Louis Stanasolovich: Short Oil, Long Gold

Louis Stanasolovich, one of the top advisers in America, offers his latest views on the market. It isn't pretty.

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HardAssetsInvestor.com (HAI): Given all that's transpired over the past year, and given the state of the economy, should investors have exposure to commodities in their portfolios?

Louis Stanasolovich (Stanasolovich): Looking 10 years out, the answer is an unequivocal yes. In the short run, though, it's anybody's guess. That's why we use the Direxion Commodity Trends Strategy Fund (DXCTX), which tracks the S&P Commodity Trends Indicator. It uses a long/short approach. That worked very well last year; this year it's not working so well, so far. But that could change.

HAI: There's a great debate raging right now over inflation/deflation and gold. What do you think the outlook for gold looks like, both in the short and long term?

Stanasolovich: Again, we think that long term - probably starting a couple years out - most currencies around the world will start to have problems, because so many governments have debased their currencies by taking out so many loans. And when you see currencies debased, especially on a global basis, that's a good time for gold.

We have bought gold and are buying gold on any weakness. We bought at the $880/ounce level. We'll continue to purchase a little here and there if prices continue to drop.

HAI: Do you have a target allocation for gold? Is there a point where investors have too much gold in their portfolios? Or not enough?

Stanasolovich: For us it depends on price. We believe we will soon enter an inflationary period ... but only if we don't go into deflation first, which is also a risk. But the truth is that gold has historically worked pretty well in deflationary periods as well as inflationary periods.

In the 1930s - the last deflationary period - gold had a very, very big move. The next big move was in the 1970s, when we had high inflation. And then we had a big move in the last few years as inflation picked up again.

Gold is a panic asset too, and it seems like a lot of the world's money is in a panic, so that bodes well for gold as well. The only period in which gold doesn't do well is during a period of low inflation.

So the short answer to your question is "no," we don't have a set maximum on gold exposure. If gold goes back to $400/ounce, we might have 15% of our portfolio in gold.

HAI: Do you ever take positions in commodity-producing stocks - say, gold miners - as opposed to the commodities themselves?

Stanasolovich: When gold went to $880/ounce, we bought 1% GLD [the SPDR Gold ETF, a bullion-based fund] and 1% in the First Eagle Gold Fund [SGGDX]. First Eagle has had a very, very good period. They own gold bullion in the fund, but mostly, they own gold mining stocks. Over the last 12-15 years, gold bullion has done better generally than gold mining stocks. But there are times when gold stocks have done well, so we decided to own both at this time.

HAI: What about oil? What's your outlook for oil prices, which have been, to say the least, extraordinarily volatile recently?

Stanasolovich: Long term, energy is going significantly higher. Last year's prices will look timid in 10 years. Could we have $300 oil? Yes, by 2022. Unless we as a world population start moving very quickly to alternative fuels in a very big way, we think oil could be $300/barrel easily.

In the short term, however, it all depends on the economy. Quite frankly, I'm surprised oil is as high as it is, given how inventories are stacking up. I think we'll see oil take off again at some point here, but currently, we are shorting oil in our most aggressive portfolios. We'll take those shorts off once we get down to $30/barrel.

HAI: Short oil? That's pretty bold.

Stanasolovich: We just don't see oil rising a whole lot right now. Technically, per energy unit burned, natural gas is cheaper. And we just don't see oil making a big charge upward any time soon. If anything, we see it lower. So we have a very small position in terms of oil shorts at this point, and only for our most aggressive portfolios.

HAI: Do you think that natural gas could finally get up off the floor?

Stanasolovich: It could. It depends on oil. If oil surges, I'm sure natural gas will move quickly.

HAI: What about the economy in general? Are we through the worst of it, or is there further to go?

Stanasolovich: Valuations are low on the stock market, but we're not anywhere near the worst valuations historically. The market would have to go down another 50% for that to occur. Does that mean we'll go down another level? No, it doesn't. However, the earnings that are coming out are highly suspect. Many banking institutions have earnings that are accounting-generated in a lot of cases. A good evidence of that is Citibank, which came up with a $2.4 billion accounting charge and is now trying to raise capital.

It just confirms that this severe recession still has a ways to go, particularly with the option-ARM mortgages and the Alt-A mortgages that are coming due and have to reset. That plus the existing problems of other mortgages ... well, the mountain of resets is actually bigger than it was in subprime. So we expect more difficulty for financial institutions, plus housing dropping an additional 20% in terms of price, as inventories go up. The scary part could be if the Federal Reserve has to raise interest rates because people stop buying our Treasury securities. That will cause homeowners to pay even higher rates, which they can't afford.

It doesn't look good in our opinion. We see about a 70% chance that the economy gets worse, and a 30% chance that it gets better. If the economy continues to deteriorate, we believe we'll see at least a sideways market, if not a declining market. I don't see a 50% decline, but I do see the potential for a 20-25% drop. I think there's a good chance we'll retest the March lows.

