by JDH on February 11, 2012

Last week I had a mercifully short commentary. This week, I have no commentary at all. Only questions.

Question #1: Is the Facebook IPO proof of the end of the world as we know it?

Rick Ackerman, in his Rick’s Picks commentary on February 7, commented that the Facebook IPO Hubris is a sad commentary on America. I am not American, I don’t subscribe to Rick’s services and I am not affiliated with him in any way (although I do enjoy reading his free commentaries), and I am not on Facebook. With that caveat, Rick’s point is that Facebook could be one of the largest companies by market capitalization very quickly, and for what? It’s a company that doesn’t make a product, or provide a valuable service. It’s a company that primarily allows us to waste time.

Of course I could argue that the entertainment industry, and sports, and books, are nothing more than time wasters, so that alone should not be used to indict a company.

However, I do agree with Rick’s comment that:

if Zuckerberg is so smart, how come he hasn’t figured out a way to monetize a billion-and-half eyeballs? At present, Facebook’s profits are only a tenth of Google’s. More to the point, at least where investors are concerned, profits seem unlikely to grow significantly unless Facebook gets in users’ faces far more aggressively. This implies intruding on their privacy and selling their “information” in ways even more appalling than those that are already troubling civil libertarians. Users will become appalled too if and when Facebook is legally forced to disclose the nature and extent of the personal data it has been collecting on them and selling to who-knows-whom. On the day that law is enacted, we can imagine Facebook shares losing 30% of their value.

Interesting. And yes, I agree, if I was an investor in Facebook (which I won’t be), revenue would be a good thing to have.

Question #2: Is anyone out there paying attention?

Here’s a chart of the S&P 500, going back to 1997:

As the chart shows, the S&P 500 today is at the same level it was in the spring of 1999, and the fall of 2000, and the summer of 2006, and the summer of 2011. That’s 13 years of volatility, but no growth. Zippo. We are in the middle of a lost decade-and-a-half, and no-one seems to notice, or care.

(I shouldn’t say “no-one”; you guys see it. In fact sunseeker posted about it on the Buy High Sell Higher Forum; it’s just that the rest of the world doesn’t see it). The Nasdaq looks even worse:

The Nasdaq peaked at around 5,046 in March, 2000. Today it sits at 2,903, a drop of 42% from the peak, so an investment made 12 years ago would have lost you 42% (unless you cashed out in March, 2003 at the bottom of 1,271, for a loss of 75%).

Question #3: Did anyone read that last sentence?

Over a three year period the Nasdaq lost 75%. This illustrates two important points:

First, it is quite possible for a main stream index in the largest financial market in the world to crash by 75%. It should not come as a surprise if the same fate were to befall the Dow or the S&P 500.

Second, the crash took exactly three years from top to bottom. A crash doesn’t just happen in a day. The great crash of 1929 didn’t finish until 1932. I therefore surmise that even though the market looks great right now, we are still in a downtrend, and there could be more to come.

Question #4: Gold’s doing pretty good, eh?

Okay, that’s not really a question, but gold is doing pretty good, eh? Compare the previous Nasdaq and S&P 500 charts to a chart of gold for the same period:

I ain’t no rocket surgeon, but what I see is what them technical analysts call an “uptrend”. Obviously it’s a very volatile uptrend, but I can’t think of many other charts that show a 12 year uptrend. Silver is also in an uptrend, but it’s obviously much more volatile:

Question #5: So what do I infer from the charts of gold and silver?

Given a choice between owning the Dow or owning gold or silver, I’d pick gold or silver. More to the point, until proven otherwise, I would treat all dips and corrections as buying opportunities, since that strategy has worked very well over the last 12 years. Even if you “goofed” and bought silver at $20 per ounce just before the crash of 2008, if you held on your investment is still up 50% today. If you bought the S&P 500 or the Dow just before the 2008 crash you have lost money.

So, buy gold, buy silver, buy physical, and perhaps throw a few dollars at some well funded juniors that will benefit from rising prices. Personally I’m not betting the farm on stocks at this point, since I still worry about another correction, so I’m keeping some powder dry.

Question #6: Is this video a window into your soul, or just brilliant marketing?

I’ll let you decide.

Thanks for reading; see you next week.

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