Dow Jones at 7600 - what I said, right and wrong

Back on November 18, 2008 I made a prediction. I said that in the first quarter the Dow Jones Index will hit 7600. I then proceeded to explain why it will do this and what will be happening. With the Dow having crossed my target I will reflect on what I said then.

“…auto makers are now first in line to ask for their own bailout,… And Congress will likely pony up the money for each of them.”

In fact the auto makers asked Congress for $50 billion dollars. As a surprising move, probably meant to give citizens the impression that Congress has some idea of what it is doing, the auto makers only received $15 billion.

Keep in mind that like the credit bailout, auto makers claimed at the time that the entire amount was needed or they would fail. To date the auto makes have not failed (though they have laid off workers, which was inevitable) nor has the economy though less than all the funds requested have been used.

“So far a 2nd stimulus plan is being conceived, growing from an initial hidden $50 billion, to $150 to $300, and now is being speculated at $500 billion dollars. Nancy Pelosi doesn’t just screw up, she does it with swings to the bleachers.”

House Speaker Nancy Pelosi not only hit the bleachers, she hit it out of the park. The stimulus package is being signed by President Obama today at the eye-popping total of $787 billion. But only Democrats think there is no waste in the stimulus.

“This means that New York City will get crushed this year.”

So far the budget of New York State is so bad that Gov. Patterson is in the process of taxing citizens based on weight. And who knows what will be next, but be assured the State is in severely bad condition.

“President Obama will get inaugurated and the Dow will drop 500 points.”

In fact the Dow dropped every day from the start of 2009. On the inauguration the Dow jones Index dropped 337 points. Not the 500 I expected, but close enough.

“Oil prices should stabilize at around $65 - $70 per barrel to start the year…”

I am completely wrong. They are currently at about $37 a barrel of crude oil. The economic crisis is keeping demand way down, and so far oil is not being used as an alternative investment.

“Gold and precious metals should all increase dramatically in a similar manner to that of 2008.”

As of today, Gold hit $973.80 an ounce. It is within $36 of an all-time high, set last year.

“Growth in China will likely stall as well, especially since the boost from the Olympics will have faded.”

The World Bank has stated that real exports will be down 7.5% in 2009 (at 3.5% versus 11% in 2008) and the growth in that nation will slow to 7.5%, or down 1.9% from 2008.

“Taxes will increase roughly 3% on all income groups.”

Wrong so far, but just wait for it.

“Several mid-sized financials will fail, blame will go to short-sellers and corporate greed.”

Expectations are that this is on the horizon.

“Confidence in the U.S. Treasuries will weaken, and several nations will begin to sell in hopes of buying national debt of England and a few isolated nations.”

Thankfully I am wrong on this so far. I pray to remain incorrect. But there is no reason for any nation to buy Treasuries at below 5%. It’s just not worth it.

“Unemployment will hit a 20 year high, again raising fears of a depression.”

I cannot count the number of times Democrats, and President Obama, have stated we are in or about to be in a depression. Call it fear mongering if you want to be honest, but it’s a daily statement without question.

Unemployment recently broke a 28 year record.

“Iran and Russia will take aggressive stances in the world stage.”

They have been blustering a bit of late. But they have not taken a full-blown aggressive stance. Yet.

“If I am as correct as I was in 2008, then 60 - 70% of what I have said will occur, though not exactly in my timeframe.”

Well looking at it empiracally I would say that I have got it about 55% right so far. The 1st quarter isn’t over yet either. World politics can shift in a minute, so that might push up my percentages at any time. And honestly I don’t what the rest of what I expected to come true. It would mean devestation to millions.

I will stand by a though I made at that time as well though. I expect things to get a bit worse and hold through the second quarter. But given I had no idea what the stimulus package would entail, nor such a enormous wasteful pricetag I will ammend my thoughts.

The 2nd half of 2009 will be just as bad, if not worse than the first half. There is no stimulus in the stimulus package. There is nothing to preserve or create jobs. No sound person would use any of the paltry amounts the stimulus will provide to do anything but save, pay bills, or watch evaporate if gas and/or oil prices move up at all.

