Saturday, February 28, 2009

Attention: Career Transitioners

It's a touchy subject, but a real one that needs to be dealt with: many in corporate America are being downsized--they're getting laid off. Some have emergency reserves to last them a few months while they land back on their feet. In this tough job market, a few months of unemployment may last a few quarters.

Whichever the case, if cash reserves are insufficient for living expenses, many have to resort to dipping into their qualified retirement savings plans, whether they are 401K's or IRA's. The catch is that if the candidate is under age 59 1/2, the penalty for early withdrawal is 10% under IRS tax codes (an additional 2 1/2% for California residents). These penalties are on top of any income tax events.

However, there is a way to withdraw from qualified accounts without incurring those penalties. It is under IRC Section 72(t). Contact me and we can go over how this tax code may provide you some relief. There are also annuity products out there that offer you bonuses of up to 15%, as well as guarantee you an income for life. In this market environment, they provide tremendous advantages in safety of principal, income, and growth.


My trailing stops for 2 of the 3 gold mining share purchases were stopped out yesterday. I lost 25% off the top, so my locked in profits were about 75% since November--still pretty good. I will have 1/3 position that I'm long on, so that is still in play. If gold retraces to $850, I will buy another mining company as I build my positions for a long-term bull run.

Meanwhile, other commodities are looking to form a base as they retested 2008 lows, but bounced off those levels. With the credit crisis still in play, my nibbles earlier in oil and commodities were early, but long-term, higher prices seem imminent, however prolonged.

On a side note, I was shocked at how high bread prices were at the grocery store, given we are still in a deflationary environment. I saw loaves of bread going for almost $5. I'd hate to think how much bread costs if we enter an era of inflation.

Monday, February 23, 2009

The Market Takes Another Dump

My negative bias towards equities is playing out as predicted. The Dow Jones Industrials should dip below 7,000--if not this leg down, at some point in the near future. The markets are skeptical that the Obama administration and Congress can wrap their arms around this financial crisis, and that skepticism is well-founded. And Treasury Secretary Tim Geithner's recovery plans haven't exactly elicited confidence in the market place. I've been personally cynical throughout the election and inauguration process, and unfortunately, it's playing out as we called it--this stimulus plan is not stimulative for the economy. It will not create private sector jobs, but detract from private sector investment. If anything, it will dampen future growth for years, as our mounting national debt and bulging deficits will only lower our standard of living and increase our tax burden.

The good news is that investors who shorted for-profit education companies are profiting handsomely (no pun intended). Without going into details, these institutions will face mounting defaults on student loans, as graduates face an increasingly difficult job market. My unabashed take on it is that prospective students are better off attending community colleges, for a fraction of the cost of these educational institutes, and save themselves a $70,000 tuition bill upon graduation. The government is starting to figure this out, and is retracting subsidies for these student loans (as outlined in the latest legislation).

These stocks have had a nice counter-rally in the midst of an overall market decline, with the thesis that newly unemployed workers are going back to school to upgrade their skills. It's a reasonable thesis, but the problem is that indebted individuals are going into more debt by attending these schools with no job prospects in sight.

The over-arching reason these stocks are due for a huge decline (they are already starting to crack) is because corporate insiders are dumping these stocks, and locking in huge profits after the run up in share prices. Question: if the share prices of these companies are so attractive at these levels, why are insiders selling them in droves?

Is this the classic pump and dump? Who knows, but I'm not hanging around to find out. My out-of-the-money put options have increased in value nicely, and if these stocks gap down as I expect, we'll make triple-digit gains.

Hang on to your hat--these next few weeks will be trying as the markets continue to test new multi-year lows.

Saturday, February 21, 2009

The Mommy Indicator

I've been planning my mom's finances, and despite a mother's undying love for her children, I figured it would take some persuasion, as my ideas on the economy are somewhat unconventional. As it turns out, it didn't take any arm-twisting at all. I was always curious about it, but it really didn't hit me until we had a long conversation yesterday as we have been tweaking her portfolio.

First, I will preface this with a quote from George Soros, billionaire hedge fund manager and a legendary investor. He is 78 years of age, which is significant, as he was born during the depths of the Great Depression, and his father survived anti-Semitic persecution after World War I and of course, World War II.

He got his start in finance by trading Hungarian currency during the hyperinflationary period in 1946 as a teenager.

His latest quote: “We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,” Soros said.

