I believe politics and government will affect the economy significantly. With our current economic crisis and the people’s belief that the government must “do something,” I think we’ll see a lot of intervention.

During the fall crash, it was primarily a deflationary moment. While gold did decently as a safe haven, most commodities crashed along with the stock market. The dollar and treasuries roared. People bought dollars to deleverage their debt (which was primarily in dollars) and bought US treasuries as a safe haven investment (which also increased the value of the dollar). I believe these actions were misguided and the opposite will be the case in the future.

America is a society drowning in debt, and the signs point the society will become more deeply in debt. Government debt is approaching 100% of GDP. This in of itself is not terrible; however, the deficit itself is about 20% of GDP this fiscal year and I think it will likely stay as high as 10% of GDP. Even though the government will likely do less stimulus programs in the future, the unfunded liabilities of medicare and social security will take their toll.

Besides government debt, people and corporations are drowning in debt too. The US government debt had been primarily bought by foreigners, particularly China, since the US people didn’t have the money to loan to the government. However, China will likely not be so quick to give a blank check to the US government. Not only are their exports suffering (thus less money to lend), there is more US government debt than ever and China is wisening up to this potential calamity.

I dont’ think we will see amazing economic growth anytime soon, which the Obama administration seems to happily assume. Our politicians are attempting to transform America into a social welfare state, similar to European countries, where growth there is 1-2% in good years (not 3-4% as Obama expects, and this makes a big difference over time). The stimulus package mainly went to entitlements, not investments. Corporations face a higher corporate effective tax (as Obama has said he will close loopholes). Small businesses (people making $250k+) will face higher taxes soon. More regulations are coming. Environmental regulations will likely increase energy costs.

The outlook for growth is pretty abysmal, but the outlook for debt increasing is crystal clear. People like their entitlements, particularly social security and medicare. Politicians are slow to change the system that does anything but expand these entitlements. The sluggish growth will be a continued drain on tax revenues, so less revenue will come into the government, but more and more demands for entitlements and social welfare programs will continue. Our debt will balloon.

What’s the best way out of debt if you can’t default? How can you magically make the debt worth less? Inflation of course. With more US debt being issued, the yields will likely rise on the debt (hence my short position on treasuries). People won’t be willing to loan to the US at 4%, they may want 8% (or as high as 12%, like it was during the early 80′s). That will of course kill all lending to business and consumers, so the Fed will be pressured to buy more debt to lower yields. This will trigger inflation.

I like silver as the best hedge against inflation since I think it is more attractively priced compared to gold. The gold/silver ratio is still in the high 60′s, something that I think is a bit absurd since silver provides many of the investment advantages of gold. However, silver is ‘cheaper’ so I think the jewelry market for silver won’t get hit as badly as gold…people simply can’t afford gold jewelry compared to silver. Also, silver has many industrial uses much like copper. If you look at the early 80′s gold/silver boom, the ratio fell closer to 30 at the peak.

The deficits we are running and our debtload as a percentage of GDP are unheard of in peacetime. The last time our government was borrowing at such a massive rate was WWII, and prices nearly doubled between 1941-1950. Since our whole society is in debt, the easiest way out of this dilemma is a period of moderate inflation, which will allow for the debts to be wiped away and hopefully positive restructuring to be done for the future. The process will be painful. Cash holdings will drop in value and holders of fixed-income debt (particularly treasuries) will get slaughtered. Holders of commodities, especially precious metals, should make out like bandits though .

Note: Author is long SLV, SSRI, GLD, USO. Short TLT.

Now, may be time though to pile in and start going long oil. Currently, I’m buying oil and will likely begin scaling out of my position once crude hits the $90-$100 range. Here’s why I think the price of crude will rise over the next couple of years.

1. I believe the market has over-reacted due to perceptions of falling demand. Yes, there will be a recession and yes it will decrease the demand for oil. But causing it to drop like it has is ridiculous. People will still drive their cars no matter what.

2. Whenever a bubble bursts, it tends to overshoot. Just like dot com companies were overvalued and then undervalued, so has crude oil.

3. I see few supply alternatives in the near future. I’m betting that solar and other technologies are still far off in development. Furthermore, the democrats won’t likely push for much more drilling, which means the supply of oil/natural gas won’t be expanded that much and they will not push nuclear power as much. Relying on the future hope of solar power means more dependence on oil than ever.

