THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding a (government's) antagonism toward a gold standard."---Alan Greenspan (1966)
"Bankers know that history is inflationary and that money is the last thing that a wise man will hoard."--Will Durant
"It's what you learn after you know it all that counts."--Harry Truman
Once again the world is fixated on debt crises--here and in Europe.
Two weeks ago, a short reprieve was secured in the Eurozone when Greece passed reform legislation in return for an emergency loan from the EU and the International Monetary Fund (IMF). This loan is enough to keep Greece afloat for 3 months. A more permanent fix is now being debated with Germanytaking a hard line, insisting that any restructuring must require private holders of Greek debt to take up to a 30% haircut. Take a moment and appreciate the enormity of this. This is like asking little Johnny to take 70 cents for every dollar he invested in a US Savings Bond. Holy Baklava, Apollo!!
Not surprisingly, the above prospect sent shockwaves through the rest of Europe, especially impacting the finances of other financially weak countries likeItaly and Spain. This week the yields on 10 year Italian treasury bonds spiked to 5.66%, almost 3% MORE than the 10 year German bond. (Remember, higher yields means lower price and more risk.) This is stunning since one purpose of the Euro was to even out these differences. Moreover, this rise in yield has made it virtually impossible for Italian and Spanish companies to borrow since the pricing of their bonds is based on a spread to government yields. Suffice it to say, that for a host of reasons the credit markets in Europe are beginning to freeze.
On our side of the Pond, Washington dances ever so close to defaulting on our debt. This week Moody's, one of the premier rating agencies, announced that it was considering downgrading US debt from its Aaa rating. If you want to read something truly scary, read Moody's follow on memo on the implications of lowering that rating which one of my readers shared with me. The report itself is not free, but the press release and follow on analysis is. Unless something gets done soon, this apprehension will weigh down ALL markets.
Add to this cheery news, the disappointing jobs numbers and the hint that the Federal Reserve may enter a third round of quantitative easing. I find this disturbing. Quantitative easing is nothing more than printing more money so as to facilitate more deficit spending. Inflation may not be hitting wages or housing (seemingly the only items that are important to the Fed), but it surely is everywhere else. The US dollar is down 13% from a year ago in comparison to a basket of other significant currencies (e.g. Swiss Franc, Swedish Krona, Canadian Dollar, Japanese Yen, etc.)
What is an investor to do?
First, it seems to me that the combination of instability and inflation will only make GOLD more valuable---and it has. My latest gold purchase was June 30, 2011 and half way through the month it is up 6%. Gold is the world's number 1 refuge from fear (it used to be the US dollar)---and investors are full of fear. Please understand that I am not a "gold bug". I use it soley as a counter bet or hedge. Gold going up more often than not means my portfolio is otherwise going down. I hate having to buy gold. But, buy it, I do, and the vehicle I use to own it is GLD, an ETF that physically holds gold. It is very, very liquid and closely tracks the actual price of gold bullion. The one downside is that it does not pay a dividend--so I am in and out all of the time. As a consequence, I have recently opened a position in a Gabelli closed end fund, GGN. I like GGN because it not only holds gold but it also holds positions in many gold miners and a few other natural resource plays. Best of all, it employs a covered call strategy to generate income which it distributes monthly. At its current price, it yields over 9%. (In a covered call, one buys the underlying stock shares and sells, for a premium, an option to a third party to buy or call the stock in the future for a higher price. If done expertly, one keeps both the stock and the premium.)
Second, I do not see interest rates increasing any time soon, a fact which confirms the wisdom of my repurchase of Annaly Capital (NLY)(assuming of course that the US does not default on its debt obligations including the guarantee of Freddie and Fannie upon which Annaly's top line relies) In so doing however, I re-learned a valuable lesson. EASE YOUR WAY INTO POSITIONS. DO NOT BUY ALL AT ONCE. Allow me to elaborate. I first re-entered NLY on July 7 at a price above $18. Four days later, NLY announced a secondary offering of more stock--its third such offering this year. When companies like NLY do this it has a short term negative impact on the price of the stock because the "offering" is not technically to the public--it is to a handfull of investment banks (e.g. Merrill Lynch, JPMorgan, etc.) which purchase the entire new issue (here, 120,000,000 shares worth $2.1 billion) and then resell them to the public. In order to induce the investment banks to buy or "underwrite" the entire issue, the stock is "priced" to them below the current market to compensate them for the risk that they cannot sell all of the shares at a profit. The new issue was "priced" at $17.70 and when the new shares hit the market they caused the price to drop to $17.90 or so where I again bought. Had I not "eased" into this position, I would have missed the opportunity. This strategy is not foolproof. Sometimes the stock just takes off and doesn't look back. If so, buy it going up---things could be a lot worse---like having to dump a slug of stock once it passes one's loss limit on the way down--mine being 8%..
As we look back on this week, we are reminded that governments do not learn from history and thus are doomed to repeat it (paraphrasing George Santayana). Nimble investors need not follow suit.
I like this one
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