When you’re up 130% - What do you do?
If you purchased SLW, GG, NBR – others like AVL that are in our long-term holds – you’re currently up over 100% – and someone wrote me asking: “What should I do?” My advice is simply: Wash – Rinse – and Repeat – meaning sell 50% of the winner (so you’re now playing with the house’s money) and go find the next winner!
Moving on, I always wondered – if I was a pension fund manager in Germany (for example), and I had purchased a collection of mortgage backed securities (all rated AAA by the three US ratings agencies) – I would have been suing the world when I found out that what I had purchased was junk! But that has yet to happen – why not? Well, this week the Federal Reserve finally had to admit to who was doing all the borrowing during those dangerous years, and most of it was going to FOREIGN banks. According to Bloomberg, foreign banks accounted for at least 70% of the $110.7 billion borrowed during the week in October, 2008 (which was the ‘record’ week). Arab Banking Corp., the lender partly owned by the Central Bank of Libya, received 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers collapsed. Ah – at least now we know that there was ‘obviously’ a deal struck between The Ben Bernanke and the foreign central banks to bail them out of anything bad. As we look through the ledgers, tons of the really bad stuff is now the property of The Federal Reserve, and that is why The Ben Bernanke fought so hard to keep us out of his books. Now ask yourself how you feel about bailing out foreign banks? Ask yourself how you feel about The Ben Bernanke - knowing his buddies at GS, JPM, and others were packaging up absolute garbage, taking in billions in fees and bonuses, and then being rescued by tossing it on the backs of the American Taxpayer?
Well in April, 2011 – Bill Gross of the Pimco Bond Fund – the single largest bond fund on earth, and the gentlemen who has been behind it’s remarkable performance for years said: “I am confident that this country will default on its debt". Now for those of you that think Bill is ‘blowing smoke’ – I’d say - two weeks ago Bill sold ALL his US treasury funds. For a gent that trades nothing but bonds (and tens of billions of them) that's quite a statement. Bill’s convinced we will default and sold his T-Bills and notes as proof. The U.S. is in the process of quietly devaluing it’s currency in order to pay back debt with devalued dollars. It makes covering the debt easier. But this time it's not going to stop with just rampant inflation. Over the years (when we had recessions) the FED would rush in - lower interest rates - people would finally take advantage of the cheap money - buy "stuff" - create demand - and businesses would finally respond by hiring workers and creating a new economic boom. Currently we are 3 years AFTER TRILLIONS in stimulus, bail outs, work programs, owning auto companies – and the best we can get is a 10% unemployment rate, with Housing sales still falling like a rock, and a 2% "growth" rate! Unfortunately the ‘run of the mill’ devaluing of the dollar will not be enough to offset the trillions in debt. I think Bill Gross knows that, but is such a public figure he cant' say it. At some point the U.S. dollar will be ‘replaced’ with something – and judging by the way China, India and Russia are buying up gold at the Central bank level – it’s going to have some form of loose gold backing again.
So what do I do with my 130% returns? Well (a) I don’t want bonds (Bill Gross told me that) and the Government and most municipalities are bankrupt anyway, (b) I don't want most Real Estate because it’s still falling, and (c ) I’m not marrying stocks because they're works of fiction based upon two sets of accounting books. So – when you ask me whether I still like precious metals the answer is still - Yes!
The Market:
Fast times at Ridgemont High – “People on ludes, should not drive” (Jeff Spicoli). The market drove past it’s 2-year high this week, but couldn't hold it and closed under that by a small margin. Everyone said it was due to the 216k jobs number that came in on Friday. Maybe, but 112,000 of those jobs were ‘fictitious’ (birth/death model jobs).
In any event, the question now is – will we truly take out the old high and romp higher? The general feeling is yes. The market has ignored Europe imploding, the PIIGS, a nuclear meltdown in Japan, a Tsunami, massive frauds, crashing housing, stubborn unemployment, and anemic growth. But it’s different this time, because at no time in the history has the Federal Reserve come out and stated that their policy includes causing the stock market to rise. The Ben Bernanke loves the "wealth effect" it gives people. But currently fund flows are anemic, as baby boomers are beginning to face retirement and are actually cashing out, not buying more. So the question becomes – how long can The FED keep this market afloat? I have two streams of thought. One: The FED is pushing the end of QE2. Now if fund managers buy into the idea that the FED is going to end the printing of money in June - they are going to be convinced that it's going to fall like a rock in June and should sell out in Late May. Well, the market never makes it that easy. So, one very real possibility is that we begin a protracted market slide in April, well ahead of the fund managers that will be trying to get "every last drop" out of the market. So, IF we can't get up and over 12,400 on a closing basis, we might start rolling downhill now. BUT if we do get up and past that level, we'll probably run up some into earnings reporting season – and then I'd expect the rug pull. The second scenario that I see playing out is that since everyone is convinced that the end of QE will spell the end of the market, that the market just keeps on grinding higher and higher by quiet QE3, 4, and 5. The people that sell out in May and early June will watch it keep going higher. They will rush back in in late July and August, and THEN in September (after everyone's back in and we've made some new short term highs) the FED yanks the rug and yanks it hard.
Be careful out there. Don't be afraid to take some profits home.
Tips:
Our long holds looking like: SLV, NG, AAU, DNN, AVL, and USSIF. The double down on DNN from the week before proved to be very beneficial indeed - and I believe that there’s more to run there.
In our short-term holds:
- We sold N and AUGT last week (both on the plus side)
- Still have SLW, FRG, QSURD, NGD, PAL, EXK, SVM, AGRO, SD, NBR, and SQM.
- AVL had quite a jump forward last week – all of those who had it with me – congrats!
The shale drillers last week - Approach Resources (AREX), GeoResources (GEOI), and Gulfport Energy (GPOR) – have started to move north – but we have not purchased as of yet because our recipe is: rising market, a catalyst, and a technical break-out.
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:
Remember the Blog:
Until next week – be safe.
R.F. Culbertson
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