My View Of The Markets:
We have seen the Goldilocks economy take the Market to unprecedented heights, but the full title of the story is " Goldilocks and the Three Bears." The Baby Bear has appeared and the Primary Trend is now Bearish. Individual Investors who do not realize this will lose a fortune on their paper assets. Those who believe the MYTH that any drop in the stock market will be followed by an inevitable move to new highs should investigate what happened with those who invested in the London stock market in the summer of 1720 as compared with those who put their money into a bank CD at the same time - over the next 212 years, for instance. Stocks are a horrible investment, even over very long periods of time, when bought into a wild euphoria.
In the 1929-1932 stock market collapse, one of the primary reasons for the extended plunge was that investors bought shares on only 10% or 20% margin, so that a moderate decline wiped out their entire investment, and triggered a chain of margin calls that continued to depress the market until stocks were trading at nearly a 60% discount to historic mean value ( equivalent to about 1200 for the DJIA ). In 1998 investors are required to put up 50% margin, and most open-end mutual fund participants have bought their shares with 100% cash. However, this requirement only applies to individuals; hedge funds, brokerage houses, banks, and other professional traders are still able to buy shares on 10% margin or even less, depending on the risk tolerance of their clearing houses. Since such a large percentage of money managed today fits into this category, the triggering of margin calls is already causing a similar effect. Many hedge funds and brokerage trading departments are teetering close to amassing serious red ink, or outright bankruptcy, and must use every rally in the market to sell in the hope of salvaging their business. It is no accident that the dollar began to plunge after the announcement of LTCM. I see further weakness in the dollar ahead. It is almost certain that several respected names on the street are not going to survive the bear market. As these brokerages go belly up, whoever assumes their remaining assets will be forced to liquidate them, further depressing the market, as most mutual funds are fully invested and in a period of net redemptions cannot afford to purchase shares even if their fund managers believe they represent good value. At a critical point the average investor will have a net loss on his or her stock holdings, which historically is the point at which individuals will exit the market big time, as in 1931 and 1974.
I am bullish on gold for the following reasons:
1) the volatility in the U.S. financial markets, including finally the first in what will surely be a long series of hedge fund failures, which will spur a small but critical and inevitably growing mass of investors to seek out alternative places to put their money.
2) the successful re-testing and recapture of the long term triple bottom in the XAU, demonstrating that skeptical investors finally decided to bail out at the bottom in late August 98( so what else is new? ).
3) nearly unanimous bearish forecasts for precious metals and their shares by major brokerages even in the teeth of the current rally, as is typical of the early stages of any major bull market following a long-term bear market.
4) traders' commitments in other commodities and financial instruments that correlate strongly with gold and which are showing powerful commercial accumulation, including especially platinum, hogs, soybeans, sugar, and coffee
5) a recent, sustained, high on-balance-volume rally from all-time historically depressed levels.
6) substantial insider buying by corporate executives of gold mining companies.
I took an initial stake in Homestake Mining on Thursday. This represents a position play for me. I expect Gold to trade at $343 an ounce in the spring of 1999. I welcome a correction here as I will aggressively buy all the way down. I will be in good company here:
1)On Wednesday, August 5, 1998, a very large purchase was announced by a beneficial owner of Homestake Mining Co.
2)On Wednesday, September 5, 1998, August Von Fink, beneficial owner of Homestake Mining Co. announced a purchase on August 3 through August 13 of 3,110,600 shares at a price of $10.39-11.01 per share, bringing his total holdings to 30,000,000 shares.
3)On Thursday, September 10, 1998, Peter J. Neff, director of Homestake Mining Co. announced a purchase on August 11 of 1,800 shares at a price of $10.63 per share, bringing his total holdings to 1,800 shares.
4)On Tuesday, September 15, 1998,William F. Lindqvist, Vice president of Homestake Mining Co. announced a purchase on August 7 of 500 shares at a price of $10.63 per share, bringing his total holdings tp 1,163 shares.
5)On Wednesday, October 7, 1998, Richard A. Tastula, Vice President of Homestake Mining Co. announced a purchase on September 9 of 3,000 shares at a price of $10.88 per share, bringing his total holdings to 3,000 shares.
$300 an ounce represents psychological resistance at the moment. I expect it to be taken out. Till then, I will buy all the dips as I did with MO ( and C-Cube in the summer of 97 ). That is how you make big money going long. $500 an ounce is a good possibility in the Year 2000. |
