Deflation or Inflation

There's been lots of debate in the media whether we are in a deflationary period or an inflationary one. Both camps seems to have great arguments for their position. But it seems like everyone is missing the big picture. The label is not important, only the result.

Let me explain through my perspective. What we have seen is the Fed inject boat loads of money into the system. Shoring up the coffers of the banks has been their priority in order to save the financial system. The deflationists have pointed out that the banks have not been lending this extra money and therefore there cannot be inflation. Point well taken. On the flip side, the inflationists have argued that the act of printing money itself out of thin air is the very definition of inflation. I'm no academic to be able to argue this.

What I do see is this. The balance sheets of banks have been shored up by the printing of money from the Fed. This money did not exist before - they did a magic trick and pulled a rabbit out of the hat or ass. Unlike you and I, money doesn't just magically appear in our wallets - we actually need to put in a day's labor for it. So this waving of the magic wand generated tons of extra money in the system where there was none before. It is the perception of fiscal responsibility and living within our means as the country with the currency reserve status that is of utmost importance here. When all investors see the way with which we uphold the value of the dollar they quickly lose confidence that there is in fact any value left in the dollar. This is key and in my opinion why the dollar has been tossed by the wayside as everyone has been scrambling to anything they perceive to be a better store of value.

So to argue whether there is deflation or inflation is purely academic. It is besides the point. The fact is that you don't want to be holding all that worthless paper called the dollar or any fiat currency for that matter - not when all governments are running the printing press. Invest in something that will maintain its value through time. Act now before its too late.

$1 Trillion Healthcare plan

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQVT0QdanBA&pos=1

Apparently, the US has enough money in the bank to pay for the $1 trillion healthcare plan. Wait, I might have misspoken. I meant that the US is currently bankrupt and has no means nor plans to fund this or any other hair brained schemes that they come up with aside from printing more money and issuing more debt. Really, this is just the type of behavior that us as citizens should participate in. You lead by example right?

Hmm, I really like that Porsche 911 I saw the other day. I'll just go into the dealership to purchase it and hand the salesperson an IOU. I'll tell him I'll pay it in 10 years, but I'll probably declare bankruptcy before then. So its a win win for me. That's just the type of irresponsible behavior our leaders are promoting.

Seriously, when your personal finances are tight, do you go out on a spending spree? Or do you cut back and live within your means?

Regardless, our lawmakers will continue to drive the dollar to the gutter and propel precious metals to new highs. Better diversify while you can. That Benjamin in your pocket won't buy you a movie ticket in a couple of years.

I'll get off the soapbox now.

The train is pulling out of the station.

Today's move in precious metals surprised me a bit as I looked at the intraday chart of silver and gold just take off. The pundits rationalized this move was due in part to India buying half of the 400 tonnes of gold the IMF is selling. This doesn't really make sense to me as I read a story yesterday regarding this breaking news and did not see the market react to it. After 11AM this morning, did the gold price take off.

Is there something else afoot here? Perhaps this news story is being bandied around to cover up a larger more sinister event taking place.... Hmmm, if I was to put on my conspiracy theory hat, I could easily say that there's a large request for delivery of physical taking place, but there is no physical to be had anywhere... But that would be jumping to conclusions.

I'll just be satisfied with the fact that gold is at new highs and silver is tagging along for the ride. You can bet that there will be more explosive moves to the upside as everyone clamors to buy the limited number of metals available. Reminds me of tickle-me-Elmo many years ago.

Are you on board yet?

Waiting to exhale

The expected pullback in precious metals is finally here. I foresee gold retesting $1000 just b/c that is the number everyone is focused on. Silver will over correct as it is more volatile than gold. I would expect a bottom in silver only after gold has bottomed. Along those lines, I would like to see gold firm up at $1000. If not, a retest of $960-970 is possible within the scope of a longer term uptrend.

