Posts Tagged ‘Stocks’

Why Invest in Gold?


By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.


In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!

Why 2010 May Be Quite Similar to 2009


If you did well this past year, I guess that’s a good thing!

Friday is my market day and it seems that with the new year some realignment of the big picture is in order. Note of optimism: When you know what’s going on you can properly position yourself to benefit from its leverage. No condition is ever entirely good or entirely bad. So here’s what’s going on…

“Sentiment Oscillation” or “Paradigm Shift”.
That’s the reason for all this mayhem. As general conditions continue to change (as they have since 2007), so will the general mindset. From growing to sustaining. From net profit to net loss. From Investment to saving. From short-term gains to long-term advantage.

Let’s focus solely on economic facts:

The How:

  1. Internationally Governments have already allocated rescue money that will be spent over the next few years
  2. They have also lowered Interest Rates which spurs a higher inflation of credit
  3. When Rates rise savings gains precedence and production falls decreasing the supply of goods and labor
  4. Less supply causes over-demand and higher prices for real goods and commodities
  5. When commodities prices rise, they tend to cut into expenses thus lowering profits
  6. Lower profits and demand for cash decrease momentum of corporate investment and the stock markets decline
  7. Lower Markets lower the sentiment of the consumer and spending decreases
  8. Less sales means less revenue and retail venues under pressure go under causing a Commercial Real Estate bust
  9. With Investing and Equity down and out people turn to Savings and Cash
  10. With Bond markets already pressured by higher Interest Rates and a debt laden currency people begin to turn to Precious Metals and Tangible Goods


  1. Someone say Bailout? Trillions have been spent and Trillions more will
  2. With the lowest Interest Rates in decades credit is merely being deferred
  3. Businesses decide to save rather than reinvest profits
  4. This one’s tricky but the former ALWAYS leads to latter
  5. Even if businesses raise prices, profits will fall
  6. Bond yields begin to resemble stock dividends only with less apparent risk
  7. Higher stock prices are always met with consumer exuberance
  8. This has already begun but has been prevented by soon ending rescue funds
  9. With higher Interest rates CD’s and Money Market funds begin to make sense again
  10. This is what happened during the 70’s as Real Interest Rates remained negative

Investing Advice: If you are going to “invest”, you must understand that the next 10 years will be similar to the last. Much higher prices for real goods, much lower valuations for equity and paper. This is because we’re doing the same things over (lower rates, more issuance of credit, more debt to pay off). These are times to seek under-valued out-of-favor securities.

Business Advice: If you are going to do business, I believe you will be better off than many people trying to make ends meet on unemployment checks and the reason for that is the ability to be proactive. Your success is what you make of it, and if you’re determination is deep then no recession or even depression could abstain it. Focus on providing customers with durable and consistent value.

Fundraising Advice: If you are in the legions of the eager financiers trying to keep the lights on in your non-profit, raising for a local charity or even seeking capital for your small business, remember that people are always searching for the best place to put their money. Your job is to provide them with the sense of value that its going to the right place for the right reasons.

Have an awesome weekend!

Friday Markets

Here are the top headlines of the week

Sorry I couldn’t provide the links. Will do so next time.

GE next big one to go?

Porter Stansberry: Who says that anyone who doesn’t own Verizon shouldn’t be able to call himself an investor and has called the demise of the original AT&T, GM, Fannie Mae and Freddie Mac, now says that Continental and GE are net to go. GE has relied on its A+ rating to manipulate its financial program. But now it seems to be following CIT by-the-click.

Doug Casey: Every investor should own at least some physical gold in their personal possession.

FDIC chairman Sheila Bair told a Congressman there would be at least 500 more bank failures 10 times as many as have already occurred this year.

Richard Russel on Gold: In order for the US to justify the recent surge in spending and bailout money, rather than renege on its death, they will instead rid it through inflation and taxation. The only way for the average citizen to defend themselves? Gold. “Gold will be the last man standing. Gold is the secret, unstated world standard of money. It can’t be devalued, multiplied out of thin air, cheapened or devalued or bankrupted. It has no debt against it and isn’t the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.” On Stocks: “It’s clear to me that we are in a rally within a secular bear market within the confines of a long-term or secular bear market”.

