WOW! What a year for precious metals prices. As we write this in mid-December silver is up 59% for ‘06, last year up “only” 34%. Don’t forget that the gold to silver ratio is still very high at 45, but historically that ratio has averaged 16, so it looks as though silver has a long way to go as gold continues to rise in this secular bull market for precious metals. As we write this we note that so far in ‘06 corn was up 64%, copper up 39.9%, wheat up 39.3% and aluminum up 19.4%. All in all, a spiky bull graph for commodities in general.
Ever since U.S. President Richard Nixon closed “the gold window” at Fort Knox and thereby decoupled the last hold on the dollar by gold, the U.S. dollar has been in a 35 year decline. The value of the dollar could decline another 29% in purchasing power before the dollar bear is over. Nixon closed the gold window because in 1971, during the guns and butter days of the Vietnam War and The Great Society, France decided it wanted fewer of U.S. dollars and would rather have the gold. Nixon said no and stopped the interchangeability of dollars for gold. President Franklin Roosevelt took away gold from the American people in 1933. The world’s powerful bankers formed the Federal Reserve Bank in 1913, enabling them to print money and charge the government interest on that money. Those were the steps taken to inflate the U.S. currency and thereby silently tax the American people in a new and profound way.
During the early ‘80s rise in gold to $850 per ounce and silver to over $50 per ounce, Paul Volcker came in as Fed chief and raised the Fed funds rate to peak at 14% in 1981 finally killing inflationary pressures and bringing value to the U.S. dollar and bonds once again. We are now ending the bull market in long term U.S. Treasury bonds. Americans must borrow more than $2 billion per day from foreigners to meet debt requirements while the U.S. government continues the latest guns and butter policy. Asians hold trillions worth of dollars and bonds and their appetite is declining for these increasingly worthless pieces of paper backed by debt. At some point the demand for payment in gold will come, except this time the U.S. may not be able to deny payment in gold. China’s Renminbi is not ready to replace the U.S. dollar as the world’s reserve currency, but the Euro may be. Remember that Iraqi President Saddam Hussein, America’s failed puppet, threatened to accept only the Euro in payment for oil just before Iraq was invaded by the U.S. and Hussein was deposed. Currently, trillions of U.S. dollars are held in central banks around the world waiting to pay for oil and other commodities. If another currency took its place, those trillions would come to the United States generating gargantuan inflation rates.
“I expect that the U.S. dollar will continue to drift downwards until there will be a change in the U.S. balance of payments....There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into Euro and yen. It is imprudent to hold everything in one currency....That will be the experience of the next few years,” says former Fed Chief Alan Greenspan before a Tel-Aviv business conference on December 11, 2006. On December 7th, the European Central Bank raised its rate to 3.5% from 3.25% and the dollar, paying 5.25% fell .10 while the Euro rose .26 that day for a .36 spread. If you would like to diversify your currency holdings you may invest in FXE, an ETF that holds shares in the Euro currency. Or, visit www.everbank.com where you can buy CDs in foreign currencies. Two of our favorite closed-end funds holding high interest foreign currencies are FAX and GIM.
The U.S. dollar began declining once more in its long descent against the Euro in February and dropped 13.8% since then during what has been the worst American housing market in 15 years. The inverted yield curve, an historically reliable predictor of recessions, has produced interest rates in mid-December like this: yield on the 10-year T-note 4.59%; yield on the 30 year T-bond 4.71% and yield on the 91 day T-bill 4.81%; so you will be paid more to hold your money in short term bonds in this topsy-turvy world. Will the current inverted yield curve forecast a recession for next year? Maybe not. Sunil Swami, Chief Investment Officer of Alerus Financial’s giant $5 billion trust department, says the yield curve is now global and with Japan’s fed rate at .75% along with the U.S. Fed funds rate at 5.25% the global yield is not inverted. Sunil has an intriguing thought there and it’ll be interesting to see how this plays out. As long as Japanese rates remain low and the Japanese government floods the world with Yen liquidity, the carry trade can continue to borrow short on the Japanese money market to invest long in the U.S. bond market. We think U.S. rates will go up next year, or at least stay the same and U.S. bonds will begin a very long bear market along with the decline in U.S. dollar value. The carry trade made up of hedge funds and giant money managers will make their money on the Yen/USD interest rate spread. If the carry trade doesn’t offer enough liquidity to the U.S. government, our government will just print the money to buy bonds. At some point, interest on long term bonds will begin to go up while gold goes up simultaneously.
