We’re about to hit many deflationary headwinds that simply are not discounted by the market in my opinion:

1. Tax increases. About $100 billion will be soaked out of the private economy to pay down the government deficit. Most of this is due to the expiration of the Bush tax cuts for those making $200k/$250k+. Not only do tax increases have the effect of taking money out of people’s hands, they discourage people from expanding and developing their businesses. Since their after-tax return is now lower, they will be less likely to take risks. Furthermore, due to the crash in small business lending, many small businesses are expanding from after-tax profits, not bank loans, and there will now be less of those to use thanks to the government.

These reasons explain why some economists apply a multiplier of 3 to tax rate cuts/increases. So $100 billion taken in taxes will have a $300 billion negative effect on GDP. This estimate was made by Christina Romer, who works for the White House no less. At $300 billion, that’s 2% of GDP…so we can expect a 2% drop in GDP from tax increases alone! Given we’re struggling to have much better than 2% GDP growth right now, tax increases alone might throw us back into recession.

I don’t think the tax increases will be fully discounted by the market until they happen. This was the case with the Reagen tax decreases (the reverse). Read Laffer’s article about this more in detail (note how the economy rocketed by over 7% for a full year during the Reagen stimulus, and we’re struggling for 3% during our peak in stimulus). This makes me believe we won’t see the worst of things until around March of 2011, as the deflationary effects of the tax increases become fully realized.

2. Europe is messed up, simply put. The recent stress tests were a joke. No one knows what is on their banks’ books, since the transparency levels there are much lower than here. One must ask…why were the stress tests not so stressful? The answer: we can’t handle the truth. Even under their ’stressful’ conditions, Greece is still able to make debt payments and the stock market doesn’t fall by more than 20%. Doesn’t sound that stressful to me!

3. China isn’t so magnificent. China’s stock market is down 20% for the year. For those that remember, China’s stock market turned up much sooner than the US did (their bear market ended Nov 2008, ours did March 2009). This is why many view China as a leading indicator. Oh, has anyone checked out their property bubble lately either? It makes California look tame.

4. We’re at peak debt. Total government, personal, and business debt is estimated to still be about 390% of GDP, which is still an all-time high. While the consumer and businesses are deleveraging, the government is running insane deficits. So we’re simply trading in personal and business debt for unproductive government debt.

5. We’re at a general level of peace right now. If Israel/Iran blows up or North Korea goes crazy, look out below. The world is struggling in a time of relative peace, and that is a very very bad sign.

6. Have you checked out the ECRI weekly leading indicators lately? Eeeeek! The last time there was a drop of the magnitude seen lately was in the late summer of 2008…and we saw what happened soon after.

Unlike foreign currencies which trade in a huge, global marketplace, stocks of small companies can lend themselves to manipulation and fraudulent practices more readily. The primary reason for this has to do with the nature of the stock market and the comparative lack of liquidity which does not usually present an issue in the currency market because of its size and depth.

As a result, stocks tend to be more carefully regulated and monitored by agencies such as the Securities and Exchange Commission which was founded in the aftermath of the huge stock market crash of 1929. A variety of different fraudulent practices involving stocks are listed in the sections below.

Corporate Fraud

Corporate stock fraud usually involves officers of the corporation disseminating false or misleading information in order to increase the value of the company’s stock. They do this in order to later sell the stock at the artificially inflated price. Enron was a classic example of a corporate stock fraud.

Other ways that corporate executives perpetrate fraud to manipulate the stock market include: making large purchases amongst several colluding investors in order to make the stock appear to be under accumulation by third parties. This might then prompt other investors to buy the stock at inflated prices.

After taking the stock price higher through these pre-arranged transactions, the stock is subsequently dumped by the perpetrators at the inflated price. This falls into the general category of a “pump and dump” stock scam.

Churn and Burn

Another type of stock fraud involves unscrupulous stock brokers that overtrade in their customer’s accounts in order to charge an excessive amount of commissions. This type of fraud is widespread and is not particular to the stock market.

Any financial market where a broker performs executions of financial instruments, especially on a discretionary basis, is subject to this type of fraud. Unfortunately, many people have no idea their broker is doing this if they have given the broker power of attorney over their account and do not monitor it closely.

Pump and Dump

This form of securities fraud has become especially widespread since it now often uses the Internet for the pump part of the scheme to artificially inflate a stock’s price. Con artists employing this scam disseminate fraudulent information via chat rooms and by spamming people’s e-mail accounts.

The false information will typically produce a rise in the stock price. At this time, the fraudsters dump their stocks and the subsequent investors lose out. This type of stock fraud works best with thinly traded and illiquid stocks that have little public information available about them.

Insider Trading

This type of securities fraud is performed by the corporation’s key personnel, directors and holders of a large percentage of the outstanding stock or other corporate insiders.

Basically, the fraud involves such insiders who trade on information which is yet to be made public. This might include such things as a pending corporate takeover or a disappointing earnings report, for example.

