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Since childhood I have followed the markets as my father had done, turning a school teachers salary into over one million dollars when he retired by investing in the top mutual funds. I think mutual funds day has come and gone, with ETF's now the best way for an investor to trade. I am a... More
  • End of the Year – Where are we now?  0 comments
    Dec 19, 2010 6:56 PM | about stocks: GLD, SLV, SH, SEF, SLW, EGO, PALL

    Well it’s been an interesting few months.  My warning on bonds is now coming to fruition.  QE2 was promised to bring down interest rates so more could buy homes or refinance which would make more money available in the economy for what is called ‘velocity’ and the opposite happened immediately!  Treasury yields went up 40% in one week alone.  This is now enough to start the worries about inflation.  Food costs and oil are also going up.  What isn’t going up is housing costs.  That unfortunately may still go down, some forecast almost 20% in certain markets.  I don’t consider NY to be one of them, but softer prices will certainly occur now.  Mortgage rates have risen.  Why?  Because mortgage rates are tied to the 10yr Treasury Note.  If you’re curious, I’ll tell you an interesting story about my attempt to refinance the last 3 months.  In short, no one would call me back until the yield went over 4%.  Not even my own bank, JP Morgan Chase.  The day the rate went over 4%, BOTH Wells Fargo, who I at least had a sometimes dialog with but couldn’t get calls or emails answered, wrote to me asking if I was ready, and my own mortgage company called me at home, saying “we understand you were interested in refinancing”.  Yeah, back in September!  The banks who are sitting on record piles of cash don’t want to lend to anyone.  I’ll boast here, one of the credit rating services listed me as an 813 credit score.  If I couldn’t get a loan, no one can.  

    As I told you months ago SELL YOUR BONDS NOW – unless they are TIPS (Treasury Inflation Protected Securities).  They are taking a hard hit and still declining.  There is no place for them to go but down.  This will wipe out many retiree’s so it sickens me that not enough people are warning them.  Since QE2 started and we’re printing money (the Fed denies this, but everyone knows it to be true) our T bill rates have skyrocketed in just 2 weeks time.  This will only get worse.  If you remember Ben said he wanted to do QE2 to bring rates down further.  Nice going Ben.  Now we’re really in a jam, if we weren’t already.  

    How about the market?  Well, I was definitely wrong in the timing.  Of course who expected Ben to start QE2 back at my last writing and see the direct opposite effect he wanted?  Here is the story.  Stocks had just about topped out when Ben announce his QE2 plan back when he was at Jackson Hole, hobnobbing with International bankers.  Since that day, the market has gone up and up and up.  Why?  Because this adds liquidity to the market.  Unfortunately the Fed cannot control where the money goes.  Where it has gone is to banks (or course) who used it to invest in Emerging Markets and Commodities, which we’ll talk about in a minute.  This got so bad that Brazil tried to put controls on outside money coming into the country because it was creating a rather large bubble in their stock market.  So much for the Fed helping out the average American.  It inflated all sorts of commodities and emerging market equities, as well as our own markets.  Didn’t do a damn thing to help the housing market or unemployment which was part of the reason to do this.  The only positive in that regard which has happened is we are losing jobs at a slower rate, but not really creating new ones fast enough.  Remember, we need to create about 200,000 jobs/month just to stay even.  People feel better about the economy and are starting spend and s.l..o…w….l…..y  starting to hire.  Companies are sitting on a RECORD amount of cash which looks good on the balance sheet which has helped in moving our markets up but has come on the backs of laid off workers and depletion of inventories.  It has NOT come from true growth which is way harder to achieve.  Therefore, it is an illusion that our market will stay where it is.  Sometime in early 1st quarter, watch it start to go down, and it will continue.  You can buy an ETF called SH to short the S&P or SEF to short the banks.  Believe me the banks are vulnerable and will get what they deserve.  You will need to time this though and I’m too busy to alert everyone when I do it but when the market seems to tumble over more than 6 or 7 days, or drop over 100+ points in a day, that will be the time.  That is of course unless there is QE3 which Uncle Ben mentioned on 60 minutes 2 weeks ago is now a possibility.  Gosh, is there no end to this????

    OK, Commodities and Precious Metals.  Finally some good news.  As you know, Gold and Silver have made unbelievable price gains the past few months as I told you.  (Even better was Palladium(NYSEARCA:PALL))  If you missed out then, a pullback which could come any day now is due.  Watch for Gold to go down to 1325 or even 1250.  If it does, it is another buying opportunity.  DO NOT miss it.  As our paper currency becomes less valuable, precious metals will go up.  Silver (NYSEARCA:SLV) and Silver Wheaten (NYSE:SLW) are good picks, along with GLD and EGO (my favorite gold miner).  Make sure you have some precious metals on hand.  If you want to own physical gold or silver, I highly recommend you doing that as well.  Buy silver eagles after the pullback.  You can buy from kitco.com or apmex.com online.  They are both reputable and offer very close to spot prices.  Most local dealers mark up even more, so decide which to do,

    Commodities.  I could write pages of info on why they have gone up, why they will continue to go up and why you should own them.  If you want more info let me know and I’ll fill your brain with the facts.  Let’s just say that the upside is incredible for MANY reasons (all good ones) and I can’t find a single reason for them to come down.  This will affect you at the supermarket if it hasn’t already.  Wheat, Corn, Soy, Cotton have all gone through the roof in the past 4 months, Cotton as high as 87%!!!  Minor pullbacks will occur but this trend is now locked in, if for no other reason than demographics.  Basically there are more people becoming middle class in China, India, Indonesia, Brazil, Russia and on and on than we have middle class people in the US.  The new middle class wants to eat better so commodities have gone up.  They will very unlikely come down.  Get used to higher food prices.  Speaking of higher food prices, have you seen the price of gas?  Of course you have.  That won’t come down much either.  The days of cheap oil are gone forever.  We got a break because our consumption went down the past 2 years because of our economy (and Europe’s) but is now going up again.  China now consumes more energy than us.  They add a coal fired electric plant every week.  Every week!  They plan on 200 nuclear plants by 2020 and it still won’t be enough.  Nuclear is big everywhere but here.  That will change soon, but not for a while.  Only after we get tired of $150/barrel oil (that’s about $5+/gallon gas my friends), because it’s only at $87-89/barrel now. If you want to buy into the oil business the ETF (NYSEARCA:XES)  which is a basket of energy stocks or if you prefer regular stocks, Exxon/Mobil (EOM) or Connoco Phillips (NYSE:COP) are good solid ones with good balance sheets.  If you can’t beat them, join them.   

    I just want to remind you that serious risk is NOT off the table.  Several things could start a serious credit crunch banking crisis not unlike 2008!  The big ones are:
    • The Euro starts to fall apart
    • The US or Japanese start to raise interest rates

    Both will cause a deleveraging of what is known as the carry trade, basically banks and hedge funds borrowing money from the Fed or Japan at no interest and investing in commodities or emerging markets.  If either the US or Japan start to raise the cost of borrowing, banks and hedge funds will need to start paying back what they borrowed.  If you want a good paper on this, let me know and I’ll send it to you.  It’s very interesting reading.   

    I wish you all success in 2011.  It will be a very volatile year.  Yes, potentially worse than we’ve already seen, for at least another few years.  Sorry for the bad news.  The good news is you CAN profit from this.  Don’t sit and do nothing!!!  It’s your hard earned money.  

    Bob A


    Disclosure: I am long GLD, EGO, SLV.
    Themes: investing, commodities, 2011.bonds Stocks: GLD, SLV, SH, SEF, SLW, EGO, PALL
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