Fast forward to my Mom, age 81, and her willingness to invest in "unconventional" investments, and lack of resistance for my ideas on wealth preservation. After all, family and friends can be your biggest skeptics, because they all remember you as a pipsqueak with a runny nose. Without knowing the details, my mother has experienced countries losing their sovereign power, national security compromised, imperialist invasions, and not surprisingly, a run on local currencies. She recalled one day using currency, and then the very next day, that currency being declared worthless, losing all purchasing power. This is exactly what happened in Iceland last November, and is occuring around the world as I post this blog. This is what happens when a currency collapses. It's happened in Ecuador, Argentina, Hungary, Russia, Thailand, pre-Hitler Germany, pre-Napoleonic France, and is a threat to many eastern and central European countries today. Even the UK, Ireland, Greece, Italy, Poland,and Spain are at risk, as their country's credit ratings have been downgraded, or are about to be.

My mom remembers stocking up on foodstuffs, grains and rice. In other words, all bets were off, and survival meant horse trading. The irony is that my mother has aristocratic roots, as her mother's portrait is hung up in Vietnam's National Museum, with the title heading "Laotian Princess".

Many members of my immediately family went on a family pilgrimage to Vietnam, Laos, and Cambodia 3 summers ago, and we actually got to see the portrait. For security reasons, I won't post them. I learned a lot about my heritage on that trip and I am so glad I applied for a last minute passport after the Cambodian Consulate "lost" mine--I will never forget that trip with my family. As an aside, I have recently retraced my roots to other parts of America, where I have grown up, including trips to the midwest and east coast. I recommend it to anybody, especially if it includes reconnecting with old schoolmates. Your past is a function of who you are, and so are old friends and family. Anecdotally, I have also created social networking sites for family and alumni, which has been a real hit. Readers of this blog are members, in fact.

I'm digressing--back to my mother. She totally understood the concept of gold and its value as a hedge against fiat currencies. This was no academic exercise in the theory of how a hard asset retains its value. She actually lived through it. Gold serves as a storage of wealth outside a financial system composed of debt and IOU's. Gold has no counterparty risk. Translation: it is not dependent on someone else's ability to keep their promise of paying you back, which is what a paper currency is, including the dollar. "In God We Trust". Trust whatever God you worship, but faith in the US Government's ability to responsibly manage our currency is being severely tested. This trust is always violated in times of financial crisis. Printing dollars begets printing more dollars.

I'd rather depend on the other mantra: "it's as good as gold." Only "it" is not necessarily a paper currency. "It" is gold itself.

CNBC--the Ultimate Contrarian Indicator

The Business Week contrarian indicator is fairly well-known among savvy investors. The theory goes like this: whatever investment is touted on the cover of Business Week, sell it, because by the time the mainstream audience gets wind of it, it is too late, and expectations have reached a manic peak. Likewise, when the cover story of Business Week declares disaster for a certain asset, a bottom is near and it may be time to buy it. In other words, Business Week is a "Wrong-Way Corrigan" indicator--doing the exact opposite of what Business Week urges investors to do is usually enormously profitable, as it sends signals for inflection points.

I believe CNBC has replaced Business Week as the ultimate contrarian indicator, because following the economy and finances has become America's past time. More Americans are becoming literate in financial matters--even when they are learning the wrong things. And CNBC is the flagship business network.

Predictably, CNBC is on permanent bull market mode. From Kudlow to Cramer, and other pundits and journalists in between, they tend to be overly bullish. And their content couldn't have predicted the stock market peak any better. Right before markets worldwide cratered last fall, CNBC was running special programs investigating how hedge fund managers were becoming super wealthy. They also had specials running on Warren Buffett, the world's best long-term investor. Both hedgies and Buffett's Berkshire Hathaway shares have cratered since.

I even saw a business show declaring how Iceland was now one of the wealthiest countries in the nation last year. Today, they are completely bankrupt.

Shorting hedge fund returns, Berkshire Hathaway's shares, and Iceland's currency would have made you a mint last year.

Shouldn't CNBC have run specials on Wall Street fraud, Ponzi schemes, bank insolvency, billion-dollar bonuses when banks were bleeding billions, the auto industry burning cash by the billions, unscrupulous mortgage lenders, over-extended and irresponsible consumers and home borrowers, the impending subprime mortgage crisis, countries defaulting on loan obligations, currencies collapsing, or any number of indicators revealing a wave of cracks which would give way to an avalanche of financial meltdown? Where was the investigative journalism?

The investing public needed these stories before the crisis, not ex post facto. However, to investors with a shrewd eye, the writing should have been on the wall. A modest 2 bedroom, 1 bathroom home is NOT worth $2 million, no matter which neighborhood it resides. And when home prices reached ten times average incomes, something didn't smell right.

But that's spilled milk, the proverbial "looking in the rearview mirror". Let's look forward through the windshield, in order to be constructive.

