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Yesterday, Ben Bernanke announced an emergency 75-basis-point cut to the fed funds rate in a bid to stop the tidal wave of selling that was racing around the globe.
I was in British Columbia when the news hit, wrapping up my stay for the Vancouver Resource Investment Conference. Today, I want to tell you what everyone there was saying about the markets, especially precious metals and energy investments.
Their comments and insights are extremely timely in light of the latest market turbulence. If I had to sum it all up in one phrase, it would be …
Lots of Interest in Commodities,
Plenty of Fear About the U.S.
Attendance at the conference was huge — growing to 10,000 people from 7,000 last year — a new record! Obviously, people are more interested in natural resources than ever before.
There was plenty of long-term bullishness, and lots of interesting investment recommendations. At the same time, the general sentiment of the conference was pretty negative when it comes to the U.S.
What about that rate cut? Well, the overall attitude would be “too little, too late.” In fact, as I sat through the first panel discussion — a meeting of four commodity gurus — I couldn’t help but think of the Four Horsemen of the Apocalypse!
The first question for the panel: Did they see a soft landing or hard landing for the markets and U.S. economy?
The replies across the board were unremittingly hard, and a bearish litany of fear and doom for the major stock indices!
At the same time, most of the panelists were bullish on gold, silver and oil longer-term. Here are the highlights of what they said …
The first horseman, a technical analyst I strongly respect, opened by saying that yes, gold and silver were topping out, but it was a normal correction in a bigger bull market. By the end of the year, he expects silver — his top pick — could hit $25 per ounce, which is nearly 60% higher than current levels!
The second horseman has 30 years of experience in the markets. He’s expecting the Dow to sell off 20% from its high, with a base around 10,400. And he expects the real trouble to come in April and May for five reasons:
#1. The spring builder starts will be awful — not just in the U.S., but also in the UK and Spain.
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#2. Investors will follow the old adage “sell in May and walk away,” accelerating the downside slide.
#3. In the first two weeks of April, big banks start reporting their earnings, and they’ll be awful because of credit card failures.
#4. Used home sales in the spring will be bad — 80% of yearly home sales occur between January 15 and June 1.
#5. One million mortgage resets will hit, sending consumers reeling.
The third horseman believes we’re already in a bear market, and holding for the long haul is a bad idea. Some investors might want to sell and go to cash. Other people might want to use inverse funds to protect their core holdings.
The fourth horseman pointed out that the big financial houses didn’t alert anybody to what was going on until it was too late. His exact words,
“It’s the most amazing thing I’ve seen in 30 years as an investment professional. What’s happened over the last few years is inexcusable. Really smart people saw what was going on and kept it under wraps.”
Lou Paquette served as Master of Ceremonies at the panel, and gave some reasons why a softer landing might be in store. For example, he pointed out that if we’re going into a recession, it will be at the lowest unemployment rate of any previous recession in history.
The panelists also addressed the fear that the recent rally in gold and silver won’t last. They expect a near-term pullback in precious metals, but then higher prices to follow.
They were bullish on oil, too. The big fear in the market right now is that a recession will cause a diminished need for crude. But the panel of contrarians said that rising demand in India, China, and other emerging markets will make up for any fall in discretionary demand in the developed countries.
The hints of bullishness I got from the Four Horseman were magnified by another excellent speaker, Frank Holmes, CEO and Chief Investment Officer of asset management company U.S. Global Funds. Here’s what he said …
The Global Infrastructure Boom Will
Continue, Driving Commodity Prices,
Including Many Metals, Much Higher!
First, Frank talked about the forecasts of doom and gloom. He pointed out that the U.S. media is focused on New York and the hedge funds and big lenders that are blowing up.
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| Frank Holmes was very bullish on commodities and other infrastructure investments. |
In contrast, he takes a more global — and historical — view. For example …
150 years ago, China and India represented 50% of the world’s gross domestic product. But by 1970, China was isolationist and India was a basket case. The two countries amounted to less than 2% of the world’s GDP. Now, Frank says, they’re coming back, and we’re seeing a big reversion to the mean.
Case in point: China has earmarked $420 billion for infrastructure in its current five-year plan. India has targeted $500 billion to $600 billion.
Plus, Frank says the effect of this spending on commodities is supercharged because construction workers in India get $3 per day compared to $30 per hour in the U.S. or Canada. So whereas labor is the biggest cost for U.S. construction, materials are the biggest expense in India.
Another great tidbit: In the 1950s, building U.S. highways soaked up 50% of the world’s related commodities. Therefore, it wouldn’t be surprising to see the huge infrastructure development in India and China have the same kind of effect.
Frank also pointed to India’s new $2,500 car — which I talked about last week — as an example of how commodity use in India and China will increase. And he says this will continue to fuel a huge secular bull market in commodities.
Speaking of infrastructure, Frank believes the U.S. is also going to embark on a spending boom of its own for highways and roads. I discussed this with Frank in a private interview after his speech.
Frank noted that when an interstate highway bridge near downtown Minneapolis collapsed into the Mississippi River in August 2007, 13 people died and more than a hundred were injured. He believes this was a wake-up call for the United States, and he expects the U.S. to start spending more and more money on rebuilding infrastructure.
Here’s the really juicy part: Frank estimates it would cost $1.6 trillion to update the U.S. infrastructure — about as much as we’ve spent on the war in Iraq so far!
Other bullish indicators for infrastructure and commodities:
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| Saudi Arabia wants to build four cities like Dubai! |
12% of all the construction cranes in the world are now in Dubai. This has impressed Saudi Arabia so much that it now plans to build four cities like Dubai! And that means a big chunk of the money we send the Saudis through the gas pump will now be recycled into infrastructure spending.
So what are we to make of the recent swoon in stocks?
Frank says the longer a cycle goes, the more the volatility will increase. And while the market is pulling back now, Frank expects a rally later in the year. He points to the election year cycle, which, if history is any guide, suggests an up year as the government creates jobs to make itself look good. Frank also thinks the double-digit growth in M3 — the broadest measure of money — is another bullish indicator.
How to Tailor Your Investment
Strategy to a Confusing Climate
If you tend to side with the four horsemen, and you’re most concerned about the short-term weakness, you might want to invest in inverse market funds. I’ve recently recommended them to my Red-Hot Global Small-Caps and Red-Hot Canadian Small-Caps subscribers as a way to hedge against market weakness. One example: The ProShares Ultrashort Dow30 (DXD).
Longer-term, however, even the bears at the conference see rallies in gold and silver, and they like small-cap gold and silver miners.
So you could buy undervalued junior miners in Mexico. Two panelists recommended this course of action, and one of them added that the junior gold mining sector has at least a couple more years to run.
You could also accumulate shares of gold companies with big reserves in the ground. After all, the value of those reserves will soar along with the price of gold.
Frank Holmes had other ideas that were typical of the bulls I spoke to. His picks include cement, steel, and other construction materials … engineering and construction companies … firms that have infrastructure assets like airports, highways, bridges … and select utilities. These are the kinds of stocks that are in U.S. Global’s Global MegaTrends Fund (MEGAX) which rose 24% last year. Its big holdings include Schlumberger, General Electric, and Berkshire Hathaway.
Me? I think the short-term trend is down, but like many of the experts, my longer-term view on precious metals and energy is bullish. And as markets bottom, there are going to be some amazing values in natural resources.
I’ll talk about some of the great stocks I investigated in Vancouver in a future column. They’re already cheap and a continued sell-off would make them screaming bargains … so stay tuned!
Yours for trading profits,
Sean
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