September 27, 2011
The Death of The Dollar Has Been Greatly Exaggerated
The Investment View from Prescott, Arizona
Common sense tells us that when the government prints a lot of new dollars the value of dollars will go down.
The text book definition of inflation that we learned in Economics 101 is that too many dollars chasing too few goods causes the price of those goods to be bid higher and the value of the dollars to fall – classic inflation theory.
But if we look closely at that theory we will see that there are two components, the amount of money and the amount of goods.
Sure the government is creating new money like crazy, but do we really have too few goods? Not really. Businesses are closing everywhere because they have too many goods and can’t sell them.
The simplistic, media inspired version of the “dollar is dead” theme is dangerously incomplete, and those folks buying into this idea, after looking only at the government’s stimulus programs, might want to take a new look at that position.
The current economic situation is anything but simple, and whenever anything about investing appears so obvious that everyone should be able to see it – like the value of the dollar going down to its demise – smart investors will start looking for something different to happen because that particular party is about over.
Decisions made on current facts tend to be more accurate than those based on what happened last year or someone’s opinion about what tomorrow might bring. So, I ran an analysis last weekend that compared the strength of the dollar against all other major currencies in the world, including gold, and not one had been stronger than the dollar during the previous month. Not one.
Clearly the dollar-declining party is over but a lot of folks just haven’t figured it out.
The reason for the dollar’s strength is twofold. One, despite what we think about the deteriorating economic conditions here, the rest of the world thinks they are in worse shape and would rather own dollars than Euros, Yen, Chinese Remnimbi or Indian Rupees, and in the past month, even more than gold.
Another reason is that T-Bills must be paid for in dollars. Whenever a foreigner wants to invest in our Treasuries they must first sell their local currency and buy dollars with which to pay for the T-Bills. This pushes up demand and the value of dollars compared to those other currencies.
And, as long as there is a huge amount of debt that needs to be paid off, dollars needed to pay that debt will be in demand. So, until the government printing of new dollars gets ahead of the demand created by debt service needs, the process is really not that far out of balance.
These factors all point in the direction of a strengthening dollar, not a weaker one.
I know, this sure is a crazy business.
So don’t count on the dollar becoming history quite yet. And don’t believe everything you hear from people wanting to sell you gold.
My Seminar – This week – Your House
We are trying something new at the office this week; we’re conducting two “webinars” – seminars over the Internet. And you can participate from the convenience of your home computer.
With all the turmoil in the markets, it sure is a good time to briefly discuss what is affecting the economy as well as the markets and to take a look at some of the tools we have that we put to work on your behalf. Of course there will be time for questions, too.
We will hold the webinar at two times, 7:00 p.m. Wednesday, September 28th and 10:00 a.m. Thursday, September 29th, so mark your calendar for the time that is most convenient for you. We will also record the seminar and have it posted on our website so that you can watch it later or tell your friends about it.
To register, go to my website at www.HepburnCapital.com/webinar and sign up. You will then be emailed instructions on how to attend the seminar.
This is my first time using this new technology and I am looking forward to the adventure.
Please join us if you can.
In a democracy it’s your vote that counts.
In feudalism…. it’s your Count that votes.
Your Statements Will Be Looking Different
National Financial Services, LLC, the Fidelity company that is custodian of your accounts with us, is revamping the format of their statements, so expect a different look when you open your statement next week.
We have seen the new statements and I like them. Actually I hated the old format, so anything will be an improvement.
The website used for online account access is changing too. Clean, clear and easy to use.
If you have questions about the new statements or the new website when you see them, please call the office and my staff will be happy to help you understand the changes.
Want a Management Fee Discount?
Would you like to save hundreds of dollars every year? Simply refer family and friends to Hepburn Capital.
We calculate fees on the total amount of money we work with for a family or other groupings of clients, including friends. The higher the amount of assets being managed for the group, the lower the fee percentage becomes for everyone in that group.
