Monday, January 10, 2005

Thoughts About 2005 - An Investment Forecast

I don't particularly like making upcoming year predictions. I also don't put much stock into most that I read. I like the markets to let me know what is going to happen within a predictable range a safe time frame ahead of the actual happenings.

I also know that a lot of people do enjoy upcoming yearly predictions. So, I thought as a service to my readers who do enjoy these types of musings, I would let you know what two sources (that I trust) are saying.

The first source is a highly reputable research firm known as the Bank Credit Analyst (BCA). They are the best research firm I have ever come across. The second source is John Mauldin (JM). I have a link to him on my sidebar. He is very intelligent and knowledgeable about the markets. I look forward to and read his newsletter each and every week. Let's see what they have to say about the investment world for 2005.

The BCA and JM believe that the economy will grow around 3-3.5%. They both believe we will not see a recession this year, but one is looming in a year or two. John states that the yield curve will advertise before the recession and I definitely agree. Our economy still needs to re-balance, but this will not happen until it has to because too much is at stake to the higher ups in the US. Predicting when "it has to" is a very difficult game to play, but my trusted sources tell us that it will not happen this year. This is of course unless another tragedy occurs on our soil. Then, all bets are off in the prediction business.

John and the BCA believe that the dollar will continue its decline this year, but there will not be a crisis. The fall will be more organized. You definitely do not want to see a currency crisis. If the dollar has to re-balance (not fall), then you want it to be more organized. Since gold is basically a neutral currency, you will see it rise more this year as the dollar continues its decent. As always look for "intelligent" points of support to add to positions on the long (gold) or short (dollar) side. See my past Investment Roundtable contribution on the Gold ETF (GLD) here.

Both sources are concerned about the Fed raising rates too high. This is an easy concern since cycles almost always carry on too long and further then most suspect. Nobody knows with 100% certainty the correct interest rate. Therefore, the rate is always going to be either too high or too low (except when passing the correct level by). Since the Fed is in a rising rates cycle, the rates are probably going to increase too much. Here's what John says about the situation, "Their (The Fed's) history is that once they get started, they do not stop until there is some pain. Since the signals of 'pain' tend to lag, it is quite possible the Fed tightens too much before it stops."

In the coming year JM says that stocks have "issues" and the BCA believes the stock market will be up, but only in the single digits. They are correct in their assumption that currently the stock market is priced for perfection. Any bad news that actually sticks in the headlines for more then a day could send this market downward. Optimism in the market is way too high! John believes we will see a high this year that will not be overtaken for many years to come. I tend to agree (look into past equity cycles). The BCA tells it's readers to look elsewhere in the investment world for higher returns. They recommend European stocks, especially UK and French equities. This means that it will be a stock pickers market again this year just like in 2004 and you buy-and-holders out there are not going to be happy.

Looking for cheaper oil? The Bank Credit Analyst does not believe this will be the case. They claim that the new floor is $40 and the ceiling is unknown. John tends to believe that the floor is more in the mid-$30 range. I tend to agree with the BCA. I don't think we will see under $40 for quite a while, if ever again. Take a look at this chart:

Click to Enlarge Posted by Hello
(Thanks to the Big Picture Speculator for the graphic!)

As you can see the resistance line at $40 is now the support line that has recently been tested. There is no need to wonder about the oil markets when the charts let you in on the secret.

So, this year is going to be a lot like 2004...that's not so scary. Is it? Trouble is looming in the future, though. The BCA warns of very dire economic and financial times ahead. They claim that the next recession could cause a global meltdown. That is not something I really want to experience, but I will be prepared for it. John Mauldin thinks the next recession will occur in the next two years unless another terrorist attack occurs, which means the recession will occur at that point. The average stock market drop during a recession is 43%.

This is a short summary of many pages of reading. You should definitely read the rest of the information yourself. Like I stated at the beginning of this article, these are two sources I put much faith into. I hope you enjoyed reading about these two 2005 investment forecasts.

Best Regards,

The Soothsayer of Omaha


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