I already have a list of miners that I will pick up when gold looks like it has bottomed. My favorites at the moment are SLW, CDE, AUY.

I'll go out on a limb here and say that this might be the last dip into $1000 territory before we have a new bull leg up in gold.

There is a new Gorilla in the room.

China urging its citizens to buy gold and silver.

Why would China publicly advertise and urge its citizens to buy gold and in particular silver? What do they know that we don't?

I believe that there is a new 500 lb gorilla in the room. The old gorilla represented by JPM and other banks have been allegedly short massive amounts of gold/silver to suppress its price. Now the new alpha male has entered the room and has its own agenda. It's not going to sing to the tune of the old cabal. The agenda of China is to enrich the lives of its citizens and its own coffers by ensuring it owns a large % of hard assets to diversify out of the depreciating dollar.

When it is good and ready, they will strike with little warning. They will announce their intent to acquire an x% of precious metals in relation to their foreign currency reserves. This announcement alone will skyrocket the price of the PMs. But of course, they would have already acquired all the tonnage they need prior to the announcement.

Beware shorts, your day is coming.

Standing on the shoulders of giants

Here is a site I saw that allows you to track the holdings of various professional fund managers. These are the Buffets of the investment world.

http://alphaclone.com

It is quite interesting in that it allows you to clone their holdings and track the performance. They have done a study of this type of investing that outperforms the S&P500 by a considerable margin with less volatility.

I haven't done any in depth research on this, but it seems interesting enough to pique my curiosity and to read up on it.

Gold and silver train

The gold and silver train are slowly pulling out of the station. Are you on board? I am looking for every opportunity to purchase gold/silver related stocks. I'm hoping we will get a pullback... It would not surprise me that we drop from here to shakeout the jonnie-come-latelys only to resume its uptrend.

Looking at the behavior of the GBP lately has me really excited. Despite all the bad news for the dollar and other major currencies rallying against it, the GBP has stagnated. It has the smell of a good short. Two ways that I envision playing it out. One an outright short of it (or puts). The second way is to initiate a bearish spread trade with options.

Perception shift

Since my last post, I have noticed a subtle but important shift in the market. Namely that the market has started to react less favorably to bad news. Prior to this, any kind of bad news was shrugged off as the market climbed a wall of worry. But not anymore. With the release of the jobs number this morning the market is opening down. I think the S&P500 can easily test 1000 from here.

Speaking of job numbers, how can anyone be surprised that it would be negatively adjusted? How can anyone be surprised by retail numbers coming in lower than expectations? Economist/analyst are still blinded by optimism. But it seems like they are finally coming around to reality. The third quarter earnings releases around the corner might be another reality check.

Is the Fat Lady singing?

I've been reading news stories about how Bernanke and others believe the recession is now over. Really? Since when has Bernanke been right? He was wrong about the extent of the housing crisis. He was wrong about the severity of the banking crisis. For that matter, he was wrong about everything so far. So is the economy really improving and is the recession really over? Or is Bernanke really right this time around? I wouldn't bet on this.

I'll layout the primary reason why. In the first quarter of next year, we will have one of the highest reset of option ARM. These are the type of mortgages where individuals pay a small fixed monthly payment initially but will start paying in most cases a higher monthly payment after their interest rate resets. We've already seen what a catastrophe these types of loans have been and the number of foreclosures will only increase as another wave of loans are reset to higher rates. Consumers will not be opening their wallets anytime soon. i.e. The economy will not pickup without an increase in consumer spending unless of course, people decide to go on another credit spending spree. But we all know the credit has dried up. Majority of home owners have no equity in their house and can't refinance. It's seems like it's a death spiral slowly spinning out of control. I don't see how the economy can improve with the next wave of foreclosure looming.

I hate to be the bearer of bad news. But the recession is not over and the Fat Lady is not singing.

Changing of the guard?