What should one notice? Government central banks worldwide are printing money ad nauseum, raising fiscal Cain in the process, in an effort to prop up their local economies. This can only debase all foreign currencies in lock step. The only reason why the USDollar remains stronger relative to other foreign currencies is because as bad as our economy is (the US consumer drives over 70% of gross domestic product), other developed and emerging countries are in even deeper water. Many are export-driven, and they are not exporting goods, because the American consumer is tapped out and no longer has any credit. And many foreign banks are more leveraged than their already overly-levered US counterparts.

The biggest reason why the USDollar is stronger than the others (with the exception of the Japanese yen, which has a reserve surplus, i.e., they are savers) is because we still possess the world's reserve currency. However, our USDollar's reserve currency status is slowly eroding, as the Fed continues to print trillions of excess dollars to fund the huge bailouts.

Other sovereign banks and funds are slowly migrating to the realizing that the reign of the USDollar as the dominant currency is coming to an end. They need to hold USDollars in a flight to safety in these shaky markets, but they also realize this is a losing trade as the USDollar is being devalued.

This is one of the reasons why gold is now considered the currency of last resort. Gold has held its value to mankind for centuries, beyond hundreds of empires, nations, wars, economic expansions, economic contractions. Meanwhile, every currency over that span has been devalued--into oblivion eventually.

So when CNBC "pundits" were bashing gold last week, I had to laugh. They claimed owning gold was "unpatriotic"--literally a bet against America. Don't believe them--they are categorically and emphatically wrong.

Owning gold protects citizens from bubbles caused by reckless governments, runaway deficit spending and crippling busts. It's a vote for sound money policy that retains its value from generation to generation. It preserves your purchasing power--and your children's. It enables true economic growth--not false prosperity built on debt quicksand. It rewards successful businesses and ideas, not broken business models subsidized by bureaucracy and favoritism.

If anything, gold is the ONLY patriotic currency available to an increasingly skeptical citizenry.

Friday, February 20, 2009

Answers to your questions

Some of you have asked some key questions, so I will answer them to the best of my knowledge. This is not financial advice, but strategies I have either deployed or considered for my own portfolio:

1) Buy gold bullion, either in 10 or 100 ounce bars. This will have the lowest premium, but then you need to take delivery, store it and secure it. There will be a serial number attached to each bar. Check to make sure the dealers are reputable, or you can take delivery on the COMEX futures exchange.

2) Buy gold coins (stick to South African Krugerrands, Canadian Maple Leafs, U.S. Eagles). Since coins are smaller, these are more transferable than bullion, but you pay a higher premium above delivery price. Wait until the premiums are in the single digits, as demand has exceeded supply. If you're lucky, you can buy them from the U.S. mint (they are allocated due to high demand) or through a reputable dealer.

3) For potential extra returns, I have also purchased rare gold and silver coins. The St. Gaudens $20 double eagles (about 100 years old) are valued by numismatic collectors due to their beauty and liquidity. Morgan Silver dollars are also liquid (coined in the late 1800's). Obviously, coins in better condition are rare and command a higher premium. Visit a reputable coin dealer with reliable grading services.

4) Buy the gold exchange traded fund (ETF), which tracks the price of gold, and trades like a stock. I cannot give specific recommendations so Google it.

5) Buy individual gold mining shares. These companies usually give you greater leverage than the actual price of gold. They offer greater reward, but also greater risk. However, not all gold mining companies are created equal, as some are mature, leading producers, while some are junior companies with even higher potential for appreciation. They may be less liquid to trade and inherently riskier. Either way, you must perform due diligence as the company's prospects are not just dependent on the price of gold, but also other factors like geopolitical risk, environmentalist risk, production risk, labor risk, earnings risk, etc. just like other sector equities.

6) Buy a gold mining share ETF, which is a basket of various gold mining share companies. Again, it tracks the shares of these companies and trades like a stock.

When purchasing items (4), (5), and (6) above, you must put in mental trailing stop-loss thresholds. While equities and ETF's offer liquidity and convenience, they also are more volatile. To limit losses, you should keep a mental trailing stop, but do NOT indicate this stop loss to your broker. Because these stocks are volatile, unscrupulous market manipulators can drive the price down artificially to your threshold, stopping you out of the trade, guaranteeing your loss, perhaps 20% or 25%, or whatever you choose. Since these shares are volatile, do not keep your stop-loss too tight, as you will be stopped out too often. Volatility invites higher reward and risk, so you have to widen your stop-loss limits.

If you are risk-adverse, stick to bullion and coins.

And the reason why you want to have a trailing-stop is because as gold and/or gold share prices rise, you want to lock in profits along the way. For instance, I rode ABX from $19 up to $38/share. However, if it drops to $29, I am stopped out of the trade, as I put in a sell order (25% below the $38 level). I've locked in a $10/share profit. However, if it continues to rise to $50, I'm still in the trade, increasing my profits.