Gold is up 22% in 2006 and has had a 6 year streak of bullish surge. One hundred years from now, the U.S. dollar will definitely be worth less than it is today, but the value of an ounce of gold will still be the same. Gold has been climbing in value against all currencies since mid-2005 as world liquidity by central banks has been expanding. Amazingly, almost no one is aware of this generous bull market. Each year as all investment rankings become known, gold is at or near the top. At some point the general public will begin to demand that investment houses and trust departments react to this phenomenon by offering investment opportunities in natural resources funds. Alerus Financial, where our 401k is housed, allows us to have Fidelity’s gold fund FSAGX and Fidelity’s natural resources fund FNARX, so we’ve been participating in this bull for several years. See if you can put 10% or so in a precious metals and natural resources fund at your 401k home.
Gold is more than a metal. It is used principally in jewelry and tooth repair, but more than that it doesn’t tarnish or rust. Gold has been recognized as money for centuries. While gold doesn’t pay interest, it does hold its value against a declining paper money value and when inflation is higher than the interest paper money pays, gold goes up. When the great Constitution of the United States was written, our wise founders tethered U.S. money to precious metals. Powerful bankers and other interests slowly moved U.S. money away from the restraint of gold and silver so that wars could be fought without tax and deficit spending could go unabated. America’s vast middle class, savers and those on fixed incomes will now pay the price with a much lower standard of living.
Thankfully, free markets have introduced a way out: inexpensive Exchange Traded Funds (ETFs) that purchase the underlying metal as you make your investment. CEF has been around a long time and the new ETFs are GLD and SLV for gold and silver specifically. ETFs with precious metal stocks include GDX and IAU.
While trinket imports from China get the headlines, the biggest import deficit is in oil. The annual trade deficit with China is around $200 billion while the annual trade deficit with Iran, Venezuela, Nigeria, Iraq, Saudi Arabia, Canada, etc. is more than $500 billion. The biggest energy consumer in the United States is our own government and 97% of all that is consumed by the Department of Defense according to Dr. Ron Sega, Under Secretary of the Air Force in a report dated April 19, 2006. Just the U.S. Air Force burned 3.2 billion gallons of fuel in 2003. Every $10 increase in the price of oil translates to $600 million more in fuel costs to the Air Force per year. Wars with Iraq, Afghanistan & Columbia and the hundreds of U.S. military bases all over the world, ensure that the United States will continue to have a hefty trade deficit for years to come. Consumption of this magnitude together with a prayed-for soft landing in the economy means we have a long ways to go before we become net savers once again.
Next month, we’ll be talking numbers and how to define them. In the meantime, think about this: the largest population bubble moving though the U.S. economy is the World War II baby boomer. We just started retiring and there are 78 million of us. Twenty million of us have assets worth less than $50,000. At a 10% return every year without fail, these 20 million folks will have only $5,000/year income plus the declining value of Social Security. Our guess is, the deficit spending has only just begun.
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com.
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business: Gold Is Back!
Sunday, October 14, 2007
Riske Business April 2007
Call me a Greaser, but I still like oil and gas at these prices. The Canadian oil trusts continue to pay out humongous dividends even if the price of oil falls to $54.00 per barrel. While it is dangerous to say “it’s different this time”, there is one factoid we must all be aware of: In 1992 China satisfied its oil needs with its own production. This year, China will import 40% of its total oil needs.
The price of oil has come down by 25% since its peak. Hold on to your oil investments, especially the oil trusts. At today’s prices PGH is paying about a 14% dividend; PWE about 10%; PWI about 13%, so you see that even if oil and gas fall further from here, dividends will still be relatively high. Upon the next new gains in oil & gas prices, you may want to sell back to 20% of your holdings if gains bring you higher than 20% of your portfolio. The commodities bull market will resume once this correction is over. Talented stock chart technicians are already predicting the bottom is in for gold and gold mining stocks along with oil and oil company stocks.
