Saturday, December 27, 2008

"Humorous" letter to Fox News

Their stock picks by the "experts" in their show Bulls and Bears has been abominable, and they are joking about it on the air. I find that morally reprehensible, and a whisker above defrauding viewers a la Madoff. I certainly don't see any humor behind it. I'm sure many people watch the show and take their recommendations seriously, losing hard-earned money. So I felt compelled to write this email to them.

Seriously, you clowns are unbelievable. You're laughing on air at showing 98% losses on your predictions?

If you're going to recommend crappy stocks, why don't you at least tell potential viewers to use trailing stops?

And now all you can do is report whether GM should be bailed out or not, when the money has already been made shorting GM for the last 18 months. Perhaps you should instruct viewers to read publicly available financial statements to understand GM was burning $6.9 billion a quarter and was running out of cash. Or perhaps maybe you experts should read them yourselves. Perhaps you should have reported about GM last year, instead of their implosion--after the fact. Gee, their stock is down 90%--NOW you report about it?

You may want to consider upgrading your bubbleheads and interview real experts who are putting their money where their mouths are. People like Bill Gross, Warren Buffett, or Jim Rogers. After all, why the hell should I listen to journalists who couldn't rub two nickels together?

BTW, I've been out of the market since the summer, and am up 95% since November on gold mining shares. Not only have I saved myself from a 50% haircut, I'm up and bottom-fishing. But this is not about me. It is unconscionable that viewers listening to your advice are as well off as investors with Bernie Madoff. Your collective recommendations are no better. Think about that before you demonize Madoff.

Speaking of stocks, could it be possible you could expand your coverage beyond equities? What about the strength of the Swiss franc or the yen? What about the debasing of the US Dollar? What about the next bubble in T bonds? Or is waiting for it to happen ex post facto your forte?

On second thought, please don't change your format, because you are a perfect contrarian indicator. Whatever your "experts" predict, any sane viewer would do the exact opposite. The financial ignorance of the American public is a given. Thanks to media outlets like your shows, you're guaranteeing their destitution.

Thanks for the amusement.

Friday, December 26, 2008

Another reason to be bullish on gold

First, the Fed has dropped short-term interest rates down to 0%. Then, the Treasury is injecting up to $7.4 trillion in additional capital, literally out of thin air, to support ailing (and failing) industries.

Capacity issues are creeping in, as farmers lose crops due to drought, mines dry up, and exploration for new resources are stalled due to the financial crisis. All these factors point to inflation. However, fears of deflation rule the day.

Yet, gold prices keep trending up. Shares of gold mining companies have shot up even more--up 100% in some cases.

The markets are betting on deflation of asset values, including equities and real estate. Hence, both are likely to remain low for some time. And crude oil and other energy sectors have been battered. Agreed.

But looking forward (instead of through the rearview mirror), oil won't remain below $40/barrel forever. And when that dynamic reverses course, inflation will rule of the day.

And today, we had other things to worry about. Palestinians are shooting rockets at the Israeli border. Pakistani troops have abandoned the Afghanistan border and re-aligning themselves along the Indian border. The price of gold shot up over $20/oz within minutes of the news.

Today, we found out gold is not only a great hedge against inflation, it is also the currency of last resort in times of financial and geopolitical crises.

The latest outsourcing business to hit the US...

The US Treasury is busy printing so many US Dollars that they have outsourced it to printers in Switzerland. That's right--our government is so intent on printing trillions of dollars that they are wearing out their printing presses, and have had to resort to offshoring the printing process. Hence, the ultimate conundrum: "Helicopter" Bern Bernanke and fellow cohort Hank "Machine Gun" Paulson have repeatedly preached about a strong US Dollar. Yet, their actions for months have been completely undermining the strength of our currency.

This indiscriminate and unconscionable monetary easing dwarfs any on record--it is essentially criminal.

Meanwhile, my long gold and long yen positions are playing out as predicted, so my portfolio is profiting handsomely. But it is bittersweet, as we will experience the second act of post-1990 Japan. Japan's Nikkei stock market index stood at 39,000 in 1990. In 2008, it stands at 9,000.

The next bubble to burst are Treasury Bonds. The 30-year maturities are yielding 2.6%. Investors by the droves are basically saying, "Mr. U.S. Government, I know your currency is tanking by the day, I know you are printing dollars like there is no tomorrow, I know your solvency is at risk, I know your balance sheet is deteriorating with trillions of debt, and I know you have to chase good money after bad money (the bailout mantra), and yeah, I know you've been beaten down. But can you please hold on to my money for 30 years, and pay me 2.6%, for the privilege?"