William O’Neil: Stocks are in the midst of a bull market that began in March. We say cut every single loss when a stock goes down 8 percent below the price you paid for it. It’s like taking a little insurance policy.

Joe Biden: ‘We Have to Go Spend Money to Keep From Going Bankrupt’

Gary Shilling: Stock Market Will Crash As US Consumers Retrench. The economy won’t start to recover until 2010 as the US consumer is cutting back fast. Spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree. Most recessions have a positive quarter or two of GDP, so if we get one, it won’t mean anything. The S&P will plunge 35% to 600 by the end of the year. Buy Treasuries.

Gold Bullion or ETFs? Hedge fund manager David Einhorn of Greenlight Capital had roughly $390 million invested in the GLD (SPDR Gold ETF) and then sold all his shares in favor of physical bullion. If you hold for a long time, bullion is likely cheaper. If you trade short-term (or in smaller sizes), GLD is likely better.

Jim Rohn: “It’s about your philosophy, not the economy”.

10 Things you should know before buying a car

Buffett’s 3 Rules for investing. 1) “If it seems too good to be true, it probably is.” 2) “Always look at how much the other guy is making when he is trying to sell you something”. 3) “Stay away from leverage”.

Lobster is now cheaper than hot dogs! LOB (not a real ticker) down from $10 to 2.25.

Buffett Dumps Moody’s (and it’s about time). “Moody’s and its rivals did such an awful job on the debt and mortgage ratings game”.

Goldman Sachs: S&P 500 to Rally Most Since 1982. Improving earnings will spur the steepest second-half rally since 1982. Expects S&P at 1000.

Stocks Both Buffett and Soros Hold: ConocoPhillips, Wal-Mart, Lowe’s, Home Depot, NRG Energy.

On Stock Values

Some Stock Advice from Dan Ferris, editor of Extreme Value

I don’t expect investors will make much money in stocks on the long side from current price levels. Dividend cuts, weak earnings, and unattractive valuations are telling you to be careful. Most long term returns in stocks have come in from dividends, not capital gains (because arbitrageurs and institutions make it too hard for the majority of investors). On the dividend side, Procter & Gamble has raised its dividend every year for 53 years. ExxonMobil has done so every year for 27 years. Most stocks are just too expensive compared to earnings. The S&P 500 is trading around 16x earnings. And with banks failing, 10% unemployment, and the middle innings of a once-a-century meltdown. With housing and debt in charge of the economy now, this means a worse outlook for earnings and stocks. In the 1970s valuations sank for a decade through the Great Inflation.

Year P/E
1974 7.3
1975 11.7
1976 11.0
1977 8.8
1978 8.3
1979 7.4
1980 9.1
1981 8.1
1982 10.2
1983 12.4
1984 9.9
Average P/E 9.5

Based on historical standards, the ultimate bottom could be another 39% below the March 2009 low of 667 (12x S&P 500 earnings estimate).

For more information on P/E ratios see:
Investopedia – The P/E Ratio – Understanding Price to Earnings Ratio
Sentiment of Success – What is the Price To Earnings Ratio

Some Stock Market Perspective…

Draw your own conclusions. Mine is that while the worst in terms of severity may be behind us, (note the only decline exceeding 66% was during the Depression), in terms of real value and bear market length we have much more to look forward to.

Note how the illustration adjusts for inflation. If, when rather, inflation come back, probably due to better market conditions, true value for stocks will take a big hit.

Also note how during the Depression, stocks shot up, plummeted down as fast as they came, recovered and then grinded down before staging the next bull market in the 1950s. We see a similar downward grind during the 70s (mostly inflation related). This may again play out in our current bear market.

Finshing for Bottom

Bernanke says that we are due for an economic recovery by year-end. In economic English this would mean that the stock market “should” find a bottom somewhere around June-July… 6 months prior to the recovery.

Time to sell your shares in XYZ?