Remember: when placing buy or sell orders, use limit orders, not market orders.

7) You can do all of the above with silver as well. In fact, silver may have more upside as the gold/silver ratio is at the higher end of its historical range.

In summary, don't view gold as a vehicle to get rich quick. History has shown that in times of financial crisis, that certainly can happen, but think of using gold or gold mining shares as a diversification away from financial and paper assets (stocks, bonds, currencies, real estate). Gold has historically held its purchasing power for thousands of years, so treat it as a hedge against inflation, as well as a hedge against uncertainty in markets.

Good luck to us all.

Dow/Gold ratio

I'm looking for the Dow/Gold ratio to reach 4, which means gold could rise to $1350/ounce and the Dow Jones Industrial Average drops to 5400.

Gold is a store of value that doesn't pay any rate of return (interest). However, there is no counterparty risk, as it is accepted as payment anywhere in the world.

When times are good, we look to stocks to give us capital appreciation and dividends. When times are bad, we revert to gold to protect our purchasing power against inflation, and preserve our asset values in a deflationary environment.

Right now we're at a ratio of 7.5. Look at the historical charts and you'll see during the depths of the Great depression, the ratio was 2:1. However, during the 1980 recession, the ratio was 1:1.

I don't even want to think about this possibility, but it has happened before.

Remember, nothing goes up or down in a straight line--expect high volatility. But don't be on the wrong side of this move. Consult your financial advisor, if he/she still is employed.

Fidelity Investments

Fidelity, the world's largest mutual fund in terms of assets, loaded up on shares of Citigroup, JP Morgan Chase, and Wells Fargo--in the 4th quarter of 2008. Shares of all 3 have tanked since then, which means investors and savers of 401K's and IRA's should be questioning: what the hell were they thinking?

Those who thought last quarter's precipitous market decline offered a good entry point have been proven wrong. In other words, what seems cheap can get a lot cheaper.

Meanwhile, many workers are being laid off, straining their qualified retirement savings plans even further. For those with liquidity issues, they should look into Rule 72T if they need to dip into their 401K's without incurring the 10% early withdrawal penalty.

Good News, Bad News...

Here in California, we got some good news.

The good news: the State Legislature passed a budget bill, resolving the $42 billion budget deficit.

The bad news: our personal income, sales, and vehicle license fee taxes will go up.

Obviously, services will be cut, but hey, at least they rejected the gasoline tax increase.

More Unthinkables

The proverbial "other shoe" is dropping. Citigroup shares dipped below $2 and Bank of America shares are headed toward $3 amongst fears of bank nationalization, which completely wipes out shareholders (instead of just essentially wiping out shareholders). As financials are leading indicators, this does not bode well for the broader averages. The Dow Jones Industrial Average dipped and closed below November 20, 2008 lows, which means that support level now serves as resistance. The charts are basically breaking down toward their 2002 levels, as the technicals are deteriorating faster than you can say "Ponzi".

Gold touched above $1000 an ounce for the 2nd time in history since last spring, before retreating. Gold mining shares have essentially doubled since their November lows and still surging. I've been expecting pullbacks, looking for opportunities to add to my current positions, but the market just hasn't allowed me to. I'll just hold on and see if we penetrate the $1030 all-time high. If that occurs, then all bets are off and we could see a buying mania which would signal an opportunity to take some profits off the table. Long-term, the chart for gold still looks bullish, but locking in some profits just seems prudent to me, considering last year's stunning rise and subsequent collapse in gold.

Eastern European defaults are a huge concern, which would cascade toward western European banks with heavy exposure to the emerging countries in the Baltics. And with European banks even more leveraged than their US counterparts, this is analogous to the US subprime mortgage crisis--only worse and much larger in scope.

Unemployment is soaring with no end in sight, corporate earnings eroding, and consumer confidence shattered, markets are braced for the next shock, with the realization that this is not your garden-variety recession--this is an outright worldwide Depression, with no country spared.

The Dow/Gold ratio is at 7.5 and dropping, and that ratio usually dips below 5 and all the way to 2 at extreme recessionary lows. Hypothetically, gold at $1200 an ounce, and the Dow Jones Industrials at 6000 would yield a DJIA/gold ratio of 5. This is another indicator which has scary implications going forward.

The Volatility Index is climbing once again above 50, so hold on to your hat.