4. Furthermore, I bet the democrats won’t reduce hte demand for oil that much. While they may be tempted to levy taxes on gasoline, these will prove to be widely unpopular, especially during a recession. Thus, we’ll find ourselves in the same situation we were in June.

There’s two ways to play the oil trade. One is buy buying the USO ETF, which I’m long currently. If you have a lot of gamble in you, consider the double leveraged UCO ETF, which does the daily 200% change of crude oil. I’ll probably start buying this ETF in a month or so. Right now, it’s still a bit too thinly traded for my tastes.

Disclaimer: Author long USO.

2. Luby’s has a solid growth plan. Luby’s has a new model in place for its cafeterias. Its new model has a more modern appeal. Additionally, it sells higher margin items through its coffee bar (besides coffee, they offer smoothies and ice cream). These newer models have shown to outperform the traditional Luby’s cafeteria model, likely due to the overall enhanced customer experience. As Luby’s builds more of these types of cafterias and replaces its current cafeterias with these models, we can expect higher revenues and profits.

Additionally, Luby’s has been expanding its culinary contracting business. Basically, it serves foods at hospitals and other health care facilities. Luby’s food has always been a hit with the geriatric crowd, so there is more growth opportunity for this small segment of the company too.

3. Luby’s has valuable real estate holdings, which I believe are underappreciated by the market. Luby’s owns the land on more than 90 of its 128 cafeterias. Many of these cafeterias were built 20-30 years ago. On its balance sheet, Luby’s lists its land assets at cost, so its land values as listed on its books are grossly undervalued. Currently, Luby’s is trading at its book value. Putting two and two together, I think it’s safe to say that Luby’s is trading well below its true book value. I’d venture Luby’s may be even trading at or below its liquidation value.

4. Did I mention the company has no debt?

Disclaimer: Authors owns shares of Luby’s (LUB)

When most people see a stock continually going up, they think “buy.” On the other hand, when they see a stock going down, they think “sell.” Instead of thinking of the reasons why these stocks are going up or down or the fair value of the company, they mainly think of the trend of the stock. Also, most people want to invest in “hot” or “safe” stocks. If everyone else is investing in a stock, they figure, it must be a good buy! In reality, since everyone is investing in the stock, it is vastly overvalued. This is why it is so difficult to have stock market success for beginners, psychology plays against them!

The extreme cases of “buying high” result in asset bubbles. The most famous of asset bubbles is probably the Dutch tulip bubble,when people were mortgaging their homes and businesses to buy tulip bulbs in the hopes that someone else would pay a higher price for that tulip bulb. The most recent bubbles were the tech bubble of the late 90’s and our most recent housing bubble.

When stocks were at their March lows, many individual investors were panicked and sold out (or certainly did not put new funds in the market). The market has since recovered by about 8%. Since the market is still risky, it is likely that many investors won’t invest until the market goes up more and more, at which point, the market may well be due for another contraction.

Our emotions are not our friends when it comes to investing. Relying on emotions is a quick way to buy high and sell low. This is because people give into their greed when they see everyone else making money in a specific stock or asset class, and then they give into their fear when that stock or type of asset plummets from being overvalued.

This simply shows that the trend during those recession years showed some familiarity. The rise from bottom was around for 5 to 6 months, and returned between 28 and 35 percent. What shall be the picture this time?

A long recession is not in the interest of the US, nor is it in the interest of the world. The US is expecting changes in the Government this time. If the recession is not reversed in the next 6 months, then we can assume it then to be a longer version this time. Assuming this recession to be a shorter one, like the earlier ones, we should be expecting a similar trend this time too. The market hitting the bottom around October, and then turning upwards for the next 6 months. This is a possibility. It is therefore prudent to watch the downwards trend carefully, especially 6 months hence. There could be a return between 15 to 40 percent if the trend follows the past pattern!

Some experts have already suggested that the markets have already hit the bottom levels this January, and if the recession is a shallow recession this time, then it is a good time to pick growth companies in healthcare, industrials, energy, and technology.

These are assumptions, and one should invest very carefully. But, a study of the history of the trends will display some interesting patterns and may well give directions to investing. The Fed interest rate cuts, the tax stimulus rebates, and the November presidential election might just boost the stock markets around the end of the year.

It is interesting to also read what Chris Orndorff, a portfolio manager in Los Angeles, says that there are always ways to make money, even during the recession. According to him, investors place their faith in the companies with stable earnings. Other analysts say this is the time for such growing and earlier proven companies with good stability to begin their rise now after the stocks took a beating during January 2008, due to the housing, financial, and other issues sank the stock markets. Some expert analysts say that this is the right time to look for a good buy!

