Complete Breakdown

Today was a rough day. Pretty much everything was down. Wachovia posted a $23.9 billion quarterly loss…largest ever for a bank! How does that happen? It sure takes a certain sort of talent to accomplish that. As I expected, McDonald’s had better than expected earnings; and, yet, they were down for the day by 1.7%. That really shouldn’t happen. Also, some of the gold shares I bought yesterday are already down by 5+ points. Everywhere I read and every dealer I speak to is reporting shortages in both silver and gold. Their spot prices really should be higher. Will it eventually happen? If and when it does, I imagine it to be a violent upswing. That is why I have started buying some gold shares to go with my gold and silver bullion holdings. What this tells me is that the selloff by the hedge funds is not done yet. Today’s market really made each of us look like a deer in the headlights.

As a hedge for future downswings, which I am sure we will continue to see, you might want to buy a few shares of SDS (ProShares UltraShort S&P500), SRS (UltraShort Real Estate ProShares), and SKF (ProShares UltraShort Financials)…either all or pick and choose. RESEARCH BEFORE BUYING but these should spike up when the market is down. I would wait for these to retreat a bit before diving in. I currently own SRS as it’s chart, a few weeks ago, made it look like real estate was healthy as ever.

Until the hedge funds and investment firms have covered all of their shorts and have unwound their positions (in the case of margin/capital calls and redemptions), the baby will be thrown out with the bathwater. As I said in the last post, tread carefully and do pick up small lots of shares until we hit a floor. Don’t invest capital that you need to live on!

Here are some articles for you:

• Here is an article discussing how spending on gold is nearing $3 billion.
• Here is a video on Sprott Asset Management’s chief investment strategist, John Embry, discussing how gold prices have been suppressed on the New York Commodities Exchange. He speculates that there will come a time when long contract holders may call for physical delivery of enough December contracts, and the exchange won’t be able to deliver enough real metal. That would be something else! Gold would surely take off then.

It’s difficult waking up each day when the government chooses to aimlessly print more and more money to patch up the holes. The problem is that this is not a US issue but a global issue…India, China, Australia, New Zealand, and Russia are all feeling the effects. It’s going to be some time before the bottom is realized. When it does, the areas to prosper will be the precious metals, basics, and large blue chips.

I can only hope to keep you informed along the way and to be financially prepared as to how to profit from this.

Regards,
Moolah

The Dollar Rally…Gold and Silver

Hey everyone,
I hope you had a pleasant weekend. As for me, I had a great sushi dinner (ever had a sushi taco? hmmm!) on Saturday and enjoyed the South Florida sunshine all day Sunday.

Yesterday, we had a nice rally in the global markets and it seems to be continuing through today. However, the US markets (the Dow) opened down by more than 100 points but, as I am writing, it almost reached par but is now off by 2%. Will the dollar continue its rally? Is gold and silver dead? I think we will see a temporary rally, which should allow for you to monetize some gains or near break even positions. Nothing fundamentally has changed. So, do keep that in mind as you continue to see these wild swings and periods of high volatility in action.

Specifically, with the US dollar rally, I think it will soon end. When? I am not sure but I think it will occur by year end. The reason I think so is because the dollar is not in a bull market but rather in a period of short covering. This is similar to what was happening when the SEC threatened to make short selling illegal for financial stocks.

International companies typically borrow in a currency that is depreciating relative to their domestic currency. This allows for easier repayment of debt since their debt would fall in relative value to their earnings. So, when Russia invaded Georgia, this triggered a massive selling of euros resulting in a sell euro/buy US dollar trade. Consequently, we have been seeing the short covering of US dollars. During all of this, nothing fundamentally has changed with the US dollar. If anything, it has worsened with the ongoing pumping of US dollars into the system. Check out this stat…the Adjusted Monetary Base has soared from $873 billion on 9/10/08 to $1.017 trillion as of two Wednesdays ago! That can only be US dollar negative.

This is why I am now starting to buy some gold stocks (Seabridge, GDX, Barrick, etc) while maintaining a strong cash position because I don’t think we are at a bottom from an economic standpoint…the increase in credit card debt and default in auto loans have yet to hit mainstream. With the increased supply of US dollars in the marketplace and since gold metal is drastically outperforming gold stocks, I feel confident that gold stocks should be higher in the near term to a year from now. Of course, stocks can continue to get cheaper but, historically from a gold metal to gold stock ratio, that is unlikely. So, either gold stocks need to rally or gold metal needs to fall. I doubt the metal will fall considering the amount of US dollars we continue to pump into the marketplace. If I get a short term positive pop, I plan to sell because this market is still very volatile and no one went broke making a profit!