With each steep correction within a secular bull market, there arises a new power within the segment. With the advent of the boom market in oil & gas prices, we are seeing the power of capitalism come to bring more energy on stream. This will heighten the competition for energy as an investment. Whether it’s natural gas pipelines, sands oil development, coal fueled power plants, wind turbines or
ethanol plants, untold billions of new investment is pouring into every
aspect of energy production and delivery. New plant production costs are not
cheap and engineering construction companies are being taxed to build them. It is the price at the pump that brings money, energy and politics to the energy spectrum.
Base metals, on the other hand, are not sexy. How many times a day do you think about zinc? How about tin or nickel? I know, me neither. Another reason I like the metals area is that a new vein of metal is very difficult to find, and when one is found, then miners have to deal with all the regulations necessary to bring a mine to production which can take up to 10 years. During the recent plunge in commodities prices, base metals moved the least and they’ve been recovering relatively more rapidly than the rest of the commodity family.
There is another, more ominous reason to like base metal mining shares here: the prospects for expanded war throughout the Middle East. Bomb casings, bullets, armored vehicles, etc. all take a monstrous amount of metals. Add to that the millions of cars that will be produced for the newly middle class of India and China and you have growing demand for the metals.
My own favorite metal miners are digging for nickel. Nickel is added to iron to make steel. There are very few pure plays in the metals arena. I’ve purchased some Jubilee Mines (JBMNF.PK) from Australia and Ivernia Mines (IVW.TO) from Canada. Jubilee mines nickel, while Ivernia mines lead. The big favorites in the mining business are BHP Billiton (BHP), and Rio Tinto (RTP); both pay generous dividends. If you’d prefer an Exchange Traded Fund (ETF) to spread your risk, try XME. Just for fun, go to Bigcharts.com, choose interactive charts then type in TIE and CCJ for a two year duration; this is how wild things can get.
Another big change coming our way is the flood of new ETFs coming to form new ways to hold actual commodities. For example, hold physical gold with GLD or physical silver with SLV. You can spread your risk in gold miners too with GDX. There’s many more. You can do some digging yourself by going to ETF Connect.
If you like stocks, silver is looking strong through this connection and the favorites there are SSRI, SLW and PAAS. AEM is a gold miner with silver production and FCX is a copper miner with gold production. FCX pays a very nice dividend and Freeport McMoRan (FCX) just declared a giant gain in earnings for the most recent quarter.
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business May 2007
SHHHHHH!!......I’m waiting for the other shoe to drop. The first shoe, the ugly subprime mortgage collapse, was the first to drop. The drop has been so loud there’s no need to talk more about it. The second shoe is just now coming off and has a ways to drop, but when it does it’ll be loud in a different way. That second shoe is the so-called “carry trade” and its unwinding.
carry trade was made possible when Japan’s central bank took a typical reaction to a stock market crash and created lots of new yen while lowering interest rates to zero. Smart, big money went in to Japan’s markets, borrowed vast sums of cheap and plentiful Japanese yen, then promptly bought American bonds returning more than 5%, New Zealand bonds earning more than 7%, etc. In other words, borrowing Japanese yen and buying other countries’ bonds carries the trade, thus the term “carry trade”.
The carry trade has been extremely profitable, while involving little or no risk, for several years. In the past few years it has grown as fast as the formation of new hedge funds. Imagine for a moment that you have formed a hedge fund with $10 billion to invest. You immediately borrow $2 billion yen because of your handsome balance sheet and use the money to buy $2 billion worth of 7 1/2% New Zealand bonds. Today’s yen rate is 1/2%, so the net is 7% without using any of your investable funds. 7% simple interest income in one year on $2 billion comes to a cool $140 million. As the hedge fund manager, you have just made $28 million each year on this trade alone.
Since the beginning of this carry trade, two components have been changing. The first is a slow recovery of interest rates by Japan’s central bank. Japanese fed funds rate remained at zero for years while the Japanese frantically tried to boost Japan’s economy out of deflation, the rate has had two quarter point increases and it now rests at 1/2%. This trend to higher rates will persist. The second insidious fundamental is the ongoing loss in purchasing power of the US dollar. This trend will also persist for reasons we’ve mentioned in past columns.