Once investors wake up to the reality that their allegedly "safe" investments aren't so credit-worthy anymore, they will demand higher rates of return in exchange for taking on the additional risk. And when that happens, the Treasury Bond bubble will burst, just like the residential sub-prime mortgage bubble burst. The Fed eased too much, creating a real estate bubble after the tech bubble burst. They then raised rates 17 times, bursting the real estate market. Now they are easing rates to 0%, creating another bubble--this time US Treasuries.

Is anybody seeing a pattern here?

Monday, December 22, 2008

Why "quantitative easing" will work, but at what cost?

The tandem of the Federal Reserve and the Treasury have taken extraordinary measures to solve the credit crisis. They've lowered interest rates as low as they can go (Treasury bills temporarily dipped below 0% yield recently), providing the markets with plenty of credit. The problem was no lenders were lending, and no borrowers were borrowing. Lenders used the swaps to shore up their balance sheets, dumping bad assets for Treasuries, but they weren't lending.

The Treasury stepped up by pumping the system with trillions of dollars, injecting capital in hopes of stimulating spending. It worked, so we can expect them to step up their efforts. It's one thing to extend credit; now the government is literally printing money out of thin air.

This is, by definition, inflationary. It's necessary to avert a category 5 Great Depression, but it will prove to be problematic down the road when hyperinflation rears its ugly head. Printing money also debases the local currency, as the US Dollar continues to plummet. This flight to quality and perceived safety (short-term T-Bills and long-term T-Bonds) is bumping interest rates down to historical lows, due to the high demand for Treasuries. The operative word is "perceived" as I will soon explain.

My investment thesis is that this low-interest environment will eventually reverse course, as investors demand higher rates of return once they realize how flimsy the US Dollar is. Parking money in Treasuries at such low rates will prove to be disastrous, as inflation asserts itself, accompanied by higher interest rates. Finance 101: when interest rates rise, bond prices decrease.

With borrowing costs so low, we are to the point where any asset other than cash seems too irresistible to pass up. Having said that, with fears of deflation and blood in the streets, temporary irrational pessimism could cause markets to undershoot more than they have. Therefore, despite snapback rallies, further lows could be tested in equities and real estate in this secular bear market.

It is impossible to time market bottoms or tops, but there is value for the patient. My contention is that inflationary monetary policy will eventually lead to inflation, and that precious metals will resume their secular bull market. Equities and other commodities will follow suit within the new couple years, and real estate will recover within 3 - 5 years. I am unsure of the timing, but the direction will reverse course eventually. In other words, I can't call the bottom, but we are closer to the bottom than a top, as many have already taken a 50% haircut on their portfolios and 30% on their home values.

Hence, my current positions are long gold, long the Japanese yen (short the US Dollar), short Treasury Bonds (10 - 30-year maturities). With inflation and rising interest rates, bond prices will plummet going forward.

For those favoring income and dividends, I believe high-quality corporate bonds are extremely attractive relative to Treasuries. A handful of shares are attractive, including companies with leading market share, high cash reserves, strong cash flow, and no debt. For the non-faint of heart, some high-yielding (junk) bonds may also be profitable due to their extreme spreads (20 points above Treasury yields). But be prepared for high default rates.

Please consult your investment and tax professional before investing.

Tuesday, December 16, 2008

A sobering, but still bullish case for gold from Morningstar

From Vahid Fathi of

I never thought I'd see the day that gold markets went into backwardation (spot prices higher than futures prices). However, the seemingly unthinkable has indeed happened. Of course, I'm not suggesting that backwardation will be a permanent feature of the market, as the misalignment of interest rates that theoretically caused gold backwardation is most likely not a permanent feature, either. Nonetheless, the question remains: Where do we go from here? This writer speculates that gold could very well turn out to be in a win-win situation, whether there is deflation or inflation. How is this possible? Adam Smith told us that gold is a barbaric relic, although it is more commonly known as the metal of kings. I remind you all that the world is still full of barbarians.

