2011 Second Half Market Predictions

Just as I told you at the start of this year, I have no idea what’ll happen in 2011. And I still don’t.

But who would?

We’re just days from defaulting on our debt with no real plan. We’re watching Europe fall apart, dollar devaluations, $40 silver, $1,600 gold, record rare earth prices, stupidity on trading room floors, and a bunch of over-paid boobs running our country back into a depression…

We’ve relived last year, watching as Bernanke lied to us about inflationary threats and this “economic recovery” that was never on track to begin with. The U.S. economy is putting an undue amount of stress on broke Americans. More than half of us live paycheck to paycheck; more than 44 million of us live on food stamps. Unemployment is through the roof and wages aren’t rising. Only 58% of Americans have a job…

Just to get by, Americans are taking on more debt. The average household is $75,000 in debt. That’s unsustainable and could lead to even more economic decay. 

And you want to tell me you know what’s coming next? How could I when our government doesn’t even know.

Calls Come to Fruition

At the start of the year, I noted that commodities would continue to explode, gold would rally to $1,500, and that silver would break $30. 

I also predicted copper would hit new highs, and that oil could easily run amok above $100 a barrel again.

We knew the debt crisis would continue, and that the dollar would continue to take a beating… And we were right on all fronts.

Gold jumped above $1,600. Silver broke $40. Copper hit an all-time high of $4.5354.

And oil ran above $100:

I’ll continue buying all of them, even at record highs — especially gold and silver. Because despite gold’s run to historic highs, this upward trend will continue. There’s no evidence of a top and plenty of reasons for a move higher, given the economic and global environments.

I don’t see why $1,700 gold is out of the question this year… and $45 silver isn’t far off, either.

Sure, we could always see a slight pullback if the debt ceiling is resolved and we see some compromise on the deficit, but just one look at Europe and there’s no real reason for a pullback to last. The European crisis is nowhere near resolved.

The U.S. economy is up a creek. Not only is it clear that a disorganized government is very good for gold; it’s also clear our debt levels have reached the point of no return. Debt destruction will follow, and investors will turn to gold and silver as safe havens.

I also noted that coal would spike higher. And it did:

Peak coal production issues within China was a catalyst for the price jump. Supplies are falling as demand skyrockets. Companies like Peabody Energy (NYSE: BTU) and Patriot Coal (NYSE: PCX) have greatly benefited from surging coal prices. And I’d continue buying coal at these levels, because global demand is exploding in the early stages of coal’s supercycle.

I said rare earth stocks would continue to skyrocket on supply-demand issues because of increases in Chinese tariffs…

Continue buying rare earth stocks like Molycorp (NYSE: MCP), Rare Earth Elements (NYSE: REE), the Rare Earth ETF (NYSE: REMX), and Elissa Resources (ELI.V).

(Pay close attention to Elissa. The company plans to drill at its Thor rare earth property in Nevada by the end of the year; this location indicates a presence of heavy rare earths, which we desperately need.)

China still has a stronghold on rare earths. And they may reduce export quotas even more, forcing prices higher. Just take a look at the cost of dysprosium oxide, used in magnets, lasers, and nuclear reactors: it rocketed to $1,470 an ounce from $740 at the start of June 2011. The price of europium oxide — a compound found in plasma TVs and light bulbs — exploded to $4,300 a kilogram from $1,300.

General Electric recognizes this dire situation in rare earths, saying in a statement: “The situation remains volatile and further price increases seem highly likely.”

The StreetInsider reported, “GE said while no one is sure what will happen next, number of actions including setting up a team to manage the ‘unprecedented’ supply chain situation and looking to expand its base of suppliers. GE warned further significant price adjustments of its product may be unavoidable.”

I also noted that housing would not improve — despite analysts’ calls for a bottom. Housing still has a ways to fall.

As I said here, inventories are still high. Seven million foreclosures haven’t been accounted for, about 10.9 million borrowers are underwater on mortgages, and another 2.5 million borrowers are in near-negative equity positions.

That’s not a sign of a bottom; that’s a sign there’s more pain ahead. 

I don’t think we’ll see a bottom until 2014 at the earliest… if we’re lucky.

I recommend continuing to short the SPDR S&P Homebuilders (NYSE: XHB) — as we did in Options Trading Pit for triple-digit gains in just weeks — and companies like Lennar (NYSE: LEN).

And finally, I talked about agflation and how it would continue to increase consumers’ food bills, sending trades like the Market Vectors Agribusiness ETF (NYSE: MOO) to $60.

We goofed on this one. MOO only hit $58 as our food bills exploded, but it’s still a buy, as higher food prices are the new normal. Global food costs shot up for the tenth time in a year.

Pretty solid predictions the year, wouldn’t you say?

What’ll Happen Next?

Again, no one really knows. But here are some places I’d recommend parking your money…

Biotech will continue to outperform the broader markets, as it did during the first half of 2011. You see, despite international and domestic evens on the political and policy fronts, the NASDAQ Biotechnology sector outperformed the broader market in the first half of the year, advancing some 14.2%.

I just wrapped up a new Whiteboard Weekly video on four biotech companies you should keep an eye on for the near term.

We also have an eye on $120 to $150 oil, as does smart money. According to Bloomberg, the number of contracts held by traders to buy December 2011 West Texas Intermediate (WTI) at $120 a barrel came in just above 45,500 lots in late July 2011. 

The best way to trade this is by buying major oil companies like Exxon Mobil (NYSE: XOM) and Transocean (NYSE: RIG). 

Let’s face it: With unemployment sky-high, housing in the doldrums, and our future somewhat bleaker than norm, Americans are broke. That said, we’re also watching credit card stocks, like Visa (NYSE: V), MasterCard (NYSE: MA) and American Express (AXP), as consumers turn to plastic to pay for just about anything. Consumers did the same thing in 2007 and 2008 right before defaulting in large numbers and taking down major credit card stocks, like AXP. 

The best way to trade this is by buying credit card stocks now, as consumers turn to plastic. But be prepared to short them at highs when defaults make headlines.

And finally, buy uranium like it’s going out of style. You’d be a fool not to, as the world faces a long-term shortage of uranium.

Despite Fukushima, nuclear power lives. And the gap between production and demand will only widen going into 2020, as China boosts nuclear capacity to eight times current levels and India plans to boost production by 13 times by 2030.

Then again, with default likely in just days, who really knows what’ll happen…

Maybe if they turned the economy off and then back on, it might run better. Works for my cable.

Stay Ahead of the Herd,

Ian L. Cooper
Analyst, Wealth Daily