At this point I would imagine gold hitting $1150, crude oil eventually getting back to about $60 (mostly through alternative investment speculation and production cutbacks). I fear but expect unemployment to hit 10% by the end of the year. The 4th quarter will be horrible. Inflation will likely run 3% higher. The Dow Jones Index can be expected to drp another 500 and stabilze there over the next few months.

Again I will say that I hope I am wrong. I want to be completely wrong by the end of the year. I want to laugh at what I expected with tears of joy. But I doubt it.

I’m at 55% and we are only in the middle of the 2nd month of the year. With a liberal Democrat President, a Democrat-led Congress that is headed by 2 of the most incompetent (in my opinion) politicians in decades, and expectations of spending that might have been called astronomical only a few years ago.

But we will see. Do let me know what you think.

Gold, oil, stocks, Democrats and 2009

Last year I was looking at the gold markets and speculated that gold would surge along with several of the gold stocks. On December 6, 2007 I rebuffed the claims of Goldman Sachs when they stated to sell gold. At the time the spot price was $855.

In January of 2008 I pointed out a few gold stocks:

• Streettrack Gold Trust
  
• Barrick Gold Corp.
  
• Agnico Eagle Mines Ltd.
  
• Goldcorp Inc
  
• Western Goldfields Inc
  
• Agnico-Eagle Mines Ltd
  
• Alamos Gold Inc
  
• Anatolia Minerals Development Ltd
  
• European Goldfields Ltd
  

- each of which was soaring. At the same time I was pointing out my belief of what would happen to gold spot prices, oil, and the Dow Jones Index.

"All stock markets, all financial markets, move on emotion first. That’s given. And few things are more emotional that 1.25 basis point moves by the Fed in a week. But fundamental facts of the markets always come to fore and correct the emotion. To me, $1000 gold, and higher gold stocks across the world, is as fundamentally sound today as when I discussed it earlier this month and in December of 2007."

Which lead me to state

"Now I will go one step better. If supply remains constrained, as we can see is likely, and the U.S. economy has the mild recession now being stated by the Federal Reserve. If oil production is cut, in combination with the recent U.S. refinery accident that has placed pressure on capacity, and Senator Barack Obama becomes the Democratic nominee for the President of the United States. If all those actions occur, which seem 80% probable to me at this time, then I believe that gold spot prices in excess of $1125 are possible by the end of this year. Commensurate with this move should be gains among the gold mining stocks across the world."

How close did I get? $1035. Close enough for me and many others. And then gold drifted down. The power outages in South Africa were resolved, oil prices peaked and then dropped. The world was consumed with the problems of the mortgage bailout and then the credit crisis. Major financial institutions failed and/or were on the brink of collapse as politicians (like Barney Frank), The Fed, and the Secretary of Treasury all scurried around like rats on a sinking ship.

Now we have entered 2009 with several important facts known. Interest rates are at all-time lows, the mortgage crisis has yet to be abated, oil is on the rise again - albeit from lower levels than seen in recent years. The American economy is leading the world into a depression, and at our helm is a new inexperienced highly liberal Democrat. None of these things are positives.

The American Government is about to spend even more money than all of 2008 combined, with a Democrat-led Congress that has no desire to reign in the Democrat President. Both his policies as stated and his indicated primary goals are wastes of money on a grand scale few countries could ever command as their GDP.

Thus we are seeing gold sit at $879, the Dow at 9034. That's just about 2000 points lower than my initial expectations for 2008, but above the lows of the year - barely. What will happen next?

In a move much like what was seen in 2008 we will see gold and gold stocks rise. I again call for gold spot prices to hit $1125, with gold stocks reaching new 52 week highs. This will likely be coupled with a reduction in oil production, increases in crude oil prices (to a high of around $105 a barrel again), an ethanol glut, higher energy costs, increase home losses, the failure of more financial institutions, the bankruptcy of at least 1 major auto company, and higher unemployment.