The above-ground stocks of gold, presumably available for disinvestment at any time, are some 60-fold of annual production of about 2,500 metric tons. This is why gold has never been in backwardation. Unlike any other commodity, all gold that has been mined throughout the ages is still out there somewhere. At an estimated 150,000 metric tons, this above-ground stock of gold--with most obvious portions in private hands or tucked away in central bank vaults--dwarfs annual production. Unlike industrial commodities such as copper, aluminum, or zinc, where prices can go into backwardation at the slightest hint of a temporary supply disruption from major producers, contango pricing has always been the norm for gold, where futures prices exceed the spot price.

Earlier this month, however, for the first time in history gold prices went into backwardation. Put differently, physical demand was to be met only by higher prices; those that held gold appear to be more reluctant to part with their hoard today than they may be in the future. Naturally, one wonders why it is that gold is now dearer in the face of what could turn out to be a potentially painful deflationary environment ahead.

Historically, it is understood that the role of gold is more of a hedge against inflation. Accordingly, the usual cadres of gold bugs have been telling us that gold strength reflects the enormous sums of money that are being printed and spent to bail out failing financial institutions and to shore up the flow of credit to prevent the economy from falling ever more deeply into recession. The inflationary implication of printing so much new fiat money is clear-cut to gold bugs; after all, Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. Most gold bugs equipped with charts showing money supply going through the roof see this as the precursor to runaway inflation ahead.

The flaw with that rationale, however, is that while it is true that money supply has increased significantly and inflation is a monetary phenomenon, it is the velocity of money that matters. And velocity has decelerated dramatically--a natural outcome of deleveraging. That's why I speculate that the deployment of monetary tools, including reducing the cost of credit through the Fed window to prevent deflation, is akin to pushing on a string. As long as the velocity of money is decelerating, one should expect that nominal economic growth will remain at best anemic worldwide, even if the cost of credit gravitates toward zero (and for all practical purposes is there already).

However, should the Fed decide to monetize debt, then inflation would become a threat. For now though, given the subdued velocity of money, swapping financial institutions' illiquid assets for liquid Treasuries to stimulate credit flow can hardly be viewed as inflationary, and it's not even having much success yet as financial institutions appear to be hoarding liquidity.

The last era of any significant period of deflation was in the 1930s. Although gold was fixed for a long time at $20.67 per ounce, in 1934 a massive devaluation of the U.S. dollar saw its fixed price jump to $35 per ounce. During this period of entrenched deflation, and in spite of the fixed price of the metal, gold proxies saw a dramatic rise in price. The NYSE-listed shares of Homestake Mining Company rose from about $4 to $500 from 1929 to 1935; the company operated for some 120 years until its flagship Homestake mine in Lead, S.D., ran out of economic reserves a few years ago and the company ceased to exist.

From my perspective, we dare not expect such returns from gold producers' shares, but I remain confident that our revised target price of $1,250 per ounce (our previous target of $1,000 was met) has a reasonable probability of panning out. That would likely result in handsome returns for gold producers' shares. The likes of Newmont Mining (NYSE:NEM - News), Barrick (NYSE:ABX - News), Anglogold Ashanti (NYSE:AU - News), Gold Fields (NYSE:GFI - News), and Agnico Eagle (NYSE:AEM - News) would benefit in such an environment.

That said, we could very well experience some deflationary forces first, before inflation (or more precisely, reflation) changes the course. Surely, a fast cure for deflation may simply be another major devaluation of the dollar, however unthinkable this may seem. Perhaps the following excerpt from Fed Chairman Ben Bernanke suffices as support for my take on gold prices:

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."

Caveat emptor: This win-win proposition for gold is not for the faint of heart and is only speculation on my part. There is no reason to believe that the randomness of events will favor any one particular scenario. Only time will tell.

Friday, December 5, 2008

The return of the gold standard? Why gold is poised to explode...

Blue-collar, white-collar, manufacturing, services, etc.---it doesn't matter what type of jobs--the more the merrier, altho it would be nice to have higher-skilled job growth.

If you think about it, who invented the internet? (No, it wasn't Al Gore). It was a British scientist educated in Switzerland (or it was a Swiss educated in the UK). But as far as monetizing the technology, most of the $$ were generated here, as well as accompanying technologies and services. It's okay to be a consumer-oriented economy, as long innovation continues domestically.

I think that's what dawg was sarcastically inferring--we can't go backwards.