As for McDonald’s and Wal-Mart, which I have previously recommended, they are holding strong amidst the market volatility. JP Morgan included McDonald’s in its “16 stocks to own” list. As for quarterly earnings, I expect both to have had a great quarter.

There is still a lot of unwinding of positions by the hedge funds at moment. So, tread carefully in the markets, hold cash, and be quick to monetize gains. Hope your day goes well and here are some articles for your reading pleasure.

• Check out the new highs that gold is making in currencies other than the U.S. dollar. Here is the article.
• This article describes the strong demand for silver.
• Economist Mundell says China should buy all IMF gold to hedge its US dollar exposure. A bit extreme but an interesting article nonetheless.
• In this article, the IMF says that all major European economies will be entering a recession. As I said, more bad to occur…we are not in the clear yet since all of the current economic issues are global issues.

Until later,
Moolah

When To Buy? The Million Dollar Question!

Hey folks,

I hope you are doing well today and looking forward to the weekend. Today’s blog won’t be long as there really isn’t a whole lot of new news (is “new news” that proper English?) today. It’s the same thing…government intervention, stocks getting beat up across all sectors, hedge funds continuing to unwind their positions, etc. This only means that stocks are getting cheaper, which means we get to be happy buyers. The question is when?

I chatted with a friend of mine yesterday about life, the markets, and whether this was the time to buy. Warren Buffet says it’s time to buy. Who can argue with the Oracle from Omaha! Check out his article here. My take is that stocks are cheap right now, they may get cheaper, gold and silver should be higher given the flooding of US dollars into the market, there is obvious market manipulation of gold and silver prices per my blog two days ago, and what the US markets have been struggling with over the past 2 years is now entering the European and Asian markets, which is evident by inflation issues in India and China consumption of raw materials and basic materials slowing down. So, how am I approaching this market?

• buy small tranches (portions) of stocks in global leaders and keep buying if prices continue to go south (i.e. Coke, Wal-Mart, McDonald’s, Exxon, Johnson & Johnson, Microsoft). You could also sell puts on stocks you would like to own and/or sell covered calls on stocks you already own since the premiums are very attractive right now due to market volatility (check out the VIX index…around 70!).
• buy gold and silver bullion (if you can find any)
• buy gold and silver ETFs (GLD and SLV)
• buy GDX (gold miner ETF) and SSRI (silver standard resources) and other mining companies with proven reserves and that are actually mining. Considering gold has held its own throughout the year, the mining stocks have been slapped downward by well over 30%.
• buy some uranium stocks because I feel nuclear technology is the only way countries can truly become independent of Middle East oil. This is more speculative since trading volume in this sector is very low and the spot price for uranium has crashed from its recent highs. If McCain wins, this sector should explode since he wants to build nuclear reactors in the US. If Obama wins, it will continue to stay suppressed until uranium shortages occur due to overseas consumption.
• hold 15-20% in cash for now until a floor has been established in the markets

Basically, I think valuations are low, and I want to start buying but in small portions in case prices continue to go down. Once there is the obvious floor in the market, then I want to load up on the above mention global giants. Also, I like gold and silver as I feel the US dollar will devalue over the long term and feel the Euro will continue to break down and some of the mainland European countries may eventually back to their own currencies. My view on the Euro is that multiple countries, one currency, and all on different agendas shouldn’t work.

Here are some articles to take with you into the weekend:

• Warren Buffet says he doesn’t know when the floor in the market will be but he is a buyer right now at these historically low valuations. Here is the link.
• What will happen when the time comes to sort out Lehman’s CDS derivative mess? Read about it here.
• Will commodities be the next market to get slammed by counterparty failures? Here is the article.

Enjoy your weekend and speak soon. If you have any questions, post a comment or e-mail me at moolahtimeletter@gmail.com.

ciao,
Moolah

Will The Real Bailout Plan Please Stand Up? Retail Sales Tumble. Natty Gas or Oil? Should We Take A Lead From The French?

This is driving me nuts. What seemed to be life and death a few weeks ago is now no longer so important? I remember just a few weeks ago that Hank Paulson was on his knee (behind closed doors of course) pleading with Congress to get agreement on the $700 billion bailout to buy bad loans. The package is being rewritten on a daily basis (Bernanke said it is still “evolving”) and there seems to be no one around to approve this. Now, the dollars are going towards propping up the big banks in the form of preferred shares. How does that help the everyday Joe? I would be more confident if they bought common shares. As it stands right now, only less than 15% is still earmarked for buying mortgages. Ultimately, it will probably be less.