HAI: Aside from gold, where are you finding opportunity?

Stanasolovich: Managed futures, long/short commodities, long/short equities. We think there's some limited opportunity in government agency-type securities. TIPS have largely run up already, so we are not excited about them. Corporate and municipals will at some point be very attractive to us, but we think it's premature at this point. Junk bonds will be attractive, but again, not yet.

Also, other currencies, especially emerging market currencies, will look attractive over the next 3-5 years. But we're not entering into positions there yet, either. There's still a ways to go.

Really, we're not overly bullish on anything. This year, there's probably 10% upside, tops, on anything, across the board.

Comments

[basehitz:]

Freya's comment on Oct '07 interview prompted me to search HAI website for "Stanasolovich". Comparing 3 year charts of oil and SPX with this forecast is insightful. Missing completely the slaughtering of all commodities and anticipating modest US weakness are humbling. In particular, it was well documented the level of aggregate debt in the US before the the Oct interview. Excessive debt was an disaster waiting for a catalyst.

But I am reminded of how many missed calls I've made over the years and that few got it right last year. Even aware of our excessive debt, I played 2008 mostly long, and took some hits. So I read a wide range of opinions, including some difffereing opinions.

Conceptually, I find the analysis presented in this interview credible. In particular, the money printing leading to inflation is consistent with history. Per Jim Rogers, there has never been a time in history where excessive money printing did not lead to inflation. Jim also missed the commodities crash last year. The broader comments on market valuation/potential correction, a pullback in oil, and NG being attractive is how I'm trading, Though I sold this week all but 5% looking for SPX correction to drag down oil to drag down NG and the drillers. Then I want to buy all of these as the supply/demand equation has been altered by the sharp downturn of exploration setting up the next up cycle.

May 03 08:46 AM

[seer:]

mr. stanaslovitch doe not impress me with an attitude of shorting oil. the world economy cannot go back up unless oil moves in the same direction, i think oil will move hihger to the 60 -70 range . its potentiol is much more if political events occur that make such a move possible. chavez and iran is troublesome. israel and iran is troublesome. their are many more scenerios around oil that could make that commodity move much higher.i truly don't understand how any prudent person would short oil.
gold is an escape commodity, it may go higher , depending on world conditions or go lower. i don;t see it at 400 for a long time to
come. it probably a good ideae to have some money in gold.
oil with out any doubt is a better bet.

May 03 12:03 PM

[blu:]

My guess is they will "take those shorts off" at a much higher price than $30......

May 03 12:36 PM

[Northstar10000:]

Try silver much better than gold.

May 03 12:43 PM

[J. D. Swampfox:]

To me expecting oil to go to $30 is a little extreme now...but, with the short term strength in the dollar and before recovery, to see $40 again seems plausible. However, gold seems to need to consolidate at present too... before advancing this summer.

May 03 04:40 PM

[capt Brian:]

Tra la la la, same old saws. Look up what the gold bugs were saying 10 15 20 years ago, all the same stuff, and gold continues to be the best deal on the block, but gee guys and gals, can't we just allow it to grow, and not have to see it at $9000 / oz. Drat it all, what the heckers would the prices of other things be.

Unless there is NO money, of any denom, then gold will reflect the economy of the day, and all during this time, had you bought dull and boreing annuities, you would be so far ahead the grin would cause the FBI to investigate you to see what you were up to.

Gold YES you bet, but nor more than 10% of your Net Worth Gomer!

I am doing that, not losing in stocks, and have watched my gold and silver move up about 4 times in 18 years, and my savings in tax def'd accounts is much better.

Go ask your Met life guy, or Prudential or or or, Stay away from any ins company that does mtgs or derivitives etc, ONLY simple mutual funds and safe stuff okay?

May 03 06:30 PM

[LilBob:]

On May 03 12:43 PM Northstar10000 wrote:

> Try silver much better than gold.

I agree with you Northstar, I'm also bullish on Copper. At the end of a recession there's usually a push for new productive equipment-the machines and control systems that facilitate new production. I believe demand for copper will increase markedly over the next six months and it may go as high as $2.65/lb.

May 04 08:26 AM

[Freya:]

The Point I am/was trying to make is that "this is uncharted territory". Those Gurus that were popular before the "Crash" did not see it Coming. Just like in the previous Article, this article does not ask a question I would have asked immediately: What should my portfolio look like if you are wrong on any one or more positions?

May 04 04:44 AM

[Freya:]

I've brought forth your last Article which interviewed Mr. Stanasolovich on Oct. 2, 2007.

A side by side comparison about 1 1/2 years apart. Long range forecasts and sundry.

"Best laid plans" even among the wealthy.

May 03 06:52 AM