It was a wicked, wretched June for the Dow, which posted its worst performance for the month since the Great Depression.
Oil prices setting record high after record high, while the dollar sinks ever lower, have put the hurts on the whole economy?except for commodities and energy, which are the only two asset classes I have promoted in these pages.
It's not that I'm a genius investor or anything?I assure you, I'm not. All I do is read the writing on the wall, and tell you what I think. It's a surprisingly rare thing to do among Wall Street pundits, who seem to prefer the safety of historical patterns and chart analysis to actually looking around them.
So you have to look past the talk about how all those beaten down stocks in tech, retail, and luxury items are good buys.
They sure are: Good bye house, good bye car...
What we have here is a new paradigm. It's time to throw out the old investing playbook and make a new one.
Rather than being safe ways to play the market, index funds, diversified portfolios, momentum trading strategies, and technical chart analysis are now more likely to lose you money than increase it.
Want some proof? Here are the top-performing diversified U.S. stock-fund categories, according to MarketWatch:
|
Category
|
Q2 Avg. Return
|
YTD Avg. Return
|
|
Midcap Growth
|
5.2%
|
- 8.3%
|
|
Small-Cap Growth
|
4.2
|
- 11.3
|
|
Midcap Core
|
4.1
|
- 6.0
|
|
Multicap Growth
|
2.0
|
- 10.5
|
|
Large-Cap Growth
|
1.8
|
- 10.0
|
|
U.S. Diversified
|
0.6
|
- 9.7
|
Yes, that's right, the top performing stock funds are down 6-11% on the year. As for the major averages, they're down 12-14% this year.
A typical Wall Street pundit, trying to paint a happy face on an abysmal market, might write up the headline as "Funds beat the indexes in 2008!"
But that's not the kind of gruel we serve around here.
A Perfect Storm
Regular readers of my column know the real score: We've got a perfect storm on our hands.
As more and more of one's income is eaten up by the basic needs of food and energy, it leads to further dependency on credit, which increases the likelihood of credit and mortgage default, which further hurts the financial sector, taking down the broader markets and putting the economy in an increasingly worse position.
Oil prices are causing inflation across the board, from food to everyday goods, and by "inflation" I mean prices for everything going up, not some geeky Austrian-school definition of it.
Part of the reason oil keeps going up (apart from simple supply and demand) is that the Fed has devalued the dollar in order to stave off a financial crisis resulting from the subprime meltdown. But if the Fed tries to prop up the dollar now, and raise rates, it could bring an already-down economy to a standstill. So by averting a crisis of confidence in the banks, they brought on a crisis of stagflation for the entire economy. As the old saying goes, if the only tool you have is a hammer, the whole world looks like a nail.
The fact is, the Fed is whistling past the graveyard. Or sticking their finger in a leaky dike. Or whatever metaphor you like.
While most investors are shaking their heads in confusion and dismay over a recession that just won't go away, it all makes perfect sense to those who really understand the implications of peak oil.
I hold a very simple thesis: Without an ever-growing supply of cheap and plentiful energy, the old investing strategies simply don't work anymore, because the markets don't behave as they should.
In fact, record high oil prices have clearly failed to bring adequate new supply to market. Consequently, oil and commodity prices stubbornly refuse to revert back to the mean, as a technical analysis says they should.
A Very Nasty Period
The trends should be clear enough to anybody who reads the news.
Transportation is on the ropes. The Big Three automakers are posting huge losses after being asleep at the wheel for years, continuing to pin their futures on big trucks and SUVs even as global oil production flattened out and the peak oil story started to unfold. Now new and used car dealerships are saddled with row upon row of gas guzzlers nobody wants, and American-made vehicles with European fuel economy are nowhere to be found. It's no surprise to me that Chrysler just shut down an assembly plant, and I expect more bad news yet from the American automakers.
The airline sector is going down in flames, with fuel prices destroying the bottom line. (See my article of last month, "Peak Oil and the Rail Revolution - Say Goodbye to Cheap Air Travel.")
Truckers are trying to strike their way out of losses due to skyrocketing fuel costs, but if they can't pass on the higher cost of their fuel to the buyers of the goods they haul, which is hard to do in a declining economy, then they're going to simply run out of road.
The financial sector is down 20% on the year, and it ain't over yet, not even hardly. Hedge fund manager John Paulson believes that we're only $360 billion of the way through a $1.3 trillion writedown from the credit crisis.
Oh, yes. The subprime mess was just the beginning. Now we're getting into the option ARM resets, where borrowers have a choice about how much to pay off each month. Merrill Lynch estimates that the losses from option ARMs could add another $100 billion to the $400 billion in mortgage and subprime related losses. And after that, we'll likely see another wave of personal credit defaults, leading to yet another fat writedown for the banks.
On June 18, the credit strategist for the Royal Bank of Scotland said, "A very nasty period is soon to be upon us - be prepared," and warned that the S&P 500 could tank to 1050 by September?a 28% drop since the beginning of the year. That means that all of the gains made by the index's component companies since the end of 2003 would be wiped out.
Retail, luxury goods, tech, travel, entertainment...all in the dumper. Want a good way to hedge against recession? Pick the weak companies in any of those sectors, and short them.
Yesterday, the Dollar Thrifty car rental company blamed its poor 2008 performance on "tough operating conditions" as if this were some unexpected, nasty bump in the road, but I call it an entirely predictable result of peak oil.
Likewise, it should have been no surprise to anyone who's paying attention when Starbucks announced that it will close 600 stores, cut 12,000 jobs, and halve its expansion plans. When people can't afford to fill their tanks just to get to work, a $4 cup of frothed coffee-flavored milk just doesn't rank on the priority list.
But energy and commodities? Ahh...now there's a different story.
Energy Stocks: The Only Way to Make Any Money
In a CNBC interview on May 29, Matthew Simmons, one of the world's top energy investment bankers and a proponent of the peak oil study, explained his investing strategy. "I have a very significant portfolio that I've built up over the last 25-30 years in energy stocks," he said, "because I think it's the only way that anyone's going to make any money."
I couldn't agree more.
The investing game has changed, and those who realize it now have an opportunity to jump on the greatest investment event of the century. The growth potential for renewable energy in particular, and the associated technologies of the future, seems nearly limitless. After decades of investment and research into renewable energy, it currently accounts for only about 1% of the global energy mix, but by the end of the century, it will have to be closer to 100%.
We should expect prices for our most basic of needs, food and energy, to continue to rise until the supply and demand equations are back into balance. And it looks to me like that will be achieved mainly by demand destruction, which could take years to play out. This bear is going nowhere.
Meanwhile, energy and commodities, including agricultural commodity ETFs, are doing very well this year even as the rest of the market goes south. (For my previous recommendations in these sectors, see the Related Articles section at the bottom.) Along with traditional safe havens like gold and silver, bonds, T-bills and the like, they're really the only place to be right now.
But if you want to do really well, then you need to have a stake in some of the choice energy picks we have selected for the $20 Trillion Report.
Until next time,
Chris
Energy and Capital
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