We all know how Mr. Market chooses to run his place, not very orderly. When everyone is on the buy bandwagon he’ll dump half his shares, only to start bidding them up again a few days later. Have a look at the last bear market. (You try predicting all that!)

While I do believe what we saw back in March was indeed an interim bottom, I don’t think its the last time we’ll see Dow 6,800. So if you didn’t make your 658% yet, its ok. You’ll have another chance. Just please, don’t go down with your own ship.

I suggest, at least, that you start taking profits. The rally may continue for a couple more days, maybe even diving down and coming up for even more air before this bear-market rally is through.

As they say on the Street, you don’t buy bear markets, you trade them, and while the profits have been truly awesome, it’s time to lock in our gains.

When people begin to become skeptical of whether or not this really is a bear-market rally, you can be sure it is.

Stop and Focus!

Those are the words business guru Michael Gerber uses often when expressing to the up and coming entrepreneur what he should do almost always. “Stop. Focus!”.

I want you to consider stocks. Not because we are going to buy, but just to get an idea of how perception, risk and reward aspects have altered over the past few months.

When we shorted the Dow at 13,00 and then again at 14,000, we did so because stocks, in every major form, were a losing proposition.

Technically, they were being overbought and overvalued on every level. The run from 10-14,000 was simply unsustainable.

Fundamentally, they offered a dividend yield that only a madman would accept, especially considering the downside risk they entailed. Book value was high, earnings were equal to historic highs, and thus p/e ratios were both high and overstated.

Sentimentally, people still couldn’t have been more optimistic on stocks than on any other asset class. Analysts kept proselytizing for higher prices, (one even dared to promote Dow 16,000), 401k’s continued to get their monthly distributions, and for the most part risk was entirely priced off the table.

Economic foresight was warning of a serious downturn in the economy, one which would definitely hurt earnings, possibly wiping out companies altogether. But no one cared to notice, saying that the nay-sayers were the same people who had missed out on the 4,000 point rally altogether.

So we had no other choice, and we did what we always do when people are pricing out something which seems inevitable. We shorted.

Now fast-forward almost a year and a half later…

Technical analysis has virtually no meaning today, which we would consider a good thing! This means that people should start focusing more on fundamentals.

Notice I say “should”. At 7,000, the Dow now offers a dividend yield of 4.5%. That itself in such an economy should whet investor’s tongues. Sure there will be many more corporate bankruptcies, but hold a conservative basket of interest bearing stocks and the future is due to be rewarding.

As earnings have plummeted the 17.5 P/E ratio seems almost too conservative. With debt being paid back book valued and balance sheets have improved drastically as well.

Unfortunately, most speculators are paying little attention to fundamental value, but rather to price motion. Sentiment has worn down and has little additional resistance before the market enters panic mode and we see a final capitulation from the share market. This bear in mind would mark, a definite bottoming process.

It should be noted that markets do not bottom in a day. Unlike their Topping counterparts, the trough could take months to form. This offers just enough time to drive the last speculators from the market and allow investors to position themselves properly for the coming multi-tier bull.

So have we seen the bottom? No. Have we seen the worst the market has to offer? We think also no. But one thing is damn certain. Someone who wouldn’t have touched a share for years may suddenly be having a change of heart.

Yes Gold, Silver and Short-term cash is the place to be for right now. But keep your other eye on the ball! One of the greatest equity investment opportunities, possibly over the next 35 years, is just around the corner!

If the Bailout Should Fail

Remember these words:

“It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal… There is no Plan B”.

Those are the words of Warren Buffett. A man who has his money where his mouth is. Buffett seems to have a lot of faith in America, in its Government, in Hank Paulson and definitely in his old Wall Street associates, Goldman Sachs.

But one thing should remain crystal clear. This is not a matter of recession or no recession. This is a matter of depression or a recession. In the event that the bailout would not go through, in the words of the greatest investor in the world “The entire financial system would break down and take years to restructure”.