So, it looks like reality (unemployment on the rise, retailers in trouble as consumer spending takes a hit, credit card debt on the rise, etc.) as stepped back into the equity markets. We are down over 3% in the Dow as retail sales were lower than expected…actually the worst in 3 years. More specifically, the Commerce Department reported today that retail sales fell 1.2% in September, which is nearly double the 0.7% drop expected by economists. Even when auto sales (3.8% decline) were stripped from the data, sales still fell 0.6%, which is three times the 0.2% decrease economists had forecasted. So, how do we profit from these stats as the holidays are soon to arrive? Rather than take the kids on a vacation, parents are more likely to buy toys for them. Rather than buy clothes from Macy’s and Bloomingdale’s for friends, purchases are more likely to be made at discount retailers. Companies with strong distribution models and ability to sell a wide range of consumer goods rather than focus on specific brands will flourish in this environment. That is why I think Wal-Mart will stand out in the end. Additional companies to prosper include Costco and Target.

To show the trend of retail sales for the last few months (excluding automobile sales, building material sales, and gasoline station sales), check this out as it definitely tells the story of how we are trending:

• September: -0.2%
• August: +0.1%
• July: Flat
• June: +0.3%
• May: +0.7%

If we head into a recession, which will hold better: oil or natural gas? Take a look at the data (from the Energy Information Administration) and info below that I pulled from an investment letter I subscribe to:

Use                            Oil                      Natural Gas
Transport                   70%                            3%
Industrial                   24%                           34%
Residential               < 5%                           22%
Electricity                   2%                            30%

So, what does this tell us? During a recession, transport and industrial activity should fall. These categories comprise 94% of the total use of oil but only 37% for natural gas. Residential use includes cooking, heating, and hot water. This should remain stable during a recession because people are likely to curb spending on eating out, going to the movies, etc. and more likely to spend more time at home. We are already seeing that today. So, this is why, especially at today’s prices, natural gas should hold up much better than oil.

Not sure if you caught the CNBC program last night discussing nuclear energy but it was interesting and an eye opener. Here is a link to a summary presentation and another link to additional information covered on the program. A few key takeaways:

• A finger tip of uranium produces as much energy as a ton of coal.
• France currently produces circa 80% of their energy from nuclear means. They are truly energy dependent.
• Nuclear energy is clean and the waste is 96% reusable.
• Dr. Patrick Moore, a founder of Greenpeace, now supports it and said he would be happy to live inside a nuclear reactor.

My thought is that for the US and other nations to truly be energy independent (granted you are not a nation in the Middle East), nuclear is the only way to go. Solar, wind, and hydro will help but alone can’t bridge the gap. The uranium spot price and related mining companies had an amazing and unsustainable ramp up over the last few years and have since crashed ($140/oz to $60/oz spot price) due to hedge funds piling in and then having to dump them due to having to raise capital because of the mortgage crisis. Once nuclear energy takes hold and the economy settles down, an opportunity will arise where we should invest in these companies.

Here are some articles and charts you might find useful:

• This graph should tell you all you need to know regarding which banks control the gold short positions on the Comex.
• This article discusses the issue with gold and silver bullion shortages and the current spot prices telling two different stories.

Well, earnings season has started. I am planning to sit on the sidelines for now due to the government intervening being in full force (consequently, shorting the financials is done for now) and see what the companies have in store for us. As I have said, once the dust settles, that’s when we want to make bigger bets. I have been told by some very wealthy individuals that I like to emulate, “if you really want to make big money, you need to know one thing: when to bet big and when to bet small.” Funny thing is that I read a similar quote today by a successful trader in an investment letter that I subscribe to.

ciao,

Moolah

Monkeys…And How To Make A Quick Buck

Some humor for you. A buddy of mine sent this to me.

Once upon a time, in a place overrun with monkeys, a man appeared from the jungle and announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man then bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort. The man then announced that he would now pay $20 for each monkey.

This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching.

The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one. The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

While the man was away the assistant told the villagers, “Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each.”

The villagers rounded up all their savings and bought all the monkeys. They never saw the man or his assistant again, and once again there were monkeys everywhere.

Now you have a much better understanding of how the stock market works!