Just as I wrote my post this morning on the strong mkt action, we get a reversal near the end of the day into negative territory. Could this be a changing of the guard? Sure this is but one day among many positive days. But it's enough to have me at least go to a more a cautious stance and initiate shorts again for my swing trades so that I am at least a bit more hedged.

Market continues to climb

I have a system in which I initiate swing trades. Normally lasting about 5 days on average. Just looking at the stats, it's obvious that the longs are profitable while the shorts have not been for the last months.

In trading the hard thing to do is usually the right thing to do. Despite my opinion of the market being overbought and climbing against bad fundamentals, I need to respect the market action and stop shorting. So now I only initiate trades on the long side until the market tells me otherwise. Perhaps this is signaling the top just as I recognize this about the market!

How I made $2,000,000 in the stock market

This is the title of a book I read a long time ago. The author, Nicolas Darvas, followed a system of buying stocks that won him a fortune. It's particurlarly amazing as he was a dancer and wasn't an expert in stock investing like Buffet or Soros. Also considering the fact that he started with $25,000 and turned it into six figures in the 1950s is even more amazing.

Nicolas happened to apply a strategy of buying as stocks went higher. Another words, he bought strength. When stocks proved that they were being accumulated, he bought more and continued buying at higher prices. Reminds me of the trend following strategy employed by the Turtles. This obviously only works in a bull market where prices continue to trend far longer than most people believe.

This brings me to the point of my blog today. I believe we are coming to the point where this strategy will work again in the stock market. No I'm not talking about the market in general. I'm talking about resource stocks - particularly mining companies. With gold testing $1000, we are entering a new era in which miners will zoom onward and upward. Are you ready?

This book is a good read and offers insight to how anyone can systematically build a fortune in a bull market.

Till next time.

All aboard! The gold train is taking off!

A colleague of mine has been quite happy with trading resource stocks - in particular the gold miners. He said that he's been buying a particular stock at a price of $33. As soon as the stock reaches $36, he sells. He waits for the stock to fall back to $33 and repeats the process. He's been quite successful at this and has been ringing the cash registers a couple of times this past year as the stock has been bouncing around like a yo yo.

This strategy will obviously work in a sideways market. Gold has been range bound for the last year. However, I believe this will change going forward. Gold is finally testing the big psychological price of $1000. This is the final hurdle before it takes off to new heights. Anyone not recognizing this and continues to execute strategies according to a range bound market will be left behind when this train leaves the station. They will look at the price of gold in frustration as it continues climbing higher without them.

Be forewarned... We are entering a new phase in this bull market for resource stocks.

All aboard!

Steady Eddie... 18% return per year

Is it possible to rake in 18% returns year after year? Too good to be true? I thought so too.

But after some due diligence, I found out that this is totally possible and well within reach of the common man. This is not some pie in the sky, nor is it reserved for the bourgeois. The investment du jour I'm talking about is tax liens. What exactly is this and how can you get a piece of the action?

Let me explain. If you are a property owner, be it a residential home or commercial building, you are required to pay property taxes. Such is the reach of the municipality in which you reside. Most cases you pay a quarterly tax. What happens when you stop paying your tax? The municipality is in deep doo doo if it doesn't have enough cash flow coming in to pay for the $1000 toilet seats, nor enough to pay for services such as policemen, librarians, etc. How does it raise this cash if it can't collect the money from you, the home owner? It sells a lien on your property to the highest bidder. What this means is that if/when you can cough up the cash to pay your delinquent tax (plus interest/penalties of course), you are paying the person that owns your lien. The investor is basically giving the municipality the taxes owed by you upfront in return for future payment of the taxes owed plus interest/penalties.

