Tony Lepage

There are two reasons for this post. The first: a follow up to the overall economic ideas I wrote about last post. The second: to explore and document new strategies for the stock market.

The Housing Market & the Stock Market

I previously wrote I could foresee home prices increasing because of severe inflation. I wish to further evaluate that statement and form a long term, measurable, prediction.

First off, the S&P is a collection of equities on a combination of US stock markets that is meant to represent the US economy. This is done by averaging the biggest companies that are most watched by investors. We call the top 500 of that list the S&P 500.

A recent commentary highlights the relationship between the housing market and the S&P 500. From the article, you can see how the housing industry could be predicting a decrease of about 30% for the S&P 500 from its current standing.

I will be watching closely to see if this decrease happens. If this decrease does happen I believe the FED will believe this is a far too drastic decrease. It would also signal something the entire nation will not be complacent about—a potential stock market crash.

If investors start taking note of the current housing situation and start adjusting their portfolios we should look to traditional assets for investing safety. I specifically feel big money will end up in the large cap stocks. The current big boys include overpriced stocks like GOOG. If you don’t believe what kind of effect google has on the markets, take a look at the recent price action of EP. El Paso is going to provide solar power to google. They have a P/E of 928. In case you’re unsure what P/E means, it’s the price-to-earnings ratio. In other words, if you bought all of EP right now, it would take you 928 years to earn back what you paid (using their current income rate).

And while commodities get hammered, if we look at one of the biggest old school players, XOM, Exxon Mobil we find a P/E of 11. I can see investors fleeing while they eventually make their way into the old school and traditional companies (many of stocks that Warren Buffett has been holding for a long time). If things are quickly getting more expensive, consumers are spending less, or both, you can expect investors to buy the stocks of companies that produce the things we NEED.

Fear

We could also see a flight from anything that has shown risk, and there is a lot to fear in that arena. I’m consistently shocked that our society is acting so complacent in the face of so much fear that is being fed to us. I wonder when the markets will realize all the things that are going on in the world won’t be good for anyone.

From recent hedge fund busts (a $5 billion loss from one hedge fund in a single week) to the North Korean nuke problems, the markets seem to be acting very irrationally. When we look back in 5 years I think we’ll see a stock market that was pretending and in denial. The emperor has no clothes.

Potential Futures

Considering my thoughts from above, I think we’ll see a decrease around 30%, probably less in the US stock market. This will reverse as the USD begins to decrease by 30% and the stock markets can begin to trade sideways or increase.

This has no guaranteed influence on the price of gold for the near term. Gold could be taken lower if hedge funds and investment banks sell off their commodities. If gold is sold with the commodities the selling will have a negative effect on the spot price. If gold is not sold, or the selling has little effect, I continue to believe the fundamentals of the US economy are driving it towards extinction. That would be positive for gold. It could also end up being very negative for us.

**Brief Disclaimer:
I want to state that I will not be held responsible for any investment actions that are made as a result of anything mentioned in these posts. You are responsible for your own investment future, whether you’re investing or not.

Gold Equities

I’ve recently begun to take on a more risky investment strategy to gain a greater amount of leverage from a positive gold price. To do this I have begun investing in gold exploration companies.

My first purchase in this arena is Radius Gold. Investors were waiting for great news from this company that didn’t come. This is reflected by RDU’s stock price of late. I will hold this stock through the upcoming turbulence that will lead to gold’s resumption of a strong uptrend. When gold moves closer to being priced appropriately, I will re evaluate the holdings of this company.

My idea is to choose mining exploration companies that are cheap but not on the verge of extinction. They need money in the bank and a plan to generate excitement, be it exploration or acquisitions.

I plan to add to my holdings sometime over the next few days. I have my eye on a few more stocks priced around 1.50 as I try to look for companies that have an established track record.

Ultimately, I think history will prove that great investments aren’t that hard to find in this industry. As you would learn from my previous posts, I’m very confident that the gold price will end up a lot higher over the coming years.

That leads me to a key point I try to implement in my investment strategy: I must be selling my holdings when this market gains more investors and before it becomes over invested. This is a serious concern because the market is so small; these investments will be highly volatile as gold prices edge higher.