Great Expectations

“Great Expectations” is the title of a classic novel written by Charles Dickens in 1861. It is regarded as perhaps one of his greatest novels. The title “Great Expectations” can also be applied to President-Elect Barack Obama, our soon-to-be 44^th President.

President-Elect Obama will be expected to cure our country's economic ills and quickly. I believe that the nearly 1,000 point stock market sell-off this past Wednesday and Thursday was due to Wall Street 'disappointment'. The cry-babies on Wall Street were disappointed that President-Elect Obama did not hit the ground running and immediately appoint the future Treasury secretary.

Speaking of the future Treasury secretary, I hope I am wrong but I expect that person to be New York Fed president, Tim Geitner. He will be portrayed as a fresh, young face. Some fresh face. As New York Fed president, wasn't he supposed to keep an eye on Wall Street? All he did was turn a blind eye to all the shenanigans on Wall Street. If Mr. Geitner is appointed Treasury secretary, Wall Street will be smiling like a butcher's dog. It will be business as usual for Wall Street.

The appointment of Mr. Geitner would be similar to what the Federal Reserve has already done. They have hired Michel Alix as senior advisor to William Rutledge, executive vice-president of the bank supervision group. Mr. Alix ran credit risk management for Bear Stearns from 1996 to 2006 and Bear Stearn's chief risk officer from 2006 to 2008. The Fed hires a guy to a key position that was in great part responsible for bringing down Bear Stearns. Incredible!

What else can we expect from an Obama administration? A friend of mine from Chicago was walking near the Obama residence in Kenwood, Illinois. He saw a large crowd of people gathered there. He asked a policeman, “Why are all these people here? Are they hoping to get a glimpse of the new President or an autograph?” The policeman answered, “Nope, these people are all corporate executives looking for a government bailout.”

We have already seen auto industry executives begging for a bailout like a dog begging for a treat. Look for many more industry executives to join the financial and auto industry executives in begging for government bailouts. I fully expect the airline and insurance industries to join them soon after the Obama administration takes office in January.

I only hope that then-President Obama will have the strength to say no to some of these executive beggars. If not, instead of American taxpayers footing a several trillion dollar bill, we will be footing a  bill in the area of ten or twenty trillion dollars.

Not-So Great Expectations

On Wall Street itself, there are no great expectations for the stock market. October was a month for the record books. According to Standard & Poor's, October was the worst month for global stock markets in history.

Global stock markets lost $5.8 trillion in valuation during the month of October. For the year so far, global markets are down an average of 42%. This totals to over $16 trillion in lost valuation!

The carnage has sent the retail investor fleeing. October saw the biggest monthly outflow ever from US stock mutual funds. According to TrimTabs, $75 billion was pulled from mutual funds.

“Maximum Pessimism”

At times like these, the words of the international investing pioneer John Templeton always come to mind. He said to buy at the “point of maximum pessimism”. Are we at this point yet? The answer is yes and no. I believe we are there in some sectors but there is still way too much optimism in other sectors.

Let me start with where I see too much optimism. There is incredible bullish sentiment right now toward US Treasuries and the US dollar. Please do NOT invest in either the Treasury bond market or the US dollar at these bubble-like levels. If you have long positions in the US dollar or Tresuries, close them out. I would also avoid the sectors that CNBC loves – financial and tech stocks. Too many people calling a bottom in those sectors to suit me

I continue to see far too many so-called analysts and chartists telling people that the US dollar and Treasuries are the places to invest right now. As I've stated in prior articles, these people are mere trend followers. They just assume the current trend will continue forever. They are ALWAYS caught off guard when the trend changes. They NEVER think about the big picture or long-term investing. I've found in my 26 years total experience in the investment industry that the surest way to be separated from your wealth is to follow people with a short-term investing philosophy, ala Jim Cramer.

Where to Nibble?

Where do I see “maximum pessimism”? The sector that I see which is absolutely hated by everyone is the broad sector of real assets. In this broad sector I'm including industrial firms, timber, water, metals,  agriculture, energy, alternative energy, and some sectors of real estate.

These are the sectors where investors should be sifting through the rubble right now for beaten-down quality companies. I believe that anyone buying in these sectors now will reap huge gains over the next five years.

Why do I say that? It's simple. The current recession or depression or whatever will not last forever. The global economy will eventually recover. And when it does, it will be the companies with real assets that will benefit the most. Why?

It's simple supply and demand. When the global economy recovers, demand for all sorts of “hard assets” will resume the climb that was interrupted by the credit crunch. China and the other emerging economies and their billions of people have not disappeared off the face of the Earth!

On the supply side, look at what is happening right now in the energy and metals industries. Every week there are numerous companies announcing major cutbacks in both exploration and current operations. Both current and future supplies of key commodities are being drastically reduced.

Even the International Energy Agency (IEA) said in their latest report that the production of oil from major areas such as Mexico, the North Sea, and Russia is dropping steeply. They stated that tens of billions of dollars of increased investments into energy would be needed annually to stop the overall global decline in oil production. Right now, investments are being drastically reduced, not increased.

Don't forget that even when the global economy does improve and investments are again flowing into oil fields and mines, there will be a long lag-time before results are seen. The dimwits on Wall Street think bringing a mine or an oil field on-line is like flipping a light switch. The truth is that it is a multi-year process.

The “real asset” companies who manage to still alive in this current environment will benefit and be the big winners as the assets they hold and they produce will greatly increase in value. I advise investors to start buying these type of companies NOW!

Analyst, Oxbury Research

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