This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, October 12, 2009

Traders put cart before horse

In our business, timing is absolutely everything. And while there is a big, big difference between being wrong and being early, waiting is rarely fun. But such is life for a contrarian.

Most readers will undoubtedly understand my frustration, as I have been calling for a downturn in the stock market for about a month now. So for the last month life around the office has been characterized by the old adage “Patience is a virtue.”

After all, we know that a market correction WILL come. There’s simply no doubt about it. Markets always – ALWAYS – correct, sooner or later. The only questions are (1) when, (2) how long it will last, and (3) how severe it will be. And once it starts, everyone who has been calling for a correction – us included – will look like geniuses.

Until then we must endure our current status as nitwits who obviously do not understand the dynamics of a bull market such as this (pardon my sarcasm).

In 2006, Euro Pacific President Peter Schiff stood up at a mortgage brokers’ conference and told all in attendance that the real estate market was going to crash. At that point, people laughed, having firmly grasped the belief that property values never went down. However, by early 2008, no one was laughing anymore. Many were looking for new jobs.

When we first started buying gold back in 1999, we did so in light of booming dot-com’s and tech stocks. For years people thought us cooks for ignoring such an obvious opportunity for easy money. Once the bubble burst and the market crashed, people wondered why we didn’t warn them sooner.

Last year crude oil ran to $140 per barrel, and even then analyst reports projected advances to $200 and beyond. We argued that the fundamentals didn’t support $140/barrel, much less $200. We argued then that oil and been pushed up to $140 by individuals speculating in the market, and that those the market would crash when there was no more money to push it higher – in other words, when everyone got on one side of the trade, the long side.

At the time we had been forecasting a major spike in inflation, a spike that has not yet materialized, but certainly will once the real recovery in the economy begins. However, we still took a negative opinion of oil, taking a step back from the sector and later watching crude fall to $33/barrel.

You can’t argue with facts, folks. And the simple facts are that the market is overdone. Right now inflation numbers are lower than they were in March of last year when Gold was setting new highs. And yet Gold is again moving to new all-time highs, propelled mostly by excited buying from individuals who know somewhere between very little and nothing about gold and how it is traded.

One argument that has come up repeatedly is that the US dollar is crashing and that investors should be buying gold and other commodities as a hedge. This argument doesn’t exactly hold water, since the dollar is currently higher than it was last March when gold peaked, as measured against a basket of global currencies (NYBOT:DX). In fact, based on global exchange rates, it has been projected that Gold should actually be just shy of $800/ounce (Nadler, Buy the Rumour, Buy the Fact).

The facts are that the stock market is currently at levels seen around 2002, a time which was NOT characterized by rampant unemployment and a recession that economists have claimed is over, but is starting to feel more like a depression, unlike today.

The picture being painted by the markets is that the economy has bottomed and the U.S. is back on the road to prosperity. But the facts are that this economy has NOT recovered as the market suggests, and that it probably won’t anytime soon with the current policies coming out of Washington.

Successful investors must make decisions based on facts rather than emotions. Lately one report after another encourages buying of gold. With gold hitting new highs, analysts argue that it has risen above any kind of resistance, so there’s no reason NOT to buy. In reality, at this point gold feels eerily similar to dot-com’s near their peak in 1999 and 2000.

Unfortunately, gold hitting new highs does not have any affect whatsoever on the fundamentals. Instead, this event is the consequence of emotion in the markets, and it’s extremely important that investors not get caught up in that emotion. Instead, take a step back and separate emotion from truth and fact from fiction.

1 comment:

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