Monday, February 16, 2009

Unintended Consequences

I attended a symposium in San Diego last week, and one of the presenters was Len Renier, author of Unintended Consequences. Len not only correctly predicted the current subprime mortgage crisis, but he also examined in-depth the structural weaknesses in our financial system, and how it has caused the worldwide economic perfect storm. He also outlined strategies on how to protect family wealth and legacy planning.

But his insight on unintended consequences was priceless. If in 2000, one had made the following bold predictions, people would have believed they were rantings of a mad man:

1) Two planes would plow into two buildings in Manhattan, killing thousands
2) 500,000 employees in California would lose their jobs as a result
3) A hurricane would render millions of Americans homeless, some for years
4) A tsunami would kill almost 250,000 people
5) The stock market would plummet 50% over the next 9 years--twice
6) The price of gold would rise from $250 to over $1000 an ounce
7) The price of a barrel of oil would soar from $10 to a peak of $147
8) The United States would elect a black President
9) Enron and Worldcom would collapse
10) Citigroup and Bank of America would become penny stocks
11) Pure investment banks would disappear, either bought out or morphing into commercial banks.
12) Almost every major lending institution would become insolvent
13) All 3 American car companies would be insolvent, on the verge of collapse
14) Microsoft shares would be priced lower in 2009 than in 1998--before the huge runup
15) Martha Stewart, the domesticated doyenne, would land in prison
16) The state of California would go broke and issue IOU's to state employees, citizens, and vendors, instead of paying them
17) 50,000 prisoners in California would be released early due to overcrowding, not for good behavior

The list goes on and on. The point is that long-term prognostications are often very difficult, and that the unthinkable is very possible.

What it does lend to is the notion that events and ideas we've taken for granted as conventional wisdom often are anything but static. Especially in these treacherous economic times, when crisis after crisis is announced at warp speed, anything is possible, good and bad. So here is a list of my "unthinkables" which could very well occur in the not-to-distant future:

1) The US government will default on their IOU's. The US Treasury bond market held up very well most of last year, in a flight to safety as investors sought havens in a market meltdown. That haven started to crack late last year, as foreign sovereign funds started getting nervous of the US government's irresponsible fiscal and monetary policies. Once they become net sellers instead of net buyers of our Treasuries, this credit market will collapse much like the real estate and equities bubbles collapsed last year--only the fixed-income market is much larger. The Fed threatened to purchase US Treasury bonds directly, monetizing that debt. This artificially suppresses interest rates, as the Fed wants to keep mortgage interest rates low, for obvious stimulus reasons. However, this form of "quantitative easing" is highly inflationary long-term, which will force interest rates higher. This will be the death nail on our government's ability to service our huge national debt, which is currently approaching $11 trillion.

It's happened recently in Iceland, Ecuador, Hungary, and will likely occur in many other countries in eastern Europe, as well as western Europe, Latin America, Africa, and Asia. But when the world's largest debtor nation defaults on its loan obligations, our world financial system will experience a complete collapse, as trust in the reserve currency will be shattered.

2) With currencies worldwide being systematically debased by central banks eager to stimulate their economies, gold prices will soar in anticipation of systemic inflation. Printing too many dollars and other fiat paper currencies will naturally devalue the currencies relative to gold and silver, two precious metals which have retained their value throughout world history. The price of gold rising is not a cause, but rather a symptom of monetary easing--perhaps it is more correct to say gold retains its value while the USDollar and foreign currencies lose their purchasing power due to massive printing.

3) Major banks will become nationalized. Actually, that's not a very bold prediction, as it is happening on a daily basis, with every Fed bailout. More banks not being back-stopped by the government will collapse.

4) Retailers will go out of business in alarming numbers.

5) This will lead to many commercial real estate landlords going belly up, unable to meet their debt covenants.

6) With consumers' home equity tapped out, savings accounts depleted, and credit withdrawn, they can no longer consume. Even those with cash and jobs, the rising threat of unemployment will keep them hunkered down, exacerbating our economic woes.

7) With 70% of our economy driven by the consumer, and with the consumer overextended, economic growth will be stagnant.

8) With consumption shunted, corporate profits will languish, driving more industries into bankruptcy.

9) And with rising bankruptcies, more consumers will be unemployed, further deteriorating their balance sheets.

10) Repeat items (3) through (9).

11) The bailout "stimulus" packages will have little effect in stimulating the private sector, as an inefficient government just grows bigger.

12) We'll have another lost decade of no/slow growth, with high unemployment, rising inflation, and higher taxes to fund the bailouts. This will reduce our standard of living.

13) Unemployment will increase while bankrupt local governments cut back on services, including law enforcement. Hence, crime will soar.

14) Litigation will increase with business failures. There will be more labor union strife and general social unrest.

15) The cost of guns and ammunition will continue to rise, as homeowners and protectors of wealth face increased scrutiny from our government in the form of higher taxes, and become targets of robberies.