It seems that investors should have one fundamental question on their minds: Will the bailout go through or not. If it doesn’t the financial system is obsolete and we have a breakdown 1929-32 style: The Dow loses 90% and everything starts over. If it does all work out then we have inflation 1970s style, possibly worse ($1 trillion is a lot), the Dow has a standard consolidation that lasts a few years and the economy sucks for a while.

Thus, we look at the Dow. What the stock market is saying is “I don’t want to be a seller. I want to buy and hold, even if my gains aren’t all that good”. The simple these are mostly the same investors who bought when things were attractive in the first place. Consider the fact that they may still be getting 8-10% on dividends, why should they sell? You’ll never hear any value investor tell you he wants the Dow to go to 20,000. That’s preposterous! Why would he want the only asset he knows to buy cheaply rise in value?

But then there is the speculative crowd. And I say speculative not because they don’t know what they’re buying, many do. But because they buy for appreciation. They believe the Dow will soon go to 20,000, and they want it to. They buy and hold betting that tomorrow some new idiot will come and buy their stock at a premium to their cost. These are the people who will be selling when the sailing gets tough, because their ships are made of cardboard. They will sell and they will be the ones to send the Dow down, possibly to 8,000. Furthermore, they won’t have the gall or bladder to buy at such times. Investors will for once in many years be euphoric.

In the meantime stocks are in a rush-hour-like grid-lock. Speculators won’t sell because its against the whole foolish buy-and-hold mentality they live with. Investors won’t sell a) because they haven’t been buying in ages, b) they already would have, or c) they are the new bulls, ready to step in as soon as things get bloody. Short sellers are out of part of the game altogether.

How do I know all this? Simple: Silver. I owned it from 21 all the way down to 10.50. Does it hurt? Well that depends. If you are out of a job with your life savings invested then probably. If you are a working man, putting more and more of your life’s toil into hard assets, it will mpay off immensely over the long run, so why worry?

The Dow right now should be priced at about 8,000 if it were looking 5 years out. But it isn’t. The market is looking at the next few days. Yes bailout or no bailout. As soon as that’s confirmed, hopefully that there will be a bailout and that the economy will only experience a bad recession at worst, then the next issue is for the Mice and the Buffalo.

The Mice are the risk-takers. The ones who thought they have their cheese and eat it too. They put too much money into too short-term of a gamble and lost. They will sell not because they want to but because they have to.

Buffalo travel in herds. Buy-and-hold today, run for the hills tomorrow. These folk would be better off owning gold. Its just as stupid as they are. They make when everyone makes more and lose more when the smart money takes losses.

It’s Caveat Emptor as they say in Latin, or Buyer Beware. Maybe they should say Seller Beware.

You can’t always change lanes while driving even though the other lane is better ,so too with investing. Sometimes you have to swallow losses. But don’t sell because others are. That’s juts plain foolish. And we are, or at least would love to think we are, Intelligent Investors.

Covering The Shorts!

If this is a hurricane, then I believe we are smack dab in middle of it!

Based on our 1973-74 Trading Radar, I believe we are near an intermediate term bottom! I know it sounds crazy, but I think its just as senile as buying back in March. Bear Sterns had just failed and Gold was at an all-time high. Rates were being cut like crazy and the Fed was lending to anyone who can possibly need it. Shortly thereafter the Dow rallied 1,400 points!

Now, I am not saying to buy stocks! But I do believe that the short-term short-trading opportunity has passed us with the Dow falling over 975 points over 2 days. Stocks ill probably trade within a confined 12,000-10,500 point range for the next few months.

I may be wrong as capitulation may be in order. Therefore I suggest that you at least consider covering. If we do cover and stocks fall incredibly – 1930s style – then we lost a good opportunity. If they rise slightly then we are due to see the 10,500 level often anyway.

Divide your position into 3. Sell 1/3 on the Morrow! Sell another 1/3 when you see supported buying on larger volume. And Hold your final 1/3 until capitulation.

Start building up capital. The major selling opportunity has seemingly passed.


Fair Value of Gold

And Why Investors Buy

We have commented on what the future has in store for stocks, whether you are buying for dividends sake, or for earnings valuations. Now we care to top it all off with an explanation as to why any conservative investor would and should buy gold.

