What Happens in the Middle East – Stays in Vegas!
I've had many people ask me about my thoughts on the Middle East, and unlike many of you I am not an expert concerning the inner workings of the Middle Eastern nations. As these regimes are toppled, will people band together to create some form of democracy, or will roving bands of armed thugs cut their countries into their own little fiefdoms? I don't know. But what I do know is that what happens there, affects each and every one of us here via the price of energy – which makes the price we pay weekly to "fill up" dependent upon tribes of rioting dissidents in far away places. Honestly – they won't let you and I on an airplane with nail clippers yet we leave our most vital energy needs in the hands of lunatic fringes on foreign soil. Between our coal, nuclear and shore-side drilling we could be completely energy independent. But for some reason we can’t do something that basic - while we wait for truly acceptable alternative energy. Remember what happened 4 years ago with $4 gasoline - people stop going on business trips and vacations and leave their boats and RV's parked, etc. I don't know the outcome of the unrest in the Middle East – but world history isn't very ripe with overthrows that worked out better than what they had.
The U.S. was built on cheap energy. In Europe if you leave "town" you’re immediately in rolling farmland. In the U.S. when you leave “town” you're in endless fields of subdivisions that stretch on forever. You remove the word ‘cheap’ from the equation and now it's a massive burden just getting to work. So the problems in the Middle East are our problems as well.
However, we may see oil hit $50 a barrel before we see $150 per barrel. (a) The reason the Middle East is in revolt is that their people are sick of being ruled like slaves with little food and education. So these nations are going to need to introduce more social programs – and since the previous ruling parties have taken all the money – they’re going to slash prices to sell oil because $50 oil sells faster than $150 oil! (b) There is ‘slack oil demand’ all around the globe that will decline as the recession worsens in the US, Europe and Japan – so prices need to come down. (c ) And then there’s ‘bio oil’ – Algae biofuel start up companies that are producing a lot of oil in very little space – that can be refined easily for cars and trucks.
Closer to home:
- Housing prices continue to fall, while interest rates are inching higher, which will to continue to drive prices down even further. CNBC announced this week that the median home sale last month was the lowest level since 2002 - with 39% of ALL transactions being foreclosures and short sales. Until all the shadow inventory is gone - prices will continue to fall.
- We’re seeing states go ‘broke’ – and unlike Uncle Sam, they cannot print money out of thin air – so how all the riots will work out remains to be seen, but you can color me skeptical that the outcome is going to be smooth.
- Hyperinflation – are we seeing it? Food prices across the globe have gone up at the "fastest pace ever" according the U.N. Oil is up $20 a barrel. Cotton and wheat are "limit up" day after day. Underlying inflation is roughly running at (at least) 8%.
- So is deflation right around the corner? One of the issues with a monetary expansion move higher on the commodity chain, is that at some point, the facts collide. Honestly at some point people will stop buying because they can’t afford it – and then everyone will reduce prices in order to sell – and then people will hold off on buying knowing that it will be ‘cheaper’ tomorrow. That is the balancing act!
I was giving a talk this weekend and someone asked me whether I thought ‘gold was a bubble?’ Gold and silver are not going up because people are buying jewelry – they’re going up because all fiat currencies are falling apart due to too much debt created from too much fiat currency and credit. The debt is un-payable in the United States, Europe, and in Japan. Here’s the deal – if you’re a fund manager, How do you feel knowing you have your folks in stocks that crashed in 08 - 09, while silly little gold roars to new highs? How do you feel if you told people to sell gold at $500 because it has no "interest payments" and is just speculation, not an investment? Now all of a sudden you 'know/think" that it's time to sell it (again)? Have you ever been right calling a Gold top? Gold isn't going up on speculation, gold is going up because it's MONEY, and the only MONEY that has ever held its value. Well – this week - silver hit another high. In my world, Bernanke doesn't stop printing, Europe doesn't stop printing, and gold and silver continue doing what they've done for ages – becoming money again.
But won’t deflation hit gold and silver as well? Yes and No. Gold is looked upon as money, and Silver as ‘almost money’ with some industrial demand. What ‘should’ happen is that gold and silver will continue higher as the printing presses run full blast and the debts mount, and more countries admit bankruptcy. When the currency buyers switch over to chasing gold and silver – that will be the final "hurrah" for the two metals. And when that hits, you can be sure that in a very short period of time, a "new" currency will be ushered in. But let’s be honest, right now if the U.S. decided it was going to back the dollar with a fractional gold backing, gold would have to be $7,000 an ounce for their holdings to equal the amount of dollars out there.
Two weeks ago I called for a pullback. That was suicide, and I was wrong. But I was only wrong by a week. This week, we opened Tuesday and fell 400 points – touching briefly below 12,000 on the DOW. Now, what happens next? I think we ride Monday slightly higher and then begin to pull down again. The bigger question is: How deep is the pull-down? Well, once it's firmly broadcast that we're looking at a 10% pull-down, they won't let us fall that far. Maybe we fall 5 or 6% and they'll rush this back up. That way, the people waiting on the 10% down, will have to buy much higher, and when they "really" yank the rug it will crush more people, at higher prices.
This week GDP came in at 2.8% - lower than the expected 3.2%. Oil also pulled down from it’s high - below $100 per barrel. I think that if nothing blows up over the weekend we will see a big green day Monday, as they try to claw back what we lost this week, but I still think we have some dip work to do later in the week. I don't think it's straight up from here. Potentially they may stay in technology on Monday – thinking that oil doesn't impact the techs like it does the industrials, so if you're looking for a quick play, I'd stay in tech. But continue to watch the volume bars as during the selling, the S&P volume has been huge.
Many are asking me whether this is the time to go short. I personally do not think that this is the "big one" and we can get short. But don’t get me wrong, if you want to day trade some shorts, by all means go for it. But what I'm waiting for is the repeat of 2008, and this pull back is not that one. Just don’t overstay your welcome on the short-side, as when they pour back in – it will be wicked and fast.
Our long holds looking like: SLV at 25.81 (+26%), NG at 6.825 (+82%), AAU at 3.02 (+24%), DNN at 2.71 (+43%), AVL at 4.00 (+85%), and USSIF at 0.61 (+2%).
In our short-term holds we have:
N up 17%, SLW up 18%, FRG up 23%, QSURD down 7%, NGD up 3%, PAL flat AUGT off 2%, EXK off 3%, SVM off 4%, and AGRO off 11%
Last week out, silver was $29 dollars, and it just closed at $32. We bought more of our favorite silver stock – SLW last week @ 35.00 and it ended the week @ 40. I still like Silver this week and with the pullback that I see coming we may get more of it.
Mark P. wrote me and pointed out that last year the exports for chemicals and plastics were up 17% and projected to be strong again this year for exporting chemicals because of the low cost of natural gas in the US. Mark recommends Conoco Phillips, Dow, Air Products or Huntsman as a few companies for possible investments and I tend to agree with him – thanks Mark.
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Until next week – be safe.