This must be some sort of intermediate top for gold...
Northwestern Mutual, the third-largest U.S. life insurer by 2008 sales, bought gold for the first time in the company's 152-year history. "Gold just seems to make sense; it's a store of value," said CEO Edward Zore. "In the Depression, gold did very, very well."
The insurer bought around $400 million of gold. Zore believes the price could at least double and possibly quintuple if the economy continues to weaken. "The downside risk is limited, but the upside is large," Zore said. "We have stocks in our portfolio that lost 95%." Gold "is not going down to $90."
If we're right, the Northwestern Mutual gold purchase means the yellow metal is due for a correction. That'll set you up for one more chance, possibly your last, to pay reasonably cheap prices for some of the highest-quality gold and natural resource stocks around.
The easy money in gold is gone. That was made most recently when contrarians bought into the panicky lows of last fall. But the big money in gold and natural resources has yet to be made...
The big money will be made after the gold price has risen to $1,500 or $2,000, and probably much higher. That's when gold gets more and more mainstream. Sooner or later, everybody with an online brokerage account or a 401(k) wants in. The gold market is tiny, so the metal and most stocks related to it will take off when everybody wants in at once. That's when the suckers will place huge losing bets... and the shrewdest gold investors who planted seeds today will harvest the biggest gains. I strongly caution you not to wait and find yourself among the dumb-money suckers. I strongly encourage you to find out right now how to get in the big-money "harvester" group.
Gold and natural resources royalty holders might just make the biggest money of all. A royalty holder's job is to sit back and collect cash. Royalty holders don't own mines, and they don't do exploration work. They buy royalty interests in mines before the miners start digging. Then, they collect their share of the revenues without having to contribute any of the enormous operating expense. They aren't on the hook for capital expenses, either.
I've researched and recommended three stocks heavily involved in natural resource royalty opportunities and other low-downside/high-upside opportunities. Their balance sheets are excellent, the management teams are world-class, and they all have excellent sources of steady cash flow – unusual for small mining-related operations.
Several years ago, when gold was in the doldrums, I heard a Canadian stockbroker recount stories of the 1970s gold mania. He said he was buying stocks for his clients when he and the clients literally knew nothing but a ticker symbol.
Extreme Value takes a different approach, focusing on the financial and operational details of the business, sometimes even delving into the history of how the business came to be. Those details are what separate the winners from the losers, especially when you're buying a small-cap Canadian company you've never heard of before. The fact that we're acquainted with some of the big players in global exploration mining finance has helped us out, too.
If you want to be an informed gold investor with a detailed knowledge of the stocks you're buying, you might want to check out the three gold/natural resource picks in Extreme Value. Get access by clicking here.
We keep telling you gold is money, and now it seems the world's cocaine dealers agree... Our friends at Clusterstock found a great article from Telegraph noting a "very suspicious" 174 tonnes of gold compound exported to the Dominican Republic – which is not known for its flourishing gold trade...
The transformation of the Dominican Republic into a key staging post in the cocaine trade between South America and the US, is a far more likely.
Wouldn't it be interesting if drug smugglers have seen the writing on the wall for the paper dollar and will now only accept payment in gold bullion?
SocGen analyst James Montier says the U.S. market has returned to fair value, "having been cheap for all of about a day." Montier suggests even experienced investors could be sucked into another bubble, given enough liquidity.
The Fed has more than doubled its balance sheet since last September. Are its efforts to reliquefy the financial system enough to create another bubble and another crash? I don't know, but I read somewhere recently the stock market is on track to follow the trajectory of 1929-1931, over which time it lost 90% of its value. Wow... better be careful out there.
The smartest investors I know are looking for good short-sale candidates. My colleague Jeff Clark says, "The stock market is poised to collapse." In addition, he thinks one financial company's chart looks more bearish than the rest... In the long term, he thinks this company will collapse. In the short term, he's constructed a trade that should return 400%. To access Jeff's research, click here.
Acer, the world's third-largest maker of personal computers, will soon start shipping a "netbook" computer that runs Android, a free operating system by Google. The main attraction of the Android operating system is that it's the only operating system that lets you power up in 18 seconds and power down in just one second.
Acer customers will have their choice of Windows or Android. Microsoft charges $20 for Windows XP and $40-$45 for Vista. It has an 80% market share for so-called netbook computers – small, highly portable laptops without disc drives.
Don't count Microsoft out. My friend Vitaliy Katsenelson says Microsoft is the Susan Boyle of software. Susan Boyle is the shy, middle-aged woman who wowed audiences with her beautiful singing voice on the TV show Britain's Got Talent. Katsenelson says "Expectations created by Vista for Windows 7 are incredibly low for Microsoft, but 7's success is likely to be very high." Windows 7 comes out later this year or early next year.
People love to say how Vista was a flop, but with a 24% market share, it was second only to Windows XP, with a more than 60% share. Microsoft trades for a little less than 11 times free cash flow, so the horrible sentiment about competition from Android and the "flop" of Vista are already priced into the stock.
Leave it to the U.S. government to screw bank shareholders one final time before losing its preferred stakes... The Federal Reserve told the 19 banks that und
erwent the stress tests that they must raise money in the equity markets before they repay their TARP loans – even if the stress tests indicated the institution in question did not need any more capital to survive. And banks are racing to remove the "scarlet letter," as dubbed by JPMorgan CEO Jamie Dimon, of TARP money as soon as possible...
JPMorgan Chase and American Express – two of the nine institutions deemed to have no need for additional funds – both went to the equity markets today. JPMorgan sold 142 million shares for $5 billion, diluting shareholders 4%, and American Express sold 19.8 million shares for $500 million, diluting shareholders 2%.