If you look a LUB stock chart, you’ll notice the stock has been in a slide since September of 2007. This slide has largely been unrelated to the company itself.

The entire market has been down significantly due to the housing credit crunch. To an extent, Luby’s has suffered along with the rest of the market. Since the company’s market capitalization is only $200M, the stock price can move significantly when one major holder has a margin call placed on his account from other suffering investments. This basically means that there has been a lot of forced selling of LUB for reasons that have nothing to do with the company itself.

A second major reason for the decline has been due to a hedge fund who has been unloading their sizeable holding in the company. Last year, this hedge fund tried to take over the company’s board of directors. The shareholders held a vote and determined they would prefer the company continue to be managed by the Pappa brothers (who have an extensive history of running successful restaurants around Texas). After they lost, the hedge fund threw itself a pity party of sorts and began unloading their position.

There is a ton of upside to LUB. First, they own the land on which 94 of their 128 properties sit. Just this land itself is almost enough to comprise the stock’s current value of 7.20 per share. Additionally, Luby’s has no debt and they’re making money. In the past two quarters, more selling has been triggered when Luby’s failed to meet their projected earnings. By the way, it’s worth noting that only one financial firm makes projections on Luby’s, so there is anything but a mean earnings projection of which they aspire to achieve. Much of the reason they company missed its earnings projection was because of increasing food costs and the expenses of the shareholder proxy vote I mentioned earlier.

To summarize, LUB has been kicked repeatedly, but there’s only so much more it can possibly be kicked. At the end of the day, the stock has no debt, owns most of its land, and it selling a product that people line up for to get their hands on. This is not a get-rich-quick stock. But if you have some money with which to exercise a little patience, bet on LUB to climb to spectacular heights relative to its current basement bargain price.

Disclaimer: The author of this article is a shareholder in Luby’s Inc. (LUB).

For example, let’s say you have a very large asset base, let’s call it $10 million. You believe the market is incredibly oversold, as it was a couple weeks ago. You want to borrow money to invest in the market. You decide to borrow $2 million, paying 5% interest. You believe that you can make 15-25% on the money you borrow, well above the interest rate you are paying. In this case, borrowing the money on margin looks like it will make a good payoff.

As you can see, the three key factors here are the margin rate you are paying, the amount you can make off of the money you borrow, and your risk tolerance. The above example, however, is a very optimistic one. Most of the time, for people with average or small asset base, margin rates are very high, generally 8.5% or more and can easily be 10% or more. Furthermore, the market returns about 10% a year on average, so most of the time, borrowing on margin mean taking on a lot of risk for potentially very little reward.

What exactly are the margin risks? Well, besides the fact that you are betting more money, so you can lose more money, you also risk a margin call. Let’s say you have $50k and borrow $50k on margin. The market gets pummeled, and your $100k in total investments ($50k yourself plus $50k you borrowed) drop down to $70k. At this point, there’s a very good chance you’ll receive a margin call. The broker will demand that you sell securities (or put up additional funds) so that you reach a certain level. For example, the federal government requires brokers to have at least a 25% maintenence requirement, though most brokers have a higher number.

Let’s say your broker has a 30% maintenence requirement. Since you borrowed 50k on margin, you will need to maintain an overall balance of about $71k or more before receiving a margin call. If you get a margin call, you will need to put up more money from your bank account or start selling securities.

Let’s say, in the $50k +$50k example that you’re somehow forced to sell all of your secuirites after your balance dropped to $50k. Now, all you have is $20k minus what you paid in margin interest. Even though the market only dropped down by about 30%, you ended up losing over 60% of your funds since you leveraged yourself.

As you can see, margin trading involves a lot of risk. It should only be done by expert investors who know what they are doing and can get access to a decent margin rate. For average investors, margin trading is generally a bad idea.

I took advantage of the drop to buy some stocks that I liked at very cheap prices. Here’s some bargains that I found, as well as the reasons I bought the stocks. In full disclosure, I obviously now own these stocks, so I’m biased in their favor. Don’t take my opinions as financial advice.