The United States government has decided to go on deficit spending even though foreign nations now hold more than $2 trillion worth of its debt. The U.S. must now borrow or print $3 billion in fresh new money each day as it continues its “guns and butter” economy. America’s trading partners want to continue shipping goods to the U.S. and they’re (so far) willing to lend us the money. The Southeast Asians are loathe to stop but they are beginning to want to hedge their bets by diversifying into other currencies and precious metals. Currencies like the U.S. dollar are governed by the same economic fundamentals as commodities; i.e. the greater the supply, the cheaper the product. Thus, if you are earning 5.5% on your money but the value of this money is declining by 6% the net is a loss. Keep in mind that as liquidity dries up the Fed would reduce interest rates which would further speed the unwinding.
These twin pincers, higher yen interest rates and depreciating U.S. currency, are causing the hedge funds to reduce their exposure to this carry trade, thus the “unwinding” of these trades is beginning. If this is correct and the carry trade continues to unwind, what do we expect will happen?
First, we cannot estimate for you how much yen is involved or the size of purchases of U.S. and other country bonds (corporates too?). There are now more than 8,000 hedge funds and we think it would be safe to assume most, if not all, are involved in the carry trade just because the income is so sure and easy. So, if 8,000 hedge funds each have an average of $500 million worth of carry trade that would amount to $4 trillion worth of bond holdings around the world. Switzerland’s low rates have made it a part of the carry trade too, but to a lesser degree because as far as we know the Swiss have not been printing money nearly as much as Japan, so we are guessing the Japanese have much more out there, say USD$3.5 trillion worth.
Imagine now that you are a Japanese citizen and all of a sudden the carry trade begins to unwind in earnest. Within a period of, say 3 years, nearly $2 trillion worth of money returns home to the banks. What would happen? Well, first the Japanese banks would be looking at any warm blooded individual to borrow money and put it to work, kind of what’s just happened in the housing industry here in the U.S. Second, Japanese banks are the biggest stockholders in Japanese equities so one would expect them to inject hundreds of billions into stocks, especially Japanese stocks.
Japanese households keep 51% of their savings or $2 trillion in the Japanese Postal savings accounts, so there is still a lot of money waiting to be invested within Japan itself. The Japanese are still afraid of the stock market, but the Nikkei crash was almost 17 years ago so the long bear in Japanese stocks could finally be coming to an end.
What could happen on the other side? During the 1980 to 1990 Japanese asset boom, the best performing assets according to Dr. Marc Faber were Taiwanese, Japanese and Korean stocks and Japanese and Taiwanese real estate. The worst performing assets were Middle Eastern and Latin American stock markets (following the 1981 Petrodollar crisis), commodities, Texas banks, oil servicing and mining companies. Also, with hundreds of billions worth of U.S. Treasury bonds coming home, one might expect the Fed to print enough money to be able to buy them back while interest rates on long bonds trend upward.
If you agree that the carry trade will unwind and that the unwinding may accelerate as it unwinds, then you may want to consider investing in Japanese yen via the new ETF: symbol FXY. We own JOF, the small company Japanese stock closed end fund that pays more than 6%. Also consider EWJ, ITF, JEQ, DNL, DFJ, or JSC.
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business June 2007
“When it comes to investing, it pays to be downright slothful.” -Warren Buffet.
Who doesn’t envy people like Buffet, the guy who invested early, stayed in, contributed regularly and let the earnings compound? Now he’s got income from investments that guarantee his future comforts. There’s nothing left to do after making a stock purchase but to let it alone and let it accumulate. The only hard part is “paying yourself first”. Like most things worthwhile, paying yourself first is simple but not easy to do. To pay yourself first take a chunk of your paycheck and put it away in an investment, then spend whatever you have left.
Take a look at the graph on this page. Notice that as time goes by, compounded dividends represent the lion’s share of the increase in market value. But we’re not just looking for companies that pay dividends. We are looking for companies that pay dividends monthly for two reasons: first, they compound faster and second, when you want to begin to draw on your income, a monthly check is nice. What you want to look for in a long term investment is a collection of companies that appreciate during bull markets and decline only slightly in a bear market. But the problem is, U.S. stocks are paying historically low dividends. America’s 500 largest companies together are paying less than 1.7% dividends today. At a 1.7% return, you’d have to have $2 million in savings to earn $2,833.33 per month. So what to do? Well, let’s take a look at foreign markets and foreign commodity stocks and the dividends they are paying.
