RF's Financial News

RF's Financial News

Sunday, December 18, 2011

This Week in Barrons - 12-18-11

This Week in Barons: 12-18-11:

‘Twas the Week Before Christmas – and We’re Up 23% on the Year…

For the most part Europe is "Closed", and that seems to have left a vacuum of topics to chat about – yes? Hardly. Believe me when I say, things are not rosy here in the U.S. as Morgan Stanley just announced 1,600 job cuts. The leading business school candidates are now seeking employment outside the banking sector. And leading Hedge Funds owned by such notables as Paulson and Tilson are down hard for the year. Part of the reason gold took such a wicked pounding last week, was that Paulson sold millions of shares (rumored 11M) of the GLD to raise cash for all the people that wanted out of his fund. Why, because his fund is down 28% for the year! Whitney Tilson is down 25% for the year, and hundreds of hedge funds are rumored to be in the process of closing. Fortunately, our trading account is still up over 23% for the year, which is not spectacular (by our measure), but certainly not as bad as some of these "Headline Stars". One of the benefits of being a "small player" is that you can be nimble. And with a market that has seen more up and down chop this year than any year in history – the investors that couldn't be 'nimble" got killed.

The ONLY thing I'm willing to be invested in long term is gold, silver and a few related mining stocks. Until this global train wreck is complete, I don't trust anything in the market. For example: look at MF Global. Even if you owned NOTHING, and your money was sitting in CASH in the fund, the crooks stole it – invested it in Europe – and now they can’t find it!

Currently, we own a significant amount of gold, and a decent amount of silver. Some will ask: “When do you stop buying?” My self-imposed "top" for gold is going to be in the $2,000 to $2,200 range. When gold gets to that $2,200 level I will stop purchasing gold and continue to purchase silver. In many respects, silver is a better supply and demand story than gold. I believe that in the years to come, silver will see $80 to $100 dollars an ounce. So at $30 currently – silver has a real chance of rising 200%, vs gold @ $2,000 can’t give me those kinds of returns. The other question is: “When do I sell?” My answer is always the same: “When you need money.” Gold and silver are nothing more than savings accounts, but instead of putting in dollars, you put in metal coins. So when it’s time for college, or a house, or retirement you tap into your savings account. The other "time" we will be selling is when the end game of our US dollar is complete and we have either: crashed, been replaced by something new, OR defaulted. In other words, gold is the insurance policy against all the ills we see. And when the world presses the ‘reset’ button – we will want to be able to buy those new dollars.

People also ask: “What about the mining stocks?” Well, the mining stocks are indeed more risky. The miners dig the precious metals out of the ground. If you have good product coming out, and you can keep your costs of extraction low, then you are making a fortune. A lot of the miners are operating on costs that made them a profit with gold at $700, so imagine how much they're making with gold at $1,600? Yet as stocks go – they’ve truly stunk out loud – why? (1) Unstable foreign governments make mining the precious metals harder each year. (2) Environmental pushbacks against mining get tougher year in and year out. And (3) the over riding reason is that when markets are in a panic, they look at the miners as "stocks" first and a back door to the metal second. So when the market is plunging for 1,000 points nobody sits and says: "I should keep the miners because they have the gold!" No, they dump them and ask questions later. There are 13 "significant mining" stocks that pay dividends. Yet the single highest return is from NEM at about $1.40 annually (which is 2.3%), and then comes FCX at just $1.00 annually, (2.7%). Now, if those miners were paying 5% or 6% - then people would hesitate to dump them, their shares would soar and even a market melt down wouldn't kill them. Therefore, the miners will continue to be volatile and relatively driven by the overall market. I do think that as a whole they've been sold off too much and the GDXJ appears to be a nice buy, but the fact is I still only “trade” the miners and not "invest" in them for the long haul.

