Betting that the US will remain a going concern
The dot com bust was unpleasant but limited to only a segment of the US economy. This current financial crisis appears to be a world conflagration. No equity class has been spared and deflation is now a real concern. So was Donald Trump’s remark on Fox News that “we will be in Heaven in 2011” a literal comment based on the Bible codes or investment advice for us who have seen a 50% drop in equity values? He probably meant it to convey his belief that the US will remain a going concern. Which begs the question, which concerns will be going and which will be gone? Betting on retailers, other than Wal-Mart and Costco appears to be speculation at best. After the prior crash, betting on energy, commodities and real estate seemed the natural thing to do, especially for a native Californian who had spent half his adult life in a car and had rarely seen property values fall. In some ways, we may be repeating the last recovery. Assuming the US and the World remain going concerns, energy, commodities and real estate will remain scarce and in demand. The relatively recent fall in these asset classes have created potential buying opportunities, not seen since the last equity crash. The question of course is when to buy in. If you are looking for a house to live in and can qualify for a loan, then the current interest rate environment and home prices will not get much better than they are today. Investing in real estate for short term profit is likely to remain risky until at least 2010, when housing prices would have likely stabilized. But other asset classes such as energy and commodities will probably be a safer and more liquid investment for most of us.
The high price we recently paid to learn that investments have risks will hopefully not be wasted money. If you have stable employment, low debt and cash ready to invest, then ask yourself if you are willing to relive 2008 for “Heaven in 2011”. Many have already resigned themselves to raising cash and avoiding any further exposure to risk. For them, this is the right thing to do because of personal and emotional reasons. But if you are young enough and unwilling to leave your financial fate to politicians devoid of common sense and altruistic virtue, then you are going to have to invest in more than just Dollars and Yen.
Since every investment is cheap relative to 2007 prices, one could argue to invest in a diversified US or global stock fund, which will probably gain value by 2011. This appears to be a safer bet than just holding cash, but will likely be hampered by dying companies not fortunate enough to receive a government bailout in 2009. So why not choose companies and sector funds that appear destined to rebound strongly over the next two years. I again refer to energy and commodity companies. I would avoid the politically correct speculative plays such as solar, wind and bio-fuels and stick with Exxon or an energy sector fund. The prices of these stocks will likely fall if oil prices drop below $40 per barrel, but this is when you want to buy these stocks, not when oil prices are $150 per barrel and windfall profit taxes are in the air.
The case for commodities, including metals and food, is a simple play on a growing world population and infrastructure development. A falling Dollar due to inflationary spending will also boost returns if the companies are located in Canada or Australia. FCX stopped paying a dividend and let go of workers that it didn’t need. It also slowed production to relieve the over supply of metals on the market. For their prudent efforts of saving cash and supporting commodity prices, their stock fell 20% in two days. This is not a retail company selling items below cost. It recognizes that when demand returns to the market, it should not have to rely on banks to furnish the cash it needs to ramp up production. Burning cash for the sake of keeping warm may work in Michigan, but for real companies trying to survive this is not a good strategy. When will FCX and other commodity companies become winners again? Probably not in 2009, based on the increasing unemployment and general foul mood of the world investors. 2010 is reserved for a world holocaust or at least some major earthquakes and volcano action, so this may not be a good year (Bible code – Watch out San Francisco, the Hayward fault is due). This leaves 2011 as the most likely year for big gains. I would guess that a 30% return on commodity investments in the next two years is realistic, assuming Donald’s statement was not a literal prediction. If you think it was, then I would recommend two books by Pope John Paul II – In My Own Words and Memory and Identity.
Disclosure: I still have a CAPS bet on XOM going down, which I made when I thought a political attack on their profits was inevitable. I now think their stock will go down a little in the near term, due to dropping crude oil prices, but this will likely be a buying opportunity.