To be honest, the only way we go back to real economic growth--without inflation and the abuse of leverage, is to go back to the gold standard. History has shown time again that when sovereign governments abandon gold-backed currencies, paralyzing hyperinflation becomes the unintended consequence down the road. With fiat currencies, central banks are permitted to print money unjudiciously--most of the time to try to dampen deep recessions (sounds familiar?). Deflation and avoidance of The Great Depression category 5 is the concern du jour, but the Coming to Jesus day will arrive soon enough, and we will all pay for these bailouts, literally with higher taxes and a higher cost of living (and accompanying lower standard of living).

Think about it: with our reserve banking system, a 20% run on demand deposits would make every single one of our major banks insolvent. This is not just a mortgage crisis, a credit crisis, etc.--it's a crisis of confidence. And with flimsy fiat, finance-based economies, confidence is everything (since there is no gold backing up the currency).

Of course, resetting of a new gold standard would mean a level of around $1500/ounce, which would cut everybody's cash accounts in half, but that's what it would take. It happened in the early 30's, when FDR declared gold would be set at $35/oz, instead of the previous $20/oz. The federal government then went on to confiscate all individually held gold (with the exception of wedding rings), or citizens risked 10 years of prison and a $10,000 fine. All that gold is now at Fort Knox. This was due to the profligate Treasury printing presses during the easy money 20's, which in turn caused the Great Depression of the 30's. (See any parallels?).

I could go on and on about what's going on with the currency and gold markets right now, with the manipulation and placating of short-sellers, but I'll summarize with this: if JP Morgan and Citibank are openly predicting $1500/oz gold for next year, and if they are accumulating gold bullion as we speak (as are Dubai, Saudi and Chinese governments), then why are they selling short gold? Could it be they want to keep its price artificially low, in order to boost their purchases? Thing is, it's a dangerous parlor game, as short sellers have to deliver against futures contracts, and there are rumors that these shadow contracts entail no deliveries. But that is precisely why the two major banks are accumulating physical gold bullion, because when the shorts are covered (i.e. gold explodes upward in price), their inventory will (partially) offset their losing sales contracts.

Another compelling case for gold: The Treasury is printing trillions of dollars for bailouts--equal to half the US GDP. What happens when you have oversupply of a commodity--including a local currency? It removes scarcity, plummeting that currency. What happens when your currency is devalued? Gold soars--it's a mathematical reality, not some wild rantings of a gold bug.

Look, gold has been the absolute worst investment vehicle from 1980 - 2000.

But in the 70's, it was the absolute best--even with inventory costs taken into account. Gold went up 23-fold in that decade. Gold mining shares went up twice that level. If many prognosticators are saying this run is much worse than 73-74 and 78, what does that say about the price of gold? Does anybody think post-2008 will be a replay of the roaring 80's and late-90's stock market booms? Or are we headed for a very subdued 70's-like stagflation scenario? You decide.

BTW, the Big 3 is old news, despite the headlines. I called their demise 18 months ago, and their shares are down a nice 98%. It's done, finito. The next shocks will be a result of de-leveraging and the precipitous decline of most currencies and US long-term debt. Whoever buys US 10-year notes or Treasury bonds is going to get crushed. Taking on all that risk (after all, one could argue the US government is insolvent), and yet earning 2% on your money? When inflation rears its ugly head, and interest rates are in the double digits, those bonds will be worth less than Monopoly money.

Thursday, December 4, 2008

Gold, gold, and more gold...

I used the recent pullback in gold to purchase more Barrick Gold mining shares, albeit it at a higher entry point than my previous purchase of $19/share for ABX. I'm in at about $26/share, which is still cheaper than the $30 it touched earlier.

I also found a way to reduce future purchases to $18.90 by writing April 2009 ABX 22.50 puts, collecting $360 per contract. If ABX touches $22.50/share before the April expiration--and I get exercised, I'll pick up the shares, and since I get to keep the premiums whether I am exercised or not, my effective purchase price would be $18.90.

I also purchased rare gold coins at an auction, including the beautiful $20 St. Gaudens double eagle. I expect them to soar once inflation kicks in from the trillions of dollars of additional money flows.

I'm usually far from a gold bug--I am agnostic as far as investments go, but the inflationary scenario is too coompelling for me not to act. As long as the Fed and Treasury aim to bail out industry after industry, as long as banks and companies continue to collapse, and as long as the government continues to print money in unprecedented amounts, gold will have nowhere to go but up. There usually is a lag period before inflation accelerates, but the inflationary pressures are already starting to build. With short-term interest rates under 1%, it's only a matter of time before people figure out it's wiser to hold gold than devalued paper currency.