Are the Stock Markets Downward Ho?

Well I think my gut was right...we're starting to see the downward trend again across the markets. Why? Because the upward trend was based on nothing but cheerleading and hope.

Hope that the half million jobs lost last month wouldn't have as much of an impact as the 600,000 lost the month before. Hope that the government could continue to print money and bail out companies like AIG, GM and Freddie/Fannie. Hope that the losses posted by company after company the first quarter somehow could slide by unnoticed.

Well, they've been noticed.

I can look at MGM as an example. Here is a company that saw it's stock price skyrocket over 700 percent from March 2009 to early May. How many 7 baggers did you have in your portfolio during that period? The funny thing is that I knew the stock was oversold. This was a multi-billion dollar company that was trading as low as $1.81/share.

There was bound to be a bounce.

And then it kept bouncing, and bouncing and bouncing, breaking $13/share on May 11. Meanwhile, I live in Vegas and all I'm reading in the newspapers is how perilously close MGM is to declaring bankruptcy. They battled in court with their financial partner in the CityCenter project just to keep construction going! They were forced to cut one of their condominium towers in half due to some faulty construction! Was nobody else getting this news?

Today I watched as reality sunk in to the stock price. It fell nearly 30 percent today during normal trading hours, and another almost 11 percent after hours. As of 8 pm EST, it was at $7.75. Had you bought at $1.81, you would still have a nice return, but this is a much more realistic valuation of the company at the current moment. I like MGM as a company, and I wish I had bought their stock when I first considered it. But right now I think it's a bit volatile for my taste.

I turn also to my most recent purchase: Wells Fargo (WFC). I mentioned in my previous post that I felt Wells Fargo and I were going to be a long term thing. My gut ended up telling me otherwise. I bought around $19 a share, sold it at $25.75 a share and then watched it RISE to over $28/share on May 8 AFTER the stress tests revealed the bank would need to raise billions in capital to cover itself.

Talk about crazy. How on Earth did Wells Fargo's stock rise when the Fed announced the bank was essentially too weak? I don't pretend to be any sort of market expert, but that just seemed counter intuitive.

Well lo and behold, reality sunk in this week. The stock has sunk over 14 percent across the past three days, and in after hours trading, ended up at $24.06. I'm glad I got out at $25.75! What will tomorrow bring? At this point, who the heck knows!?

I'm not a negative person, and I don't like to watch my portfolio value sink lower either, but it's nice to see the prices come back down from orbit. MGM Mirage and Wells Fargo are but two examples of stock rebounds that were based on hopes and dreams.

Now comes reality.

With the incredible amount of money being printed in the U.S. (and in many other countries across the globe), we are going to run into severe inflation at some point. Oil prices just broke $60/barrel, and in case you haven't been watching you're local Shell station, prices at the pump are starting to rise too. The gas station by my place has gone from $2.06/gal to $2.24 in the past couple of weeks.

Inflation will also devalue the dollar, and will make it harder for those of us who still have jobs to be spending on the economy and helping it recover. We already aren't buying new cars (sorry Chrysler, GM) or new plasma screen TVs (sorry Sony, Panasonic, utilities companies)...think we'll splurge on $5 loaves of bread?

I'm not writing this to be a harbinger of doom. I don't believe in that junk. I'm not stocking up on bullets and bottled water. Yet. But I am turning my attention to some stocks that may help me ride out inflation.

Traditionally precious metals like gold have been favorite refugees for investors, and I don't think this go-round is any different. I'm keeping my positions in the medical/health industry (AOB), the gaming industry (MPEL), the steel industry (GSI), the oil industry (GLBL, EPD) and the technology industry (ACTU, ITLN). But I think I may just diversify some more and make my next purchase a golden one.

I've been looking at Yamaha Gold (AUY), but there are some other interesting companies out there worth taking a look at. Vista Gold (VGZ) and Western Goldfields (WGW) could hold some promise. I also like Taseko Mines (TGB) as a copper play. I've been watching them for a long time - I wish I would have gotten in at $0.75, but even at $1.35 it still looks attractive.

As always, these are only suggestions. Doing your own due diligence is a must. I think there is some real potential out there in the stock markets, but I think it'll take a combination of patience and rational thinking!