Other Stock Fraud Situations

Corporations can sometimes “cook the books,” which involves the corporate accounting of the firm, making it appear the company is doing much better than it actually is, making the stock price reflect the distorted information and defrauding investors. This sort of fraud came to light recently in the huge Refco case that forced the company into bankruptcy shortly after its Initial Public Offering or IPO.

Shorting stocks, which involves borrowing stock in order to initiate a short position, can also be fraudulent if done with the intent to profit by subsequently disseminating false or misleading information to make the market in the stock drop. “Short and distort” is the common term for this sort of stock fraud.

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.

Options: While advanced investors may be able to successfully use options to hedge investments or as leverage, options are a suckers game for beginning investors. The appeal of options is that the investor can quickly turn a small amount of money into a large amount of money. However, most of the time, the investor just loses most of or his entire investment if he doesn’t know what he is doing. When you are buying or selling a stock option, you are betting against someone else (whoever is on the other side of the trade). Most likely, this is someone with a lot more information and experience than you, so options are generally best avoided.

Mutual Funds That Charge Loads: Some stock brokers or bankers will try to get you into a mutual fund that charges a load (an upfront fee). This fee generally is just used as an advertising expense; basically, it just goes towards someone else’s commission. These loads can be very hefty, often 5% of your initial investment. There’s little evidence that mutual funds that charge loads do any better than mutual funds that don’t charge loads. If you are going to invest in mutual funds, there’s absolutely no reason to put your money in one that charges a load.

Penny Stocks: This is another area where there is often a lot of fraud and stock manipulation. Penny stocks are often very risky. Many novices who invest in them do not really know what they are doing and may be buying a company at a lofty valuation, even though the stock looks ‘cheap’ at $.80 a share. Remember, it’s the P/E, P/S and other ratios that determine how ‘cheap’ a stock is, not the share price.

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)

There are other reasons to fear an Obama presidency. His anti-business stance isn’t exactly a secret, and combined with a democratic leadership, could create a wealth of burdensome government regulations that eat away at profits and bring the economy to a standstill. Some businesses might actually do better with an Obama presidency, particularly solar, as Obama’s energy policy is to put about $40 billion towards developing renewable energy, paid for by increased taxes on oil businesses and other businesses.

In short, who you think will win the election is something to consider when investing over the next few months. Who our president is, more so than anything, may have a bigger effect on the stock market in 2009 than anything else.

When the public starts to believe that a certain type of asset has nowhere to go but up, generally it’s a good bet that it’s going down. There is widespread debate over the cause of the increase in the price of oil. Those bullish on oil claim it’s a simple supply/demand issue. The supply of oil is relatively stagnant, but the increase in demand from countries like India and China are rocketing up the price. Furthermore, the decline of the US dollar has also raised the price of oil.

However, many believe that oil speculation has resulted in an increase in the price of oil. People are buying oil as a hedge against both inflation, the weak dollar, and any economic slowdown caused by an increase in oil prices. The volume of trading of the USO ETF more than hints at the public’s raised interest in the price of oil.

I’m no oil expert, so I’m not going to pretend like I have some special insight into the supply/demand fundamentals of oil. However, one thing I consider myself pretty good at is spotting where the ‘dumb’ money is placing its bets. From what I can tell, these investors seem to love the oil trade, since they it seems like oil will only go higher and higher. They keep repeating the same old logic of the raised demand/stagnant supply, which while it merit’s a rise in oil prices, doesn’t mean that oil prices will rise forever.

Disclaimer: Author is short USO

Now, however, there are increasingly viable, cheap alternatives. Google docs, its free online service, is almost identical to Word/Excel, except you don’t have to pay a dime. Also, since it is saved online, there is no worries that your computer may crash. You can also access these documents from any computer, as well as easily collaborate on them with other people. In the past, I did all of the accounting for my businesses on Excel. Now, I use Google Docs because it is both free and superior in my opinion.

In addition to Google Docs, the increasing use of Macs should be cause of concern for Microsoft. Right now, Apple is the “hot” brand and people can’t get enough of these types of computers. No Mac user in his right mind will shell out $300+ for Microsoft Office for Mac, when he can get Apple’s version for about $89.

I also don’t see Microsoft expanding its online presence anytime soon. Few people use the msn.com search engine, and it’s likely not going to attract anymore users anytime soon. There’s simply no reason to, as Google is still the superior search engine. Its portal, msn.com, is also vulnerable if Google starts a portal site similar to it. Google is already moving into the portal space, with the launch of its beta finance site (finance.google.com), as well as the success of Gmail.

In my opinion, Microsoft’s failed attempt at buying Yahoo is a sign that the company has run out of ideas and is desperate to remain a player in the consumer sphere. Microsoft’s products are no longer cutting edge; the main reason people use them is simply because they have been using them in the past. With Google and the increasing competition from Apple, Microsoft is increasingly on the defensive, and I expect its stock price to take a hit over the next couple of years.

Disclosure: Author is short Microsoft (MSFT) and Yahoo (YHOO) and long Google (GOOG).

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.