U.S. stocks are rallying on hopes of the recent budget deal coming out of Washington. Just like we have witnessed over the past several years, lawmakers came to some sort of last minute deal to kick the debt can down the road. I expected this sort of move to avert a default.
The markets could rally short term on such a deal, but over the longer term the equity (NYSEARCA:SPY) and housing markets (NYSEARCA:XHB) appear to be ready for a major correction after rallying for two years. We are witnessing bubbles in certain areas of the market which I encourage investors to steer clear from especially banks (NYSEARCA:XLF), housing, social media and biotech (NASDAQ:IBB) as these are very crowded trades filled with promoters, snake oil salesman, charlatans and day traders. PE ratios are hitting sky-high levels like Facebook (NASDAQ:FB) at a PE of 245. Some of the high quality mid tier and junior miners are selling at a fraction of that PE with much higher returns. Take a look at the ones acquiring high quality gold mines as they may be in a position of strength to use their cash flow to build growth at pennies on the dollar.
I'm keeping a close eye on the increasing acquisitions from gold growth players flush with cash such as New Gold (NYSEMKT:NGD) which bought out Rainy River and Alamos Gold (NYSE:AGI) who recently bought out Esperanza in Mexico. New Gold has a PE of 14 and Alamos has a PE of 18, just a fraction of Facebook and Amazon. Both companies are flush with cash with strong returns on equity and are looking to boost growth plans. The move to acquire these assets may indicate some of the smartest minds in the world believe we have hit a bottom.
Learn from history, overbought bubbles end up in devastating losses. Stay away from high flying stocks and instead focus on value. The great bargains are found in the mining sector trading at historical lows. Stay away from the marginal junior miners struggling to advance. That may be more risky than the acquirers that have increasing cash flow and are positioned for strength. The mining assets are a buyer's market, not a seller's.
Meanwhile, the U.S. government shut down may trigger a credit downgrade. The gridlock is over Obamacare which will cost the U.S billions of dollars of debt over the next few years.
This will force Bernanke's successor Yellen to continue monetizing the debt through quantitative easing which may be increased over the next few months as unemployment is rising to the highest levels in 2013. (click to enlarge)
In my opinion, investors should steer clear of real estate as home sales fueled by record low interest rates and hedge funds could slow down. Interest rates are beginning to rise rapidly despite $85 billion a month of QE.
Unless we see a significant increase of quantitative easing be prepared for a major exodus out of bond funds into real assets in the form of gold (NYSEARCA:GDX) and silver (NYSEARCA:SIL) junior miners (NYSEARCA:GDXJ)
For over two years, pundits in the media have claimed that the Fed will taper or exit from QE. This has been wrong. The Federal Reserve has only increased QE and may consider doing so shortly.
Rising rate environments usually predicts higher commodity prices and inflation. Historically, it is wise to position oneself into precious metals and commodities when interest and inflationary rate risk are great, yet the masses are still chasing the latest high flying biotech or social media stocks. The miners haven't been this cheap since the 2008 credit crisis and the 30-year low in 2000.
I think we could be on the brink of a major spike in interest rates that were manipulated lower for many years. This could cause a correction in equities and bonds (NYSEARCA:TLT). Investors may race into precious metals, commodities and mining stocks which are being completely ignored by the public.
A catalyst for this rotation could be caused by a large sovereign nation selling U.S. debt and not finding willing buyers. We could see increased volatility in the foreign exchange markets, interest rates and commodities due to capital seeking inflationary havens.
The real estate and banking sectors could turn lower quickly with interest rate spikes forcing the Fed to stop all taper talk and possibly increase QE. The housing numbers and high unemployment shows the economy is still on shaky legs.
Home sales are a huge part of this recent recovery in equities. Yields are reaching two-year highs and may soon start putting a damper on the sector. QE is losing its effect on bond yields and we must all prepare for a major move in interest rates.
Be careful if you hold adjustable debt. Stick to companies with no debt or at least paying down debt with positive cash flows and strong treasuries and shareholder base.
Remember the S&P 500 has made a 150%+ move since early 2009. When stocks are high and commodities are cheap I favor junior mining equities as historically high commodity prices follow equity bubbles.
I believe we may be entering a very strong cycle for our wealth in the earth sectors as more savvy investors may capture profits in U.S. equities and housing and begin hedging against inflationary risks by buying the deeply discounted mining equities trading at historic lows.
Disclosure: I own NGD shares. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.