But before we do that, I want to talk a bit about compounding and the importance of time. As you look at the graph on this page, first look at the giant share of the current value is dividends paid over time and compounded. At the beginning of the graph you can see that dividends were as small a proportion of the total value as the underlying investment itself. It was only after time had gone by that dividends had their compounding effect. Go to this website to see graphic illustrations of compounding power: http://www.angelfire.com/ca/hennings1/Acompounding.html So the big lesson is, start now to pay yourself first. Also as soon as your kids are born, start putting a few dollars a month aside for them and let the funds compound.
You may have heard stories about how the value of the U.S. dollar has declined relative to resource rich foreign countries. As I’m writing this the Canadian dollar has just hit 92 cents per US dollar vs: only 56 cents a few years ago. Therefore, those holding dividend-paying Canadian stocks are being paid in a currency that is increasing in value vs: the U.S. dollar. The British pound just rose to over $2.00 U.S. up from $1.06, so British and Canadian companies paying dividends in British currency offer a double whammy: rising dividends in a currency that is rising in value against the U.S. dollar.
The next step is to look for foreign stocks that will appreciate in a bull market but decline only slightly in a bear market. One of my favorite foreign stocks is United Utilities, a water and utility company based in Great Britain. Even at today’s price, UU pays a very competitive 5.6%. What is more necessary than water? The next most necessary item in a modern country is electricity. United Utilities sells both water and electricity.
Boralex Power Income Fund is a Canadian utility trust with great cash flows that pays a monthly dividend. It has interests in 10 power generating stations in Quebec and the U.S. The fund is listed with the Toronto Stock Exchange as BPT.UN. And, by the way, if you are unaccustomed to buying shares from foreign exchanges you’d be much better off by getting used to it. Expect to pay far higher commissions unless you use an ETF traded on domestic exchanges. The world is global and the sooner we all get less America-centric the better our financial future will be. Boralex holdings generate 190 MW from environment-friendly hydroelectric stations, wood chip stations and natural gas.
The CanRoys are really hopping. Oil and gas properties like these will track the volitility of the price of oil, but the dividends are monthly and generous. Canadian Royalty Trusts suffered a meltdown November 1, 2006 when the Canadian government suddenly jerked the tax free status of trust incomes on 2011. This may very well reverse as Canadian retirees who vote regularly and rely on the income and capital of these fine investments have been kicking and screaming. But, even if there is no tax reversal, at today’s prices the dividend returns are truly mouth-watering. Consider my old favorite oil and gas producer Pengrowth Energy Trust for example. Legendary contrarian investor David Dreman who runs DCS, a high dividend paying closed end fund, just bought a slug of PGH. As I’m writing this PGH is paying 14.5%. Folks this is proven fields already pumping oil and gas, not some wildcat hope. Some of my other favorite CanRoys are PVX (dividend 11.06%), PWE (dividend 10.7%) and HTE (dividend 13.53%). All pay monthly and all have performed marvelously of late, so you may want to watch your graphs for a chance to pick them up after they’ve cooled a bit. Also, ask your broker to automatically reinvest your dividends for a commission-free compounding; this works especially well in your IRA. There are more than 100 investments that pay monthly. If you’d like me to talk more about these and give examples, let the publisher of The Business Journal know.
There’s lots of dollars sitting on the sidelines here in the U.S. because investors have been expecting a correction. However, China just committed $3 billion to the Blackstone Group to invest for them. The DOW has been hopping to new highs confirmed by Transport and Utility Averages. The thinking here is that if the U.S. dollar continues to decline, it is better for foreign countries to hold U.S. stock ownership rather than depreciating paper. We agree and we like the dividend paying ETF with the stock symbol DIA, now paying around 3%. DIA holds the 30 stocks of the Dow Jones Industrial Average. Most of the 30 companies listed in the DOW index earn almost half of their sales by exporting, so they are really global companies earning money in strong foreign currencies.
