RF's Financial News

RF's Financial News

Sunday, February 20, 2011

This week in Barrons - 2-20-11

This Week in Barons – 2–20-11:

The Ben Bernank’ says: “No Inflation”
The ONLY constant I've ever seen in my life is that every year, things cost more. If the prices of "things" that we need continue to go up, what makes more sense: (a) trying to make more dollars to keep up, or (b) investing in the very things that will indeed be going up? People will get uglier as the economy remains on life support, and as our debts and deficits continue to rise. One of the oldest and best ways to "get rich" has been buying real estate. Right now that seems toxic because the housing bubble pushed prices to insanity, and on average, they're still over priced. But a very bright person once said that the easiest way to get rich was to buy real estate and let someone else pay for it. In the olden days, you would put $25,000 down, rent the house out for 15 years, and you were guaranteed a nice return when you decided to sell it. But right now real estate appreciation may be a long way down the road. Housing prices, the foundation of so much of private citizen debt loads, are destined for stagnation (not inflation) as the supply of homes is far greater than the demand (11% of the nation's homes stand empty today). However, what has been rising is rent – and as more and more people cannot afford to purchase a house – they will be forced to rent.

The point of all this of course is that although I think gold and silver are the single best inflation hedges, they are not the ONLY places to be. The right property will always carry a nice value, but it’s the entry price that is the important variable right now. The right price is NOT a property that was 100K in 2000, ran to 500K in 2006 and is now trying to get 265K. Real estate has traditionally gained between 2 and 5% per year. A quick way to know a bargain is to go back to 1997, ’98, and ‘99 and check comparable sales in the area. Once you get that price, add 2 to 5% per year until you get to 2011, and that will be a realistic price for the property today. If you can find the right property – at the right price – it will maintain it's value better than U.S. dollars.

This week we saw the market once again ignore:
- Riots, as 3 more countries are facing governmental overthrows,
- Insanity ruling Wisconsin as the Democratic leaders left the state so they wouldn't have to vote on the Union proposals,
- Inflation figures soaring, and
- Initial jobless claims bouncing higher.

Last week I warned that everything was setting up for the first significant pull back in months. Well, the pullback never came, and now we’re in the land of the unreal. Right now - it's so blatantly "in your face" that floor traders on the exchanges will tell you that this market is all about the FED pushing it, and how you have to be long because the FED is pushing money at the market until summer.

Now, my issue with that is: it’s pretty rare that the market makes it that easy. So since everyone knows that is the plan, what happens in summer? But as this market goes higher - people are capitulating. John Q. Public is coming back into the market as after 38 months of mutual fund outflows - those same funds are now experiencing major inflows. I do think the one thing that everyone is beginning to believe is that The Ben Bernanke can't stop printing this summer, because if he does the economy crashes.

The Market:
Jim Taylor wrote me a comment this week that I’ll share with you: “My opinion is, given the trillions we are spending propping up the banking system, the cost of the Fed using Futures and Options to quietly prop up the equity markets is probably small. The key to doing that is to create the perception to the consumer that the Economy is OK – and believe in a high correlation between equity market valuation and consumer confidence. Right now I find it hard to justify owning any large diversified equity basket, as the combined valuations may be untenable. Individual equities need to be closely analyzed using the DDM (Dividend Discount Model of the 60’s and 70’s). In a nutshell – No Dividends – No Earnings – No Dice.”

This week silver went ballistic. You could come up with 15 different reasons why, and some will say it's big pops like that, that spell the end of a run – while others will say it's because of the technicals. All I do know is that inflation is now so bad that it’s in every economic report. This week the Empire and the Philadelphia manufacturing reports were released. We found out: hiring was down, sales were down, orders were down – but prices jumped like mad. The CPI and the PPI are now so bloated with inflation, they can't seem to fudge it any more. So, what happens to gold when inflation rises? It goes up.

With all the elements going on in Egypt, Ireland (their credit rating was cut yet again), the PIIG nations rebelling against austerity, the storms in Australia causing coal/mining shortages, the harshness of the US winter, the undersupply of food, the inflation we see, coupled with Bernanke's insane plan to devalue the U.S. dollar – I think silver’s time has arrived – and I resumed buying it last week. Over the past 2 weeks I said I was now ready to buy silver again. I stated that I was to be buying 4 “monster boxes" total, and I would scale into them. By scale I simply mean I wasn't buying all 4 in one day. Since we never really know when a breakout, or a pull-down will be manufactured, I was “averaging in.” Thus far I have only bought ONE out of the four I wish to own – and ‘knock on wood’ we got that right, as silver perked up and then in the last few days "roared" higher. I have 3 more monster boxes to buy. I'll probably buy my next one sometime next week. I'm hoping that yesterday wasn't a clear breakout and it just keeps roaring higher, but if it does, it does.

Tips:
Our long holds looking like: SLV at 25.81 (+22%), NG at 6.825 (+90%), AAU at 3.02 (+34%), DNN at 2.71 (+52%), AVL at 4.00 (+85%), and USSIF at 0.61 (+3%).

In our short-term holds we have:
N up 18%, SLW up 13%, FRG up 22%, QSURD = flat, NGD up 2%, PAL up 10%, AUGT off 3%, EXK off 2%, SVM off 1%, and AGRO off 5%

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 @ 39.20. I may take more of it next week if conditions are right. A couple other places to look:
- NVDA over 26.00 is going to get attention,
- IPI when it finally gets over 40.00 should be interesting, and
- FCX over 55.60 should finally see it rise. They did their split a while back, went through a funk.. but with copper at all time highs, and gold moving back up, it's day is coming.

If you’d like to view my actual stock trades – and see more of my thoughts – please feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave 4 months or so ago now:

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Until next week – be safe.

R.F. Culbertson

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