California taps the herd... Mr. Market's mischief... Why markets are weak... Sprott: Silver raid won't work... Paper gold vs. metal... Clark: Gold stocks are cheap again... Buffett joins Porter... Housing (still) down...
The State of California can't pay its bills, and its last resort is… you.
California Treasurer Bill Lockyer wants to reduce the minimum denomination of state debt instruments from $1,000 to $25... and list them on the New York Stock Exchange. Why? According to a spokesman for the state treasurer's office, "It puts you in a better position to get the best possible price..."
In other words, nobody overpays for securities like a thundering herd of poorly informed individual retail investors.
Maybe I shouldn't be too hard on the thundering herd. It seems to learn... eventually. Freddie Mac reports 89% of one-year adjustable rate mortgage (ARM) borrowers and 84% of all hybrid ARM borrowers sought fixed-rate refinancings in the first quarter. The trade publication National Mortgage News reports, "For the second consecutive quarter, virtually no refinancers sought out a one-year adjustable or balloon mortgage."
This morning, I got a call from a friend who is a sophisticated individual investor with a large portfolio. He's concerned about the poor performance of his resource-heavy portfolio. I'll tell you exactly what I told him: "If you're resource-heavy, gird your loins for the next few months. It's going to be hairy. You can't have a long-term trend without it unwinding every now and then."
You have to remember something about betting on publicly traded securities. Your partner, Mr. Market, is a manic depressive… a fool who knows the price of everything and the value of nothing. Even worse, he has a mischievous streak a mile wide. His favorite thing to do is invite you in the front door, make you feel welcome, then yank the rug out from under you.
That rug right now is made of short-dollar/long-commodity plays. Everyone still hates U.S. Treasurys, fears inflation, and loves commodities. So for a little while at least, you can expect Treasurys to rally and commodities to correct.
Everybody is afraid that when the Fed stops buying Treasurys on June 30, risky stocks will collapse. So they're selling now, before it's too late. When they sell, some of their money is automatically put into Treasurys. Much of it goes there on purpose because U.S. Treasurys are still seen as safe-haven assets (against all reason).
Meanwhile, gold is about 5% off its all-time high. Silver is still more than 30% off its recent high. The Market Vectors Junior Gold Miners ETF is down 24%. Such is the life of a precious-metals speculator. If you really want to get inside precious-metals markets, you have to talk to someone who's had a great deal of success there, and lives and breathes them...
Eric Sprott of Sprott Asset Management gave another great interview last week on Max Keiser's popular financial cable TV show. Sprott calls silver the "investment of the decade."
He says he's a "net buyer of silver every day... I'll be a buyer of silver today... I'll be a buyer of silver tomorrow." He believes silver will eventually trade at a 16:1 ratio with gold (the current ratio is 44:1). And he said the ratio may overshoot to 10:1. At current prices, a 10:1 gold to silver ratio implies $148 silver – more than four times today's prices.
Sprott thinks the recent plunge in silver prices was a "bear raid" – when some investors band together to drive the price down. We saw silver drop $6 late on Sunday. That was immediately followed by a margin increase. Ultimately, Sprott doesn't think the raid will keep prices down for long. The silver market is just too small. He says…
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One of the things we should look at is the trading of silver in the paper markets… the Comex and the SLV. Last week, it averaged 1.2 billion ounces per day. There is only 700 million ounces mined in a year. There is only 33 million ounces of physical silver that is available for delivery by the commercial shorters. If something like 3% of the people that were trading silver in one day demanded physical delivery, there would be no silver on the Comex... The key market is the physical market. I don't think this raid is going to work. |
You can watch the entire interview here.
Lots of investors worry the precious metals funds don't own the metals they claim. Perhaps that fear is spurring some large investors to dump their SPDR Gold Trust (GLD) positions. We already covered the rumors of George Soros' fund selling its gold. The latest round of quarterly filings confirms the sales...
As of March 31, Soros' fund owned 49,400 shares of GLD, down from 4.721 million at the end of the fourth quarter. The fund also dumped the 5 million shares it owned in the iShares Gold Trust (IAU). Soros increased positions in some gold mining stocks, but nothing major.
Eton Park, the hedge fund founded by Eric Mindich, dumped 48% of its GLD position. The fund now owns 2.328 million shares.
It's possible the two mega-funds are simply taking profits. Or maybe they're moving their gold out of the public eye. David Einhorn of Greenlight Capital sold his firm's gold ETF holdings and bought bullion. Einhorn was concerned about counterparty and systemic risks. Buying bullion lets funds accumulate positions quietly, without the need to report their buying in SEC filings.