16) Despite rhetoric, protectionism worldwide will become fashionable, accelerating the death spiral of world trade. Instead of working together, countries will collude against one another, sparking trade wars.

17) Trade wars will lead to outright military skirmishes, increasing the probability for world war.

You think these events can't happen? I hope they don't, but this playbook has already been played out--multiple times, so it CAN happen. Whether it does or not is up to us. Right now, I have no confidence that our elected officials will do the right thing, which is taking our medicine now, instead of deferring it into a bigger problem into the future. Very few in Congress are speaking up about the current course our government is taking, and no one within the Obama Administration will have the courage to speak up against these massive lard bills.

So where does that leave the individual to protect themselves? Gold--and guns.

Saturday, February 14, 2009

Bacon Explosion

In the spirit of Congress and the Obama administration passing a pork-laden "stimulus" bill (quotation markets for emphasis), I found it fitting to post a recipe of bacon wrapped around sausage, dubbed the "Bacon Explosion". Enjoy, while your arteries slam shut:

Bacon Explosion

Oh, and to all you lovers out there, Happy Valentine's day! And to the loners of the word, happy bitter day! :-)

Thursday, February 12, 2009

Ammunition prices explode in Florida

I've been reading about ammo prices increasing over the last year, but it's getting crazy in Florida, as they experience severe shortages. With governments running deficits, with law enforcement agencies cutting back, and with crime soaring (California is releasing 50,000 prisoners early), it is no wonder that citizens are snapping up guns and ammunition at alarming rates. "Blood in the streets" may no longer be just a metaphor.

According to the Orlando Sentinel:

Selling bullets may be the most secure job in Florida as long as supplies last.

After months of heavy buying, gun dealers across the state are experiencing shortages.

Some say it began with the election of President Barack Obama. Others say it's about the economic downturn or fear of crime. Whatever the reasons, ammunition has been selling like plywood and bottled water in the days before a hurricane.

"The survivalist in all of us comes out," said John Ritz, manager of East Orange Shooting Sports in Winter Park. "It's more about protecting what you have."

Demand for bullets is so strong that suppliers are restricting deliveries.

"Where we used to get 20 to 30 cases [in a shipment], we may get two to three cases now," said Vic Grechniw of Florida Ammo Traders in Tampa. "The supply just isn't there. . . . Everybody is pretty much rushing out to get their hands on whatever they can."

Tuesday, February 10, 2009

Snow in California and slippery slopes

I drove down I-5 thru the Grapevine, where we got tons of snow yesterday. I actually pulled over at a rest area to throw a bunch of snowballs (at trees, not people). It was the most fun I've had in a while, but my hands got really cold, and all I had on was a t-shirt.

Then as I descended upon the Valley, the full moon was shining brightly against a backdrop of some clouds. It was as clear an evening as I ever remember in LA. The rain must have cleaned out the smog temporarily. Traffic was light, probably due to the tattered economy.

The City of Angels really is beautiful when you can see all the lights against the hills. It made the long drive more bearable.

It was a good day, as the biopharma company was up big again, with CNBC now reporting it in New York at the biotech conference. I got in at $4 last week, and it closed above $6 today. If Phase III trials are positive, it'll double from here. If they're negative, it'll collapse back to $4. We'll know next month. Biotech investing is a slippery slope--it can be dangerous as most drugs in clinical trials fail, but when they hit, it's a beautiful thing. Kinda like LA.

Next up is a melanoma drug company, with results due in the 2nd quarter. People afflicted with this aggressive cancer can't wait--there hasn't been an FDA-approved drug in 30 years. It's do or die. Which makes this play dicey for investors, but more importantly, patients really need some positive news.

The government's stimulus plan should include investments in biotech and stem cell research--that's where the new frontier is. We need to find cures for these terrible diseases. A lot more than we need more frisbee golf courses.

Saturday, February 7, 2009

US Treasury bond auctions

According to Bloomberg:

Feb. 7 (Bloomberg) -- Treasuries fell for a third straight week after the government’s announcement of a record $67 billion in note and bond sales overshadowed the biggest monthly decline in payrolls since 1974.

Yields on the benchmark 10-year note touched the highest in more than two months as the government set the auctions for next week and concern mounted that debt sales will damp demand. President Barack Obama lobbied lawmakers to pass his economic recovery plan, which may cost about $900 billion. Treasuries lost money this year amid concern government borrowing will skyrocket.

“Supply accommodation is the one thing that has been driving the market over the last week,” said David Ader, head of U.S. interest-rate strategy at Greenwich, Connecticut-based RBS Greenwich Capital Markets, one of 17 primary dealers that trade with the Federal Reserve. “It will be the story for the week to come, and the next couple of weeks. The market is nervous about the auctions and anxious about buyers.”

