May 7, 2009

Global Market Comments
May 7, 2009

Featured Trades: (SILVER), (GOLD), (TIPS)

1) If you don't rush out and buy silver right now at $13.70 an ounce, I'm going to pick you up and shake you by the lapels of your coat until your false teeth pop out and fall clattering to the ground. Take a look at the chart below and hold in wonder the definitive break out to the upside from its recent tedious range. The trigger is a selloff in global stocks from their recent heady nine week run. The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1m and is currently 65:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon's mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties. Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means were are setting up for a classic supply demand squeeze. I think we could run from the current $13.70/ounce to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.

Silver-2.png  picture by sbronte

silver2.jpg picture by sbronte

2) There are now more cell phone only households in the US than land line only homes, according to the Center for Disease Control. Those who only have cell phones jumped from 7.3% to 20% since 2005, while land lines fell from 34.4% to 17.4%. Most generation 'Y' customers have never had a land line, and probably never will, and are even abandoning voice communication for Facebook, Twitter, and texting. 'Cord cutting' really took off when cheap and effective wireless routers hit the market a few years ago, and land lines, with their high costs may eventually become a dinosaur. The CDC originally got in the cell phone business in an effort to research claims that the devices cause brain cancer or any other number of maladies. The research has proved so popular with industry, it has been continued and expanded. The brain cancer was never found.

phone1.png picture by sbronte

3) Five to six million students are expected to graduate from college this spring. Only 30% are believed to have nailed down jobs so far. I doubt these kids put on an average of $40,000 in debt so that could ask customers if they want french fries with their big macs. The best thing they can do now is to go for their Masters degrees, if they can get the financial aid.

graduation1.jpg picture by sbronte

4) With money pouring into equities, another window is opening for investors to go into Treasury Inflation Protected Securities (TIPS). If you believe that imminent and massive Treasury issuance is going to pop the Treasury bond bubble, and that Obama's reflationary policies are long term inflationary, you have to be looking at what TIPS offer. Investors get a US government guaranteed protection against future price hikes by raising the security's principal in line with the inflation rate. A 3% coupon TIPS facing a 10% inflation rate automatically boosts the face value of your bond from an issue price of 100 to 110, giving you a total return of 13%. You can buy these directly from the US Treasury, or buy the iShares Lehman TIPS Bond Fund (TIP). Of course this is all based on the government's calculation of the inflation  rate, which we all know is rigged, and has massively understated the true inflation rate for decades. But some protection is better than none. The best time to buy flood insurance is at the end of a long drought.

TIP-1.png picture  by sbronte

housewreck5.jpg picture by sbronte


'I'm used to a market that trades off of hard data, not one that is blindfolded and walking across the interstate,' said David Bahoric, at Trade the News about therecent run up in the stock market.

blinfold1.jpg picture by sbronte