Today’s market is just plain ugly, and I am beginning to have serious worries about the economy flipping into a recession. In fact, the more I listen to companies guidance (Caterpillar (NYSE:CAT), Union Pacific (NYSE:UNP), etc). In fact, I am willing to bet that the U.S. is already slipping into recession, but we have yet to actually see it in the numbers. The way that both the stock and bond market have acted in the last few sessions is telling me to beware, so I have sold sizable amounts of long positions, increased my short positions, and taken up sizable new positions in gold miners. The rate cut thesis has continued to work over the last few days (with my portfolio being green despite the market), but Friday’s selling has me worried that we are going to see a bit of margin selling and other panic selling, and therefore, I have to exit some positions simply based on the fact that selling breeds more selling. I don’t see this being over in a day.
Therefore, I have closed positions in the following stocks:
China Agritech (OTCPK:CAGC) at $4.75
ShengaTech (OTC:SDTH) at $7.83
China Education Alliance (CEUA.OB) at $3.57
AeroVironment (NASDAQ:AVAV) at $23.87
Biogen Idec (NASDAQ:BIIB) at $80.02 (I was a bit hesitant to let this go, but with credit market turmoil, it probably lessens the number of people who can afford to buy it).
I have also sold 60% of my position in Annaly Capital Management (NYSE:NLY) at $16.52, even though I do believe it will benefit from a Fed rate cut. Quite simply, I don’t want to see my nice gains evaporate if we get forced selling, and I also want to free up capital for what I believe are the opportunities going forward.
I have also increased my leverage to the downside, tripling my position in BC at $20.46. Read the archives for my thoughts here.
Finally, let’s get down to where I am really putting my money–gold. I think we are on the verge of an incredible bull market for gold, based on the fact that the Fed has to cut rates in order to assure the sanctity of the banks. The banks need low short rates or we may well see WaMu or Countrywide or someone else actually fail as losses continue to pile, and the Fed cannot let that happen. This confirms once and for all that the dollar is no longer fit to be the world’s reserve currency, and therefore, it will continue to fall as people look toward the euro and gold to take its place.
In addition, the dollar is going to be further plagued by the weakening economy. As I see it, the Fed has to cut on Oct 31st because a banking crisis is the nuclear apocalypse of economics. However, what people don’t realize is that the Fed is powerless to stop a recession because the drop in short term rates will not act to lower long term rates as well (and the 10 year is all that matters to save housing). As we say during the most recent capital flows data, Japan, the rest of Asia, and the Middle East all were net sellers of Treasuries last quarter, which was one of the key reasons why yields spiked so much. If the Fed cuts again, you can bet that the demand for Treasuries abroad will continue to decline, and therefore, long term interest rates are going to be pushed higher. While that may be good for the banks’ solvency, it will hurt housing and the rest of the economy. Therefore, a rate cut isn’t going to do much to prevent a recession (other than preventing a depression by ensuring the banks health). The weakness in the U.S. economy is going to continue to drive rates in the U.S. and Europe in opposite directions, which will lead to more dollar weakness and a surge in gold.
The result of all of this policy will be that the euro probably goes to $1.50, gold goes almost immediately to $1000, and oil will probably spike short term above $100 (due to dollar weakness). While oil will then probably correct back down because of U.S. economic weakness, there is no reason to believe that the euro or gold will weaken after a rate cut. To the contrary, we could see gold assume leadership of the economic system, and that could push gold higher than anyone is currently willing to admit.
However, it’s not all bad (just kidding)…the coming dollar devaluation will finally force China to revalue their currency in order to fight inflation. In fact, it is not against the realm of possibilities that Hank Paulson and Ben Bernanke are waging war on the dollar in order to force this revaluation. Honestly, they’ve exhausted every other path in trying to convince the Chinese to revalue, so maybe they’ve resorted to forcing China’s hand. Given that Chinese inflation is already running at 6.5 percent, and they simply cannot afford to pay $100 for oil from an inflation standpoint. Therefore, China will revalue the yuan below 7 yuan in the next 6 months to try to stem the tide of inflation and cheapen the cost of oil in terms of yuan, which may very well rock the Chinese stock market in a way we have not yet seen. Of course, the U.S. will have to pay for its war on the dollar with higher interest rates as China refuses to continue to finance the U.S. government deficit, but as long as the dollar war is waged with secrecy, the adjustment should be slow (but still painful).
With my rant over the dollar out of the way, now on to where I’m putting my money. I am making a very big and broad bet on gold, and spreading my money across the sector in several different miners. Readers of the blog know that I like junior miners, but we have to be a bit more conservative here and pick companies with near term production prospects or current producers in order to ensure that we capture the move higher in gold. Therefore, here are my new buys from Friday:
Barrick Gold (NYSE:ABX) – moderate position at $41.43
Yamana Gold (NYSE:AUY) – small position at $13.99
Eldorado Gold (NYSE:EGO) – small position at $6.74
Vista Gold (NYSEMKT:VGZ) – large position at $5.15
VGZ is largest position, and it is also the most speculative as it is still awaiting the go ahead for production of its mine in Mexico. However, this stock has huge upside potential, and my bet on gold is not designed to be a small one. I also continue to hold U.S Gold Corporation (NYSE:UXG) as another speculative miner, so my bet on gold is very large indeed.
Yes, I am taking on a big risk by betting so heavily on gold, but given the economic and market outlook, I think that gold is the best risk adjusted opportunity right now. I still have significant leverage available, so I have flexibility to navigate this market.