The U.S. will sell $32 billion in three-year notes on Feb. 10, $21 billion in 10-year notes Feb. 11 and $14 billion in 30- year bonds Feb. 12, the Treasury Department said Feb. 4 in a statement on its quarterly refunding of long-term debt.

The department will issue seven-year notes later this month for the first time since 1993, and plans to boost the frequency of 30-year bond sales, the Treasury said. Officials are weighing the “reintroduction or establishment” of other securities.

The government will need to auction $493 billion in debt this quarter, 34 percent more than initially projected, the Treasury said on Feb. 2. It will probably borrow as much as $2.5 trillion during the fiscal year ending Sept. 30, compared with $892 billion in notes and bonds it sold the prior 12 months, according to primary dealer Goldman Sachs Group Inc.

The sales are the government’s response to a surging budget shortfall. Treasury’s primary dealers projected a $1.6 trillion deficit for 2009, according to the results of a survey released Feb. 2. That’s more than triple the record set last year.

Friday, February 6, 2009

Jack Welch

Jack Welch, former CEO of General Electric, knows a thing or two about business. This morning, he commented on the stimulus bill proposed before the Senate for passage:
1) the bill should include components to CREATE jobs, not SAVE jobs.
2) the bill should address resuscitate the banking industry which is on cardiac arrest
3) the proposed bill is addressing the wrong priorities. He made an interesting comparison of the cardiac patient needing blood to flow through his body; yet, the bill proposes purchasing the patient a pair of shoes and a suit.

I think that is an apt metaphor. I believe the current bill does not include enough investment in infrastructure, and too much pent up pork--which will clog the arteries of the patient.

Thursday, February 5, 2009

Deflation or Inflation?

I've posed this question before, but if you own gold, the answer is it doesn't matter.

According to Porter Stansberry:
"This is really shaping up as the Great Depression Part II, with Obama's nearly $900 billion bailout package as the first episode of the New New Deal. Protectionism was one of the highly destructive ideas that helped keep the U.S. economy down during the 1930s. The bailout includes "Buy American" language, requiring bailout money to be spent on U.S. goods, something U.S. trading partners like China, India, Russia, and other signers of trade treaties with the U.S. aren't crazy about.

I bet you some day soon we get something very much like the New Deal's Committee on Continuity of Business and Employment, which put out a report in 1931 stating: "A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today... We have left the period of extreme individualism and are living in a period in which national economy must be recognized as a controlling factor."

Where do you invest if the Great Depression II is in our future? Believe it or not, gold stocks. Homestake Mining shares rose sixfold from October 1929 to December 1935, during which time the Dow Jones Industrials Average lost 64% of its value. A huge run up in Homestake's share price came after FDR stole everyone's gold. It's foolish to think you can impair gold's value by making it illegal. Prohibition usually increases the price of the outlawed commodity."

Bernie Madoff client list exposed

It's the list no one wants to be on. The Wall Street Journal just published the client list of Ponzi schemer Bernie Madoff. Those on and off the list include a who's who of the wealthy and famous: Larry King, John Malkovich, Sandy Koufax, Steven Spielberg, Jeffrey Katzenberg, Kevin Bacon and Kyra Sedgwick to name a few. This isn't a surprise as celebrities aren't expected to be smart investors.

What's really telling is Madoff's client list also includes all the major money centers, including Bank of America, Barclay's, Citigroup, and Credit Suisse (notice I only covered A through C). It also is includes individuals who should have known better, such as private-equity investor Thomas H. Lee, real estate mogul Stephen L. Green of SL Green Realty, David Greenbaum of Vornado Realty, and Henry Kaufman, former Salomon Vice Chairman and economist with the Federal Reserve Bank of New York. Money managers like Sandy Gottesman, an early Berkshire Hathaway investor and long-time Warren Buffett acquaintance who manages $10 billion at his investment firm, First Manhattan, is also on the list.

The Madoff lesson? If you don't know how your money will be invested, don't do it. Don't be intimidated by so-called "experts" in cryptic jargon. There are no stupid questions. Your money is yours and you suffer the consequences if it disappears.

Good news

The shares of the biopharmaceutical company gapped up again in pre-trading, so my purchase yesterday are up big, but I didn't buy the calls because they are just way too expensive. The chatter is starting to circulate and the speculators are driving up the premiums on the call options. They will probably pay off if the results of the Phase III trials are released next month. But I don't want to chase it. I'll wait for a down day where the market takes down all stocks before I buy the calls. Patience, grasshopper...

