn’t kept up with the spot price of gold and could therefore be a better trade. The spot price of silver just broke the $37.00-per-ounce level and there’s no reason why it won’t retreat further to the $30.00-per-ounce level if the current trend in capital markets continues.

This is a very difficult stock market and individual investors are loath to participate. While expectations for the future continue to be reduced, the fundamentals for gold and silver remain mostly intact and are therefore worthy of new positions when spot prices find a new base.

It’s a wait-and-see stock market and a wait-and-see spot price market for precious metals. I think the focus for speculative investors should be on gold and silver and that risk-capital investors will have an attractive new entry point very soon.

As for the rest of the stock market, share prices remain very vulnerable before third-quarter earnings season begins. Over the last little while, equity investors have had to endure tremendous shocks to the system: sovereign debt problems in Europe; the downgrade of U.S. sovereign debt; natural disasters in Japan; no improvement in housing prices; and no improvement in employment…the list goes on. I think it’s fair to say that the equity market has held up quite well all things considered.

What we know is that mature economies are now in a period of very little to zero growth over the next 12 months. We also know that developing economies are slowing down and the probability of another recession is going up. The trading action in financial and commodity markets reflects falling expectations for economic growth and an expansion in the time horizon for recovery. Predicting outcomes in this environment is a crapshoot—nobody knows how or when the economy will get better.

With belt-tightening going on at the individual consumer level and at the government level in virtually all mature economies, we should be in a slow growth environment for quite a long time.

The Best Bet in Town—Resources—Getting Ready for the Big Squeeze

By Mitchell Clark, B.Comm.

The key in this bear market with stocks is to stick with resource stocks if you’re a speculator. I like large, blue-chip companies that pay high dividends for long-term investors. For risk-capital equity traders, the best action remains with gold stocks, and some of the best value now is in oil.

There isn’t much wind at your back in this market. Lately, the shorts have been winners. The trading action is choppy and trendless, reflecting investor sentiment that doesn’t have high expectations for the future. The current stock market malaise should be with us for a while longer, but the market is developing some decent values and the earnings outlook remains solid.

I’d be a buyer of new gold investments as the spot price corrects. There’s just too much strength in the fundamentals for gold for it to be ignored. In a world without growth, producing gold mines are some of the best businesses around. If you have a mining company with growing production and unhedged exposure to the spot price of gold, you have the makings of a very profitable enterprise…and the kicker is that business will just get better and better as the underlying spot price of the commodity rises.

We’ve been harping on gold for a number of years now and the trade has worked big-time. But, I also think it’s fair to conclude that the trade will keep on working with the growing likelihood of increased price inflation around the world. Global investors, even central banks, are looking for a store of value and there isn’t much in the way of anything that pays a decent return. Treasury yields are very low. The returns on cash are negative if you factor in the rate of inflation. The gold sector remains one of the best for speculators. The trading action in technology, biotech and most other stock market sectors just isn’t as good.

I mentioned oil because I like to consider investments when prices are down. Oil and natural gas are now trading at levels that I think are highly stimulative to the economy. Some exposure to this sector is warranted. And, as we see the commodity price cycle migrate into agricultural commodities, a couple of positions in this sector should also do well over the coming years.

As I say, I think equity speculators should have solid exposure to real resources going forward. Economic growth in most of the world’s mature economies is at a standstill. But emerging economies like China and India still have burgeoning appetites for raw materials. When mature economies start to accelerate, there is going to be a big squeeze on commodities and prices should skyrocket. Think of the state of the domestic economy now and consider the current prices for gold, copper, oil, corn, soybeans and sugar. Then consider the demand side of the commodity price equation when things get better. The supply side is quite stagnant. In my mind, the resource bet makes a lot of sense.