May 3, 2011
All That Glitters is Not Silver
The Investment View from Prescott, Arizona
Precious metals are becoming a topic as hot as tech stocks were a dozen years ago. With Silver up over 80% from its late January lows, it is no wonder that people are talking about the stuff.
Some folks are wondering how and when to buy silver to get in on this historic move. Some seasoned veterans like myself are looking at the straight-up nature of the pricing chart and thinking that this looks dangerous, a lot like the price spikes that often occur at the end of speculative bubbles.
The reason I say that is that an 80% move in 3 months is simply not sustainable. To continue at that pace for a year would mean a 900% rate of return and I can’t think of any investment that has ever done that.
So the end of the big run in silver is probably close at hand.
But there are strange happenings in this regard. Gold and silver normally go up and down at close to the same rates. While silver has rocketed up recently, gold’s advance has been very orderly – nothing like the spike in silver prices.
This tells me that the run in gold has not been overdone because we have not seen a huge spike in gold prices, just a relatively steady rise over the past couple of years.
This is good, because it means that when silver comes back to earth, it may not crash completely, but merely dip back down to the path of the gold price, where it will be pulled back up by the natural tendency for the gold and silver prices to act similarly. However, that “dip” could be a 50% loss from where it is currently, so when it happens it will be a rude awakening to those who hold silver too long.
A Slice of Life
Pink’s Hot Dogs has been a fixture on La Brea between Santa Monica and Melrose in LA since 1939. On my last trip through here, at 11:00 pm, I saw about 40 people standing in line to get to the order window and thought to myself “those have to be great hot dogs”. I had a “Chicago polish” with son, Matt, the other day, and they were definitely world class hot dogs. Pink’s is certainly worth going out of your way for if you are going to be in LA.
I’m on the road again. San Diego this time for the annual meeting of the National Association of Active Investment Managers of which I was President a few years back. I still serve on the board and get to present a class at the conference, however, seeing so many colleagues and old friends it hardly seems like work.
I’ll be back in the office shortly after you get this, so if there is anything you need just let me know.
How’s The Market Doing?
Right now, the market is rocking right along, with good gains recently for both income and growth accounts. However, the next few months could prove to be challenging for investors.
I say this because we are getting close to the summer period when markets tend to be weaker than normal, and we are facing two daunting obstacles to more growth, namely rising oil prices and rising interest rates. Those two factors have ended more bull markets and begun more recessions than any other factors affecting the markets.
The straw that breaks the camel’s back could be the end of the Federal Reserve Board’s buying of Treasury bonds that has been going on in a big way for 7 months now. The nickname for this program QE II, is short for the second Quantitative Easing. This refers to the easing of the money supply or printing money, and QE II is scheduled to end next month.
The Fed has been buying the majority of the Treasury bonds being sold for these seven months. When they quit buying, it is anyone’s guess what will happen, but unless the government stops spending money to cover the deficit, they will need to borrow money by selling bonds. A shortage of bond buyers means interest rates will rise until enough buyers are attracted by the high rates to buy all of the Treasury bonds that are being sold.
Through QE II the Fed has managed to keep interest rates much lower than they ought to be. And a rise in interest rates, which looks virtually certain to happen when government intervention stops, could provide a shock that will pull down stock prices.
There have been two previous rounds of easing, and both ended with nasty spells in the stock markets, including the “Flash Crash” a year ago when the stock market dropped 13% including a 9% drop in only 20 minutes.
I suspect the end of the current round of easing will provide more of the same and could make for a summer in which the ability to get out of a market in decline will be worth a lot to investors.
I don’t worry much about Flash Crashes and such because these things never happen out of the blue. Even the crash last May gave several weeks of warnings and allowed me time to protect my clients by moving from fully invested to 60% out of the market by the time the May 7th crash occurred.
Right now the market is not giving off any signals of weakness. When it does I will reduce our exposure to risk. In the mean time, we will stay invested to put away some acorns for winter. That is what you hire me to do.
Mental Floss
Q: There are six eggs in the basket. Six people each take one egg. How can it be that one egg is left in the basket?
A: The last person took the basket with the egg in it.
Please Call Us If Things Change
I realize that this newsletter does a good job of keeping you apprised of what I am seeing in the market, how your accounts are behaving, and what I am doing on your behalf as I manage your investments.
The newsletter is purposely designed this way as many of you are not comfortable making investment decisions and have thanked me for making this aspect of our relationship so effortless for you.
Financial practitioners who get commissions from mutual funds and annuity companies require a lot of face to face meetings, some as often as quarterly, because those are opportunities for them to sell you some new investment. I don’t work that way, and accept no commissions at all, so I do not require you to come in for meetings.
However, we do need to communicate, especially if your situation changes somehow. If income needs are rising, lump sum withdrawals need to be planned, or new money is coming in that you will need to invest, these are all reasons to meet. And, a change in your comfort or lack of comfort with the risk in the markets should be addressed as soon as it presents itself to keep my work within your comfort zone.
My style is not to bug you, but to continue to do my work on your behalf, while still being available for you whenever a meeting becomes appropriate.
Please call us if things change in your life. It is important.
What’s Going On In Your Portfolio?
Both our Flexible Income* and Careful Growth* Strategies had one of their strongest months in a long time in April. I’m sure you will be pleased when you look at your statements.
All strategies are fully invested as of this writing on May 1st , and I am hoping that we can stay that way for a while.
I cut our silver holdings in half last week as the price of silver got volatile (went down and up a lot in a short time), which often marks the beginning of the end for a price cycle. Silver may go higher, but I thought it time to lock in some of the terrific gains we had in silver.
We still have about 6-7% in silver in both Growth* and Income* accounts, along with 17-21% in gold, depending upon the account.
Flexible Income* accounts also hold funds with convertible bonds, high yield bonds, diversified bonds, floating rate bank loan and energy income securities which invest in things like oil and gas pipelines and act more like utilities than growth stocks.
Careful Growth* accounts hold a mix of growth, energy, technology and medical stocks along with gold and silver.
And of course our Balanced* accounts continue to make new all-time highs since both their growth and income components are doing well.
Life is Good!
Our Spotlight Strategy
Balanced Strategy strives to provide high total return.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
