Through the Eyes of an Australian

My contribution rate at GOLD-EAGLE.com has slowed up considerably of late as a result of being somewhat exhausted in terms of gold and silver content. The educational foundation as I like to put it has been laid, and now it is simply a matter of putting everything together much like one of those rare classic albums where no track skipping is required. As I shuffle through all four Foo Fighters Cd's (uplifting), my thoughts are a mixture of market mechanics, specifics and how the world is launching into a period of conflict, financial devastation and in it's conclusion hopefully a return to basic values once the horrific events of the decade are scrutinized and put to rest.

RECENT EVENTS

From the gut wrenching tragedy in Bali, to the worst drought in 100 years Australia has been hit fairly hard of late, and no longer can we assume that we are immune from acts of terrorism regardless of their location. There have been major appeals launched for the victims of Bali, and tonight we had a concert in aid of supporting our farmers who have been ravaged by drought. The events in Russia are also distressing with significant casualties, whilst the capture of the snipers in the US has relieved what must have been a frightening period for those residing in and around areas where innocent people were randomly murdered/injured.

After reviewing major events from 1920 it is apparent that 2000-2009 could be a period where those in 20-30 years time would struggle to come to terms with the events of the last 15 months.

US MARKETS

I must admit to having a soft spot for those on the wrong side of the current "bear market" rally that has decimated many that have effectively come to a similar conclusion that I have on the fate of the Dow and S&P. My care factor for the NASDAQ is ZERO so I will not go there, even allowing for the fact it could well recover and outperform other major indices. In March this year I forced myself to sit down and look at each of the 30 Dow components and attempt to factor in some degree of distrust in stocks, and a gradual shift in investor sentiment. My first target range came in at 6000-6500 and I opted for a target in the middle (6250).

I picked off some Dow 8000 puts, after realising they were available and waited patiently. My clients were bombarded with regular negativity and sarcasm, however it was clear from the words I penned I was never going to generate much in the way of business out of it. After reading up on the Dow selection criteria it was apparent that the current basket of stocks were a fair representation of the economy, and thus far we have not seen any major instances of corruption or suspect accounting practices.

So we now have the average P/E ratio in the low 20's, and talk of a major recovery underway. I recently asked a colleague if she had heard of the pension crisis looming, and it was interesting to note that the issues raised were an eye opener to those that listened in on the conversation. It would appear the mainstream are yet to be made privy to some information that could well convert even the most hardened bull into a panic stricken bear.

From all the research I can muster, and looking at how people react in a financial crisis, it is apparent that the once mighty Dow Jones could well easily slip below 5000, and then gather downward momentum from there. Lets face it the market has enjoyed an incredible run, that has generated considerable wealth and managed to fuel the credit, real estate and the now very much deflated NASDAQ bubble. There seems to be an attitude out there that the "good times will keep on rolling" and this belief has been a major driver of the "bear market" rally along with those caught heavily on the short side covering their positions in fear of another tilt at 10000.

One of the major benefits of GOLD-EAGLE.com is the quality information that allows a broader view to be developed all at no cost to the reader. The articles relating to historical P/E ratios, the 1929 crash and how PM's have fared have been invaluable and allowed me to further develop as an advisor and part-time author. From the wealth of information it is apparent that P/E ratios tend to overshoot in both directions, and in the final stages of this gnarly bear market we may indeed again visit single digits. One basic argument could be that the "bull market" was much longer in duration and more powerful than many expected, so why can't the final stages of this "bear" be played out like an E grade horror movie?

I am trying to look for reasons to be bullish, and no matter how hard I look I can see nothing except this market scenario ending in tears for the vast majority still faithfully holding onto overpriced blue chips and tech stocks that may yet undergo "more reconstructions than Michael Jackson". Basically I tend to agree with one of the most hilarious contributors to GOLD-EAGLE, Doug McIntosh in relation to his Dow 5000 call. The "bear market" rallies have a habit of causing those oblivious to the dire fundamental situation taking cheap shots at those maintaining a negative view. After every triple digit gain on the Dow, I would face a barrage of questions and sarcastic remarks at the morning meeting, and this was also related to gold having an off night, or silver failing to hold $4.50oz.

I could sit down for weeks and write a 50-page report on the US markets, or simply utilise the research to date, then attempt to picture what could transpire over the coming months. Very similar to a random roadside breath test where you could gauge that alcohol was present, but would have to take them back to the station and put them on the fancy machine with the key lock and sliding grill. I have seen research reports to rival War And Peace and the analyst still got the story completely wrong.