Why So Unconventional?
In the early chapters of The Intelligent Investor, after explaining the balance between bonds and common stocks, Ben Graham goes into a lengthy analysis regarding earnings-price ratio relative to dividend yields. It does not pay, he explains, for the investor to remain invested in bonds during times when inflation of general goods are rising, and is better off holding stocks, albeit the lesser of two evils.

Mind you, the above is written by a man who experienced markets between the 1920s and early 1970s. Unfortunately, when Graham wrote the above in 1971, gold was still unavailable to the average investor and was still linked to the U.S. Dollar. This means that inflation, although an issue had no weight whatsoever with gold, as nominal loss and Dollar devaluation were synonymous.

If his book were written just a few years later I believe he’d be all the more wiser (and wealthier!) and would have urged investors to buy gold as an adequate hedge against inflation relative to interest rates. Real Interest Rates (IRs minus CPI).

Real Interest Rates and Gold
When real rates turn negative due to rising inflation greater than the return on cash, it makes little or no sense to hold anything currency denominated. This is where gold plays a crucial role that it has not played in over 120 years – the ultimate sound currency.

When investors squabble over gold being a hedge against inflation (flight to assets) or deflation (flight to currencies), what they really refer to are real rates of interest. Gold now has the ability to act as both a currency that retains its value amidst a flight from fiscal assets and debt, and a commodity that rises with the tide of the rush to hard goods.

Dow/Gold Ratio
This trend can be seen on a wide scale from the Dow-Gold ratio. Seemingly, the business cycle runs through years of investment and expansion, with money flowing out of cash into businesses, to times of savings and contraction, with liquidity flowing out of enterprise and into the highest yielding accounts.

Not much explanation should be necessary to understand what this ratio represents. Why would I buy shares trading at 20-40 gold ounces when I can just hold my gold and expect to buy a business at a later date at practically parity?

Hold and Buy!
The ratio reminds us that just as the “buy-and-hold” strategy worked so well for so many throughout the 40s, 50s, 80, and 90s… a “hold-and-buy” strategy would have done just as well during the 30s, 70s and 10s.

What would Buffett Say?
Quite frankly, I believe that the wealthiest investor of our time may have missed out on one of the greatest profit opportunity of the decade (excluding Uranium). Buffett himself expressed his thoughts when he said regarding his silver investment “We bought too early and sold too early”. He knows better than to buy into a rally. He missed out and that’s something he’s gotten used to over the years. If you asked me, I think that the $40 billion pile of cash in his portfolio is filling gold’s role as his savings. And don’t be surprised to see him splurge it all at once in the coming months!

Real Valuations
Many investors look for opportunities that stand square in their favor. With the Dow crossing over the 15 ounce line stocks will soon be trading in the lower buying range. The last chance to buy gold is now!

Unless you know of a stock that has fundamentals set to rally over 300% in the coming years, you may want to look into gold!

Buy Stocks?

I am going to make a very bold statement. The source of my “madness” is 50% educated hypothesis and 50% gut instinct. You’ll understand why I call it madness in a moment.

We all know that while stocks like to trend together, they don’t copy each other exactly. Each follows its own business plans, sales, customers and respective wacky technical charts. On the day of the Great Crash in 1929 there were a number of issues, however few, that actually went up in price. The general trend does not concern each stock. One of the prime reasons that the indexes have been falling is because in each financials weigh heavily.

Nevertheless, it is important to realize that while some stocks set in a major bottom in 1982, others did so in 1978, many in 1975 and a few in 1971. Some swam against the tide altogether.

I believe we are experiencing a major bottom in financial and homebuilding shares. This does not mean that they have bottomed yet but the formation is in the making and we are merely a sharp decline away. Nor does this mean that they have sound books or have written off all their losses – far from it. It does mean that the coming panic (double-bottom) will place banking and home-developing shares at prices and valuations that are simply the lowest they can possibly be discounted. I suspect this may happen in as soon as they next few weeks.