Wednesday, February 4, 2009

Today's screw up

I purchased shares of a biopharmaceutical company this morning, hoping to capitalize on the positive results of an upcoming Phase III trial. It's been trending up, but sure enough, as soon as I purchased some, it dropped in price. Fine by me--hopefully the news is good next month and I should profit if the results are positive.

I also got greedy, hoping to buy some out of the money call options at $0.40, with the bid at $0.35 and ask at $0.45. My limit order never hit, as I was looking to buy many options, all or nothing, as I didn't want to incur unnecessary transactional costs (multiple buying units). I realize this illiquid market would have inefficient pricing and wide spreads, but my order never got filled. I was a enraged initially, until I figured out there weren't enough sellers out there to fill my buy order. And that anger turned to relief when the underlying stock priced dropped even more. Had my order been filled, I'd be down over 60% right now!

That's why trading illiquid markets is so treacherous--you can guess right, do everything right, and still lose money--or miss out on a big opportunity. Or in my case, you could save a lot of money, even if you're wrong.

Obviously, I have to change my strategy tomorrow because I'm still bullish on the company. I just have to analyze the open interest and volume better, and hope someone takes my bid. I'll probably have to raise my bid at the market opening, but the funny thing is that today, even tho my bid ended up being high--the all-or-nothing bid was never filled.

Live another day to do it again tomorrow.

Madoff Investigation in House Subcommittee

As I intimated earlier, whistle-blower Harry Markopolos not only testified that the SEC was incompetent as a regulatory body, but that Madoff's client list included members of organized crime, including the Russian mob and the Latin American drug cartels.

Perhaps that explains why Madoff is wearing a bullet-proof vest, and why his family has body guards. It's not so much they are flight risks--it's for their own protection.

This won't end here. UBS and Credit Suisse clients were not only big investors with Madoff, but they also played the carry trade, where they borrowed money at 0% interest from the Japanese and invested in Icelandic bonds which paid double-digit interest rates. Investors in this trade on Iceland lost everything when Iceland's financial system collapsed last November, much like investors with Madoff have lost everything.

When that carry trade reversed itself and imploded, bankrupting Iceland banks and its economy with it, investors got murdered (no pun intended). Not all their clients are crooks, but people with means and something to hide invest in Swiss banking giants UBS and Credit Suisse, as well as other private Swiss banks.

US Government authorities have been increasing their pressure on UBS to expose their clients' identities. According to Swiss banking laws in place for centuries, it is illegal for banks to "out" their clients. The pressure has intensified with the US government attempting to extradict Raoul Weil from Switzerland, where he is in hiding. Weil, the former UBS bank chair and CEO of global wealth management in the US, has been indicted on charges relating to tax evasion. He is accused of helping 19,000 US taxpayers hide nearly $20 billion in assets from the IRS.

UBS sidestepped their own banking laws by not exposing the identities of their private banking clients, but by returning client funds, or diverting funds to their chosen destinations. Of course, this doesn't expose their identities, but it does create a paper trail, which the IRS can now prosecute against. 19,000 Americans are about to be felonious tax evaders.

Tuesday, February 3, 2009

Gold pauses

As suspected, Gold corrected yesterday, as the mining shares did not move up friday, despite spot prices rising to resistance at $927. Corrections are healthy, so we'll see if gold prices hold their support levels. With further consolidation, the technicals favor another move up, with resistance at the $975 level.

More importantly, the fundamentals are still in price for a bullish case for gold. We'll see if gold trades in this range before testing last year's high.

Sunday, February 1, 2009

Sector Performance during a Bear Market

This is another Barron's data sheet gathered by Mark Lundeen depicting stock performance among different industry sectors. Between 1963 and 1975, gold mining stocks were the biggest winners, by far. Other winners were the drug sector stocks. Bringing up the rear were installment financing companies, utilities, and airlines.

Are stocks really cheap?

Many analysts believe the equities market is cheap, after a 40% correction from 2007 highs, based on valuation metrics like dividend yields. Mark Lundeen gathered this chart on dividend yields that goes back to the pre-Great Depression era:

Historically, stocks are "cheap" when dividend yields rise above 6%, and are considered expensive when yields dip below 3%. In fact, at the Depression lows, stocks yielded 10.38%. Today, the DJIA sits at 8,000, yielding 4.06%.

So the question begs: are stocks cheap? That depends--compared to last year, yes. But historically, stocks are not cheap. At a 6% yield, the DJIA would be priced at 5235. At 10% yield...well, let's not go there--it gets really ugly.

The bad news is that companies are either reducing or eliminating their dividends, so the aforementioned figures would be even lower. Let's hope history doesn't repeat itself.