RF's Financial News

RF's Financial News

Sunday, February 6, 2011

This week in Barrons - 2-6-11

This Week in Barons – 2–6-11:

Liar, Liar Pants on Fire:

Ben Bernanke, the head of the Federal Reserve is a ‘bold faced’ liar. There, I said it! I listened to him give a speech and the corresponding Q/A session – and to say I was puzzled would be an extreme understatement. Ben said that his monetary policy is NOT responsible for commodities soaring higher. According to him it’s due to “demand from emerging markets.” And then Ben goes on to say that his policies have: "strengthened the stock market as it pushed investors out of one class of assets and into another.” Now how is it remotely possible that his money printing has caused the stock market to rise, BUT has had NO effect on the prices of commodities? (1) This is Economics 101 – when X dollars are going after Y product – increasing X dollars increases the prices demanded for Y product. (2) If indeed the emerging markets had so much pent up demand for "commodities" that it was causing commodity prices to soar higher, then the Baltic Dry Index (BDI) – the index used to track the shipping of goods around the globe – would be noticeably higher – yes? So it stands to reason that if all this demand, such as in copper (which just hit an ALL TIME HIGH this week) - would be backlogged on ships for months. Well – not exactly – in fact the BDI has crashed – literally cut in half in the past 18 months – and it’s not because of the new shipping capacity that was added – the shipping business is just lousy!

Ben also said: “inflation is low and getting lower.” Now everyone out there knows that medicine, education, food, energy – are all up over 6%. Ah – but what is lower – housing (the average person’s #1 investment)! Oh and what did the CEO of Whirlpool say the other day: “10:36 AM - Rising commodity prices are blamed for declining revenue at Whirlpool's North American segment. Raw material inflation is driving costs higher," CEO Jeff Fettig says, "and we expect to mitigate these costs with recently announced price increases.” Well Ben maybe that’s just Whirlpool – let’s ask the CEO of General Mills: “11:31 AM - We are seeing a fundamental level of price inflation, higher than the 1980s and 1990s," says General Mills CEO Ken Powell. Oh Ben – I suppose the U.N. announcing global food prices up – 3.4% in January alone – really threw you for a loop! Now I do realize that Ben has been TOLD to lie to us – I get that. But where do the lies stop?

Consider the Jobs Report we got on Friday. Everyone was looking for an addition of 144,000 jobs – and all we got was 38,000. But everyone was giddy about the unemployment rate going from 9.4% to 9.0%. The reality is: (1) the rate number is full of ‘seasonal adjustments’, and (2) 504,000 people (the single largest body of folks ever) fell OFF the roles and out of the pool – taking us down to employment levels not seen in 26 years. Well, what about the gain of 38,000 jobs you say – well that’s less than Wal-Mart employs in one state!

At some point in the future (between now and the beginning of 2013) I think we're going to see the proverbial black swan. At that point China and Russia will decide that the game is over, they will sell their US-denominated assets, and the dollar will be completely removed from its global reserve currency status. Once it is abundantly clear to everyone that the US consumer is NEVER going to be able to binge spend like they did during the housing bubble years, all these countries will turn inward, looking toward their own consumption to sustain themselves, shunning the Dollar, and what's left of our exports.

So what do you buy – well gold and silver – that’s nothing new from me – aye? But you don't buy GOLD to get rich. You buy gold to preserve your purchasing power. As the value of the dollar continues to fall the price of gold continues to hedge against that loss of buying power. Silver (however) is totally different. While it too occupies space as ‘money’ in people's minds, unlike gold, silver has so many other uses that it's a very high demand commodity. And in fact – we are running out of silver – as each year demand outstrips new supply, with the bulk of the shortage made up from simple above ground inventory. As the dollar loses its place as a world reserve currency – I think gold will be a very good place to be. But silver tends to have better income abilities to me. But what about timing? About a month ago we cashed out of about 10 positions we had in the metal space – all of them for very good gains – NG for over 100%, SLW for over 100%, and the list goes on. We then sat on our hands, knowing that the bear raid would take us down – knocking gold from 1450 to 1320, and Silver from 30 to 27 (both about 10%). However, traditionally silver would take a 40% hit on one of these raids – why only 10% this time? I think they’re losing the ability to manipulate the price of silver as they once did. I think the ‘naked short banks’ are buying up their naked shorts even at these prices. Now, many out there think that silver could see $22. So watch out there – maybe we go to $26 – but if it can’t pull down to $22 – silver could explode upward.

With all the Egyptian issues, Ireland’s credit rating being cut yet again, 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, and Bernanke's insane plan to devalue the dollar - I think silver’s day has arrived and I am going to resume buying as of today. If it fades, I will ladder down into it, and if it rises, I'll add more to it.

The Market:
This past week was a “marvel of modern science” – watching the buyers rotate from tech to commodities, to materials, back to tech and all the while the averages ticking higher. Even Friday on the heels of a horrendous jobs report, Bernanke and POMO saved the day! Now allow me to do something ‘stupid’ and call for a pull-back – that should start this week. I’ve always criticized people for ‘calling a bottom’; however, that’s not what I’m doing.

We are overbought in every sense, and I think that it’s about time Wall Street fleeces the latecomers to the party. I think we’re in for a 10% correction in the near future that will be quickly be ‘bought back up’ and we’ll hit a high after May. I think we can have an ‘up day’ on Monday and possibly have it last through Tuesday, but by Wednesday I think we get our first decent pull down. If I'm right, it won’t last long as those people who missed the whole run up will be buying on any significant dip. For me – I’m going to lean long but start scaling out early in the week. If I'm wrong, we'll simply have to buy back in, but I feel pretty good about this… so we’ll see.

We still have a couple positions in our gold and silver stocks – with our long term holds looking like: SLV at 25.81, NG at 6.825, AAU at 3.02, DNN at 2.71, AVARF at 4.00 and USSIF at 0.61

In our short term holds we have:
N is still flat to slightly lower for us, and on Friday we purchased: SLW at 31.50, SLV at 27.45, NGD at 8.40

I’m still looking at: IAU over 13.20, NAK, AG, UXG, and more NG.

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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