Next, a bottom may set in for one sector that has dominated trading desks for years. Can you guess? Technology. Shares of Retailers, Financials, Homebuilders, Manufacturing, you-name-it have fallen over recent months. But some have held up reasonably well – until now. I think that during the major bottom that I expect sometime in late 2009 will offer bargains in some of the names that investors crazed over 10 years ago – Microsoft, Cisco, Apple, IBM. I think even Google will be selling itself unfavorably.

The key is: Safety and Earnings. I am extremely cautious on the banks not only with concern to their own solvency but more so the solvency of the system and the Central Banks to prevent it. If the financial crisis over blows heavily to the point where balance sheets are no longer legible, I would retroactively suspend my case for the Financials.

As for the Homebuilders, I think that very soon a great opportunity will be upon us and investors who look just a few months passed the carnage and bad earnings reports will see a solid balance sheet with a sound business model.

As for everything else, make sure when the market swoon comes, not only have you read the financial reports, but you are ready with trucks rented.

As for now, you want to be in Cash. But there’s a catch to cash – You don’t want to own currencies as they are just as subject to getting slammed as the banks that trade them. The best currency to hold is gold and silver. Sure the Franc, Aussie and Yen may rally too, but nothing will compare to the rush that will influence the greatest price increase (relative to time) in this Precious Metals Bull Market.

There are few currencies that will be safe from inflation – and not the CPI – but rather real family-oriented price-increases. SaraLee has just reported that they will have to hike the price of meats up 20% by year end. Many companies will follow suit.

The commodity that will most probably emulate that increase is Gold. Retail investors are well aware of its characteristics and it seems that, as predicted, small speculators are beginning to catch on as well. Gold seems to correlate very well with fear, to which inflation (read: falling dollar) will greatly contribute.

At that time, whenever it is upon us I’d say: Sell Half your Gold, and Buy Some Bargains! And Buy with Care! This is going to be the best buying opportunity in 35 years!

It’s Time to Revisit The Markets

It’s time to reflect on the predicament of the markets. We ran two editorials in late December entitled “Are You Ready for The “Blue” Year?” and “Some Thoughts on the Markets“. We defined a general outlook for the economy for the year of 2008.

We are constantly reminded that “The more things change, the more they stay the same”, it is far easier to predict what we may see in the future. With that I would like to offer clarity to the confused investor.

Dow/Gold Ratio
The ratio currently stands at 15, with a low of 12.5. Our immediate term goal is 7 with an eventual decline to 3 before the economy pulls itself out of recession.

During the brutal 1973 downturn the Dow Jones Industrial Average fell from 1050 to 570, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 800 to 1000, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 70 to 195 over the 2 years period. Over 178%!

If I were to rewrite that paragraph but multiplying all 1973-75 dates respectively, it would read as follows:

During the brutal 2007 downturn the Dow Jones Industrial Average fell from 14,000 to 7600, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 10,650 to 13,300, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 700 to 1950 over the 2 years period. Over 178%!

Obviously, history will not repeat itself, but it sure as hell does rhyme. I believe that the DJIA will push above 13,000 temporarily and then resume its decline to 7600 vicinity. While gold will trend ultimately to the $2000 level by late 2009.

[One may ask based on these calculations, that Dow 7600 / Gold 2000 = 3.8, well above our factor of 3. Nevertheless, it is most probable that gold won’t peak at the exact time that the Dow bottoms].

Thus the prudent investor will seek refuge in some words from our December article.

“The truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom”.

This simply means the investor can do phenomenally well by simply paying little attention to the media and markets and instead focus on the short yet profitable buying opportunities that present themselves.

With that we move on to some predictions we made back in December of 2007, results since then and what we can expect going into 2009.

The Economy

“When demand is high and supply is low prices must rise, and if by any means they are manipulated or capped they will rise further in no different a logic than the what lead to most of the current problems in housing

This sums up what we’ve been seeing over the last few months, and it can be expected to continue into 2009. The media will keep calling bottoms while credit and leveraged conditions deteriorate.

