Monday, April 18, 2011

Is Silver (or Gold) a Safe Investment?


Silver was not a very good investment for one billionaire in 1980. Here’s the story...

Nelson Bunker Hunt is best known as a former billionaire whose fortune collapsed after he and his brother William Herbert Hunt tried, but failed to corner the world market in silver.

Beginning in the early 1970s, Hunt and his brother William Herbert Hunt began accumulating large amounts of silver. By 1979, they had nearly cornered the global market. In the last nine months of 1979, the brothers profited, on paper, by an estimated $2 billion to $4 billion in silver speculation, with estimated silver holdings of 100 million ounces of silver.

During the Hunt brothers' accumulation of the precious metal, the price of silver during 1979 and 1980 rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later.

Hunt filed for bankruptcy under Chapter 11 Bankruptcy laws in September 1988, largely due to lawsuits incurred as a result of his silver speculation.

According to TV Investment Commentator, Jeff Macke, investing in Silver now is a strategy akin to “being reckless without getting killed… The fact is that charts like silver's 5-year (2006-2011) don't occur in nature. They are functions of a mob. Being part of a mob can be fun and lucrative as long as you don't get arrested or killed.”

It should always be remembered that during the last time the US had a bout with high inflation, the price of Gold fell by over 50% from 1980 to 1982. Precious metals are investments for people that are gambling or who are afraid. They have not done well in recent periods with high inflation and high interest rates.

Human nature is fascinating.  Some people will make a concentrated and speculative “high risk investment gamble” that they know has the potential of an almost permanent 50-78% loss in just a few months, yet a potential but temporary 10-15% drop in their diversified stock portfolio causes them to lose sleep at night.

Concentrated “investment gambles” like Silver (and Gold) sometimes pay off,  but the potential for sudden and great loss makes them an unwise choice for your serious money that you are saving for future income. There is no substitute for prudence and patience with a highly diversified portfolio.

 
This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Market’s Reaction to S&P Rating is probably Melodramatic


Three days ago I wrote: “Conservative and Liberal elements of our society are so diametrically opposed that the path forward regarding government’s role and spending are uncertain. What happens when government spending stimulus is withdrawn? What happens if government deficits continue?” 

Today, changing the outlook for US debt from stable to negative, Standard and Poors (S&P) said "We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns”
Excerpt  from Bloomberg, August 31, 2007 :
“S&P and Moody's Investors Service failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar. …U.S. Senate Banking Committee Chairman Christopher Dodd said yesterday credit rating companies must explain why they assigned ``AAA ratings to securities that never deserved them.''

The irony of S&P’s ratings today, warning about AAA rated US Treasuries, given Senator Dodd’s comment  3 ½ years ago,  is notable. Sort of in line with "be careful what you wish for".  
Given the track record of rating agencies and their own limitations/warnings regarding their comments, one must wonder why markets would react in any major way to anything they say.  Click on the below for warnings from S&P itself regarding what ratings are and are not.
           http://www2.standardandpoors.com/aboutcreditratings/

What we know after the S&P outlook change is the same as what we knew before.  We knew we had a deficit problem. We are expecting higher interest rates.  So why have world markets lost almost $600 billion in value, in one day, in reaction?
People act irrationally when they become fearful.  Sometimes being reminded about risks that they know already exist just makes people panic from fear.  
The value of the US $ in currency trading generally  rose after the S&P report today—exactly opposite the direction it should have gone if the US is less credit worthy—it went the direction you would expect during a general rise in the level of fear and uncertainty  in markets.

As I said on Friday, the Wall of Worry Gets Taller as potential risk and opportunity both grow.  

The important news will be what we don’t already know.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

Saturday, April 16, 2011

The Wall of Worry Gets Taller



The “correction” we expected as mentioned in our February 26, 2011 article did in fact occur in March.  Corrections can be likened to a room with gasoline spilt on the floor—the potential for fire exists—it only awaits the match.  In March, the “match” that lit the fire was a combination of a natural disaster in Japan, increasing tensions in the Middle East, and a new “limited” military adventure in Libya.  The correction did not last long.  After a 5% drop, the S&P500 ended March at the same level that it began.

The list of risks, any of which might derail our recovery seems to be growing.  European sovereign debt issues continue.  We are now engaged in three military conflicts in a Middle East that seems on the verge of revolution. Some believe the revolution is with the goal of democracy—others fear it is with the goal of radical theocracy.  Inflation caused by rising oil prices is threatening to permeate our entire economy. Unemployment is falling, but it is still very high. The residential real estate market continues to be weak, threatening a continuing problem of debt defaults and foreclosures.  Conservative and Liberal elements of our society are so diametrically opposed that the path forward regarding government’s role and spending are uncertain. What happens when government spending stimulus is withdrawn? What happens if government deficits continue? What happens after the world’s third largest economy experiences perhaps the most serious natural disaster in modern history? Fear regarding the future value of paper money seems to be creating a new bubble in the price of commodities and precious metals. As my title suggests: the Wall of Worry seems to have gotten taller.
As I have said in the past, a Wall of Worry is an absolute requirement for a continued bull market. It means that there is still a large bank of “potential” buyers.  While any of the risks mentioned could cause a fall in markets, it is important to remember that the values of equities depend on the psychological perception about corporate earnings in the long term as compared to interest rates, and a perception of the direction of corporate earnings in the short term.   
We are now just at the beginning of “Earnings Season”. Earnings and outlooks from Alcoa, Google, Bank of America and JP Morgan last week produced a bit of anxiety.   Be prepared for a great deal of volatility as the markets try to “read” the true meaning of the corporate announcements over the next few weeks.  What has been driving the markets up, despite worries, is the belief that the economy is recovering. This is supported by facts.  The fear is just about whether this trend and recovery continues.
I am most optimistic about one key indicator. CEO Confidence as measured by the Conference Board is quite high. Says Lynn Franco, Director of The Conference Board Consumer Research Center (April 7): “CEOs’ confidence has improved, yet again, and expectations are that the economy will continue to expand in the coming months. As for the employment outlook, CEOs are more bullish than last year, with half now saying they intend to ramp up hiring.”
Our advice is to remain cautious in the short term.  However, we are also convinced that tremendous opportunity exists for those with a long term view.  Stay the course, remain conservative and diversified—but keep your eyes peeled for trouble and opportunity—we are likely to see both.
This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.