Having said that, if you had invested $10,000 in the basket of the 13 big miners that pay dividends in the year 2000 (AEM, AU, ABX, BVN, FCX, GG, GFI, HMY, KGC, NEM and RGLD) – you would now have an investment worth $94,000 – a 22% annualized return. However, you would have had to sit through a period from late 2007 to mid 2008 where their value crashed from $96,000 to just $34,980 along with the rest of the market.

In terms of the U.S. economy: in years gone by you would let an economy go through the death throes, default, and have investors run in and pick up the good stuff, toss out the bad stuff and "start over". But things are different now. The world is intertwined like never before, and we are all witness to a global reset. If it was "just" Europe, or “just” the UK, or “just” the US – that was bankrupt we'd be ok. But it's everyone from Japan, to most of Europe, to the UK including Ireland, and the US that are mired in crushing debt, and slowing economies – all caused by the global housing bubble. And even China is facing something they will not admit – their economy is on the ropes.

It's my opinion that we're in a slow motion train wreck. And between now and the ‘global reset’ we're completely dependent on The Ben Bernanke's printing press. If he prints a few trillion, the markets soar, and countries function. If he doesn't print enough, the markets fall, and America implodes. I believe we're going to see the DOW below 6,600 in our future. I believe the world will mire in a dark depression for a few years. The “when” is a little fuzzy because countries can keep playing "kick the can" by printing more money. But like all games, scams, and schemes, they come to an end when the system can no longer support them. My guess is that point is in late 2012 and into 2013.

So, if/when the Fed does another round of mega stimulus to save Europe and the US, we will get a giant pop out of it – possibly propelling us up and into the DOW 15,000 range. But then it would be lights out, because there could be no more mega stimulus, due to inflation being greater than 15%. If we don’t get the mega stimulus, then things continue to break down – a little here and there – with ultimately the big swoon coming in. In either case having some gold and silver lying around should get you through it all just fine.

The Market:
It's the last call – 9 trading days left until the end of the year. Everyone’s trying to drum up some excitement and get the market higher, but it's a massive struggle. Without The Ben Bernanke’s money, there is more money flowing out of stock funds than into them. On Friday we didn't hold the early gains, but we ended the day statistically flat. I suspect they're going to try and move us up Monday thru Wednesday, and then get flat on Thursday and Friday.

One thing we will have to worry about is the tax selling that's going on behind the scenes. Hedge funds will be dumping things that can create a tax advantage against their winners, and sometimes that gets a bit too "out of hand". Then of course what we often see is the "January Effect". The “January Effect” is when the pension funds come into the New Year with fresh deposits, looking to jump into last year’s winners. That gives the first quarter a good shot at looking decent. Now, factually over 70% of the time the “January Effect” has worked in moving the market higher.

We'll be trying to lean on the long side into the week, but we are definitely going to have to take profits quickly. Although it's possible we could roll over and fall from here, it would be fairly unusual in a historical sense. I tend to think we have one more shot at higher, and then we're going to see some roll over pain. Then with a bit of luck, we'll use the “January Effect” to ride that home.

For those of you following me on Twitter – we sold out of the banks last week, MS, BAC and Goldman Sachs (GS) – with a nice profit – and are fairly slim right now.

Currently we have:
- GLD at 159.49 – now at 155.49,
- SLV at 28.00 – now at 28.85, (bought more last week).

A shout out to Jim T for noticing that the Divergence between (lower) Labor Compensation and (higher) Corporate Profits is at its highest point in over 40 years. Think that’s leading to any discontent?

A shout out to John for pointing out the chart breakdown in the Gold sector – and the easiest path going forward for the market could be ‘down’ – especially after the early part of January. Absent printing, the deflationary risk will cause The FED to add liquidity to make up for the contraction in the private sector and that will ignite the next phase in the gold run. This could (however) take a couple of quarters – but could be just in time for the November election.

To follow me on Twitter and get my daily thoughts and trades – my handle is: “taylorpamm”.

Please be safe out there!

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