Morgan Stanley, which the Fed told to raise more capital, sold $2.2 billion in additional stock today after selling $8 billion in shares and debt last month.
After announcing the stock sale, JPMorgan's Dimon read from a mock letter to U.S. Treasury Secretary Tim Geithner... "Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did."
GM and Citigroup were making the Dow Jones Industrials look really bad, so the Dow people kicked them out and brought in Cisco Systems and Travelers, the insurance company (a former subsidiary of Citigroup). The switch is effective June 8. You may recall that last fall, AIG was giving the Dow a black eye and got replaced by Kraft Foods.
New highs: none.
In the mailbag: Huge deals on flat-screen TVs... If you think that's a sign of impending doom, let us know: feedback@stansberryresearch.com.
"Now that you have me completely confused and totally up in the air with indecision, let me explain. I am a 76-year-old practicing ophthalmologist. I have NEVER invested in stocks or bonds or any financial instrument. I have acquired some disposable cash and have subscribed to your program thinking you were going to 'show me the way' which you probably are, except I don't understand how to do it. This is obviously not a program for a novice investor. I thought you were going to tell me exactly how to do this. But when I read your S and A digest, I am continually directed to another advisory letter to subscribe to and on and on. You've got my head spinning. I work full time in Ophthalmology and don't have the hours to spend studying all of these things. I'm afraid you're going to lose me. I've already subscribed to two programs, opened a Scottade account, deposited some funds, and haven't made a single purchase yet because just when I think I'm ready to do so, you direct me to another 'letter' or service. I just can't keep up with you. You're not helping me." – Paid-up subscriber John Colombo
Ferris comment: Stansberry & Associates' products don't constitute a formal educational program, though we do try hard to make our ideas easy to understand. We publish several different newsletters, all written by different editors with different points of view. And yes, the daily Digest will always be filled with links to our other products. If we don't stay in business, we're not much good to you.
It's hard to know exactly how to help you since it's not clear which publications you have subscribed to... Some of our products are more appropriate for beginning investors than others. A call to our customer-service team at 888-261-2693 may help straighten things out.
Overall, though, it sounds like you're doing the right thing, which is not pulling the trigger until you're comfortable with your level of knowledge. Before you buy one stock, you should read chapters 8 and 20 of Benjamin Graham's Intelligent Investor. Skip the other chapters, and go straight to 8 and 20. Read them through four or five times each and really think about what you're reading. Chapter 20 in particular is the most important thing you'll ever read on investing. You should learn to read financial statements, which it sounds like you might not know how to do.
"The GM saga appears to be a replay of British Leyland back in the '70s and '80s. It still has a long way to go, but I think the destination will be the same!" – Paid-up subscriber Doug
"You said 'These real-life experts (Paulson, Einhorn, Rogers, and your humble editor) believe America has entered into a new period of rampant monetary inflation.' My only concern with that statement is that if they are wrong, if they and the rest of the people trusting in their expertise for their retirement funds and pensions are just being led down that path like cattle to the slaughterhouse, when it all does collapse under the weight of the global deflation your experts seem distracted from seeing, those losses will be used eventually as a justification to nationalize (loot) everyone's 401k and pension funds. As for inflation versus deflation, about 6 months ago I noticed a particular low end 42" plasma TV selling at my local Wal-Mart for $1195. Four months ago I noticed it was $995. Three months ago it was $895. Two month ago it was $795. One month ago it was $695. This past week it was $595. So over the past 6 months, the price of that particular item dropped by 1/2 (as did the higher end models). I just don't think your experts are right about inflation, now or at any time in the next several years. Many of the things that your experts seem to believe are inflationary, if you look a little closer, are really deflationary. You all are being distracted and taken in by people doing everything in their power to obscure reality for their own benefit, and the detriment of everyone else they are deceiving. All of the markets are being manipulated to a degree that boggles the mind, to create the false perception you are seeing, yet you and your experts seem to believe you know how to value them. Good luck on that." – Paid-up subscriber Leland Hosford
Ferris comment: Anybody can be wrong, but I think inflation is the ever-present risk in our system, and deflationary events are the great opportunities. And if you think Wal-Mart's ability to offer TVs at a lower cost has anything to do with inflation, you need to learn the definition of inflation...
Inflation has one definition: an expansion of the money supply relative to the same or fewer goods and services. Inflation is not measured by the price of TV sets at Wal-Mart. (Nor is it measured by the price of Big Macs at McDonald's, though some people try to do that.) Inflation is measured by how much money has been created. Lately, the Fed has created money at an unprecedented rate.
Last September, the Federal Reserve's total reserve bank credit was less than $900 billion. It was at $2.07 trillion last week. THAT'S INFLATION. The Federal Reserve created that money out of thin air (thin electrons on its computer system to be more accurate). Click here to see the average weekly reserve bank credit balance as published by the Fed.
Our money is created by the Federal Reserve and multiplied into
existence through the lending and depositing activity of the banking system. Wal-Mart has nothing to do with it.
Since the bulk of our money is created in the banking system and the banking system's assets are not doing well, the effects of the Fed's inflation have a harder time making their way to the economy. When and how deeply inflation's effects will be felt is impossible to know with any precision. But the inflation is there. It has already happened.
"I love the Direct Line. Thanks so much for your levity! It helps save my sanity."
Ferris comment: We've gotten a lot of great feedback on Jeff Clark's daily market "blog." S&A Short Report subscribers can access it here.
Regards,
Dan Ferris
Medford, Oregon
June 2, 2009