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Prepare Your Portfolio

|Includes: Pfizer Inc. (PFE)

The dollar is falling, true to expectations, after the revelation Tuesday that countries are no longer floating the idea of replacing the dollar as the “world’s reserve currency” but are actively working to make their wish a reality.

What do we need to do to protect our nest egg?  Luckily, we have been positioning all of our portfolios for future inflation.  In the long-term portfolio, we have looked for companies with significant foreign operations.  These companies produce profits just on currency exchange ratios.  We have concentrated on sectors that will profit on increasing prices for natural resources.

Don’t get me wrong, I am re-evaluating some of our holdings.  I encourage you to do the same.  Your portfolio still needs to be diversified, you cannot know where the next profit opportunity will be.

The only sector I chose to avoid is pharmaceuticals.  I don’t understand them, and they are too volatile for the wrong reasons.  I refer to the dangers of regulation.  A great company can have a wonderful drug, and unexpectedly a study shows an increased risk of heart attacks in mice, if they take 17 times the daily dose.  What happens?  Hand wringing by the regulators, salivating by the tort lawyers (with late night TV commercials) and the drug is pulled from the market.

Tens of billions of dollars in sales just evaporated.  Think Pfizer's Bextra and Celebrex.  Pharmaceutical companies work for years to develop, test and bring a drug to market.  It is sad when all the work is thrown on the tidal rocks because a third stage trial reveals a negative reaction and dashes all hope of ever marketing the drug.  I am not railing against the regulators here; it is a tough business that can throw an investor for tremendous losses.  There are gains to be made, but one must study and understand these companies better than anyone to play the game.

Our short-term trading services have looked for great trades regardless of the sector.  Increasingly the great trades are going to be centered on commodities, natural resources, energy and precious metals.  Will there be bumps, yes.  However, long term, the market only has one way to go.  In the 1970’s a popular saying was that, ‘inflation covered up a lot of mistakes.’  You could pay too much for an asset, but inflation would bail you out if you locked in low long term interest rates.  As asset prices rose with inflation, even the worst businessmen looked like Henry Ford.

I visited with subscriber F.C. last night; he had been gone on a pleasure trip for the past three weeks.  He drove his Model A to New England to view the autumn colors.  He lamented being out of touch for so long and was anxious to catch up on the news.  He was surprised by this week’s currency news and dismayed.  He immediately grasped the gravity of world events, and the effect on our future.

I encourage you to review your holdings, make sure you are positioned to survive an inflationary period and prosper.

We all know gold, and all precious metals, have been on a tear the last few weeks.  I saw an interesting statistic this morning and had to share it with you.  As of 9/29/09, gold contracts on the commodities exchange were held by:

Commercial:  Long—126,538
 
                      Short---414,845

Difference:                 (288,307)

Speculators:  Long---260,419
                      Short---  17,925

Difference:                  242,494

Each contract represents 100 troy ounces.

The large commercial traders are shorting gold; the speculators are piling in on the long side.  The big guys are betting the bubble is going to burst.  If you are playing the precious metals boom, tighten up your stops, or take some profits off the table.  The report is updated every Friday.  I will bring you the new report tomorrow if available by market close.  You can see the report at 321gold.

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