“There isn’t much we can be sure of in the next year other than the fact that more volatility and election jargon will be stuffed down our throats

This in my eyes was a no-brainer. Tension was all too high and much of the markets movements were based on speculation rather than solid fundamentals.

“Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow”

This may have been too short an outlook, however it is expected before markets bottom. It’s not if, but when.

“Expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat”

This has been seen slightly and is significantly increasing. Foreclosures have doubled year-to-date and increasing amounts of home-owners are just walking away.


Whether or not [we have a Recession]… expect some sort of ‘flation.

So far GDP has been positive so there is no “official” recession. But ‘flation indeed! Stocks have fallen and since found some relief, while commodities have boomed and since corrected. Yet the investor should not be fooled by this.

Interest Rates

“He [Bernanke] really has no choice… right now he sees fear of recession and it’s his job to cater to it”

With rates lowered from 6.25% to 2%, all Fed Discount Windows were opened and inflows have been supplied to the market, not to mention the bailing out of Bear Sterns.


“The Yen and Yuan seem to be holding up fairly well… As for Switzerland? Yeah, I think the Franc should hold up just fine… for the Loony, Real, Ruble and Aussie Dollar the future never looked so bright”

This was mostly due to a declining Dollar. The Dollar may have now found a bottom and this will be sustained when the Fed turns to raising short term rates. Yet if markets follow any similarity to the 1970s, this rally will be short-lived, with the Dollar testing new lows come 2010.


Interest rates are a major part of the equation. The lower rates go the higher the floor for housing prices”

Any economist would agree that the potential damage has been avoided. Yet we are faced with the worst housing recession since the Great Depression and the results will be felt. Low interest rates cannot makeup for decades of careless credit policy.

“Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

According to the Schiller Index prices are down 12% in many U.S. cities.

Oil and Gas

“Oil at $150? …I think oil has more to run… many others say $150 or even $200 before the year is out… Expect higher prices at the pump”.

Right on the money! Oil has risen as high as $120 recently. (with gas prices expected to possibly reach $8 a gallon before the year is out). This may be due to the fact that many airline fuel storages, were running low. Acting as a catalyst this replenishing pushed up prices.

“Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity… Wall Street’s assumption of $50 oil… may be way off target”

This can be seen with regard to possible production decreases in Nigeria, and with regard to metals production from South Africa.

The Stock Market

“It’s all in the earnings… there will be surprises… there will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins”.

Earnings have yet to plummet as stocks are currently down a mere 8% from their highs. Yet while we find ourselves amidst a speculative, yet predictive, short-term rally, we remain within a well defined long-term downtrend. (Is the Dow really selling for 64x earnings?)

Small Banks and Homebuilders

“I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.”

This call is still up in the air. Average bottoms have been presented with indexes selling below book value. They currently sell for 1.3x book.

Commodities and Precious Metals

“When people want food, prices rise”

If I say “Rice, Wheat, Soybeans”, need I say more?

“This will benefit all commodities, as well as gold (The Street gives a $1000 projection). Of course Silver has much further to rise as it regains some historical ratio.”

Talk about psychological resistance! Commodities benefited greatly and Gold went straight to $1000 before correcting strongly. In the case of the Gold/Silver ratio now major advancement was seen. The ratio hovered around 48 before heading as high as 53.5

“In the event that commodities… decline in the short-term this should be seen as a buying opportunity”

We have since been offered this buying opportunity.


“China’s bubble will blow over, but not before the Olympics… After that I suggest you get out, especially if USA Today is announcing record high stock prices.”

China has corrected together with the world markets, but has since regained much losses.

Another great quote from the last article

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

The Contrarian Philosopher

They say good traders happen to be philosophers, and necessarily so. A good analyst must understand what everyone else knows. If a good play has been diluted with public interests, it’s not ought to be that promising. In June we wrote

Contrarians aren’t always right. Many times contrarians are dead wrong – consider shorting the market in 1998. Divergent thinking comes in handy only once fundamental analysis is strongly in play. A stock can be a good value, but if everyone is ranting about it, there may be something you don’t know.