For long-term trend players buying big-cap gold mining stocks, this could be a great moment to buy. Barrick and Newmont trade around 12-13 times earnings, and gold is still near $1,500 per ounce… a price at which they make huge profits. So while some funds are selling gold, John Paulson is loading up. He kept his $4.41 billion position in GLD unchanged. And he added to his stock positions in AngloGold Ashanti and Gold Fields Ltd.
Our own Jeff Clark says gold stocks are the cheapest they've been in two years... And he's buying. In today's Growth Stock Wire, Jeff notes the discrepancy between gold prices and gold stock prices…
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In March 2008, gold hit $1,000 per ounce for the first time ever. It's now trading for $1,500 per ounce. Shares of GDX hit $55 per share in March 2008. Today, those shares are still trading for $55. |
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In other words, gold is up 50% in the past three years... while gold stocks are unchanged. |
The chart below shows the exchange-traded fund GDX (a basket of gold mining stocks) versus GLD (the gold proxy). A low number means gold stocks are cheap relative to the metal. A high number means gold stocks are relatively expensive. As you can see, gold stocks are cheap relative to gold itself…
In his S&A Short Report, Jeff delves deeper into the opportunities in the gold stock sector. One of his favorite trading indicators shows gold stocks are at the same point they were last year – just before a huge, one-month rally in the sector.
Jeff is recommending calls on one of his favorite mining stocks... This stock has excellent fundamentals (tons of gold in the ground), and is trading near its 52-week low. If gold continues to trade in its recent range, Jeff expects the trade to return 100%. But he's even more bullish than that... A small rally in the gold market could push these calls to a quick 175% return. To learn more about the S&A Short Report and access Jeff's gold trade, click here...
Buying gold is one way to protect yourself from an economy being flooded with new dollars. Payment processors are another. That's why Porter recommended Visa, the world's largest payment processor, in the June 2009 issue of Stansberry's Investment Advisory. His reasoning was simple…
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The financial institutions that license [Visa's] brand do so on the basis of transaction volume. The more money people spend on their Visa-branded debit and credit cards, the more money Visa earns. (This is important: Visa doesn't hold any of the debt put on those cards. It merely licenses the brand and receives a fee for processing the transactions.) |
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Ergo, the more money that exists, the more money Visa will make. It's perfectly correlated to inflation. |
Today, Berkshire Hathaway disclosed a position in MasterCard, the second-largest payment processor. Warren Buffett's company owned 216,000 shares of MasterCard as of March 31 (valued at $60.3 million). It's not a large position for Buffett, whose total equity holdings exceed $63 billion. But it's clear why he bought. Buffett is worried about the debasement of the dollar and inflation. This position, in addition to his "World Dominator" stakes, is more proof of his thesis.
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New 52-week highs (as of 5/16/11): Dreyfus High Yield Strategies Fund (DHF), Abbott Labs (ABT), Eli Lilly (LLY), Procter & Gamble (PG), McDonald's (MCD), Altria Group (MO).
We'd like to hear from anyone who doesn't agree with us about The End of America. If you think we're wrong, write in and tell us at feedback@stansberryresearch.com.
" I am a long-time reader and subscriber. You have even been featured lately on my favorite program, The Alex Jones Show. This endorsement by Alex Jones only confirms what I've known about you and your firm for years. Your research is reliable and you don't care what the rest of the world thinks or says about you. Bravo!
"However, I am a little confused about what S&A's position is on whether Tax-Free Municipal Bonds are currently a good investment or not. We all understand the debt crisis that this country is in. And this issue not only affects the Federal Government, it will probably cause the default of most States and Municipalities as well.
"So what gives? In the past, S&A publications have recommended shorting Municipal debt because there is only one Insurer left standing. Now in today's DailyWealth article titled "Don't Let Wall Street Scare You Out of This Year's Best Income Bet" Dr. David Eifrig highly recommends Tax-free Municipal Bonds and says that we should not fear their default. ??? Again, I am a believer in your research because you've made me a lot of money. But I'm not sure what position I should take on Muni's now. Thanks!" – Paid-up subscriber Mike Dubuss
Porter comment: As I've said before… I don't pay my analysts as much as I do to tell them what to write. Sometimes we disagree… or at least we seem to. You'll have to read what we've both written about the topic and decide for yourself. That, as you know, is the responsibility of a free man.
Regards,
Dan Ferris, Sean Goldsmith, and Porter Stansberry
Medford, Oregon and Baltimore, Maryland
May 17, 2011