Jack In The Box (JBX): This major fast food company has taken a beating lately. I’m not exactly sure why this stock is down so much. Even if a recession hits, people aren’t going to eat fast food less. If anything, they’d eat more! I like JBX’s low price/sales ratio, and the company has excellent growth prospects. It’s flagship restaurant, Jack In The Box (it also owns Qdoba), still has a lot of room for expansion in the Eastern United States. Its ratios are all much smaller compared to peers like McDonalds and Burger King. For example, Jack In the Box’s P/S is .5, whereas Burger King is 1.34 and McDonalds is 2.67. These other companies do get much of their sales outside the US, and there seems to be a premium for international exposure in today’s market. But this huge of a gap is silly, especially considering Jack In The Box has much better growth capabilities in its home country. I was able to scoop up quite a few shares around 22.60 when it opened down by a few percentage points, and the stock ended up closing at 25.55 for the day.

Jamba Juice (JMBA):: This is a major smoothie chain that is based in California (where most of its stores are located as well). This stock has been beaten down a lot lately as well, off about 80% from its highs. From what I can tell, the legitimate arguments against the stock are that smoothies are a dying fad and that the company is not currently profitable (and it’s not clear when it will or ever be). Also, a recession caused by housing would likely hit California pretty hard, which might cause people to drink less smoothies.

Here’s the reasons I bought the stock though:

1. The whole smoothies are dying fad thing is well-priced into the stock at this point.

2. It’s difficult to tell what Jamba’s profitability prospects are. Gotta figure it can achieve it though; might just need to shut down some bad stores. After all, it doesn’t take a nuclear scientist to figure out how to run a profitable smoothie store.

3. What I like a lot is the enterprise value/revenue ratio. Jamba has a lot of cash, no debt, and a lot of revenue. It’s enterprise value/revenue is .28. Compare that to Starbux’s of 1.54! Granted, Starbux is actually profitable right now, but I’d find it hard to justfiy buying SBUX over JMBA. McDonalds Enterprise/revenue is 2.88 (Jack in the box is .64, which makes me want to buy more JBX as well.) There seems to be a weird market momentum where people are viewing Mcdonalds as a recession proof stock, but the declining housing market is going to stop everyone from eating at JBX and Jamba Juice. I just don’t think this is the case.

I was able to buy some JMBA at 2.15 (it had closed at 2.34 previously). The stock ended up closing up a little for the day, at 2.37. Sometimes, a sharp drop can provide good buying opportunities!

2. Be clear about your exit strategy. If you are dead sure a stock will tank long run and will hold a stock short even if it goes up 50%, then only short an amount where you are comfortable losing quite a bit in the short run. In other words, if you are certain that stock XYZ is going to zero in the next few years, but believe it may shoot up in the short run due to investor irrationallity, give yourself some margin of safety so you don’t risk a margin call if the stock goes up. On the flip side, if you hope to make a quick buck off of a stock’s negative momentum, set an exit point where you’ll cover your short no matter what as to avoid escalating losses.

3. Don’t short a stock just because you think it’s overvalued. Many stocks are overvalued; it doesn’t mean they will go down anytime soon. Also, an overvalued stock may just stagnate for awhile instead of diving down. It’s better to short a stock because you think the company is bad than because you think people are overpricing it by a little too much. Also, you may be overlooking the stock’s growth or book value, which may give the stock good reason for its valuation.

What do I mean by this exactly? Well, look at it this way. There are always two sides to a trade. If you are buying a stock, then someone is selling the stock. You each are essentially making bets about the future of the security. The seller thinks it’s good for him to get out, while you think it’s time to pick up shares of the stock. Time will only tell who is right.

It’s difficult to beat the market by investing in large and mega-cap stocks like GE and Microsoft. Sure, these companies are generally safe investments for the long run. But it’s difficult for an average investor to tell which of these companies will have above-average returns. These companies have many analysts covering them, and the major institutions that invest in them do significant amount of research to know when it’s best to buy or sell these types of companies.

For an average investor to beat the market over the long term, he or she often needs to invest in under-followed companies, which are generally small caps. Since fewer analysts and professional investors focus on these companies, the chance for finding good bargains is higher. Of course, the chance for finding total duds is higher too, so small cap investing can be riskier.

How do you find good small caps? Well, generally, it’s best to start off with companies you know well. These companies may be locally-based or they may be in a field that you understand well. If you are in the web industry, then you may have a better understanding of web-focused companies and their prospects and risked, so you may be in a better position to make a calculated judgment about the future of a stock compared to most people in the market.

If you want to beat the market, then view your stock investments as bets. When you buy, do so because you think you know something or understand something that the seller doesn’t. The best way to do this is by investing in companies that you know well.