The new stimulus plan envisioned by President Obama, some $850 billion dollars (about 5x the Bush stimulus), will stabilize investor fears and consumer confidence for 1 quarter. Then the resulting fact that most of the money was spent on mortgages, credit cards, bills, or placed into bank accounts and mattresses will be seen. And the economy will drop again. The stock market will drop to about 7600 - as I stated in 2008. The bear will roar.

Gold and gold stocks will be one of a few places investors and those that fear financial institutions will run to. Crude oil will be another. Demand will outweigh supply, and emotion will propel prices ahead of that. For 9 months of the year the economy will be abysmal.

If I am as correct as I was in 2008, then my expectation for gold will be in excess of 90% correct. In terms of the Dow I am being overly generous, if my past predictions are accurate. And Crude oil will likely exceed and then under-perform my belief.

While many will feel my thoughts are overstated, as they did and were partially correct in 2008, I believe that the overall outlook is less stable than in 2008. Politics internationally are as bad with Israel and Palestine trading rockets and Iran moving forward on creating nuclear weapons. Fewer banks are making loans, and fewer people and businesses are qualified to get them. Democratic spending is looking to increase the national debt to levels unseen, without any real expectation of improvement. Government interference with private business is greater than ever before - with the Government consistently proving it has no clue on how to run anything.

It is quite early in the new year. Our new President has yet to be sworn in. Much in the world is in flux. So I hope to be wrong, I hope very wrong, in what I am predicting. But I believe that at the end of this new year I will be no less than 60% correct. How you act on that is up to you.

Are mining stocks the safe haven from the bailout crisis?

There is no deal on the bailout of the U.S. financial markets as of this moment. Treasury Secretary Paulson is in the White House as I type trying to create a new plan. The Congress is busy trying to make their own plans as well.

That is the situation that the world markets will be facing tomorrow. And in the wake of this revelation I expect that the Dow Jones Index and other markets will retreat in the face of an unsure weekend. Which means that this is a great market for mining stocks.

I have already mentioned that I feel that coal mining is a great area for the future, based on the need of alternative sources of energy to crude oil. But when the markets are in turmoil, and with direct talk from the likes of Warren Buffett stating that the potential of failing to get a bailout deal done is akin to a financial Pearl Harbor, well there is just 2 place you can bet people will go – gold and oil.

Gold is the traditional hedge in worrisome times. And crude oil has gained in popularity as a hedge as demand has increased in China and other developing nations. Both of these items are limited commodities, and require mining to bring them from the earth that surrounds them.

In the immediate short-term gold will have to fluctuate to handle the demand for safety. Which means that the gold supply will diminish and mines work harder to make up the difference. In the short and long-term oil is both required for energy needs and depleting the finite supply.

And I have to say that mining stocks look great because of all these factors. Why?

There was an old saying from when I was a stockbroker

“You may or may not get rich looking for the gold vein, but if you own the picks and axes you’ll never go poor.”

Companies with proven assets in coal, gold, and oil are the picks and axes of this market and on into the future. The world needs these commodities for safety and energy. No matter the financial outcome, and perhaps because of it, these valuable commodities have to come up to the surface. And mining companies are the means to do so.

With the decreased liquidity in the capital markets, competition is reduced and weaker companies will be forced to merge with bigger and stronger companies. Thus supply will be centralized into fewer hands. With demand up, profits will increase.

Now some would say that this is a temporary blip. And were this the spring I would agree. But with winter and cold weather approaching, and the fact that a slow 4th quarter is all but guaranteed in the U.S. this small blip should last for 6 months from this point.

Plus the fact that a Democratic President has usually been met with a lower market day one. In this case, Senator Obama has yet to declare that the current bailout of $1 trillion (including AIG and Fannie Mae and Freddie Mac) will disallow his initiatives on healthcare and other social programs. So the damage, unless he changes his stance, will even be worse.

When you consider all this, I come to the conclusion that mining stocks are one of the few safe havens in this tumultuous market. If you disagree, please do let me know why.