As I read through some of the articles the bulls (as well as those who don’t want to write anything bearish) are writing, it seems that the spectrum has radically changed. One analyst writes that at times when short-interest is at record highs and shorting from floor Specialists are at lows, a bear market has never commenced. This fits with the chanting of all the short-term analysts who, along with all the technical technical analysis (yes), claim that markets remain stable and healthy. The problem with such thinking is that we find ourselves in an information age where the time difference between a headline, the trader wanting to make a trade and the trade being executed, is literally instantaneous. A short ratio can be cleared in a day or two through awfully volatile trading. The predicament may change during after-hour trading and may not even give the investor a chance to position him or herself properly. I mention this to bring up the dynamic concept of contrarian sentiment. Now, the average analyst, upon hearing this will probably roll his eyes. But in essence it is the core mindset; one indispensable to the long-term investor and his decisions. The idea is quite simple: Any great idea may cease to be a great idea if everyone knows it’s a great idea. An example is the “January Effect”. For years it was one of Wall Street’s biggest secrets: “Throw away the bad stocks toward year end as tax write offs and buy them back in January”. Naturally, year after year stocks rallied during this month, however over time as the average investor became aware, returns declined gradually to mediocrity. In the long run the crowd is always wrong. Yes, they may group together and seem equally successful over a period of time, but this will end badly, as did every bubble in history. This said, it becomes similiarly apparent that as the crowd begins to question the crowd itself, you are left with an inverse logic. This is what I believe is occurring in the markets as we speak; an increase in overall volatility as well as a wide spread of critical thoughts from both camps, (calls for both Dow 26,000 and 5,000). When people try thinking like contrarians, they flounder. They will often begin with a biased mindset, moving with ideas congruent with their desired outcome. This may be exemplified by the current logic of the bulls in two ways. Firstly, the “Stocks are long term vehicles and this is only short-term noise” group, remains dominantly strong. As a matter of fact I strongly believe that many astute investors haven’t sold a single share since markets have turned volatile. This will change and the longer it takes to do so the stronger and more crucial the downturn will be. Secondly, some analyst have attempted to claim themselves “counter-bearish” advocating how with so much worry in the air stocks will surely rise. When I look at the stock market I try time and again to see a rationale behind the presented logic. Just two weeks ago the Dow hit an all-time high. Unemployment stands at historically low levels, the economy seems stable and many have just been observant of the subprime mess. The Dollar hasn’t made any major adjustments, the Federal Reserve hasn’t touched interest rates (as they did in 87 and 91), many investors remain calm expecting the action to subside, the Dow hasn’t even reached what is considered an adequate Correction (10% decline), there is still the inventory problem in housing, there is still much speculation in the derivatives market as there are still many bond portfolios that have not yet been re-rated or marked-to-market. How could anyone say that the danger has passed? The contrarian knows to “buy when others are fearful”. When there are no more eager sellers, eager buyers are usually nearby. But where does one see frantic selling? Recent down days by no means represent liquidation, especially when a significant number of those days have been of strong rallies. It seems that now too, many who attempt to beat the market are indeed falling under their own weight. It has long been shown that the average investor wrongfully cuts his gains and extends his losses. In the event of a hard sell-off we may see again, as we have in recent days (and today), surging short-covering rallies. It is quite interesting to note that after every major crash in history a strong rally has followed. It happened in 1929. After October stocks began to climb again. Many investors eager to recuperate their losses, as well as throngs of people previously on the sidelines saw it as a buying opportunity. The market came back strong. Then along came the Crash of 1930 and wiped out investors a second time. This occurred time after time until 89% of investors money was history. Those “long-term” traders waited 24 years to see a positive return on their capital. “Be greedy when others are fearful and fearful when others are greedy” we are taught. And it sure as hell doesn’t seem like investors are running around in panic, desperate to sell shares for pennies on the dollar, at multiples of 10 times earnings, as they have in the past. We wait.


“Gold isn’t competitive with Stocks” says you?

(Click for Larger Image)

…”Take That Alex Green” says I.