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, January 4, 2010

Outlook for the Dawning Age

The past couple weeks have seen very little activity in the market, with trading volume slowing to a crawl. This is not unusual given the time of year, for several reasons, all of which have caused the market to remain level, more or less.

While many traders and money managers have been spending time with their family for the holidays, none of those who remain active want to “rock the boat” by causing any big market swings. Most have completed their window dressing trades, and there has been very little profit taking going on. While we may see more profit taking after the first of the year, the market has so far been unaffected.

As we discussed last week, this week marks the end of an era. With the end of 2009, we come to the close of the worst recorded decade for stocks in history. This is certainly a discouraging thought, but fear ye not, for the worst decade in history for stocks is not at all likely to be followed by the second worst decade. Put another way, the next ten years probably won’t be anywhere near as a bad as the last.

Think back to the 1970s, which were an absolutely terrible period for the financial world. However, after bottoming in 1980, stocks went on went on have a fantastic decade, thanks mostly to tremendous recovery and growth in US manufacturing.

This time around, as the decade comes to a close, we’ve already made a substantial bottom, and staged a historically unprecedented rally. In some ways, we may be ahead of the curve. The argument now is where we go from here.

Forecasts range from this rally continuing back to old highs and beyond, to the other end of the spectrum where the likes of Eric Sprott, a Toronto-based Canadian hedge fund manager, and a very smart guy, saying the S&P 500 will break through its lows set early this year. That would mean more than a 30% decline from stocks’ current levels.

Our prediction, for what it’s worth, lies somewhere between these two polar opposites. We believe, and have stated repeatedly, that the market is well overdue for a correction. Whenever this correction does come, and rest assured that it will come, it will take commodities and stocks down while boosting the dollar. Further, the more time passes before the correction, the more violent it will be.

Note that we’re calling for a correction, not a bear market. In our view, loose money policies from Washington have allowed a surprising amount of borrowed money to build up in a few trades, particularly in gold. We think a correction is absolutely necessary to wipe out some of that debt and encourage sustainable price growth.

After this correction, we believe the market will trade within a range for an extended period of time, possibly as long as two years. As we wrote last week, there will undoubtedly be money to be made in this consolidation, but only by seasoned, active traders and money managers who do their homework.

As the market consolidates and builds a base of support, the economy will begin to recover, at which point inflation will rear its ugly head as the new money created by the Fed during bailout programs begins to circulate. This means that commodities will probably lead the breakout towards the end of the market’s consolidation, with stocks to follow as real economic growth resumes.

To some our outlook may seem bleak, but be assured that we are not fatalists. Things may not be great at present, and we will certainly face tough times again in the future, but the world isn’t coming to an end.

One of our favorite sayings around the office is “this too shall pass,” and it has proven true time and time again as we see that everything cycles, especially the markets. Investors need to focus on weathering each passing storm without getting discouraged.

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