As a purchaser of a tax lien, you are entitled to receive the amount of taxes that are delinquent plus interest. How much is the interest? Well it depends on the state where you are purchasing a tax lien from. What generally happens is that the state will have an auction at least once a year where they will try to sell tax lien which have been delinquent for 2-3 years (again this depends on the state). You can 'bid' on any particular property's lien that is being offered at the time. The bidding process varies from state to state. In Florida, for example, bidding starts at 18% and is bid down. This means you can receive as much as 18% interest on the delinquent tax amount. Bidding down the interest means investors of these tax liens are willing to accept less than 18%. The more bidders there are for any given tax lien, the smaller the return. If you happen to win the bid, you are required to pay the delinquent tax to the municipality in as little as one business day. When the municipality is paid the delinquent tax by the homeowner, they will forward the cash to you.

Now, what happens when the homeowner never pays the taxes? This is the great thing. Their property is collateral. Again depending on the state, you can force the property to be liquidated within a certain number of years and you will receive your money back plus interest assuming the property is worth more than your investment. In some states like TX, you actually receive the deed to the property. It is yours for keeps - you get the house that was attached to the lien. WOW, that would be an incredible return... But alas, this seldom happens as the majority of the time the lien is paid in full before this ever happens.

I have really just touched upon the basics of the entire process. You should do your own due diligence and see how viable this strategy is for you. There are obviously some risks involved, but if you do your homework, those risks are mitigated. Each state has their own rules regarding purchases. Hopefully, this has sparked some interest in you for you to start your own tax lien purchases.

Here is a link to wikipedia about tax liens.
http://en.wikipedia.org/wiki/Tax_lien

The Great Equalizer

Since this is my first posting, I shall share with you my favorite investment vehicle for the moment. Unlike yesterday's bell bottoms, this is not a one minute fad. I've tracked this vehicle and followed it's movements for several years now. I believe it will be 'The Great Equalizer' as it can be the so called ten bagger that everyone dreams about catching. It can make Princes out of Paupers. In the vernacular of big game hunting, this will be the elephant or maybe the lion of the Serengeti that is the prize - take your pick. The investment returns might be so big that people will name their kids after it.

Okay, enough of the buildup... drum roll.....
The winner of this year's 2009 Miss Universe pageant is.... Ms. AU. On the periodic table AU is better known as SILVER! Yes, silver. The stuff that forks and knives are made of (well for the rich folks at least). The trinkets that Tiffany charges an arm and leg for.

Why silver? The most compelling reason is that this will be the first element on the periodic table that will be totally consumed according to the US Geological Survey (ETA ~2020?). Wow, if that doesn't perk up your ears, I don't know what will. Just imagine for a minute. No more silver to be mined on Earth. Technically, there probably will be silver left on Earth, but not enough to satisfy both growing industrial and investment demand. Silver does not just serve as a store of wealth, but is actually consumed in electronic goods and other applications that make the modern world tick - ipods, laptops, etc. At some point, there will be so little left for consumption that prices will HAVE to move higher - it's simple supply and demand. And since silver is used in such small amounts per industrial application, it is not economically feasible for recycling (at least not until silver price rises significantly higher). So when we say it is consumed, it is gone... kaput... no mas.

So this brings me to my point. Current silver price is at an attractive level for a great potential investment - one in which the price can rise perhaps one to two significant orders from the current price. What do I base this on? One can compare the price of silver to say another source of wealth like gold and say it is relatively cheap. But that is another topic for a future blog.

What I would like to leave you with today is the following thought. If I told you that there was only a basket of oranges left on the face of the entire Earth. Or in the vernacular of Joe Six Pack, only one 12 pack of beer [insert your favorite beer] was left on this world.  How much would you be willing to pay for that beer? To what dollar amount would you value that beer at? Hmmm.... In the case of silver we're not talking about a want but a necessity (some would argue that beer is a necessity, and I wouldn't argue that). Silver is a necessity in modern day society where cellphones and laptops are all around us. How much do you think people will value something that is slowly disappearing from the surface of the earth?
Just really think about it for a moment and perhaps you will see that my estimate of silver increasing one to two significant orders is too low of an estimate... Beer anyone?

Cheers.