Besides being one of the nicest things you can do for me (and them), mentioning Hepburn Capital to your friends can save you real money.
The easiest way to introduce someone to my work is to forward my newsletter to them. Here is a link that will allow you to forward it with a just click.
Thank you for your help and support.
How’s The Market Doing?
Investors, Are You Sitting Down?
All major indexes, both US and foreign, are below the point where they were before the government’s stimulus program, called QEII, began last November. And, while the US markets have barely eked out a profit over the past couple of years, foreign markets are in much worse shape, showing significant losses during that same period.
That means the $800 billion of freshly printed QEII money accomplished a big fat nothing.
Transportation stocks are a good measure of economic activity, because manufacturing goods requires raw materials to be transported to factories and finished goods moved to market.
Unfortunately, from the market highs of early July, the Dow Jones Average of 20 Transportation stocks has lost about 10% more than the Dow Jones Industrials or the S&P 500 Index** during that same period. Judging from this barometer, the economy is really struggling.
Most of the tea leaves I read are still looking pretty dismal, too, so I would not start betting that we are at the bottom of this bear market.
In fact, the only thing I can say that is good about the markets is that Hepburn Capital clients have missed most of the decline.
That doesn’t help you if you are one of the hundreds of readers who do not yet invest with me. If you are in that group, I would encourage you to call the office today to set up an appointment to discuss my management of your accounts before the market has another leg down. The number is 928. 778.4000.
If you are ever going to have me help you manage your money, this is the time.
This market feels really ugly, but I expect it could get much more so before we are done.
What We Were Saying Back Then
An Update on Gold
In my August 30th newsletter I mentioned that gold had suffered a breakdown in its chart pattern, giving an ominous signal.
Quoting from that newsletter: “we should not depend upon gold to be a safe haven during the remainder of the current bear market decline. If things in the stock market get tougher this Fall, as some of my work suggests, gold could start being sold to offset other losses.”
When I wrote this, gold was only down about 3% from its August 22nd high price of $1,895. But my sixth sense was twitching, and we had good profits that I did not want to give back to the market, so I cut back our gold holdings from 25-30% of portfolios to 10%.
Well gold prices broke down in a big way last week, so I sold the last of our gold holdings the day before gold incurred its largest one day loss ever, falling a huge $100 an ounce on Friday September 23, 2011. Whew! We dodged that bullet!
At this writing on September 25th, gold is down 12% from its August 22nd level.
However, we may have dodged another bullet, too.
After last Friday’s close of business, margin requirements were raised on gold, silver and copper. This means that speculators must put up more cash to buy metals than they did before. This translates into less buying and more selling and when combined will usually send a market down. Increased margin requirements have ended a lot of bull markets. They ended the Hunt brothers attempt to corner the silver market in 1980, which resulted in the Hunts going broke, I might add.
I would not be surprised if gold eventually turns back up again at some point, but right now asset deflation appears to be winning out over inflation. We also need to keep in mind that gold prices declined for 8 straight months during the bear market of 2008, and could possibly decline like that again, so I am not going to jump blindly back in. I’ll wait for the market to tell me when the time is right.
What’s Going On In Your Portfolio?
It has been a tough market to make money in, as you can tell by the headlines, but both our Careful Growth* and Flexible Income* accounts had small profits last week.
Flexible Income* accounts have investments in a rising dollar fund, and a diversified bond fund which have both done well lately, plus a big chunk of cash.
Careful Growth* accounts hold two inverse funds – ones that go up as the market goes down. Those were good funds to hold while the stock market tanked last week. We still hold a Japanese Index fund that is paired (hedged) with one of our inverse funds for strategic reasons – this move dampens volatility in your portfolio.
Rounding out our growth portfolios is a strong dollar fund and cash.
Our Spotlight Strategy
Our strategy spotlights focuses on each strategy once a quarter. Since this quarter has more newsletter issues than we have strategies, there is no strategy spotlight in this issue.
* 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.