We have a number of issues combining that could easily extinguish the bullish flames attempting to engulf the market, and once it becomes clearer that things are not going to recover quickly, we could well witness the onset of FEAR which has still failed to rear its ugly head.

AUSTRALIAN MARKET

After our banking stocks looked like finally throwing in the towel, we had some decent bounces across the board followed by a solid result from the ANZ. Companies are still being punished for underperformance, however in light of the yearly performance of the US market we have managed to hold reasonably well.

The market still has a fascination with the former darlings, however I am suggesting that it is time to move away from the "brand names" and into the "no names", with the attitude that there will still be numerous opportunities in our market regardless of whether the Dow is 10000 or 5000. It is often basic analysis of your living surroundings that provides the most valuable source of research, and for me the birth of my first child around one year ago has provided me with a greater insight into the various industries associated with children, and how expenditure on the little bundles of joy does not taper off drastically due to a poor market or being hit with a voluntary administration.

Despite our market outperforming the US, in no way can we safely assume that we would not be affected by a more serious correction in the Dow. One would like to think that a Nikkei style bubble that followed the 1987 crash, would come to our shores, however it is often the markets in developing nations or former superpowers that have experienced staggering percentage gains whilst the rest of the world struggles in a protracted bear market.

REAL ESTATE

There is some clear evidence that prices are starting to retreat with some press attention relating to Melbourne in particular. Buyers are becoming far more discerning, whilst sellers are tending to be more anxious. It was interesting to note that those in Sydney are the most leveraged to real estate in world in terms of wages in comparison to mortgages. It does not take a mathematics genius to work out the damage a rise to 10% on a $350,000 mortgage could cause and whilst many claim it could not possibly happen, I would suggest a review of what occurred in 1989-1990.

I have noted that the PR drive has slowed considerably and the auctions broadcast on TV are not the crazy affairs we witnessed earlier in the year. The real estate market is a worldwide accident waiting to happen and I feel far more comfortable living in a rental than I ever did in "my own home".

AUSTRALIAN GOLD AND SILVER

From the feeling I got and responses from clients, last Tuesday could well have been the turning point for the junior resource stocks. The whole day was sluggish, market depths were atrocious with no buying in sight, and I had some clients threatening to pull the plug completely. Normally a market bottom is welcomed in with some form of abuse in the dealing room (verbal or physical), however Tuesday was like root canal therapy. As one Director stated, "People are now sick and tired of being depressed", and on Wednesday we were greeted with some stronger depths, a few solid attempts at a rally and even some talk of pending exploration programs.

On Friday we had two releases of drilling results I would label as being "nothing short of sensational", and whilst the impact price wise was negligible it is a positive step towards setting up another decent tilt in the new year. The exploration efforts are being cranked up, cheques books are starting to be opened again, however the missing ingredient is a $10 overnight spike in the POG, which triggered a mini rush in 1994 and some madness in 1999 with a $27 jolt.

The fundamentals for PM's remain solid, however those that expected a tearaway bull market post 911 have become somewhat disenchanted with investing in gold and silver. The shock factor of war and terrorism has been somewhat removed, and to an extent the outlook for gold is far more reliant on economic factors as opposed to being viewed as a "safe haven".

REMAINING OPTIMISTIC

I have found that being a "permanent optimist" works well in terms with dealing with the markets. I do not spend copious hours researching sectors of the market that are in decline or flat lining, but would rather focus my energy on sectors or commodities where the outlook is somewhat bullish. I will revisit the Dow when valuations and sentiment justify re-entering the market, however I always have a small wager to the downside just in case. Taking a totally negative view on the Dow and throwing the kitchen sink is not healthy and for many valuable lessons would have been learnt over the past fortnight.

I am presenting my case for gold/silver and junior resources to an audience of around 70 people on Sunday morning, and whilst I will be as enthusiastic as ever I tend to get the feeling the response will be somewhat lame and bordering on "Is this guy an idiot?" For me selling the house, and helping to get a silver IPO over the line are areas where I see great potential. When the mainstream manage to pick up on this, they need not despair as I intend to accommodate them. I guess the moral of the story is "get educated or get slaughtered", and I am sure those that read GOLD-EAGLE.com religiously will appreciate this when TSHTF.