Buy the BRIC countries and the stuff they need as they continue to flourish, Brazil, Russia, India and China will continue to industrialize while consuming huge quantities of base metals like iron, nickel, tin, zinc and exotic metals like molybdenum. There are several companies who are really a type of mutual fund of the various metals mines. AAUK (Anglo American, South Africa), RIO (Campanhia Vale do Rio Doce, Brazil), RTP (Rio Tinto, Britain) and BHP (Billiton, Australia) can all be found in U.S. stock exchanges. These are excellent companies paying good dividends. Brazil has an excellent oil company called Petrobras (PBR) listed on the New York Stock Exchange and pays about 2.4%. These do not pay monthly and the returns are not as high as resource trusts from Canada, but they are in a bull market and dividends are being raised regularly. War is inflationary because governments don’t like to ask citizens to pay for them. The first beneficiaries of rising prices are the resource stocks, the materials used in the manufacture of goods. Also, wars are big users of energy and exotic metals.
You might say, “Why should I trust what Riske has to say about commodity stock investments?” and I don’t blame you. So let’s defer to Jim Rogers, former partner of George Soros in the amazing Quantum Fund. Rogers and Soros partnered up in the early ‘70s and went on to deliver an investment return of 3,365% by 1980. During that same time the Dow Jones Industrial Average returned 20%. In 1998 Rogers launched the Rogers International Commodities Index. So far the index has gained 250% and Rogers figures the commodities bull has another 10 years to run. Oil comprises 37% of the Rogers Fund along with smaller percentages of other commodities like sugar which he also expects to boom. Rogers says, “Sometimes I wonder if our central bank is just going to print money until we run out of trees.”
Riske Business: Expect meat prices to skyrocket because of the rising costs of feedstock. Corn is being diverted to the production of ethanol. BMO Capital’s strategist Donald Coxe warns: “Consumers could get burned at the steak this summer.”
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business July 2007
In last month’s column we talked about dividends and the power of compounding over time. This column will also tell you about juicy dividends, but we’ll also get into the specific investments of a new bull market and the extra boost dividends in stronger currencies can bring.
Add this all together and you’re in for a rocket ride.
As an American concerned with mostly American-based investment decisions, it is important to remember that a combination of rising US long-term bond yields and a slipping US dollar value is the worst possible scenario for foreign central banks holding a mountain of currency reserves mostly in US$.
Since my last column, US interest rates have risen sharply. They’ve broken important long term resistance leading market technicians to say “The 24 year long term bond bull market is over.” As I write this the interest rate on a 30 year US Treasury bond has risen from 4.63 percent to 5.25 percent in only 3 months. Remember, when interest rates rise, the value of the long bond declines. With the US Dollar declining in value while bonds decline at the same time, the Chinese, Japanese and Middle Eastern oil countries will be looking to diversify their currency holdings.
A few years back I began to ask, “What will the Chinese do with all the US money they’re accumulating?” That was when the Chinese held “only” $800 billion. Now the Chinese hold more than $1 trillion and rising fast. In May ‘07, China’s trade surplus was US$ 22.5 billion, up 73 percent over the same month last year. The US has become one of China’s leading sources for goods, but the entire year last year saw only about $50 billion worth of U.S. exports to China, so you can see that trade is vastly out of balance. By itself, that is not a problem, but with the deflating value of the US dollar along with rising US interest rates, the central bank of China is suffering a double whammy loss on its US bond holdings.
We won’t spend time talking about what to do in response to this gigantic trade imbalance but instead we will ask the burning question: What is China going to do with all those US dollars?
China needs raw materials in order to continue to fill American orders for consumer goods, so I’ve come to think that China will seek to own as many of the finite resources as possible, namely mines and energy holdings.
There are several advantages to the Chinese:
1.) raw commodities are the first to experience a price rise during inflationary times so wealth value is retained;
2.) in times past, gold and silver as finite resources have been tied to paper currencies in order to limit the amount printed, and while this will undoubtedly become the case again, in the meantime other useable finite resources will become the defacto protection from money printing;
3.) witness the bull market in Canadian currency vs: the US dollar, which shows that so-called “resource currencies” are sought after by currency holders;
4.) the United States owes trillions of dollars, plus Congress and presidential candidates have promised trillions more than the US is capable of paying, therefore the US will continue to inflate its currency, the same solution chosen by Germany after WWI, which led to hyperinflation;
5.) the United States will continue the war in the Middle East and South America, thereby calling for even more paper currency to pay the bills;
6.) no foreign nation is allowed to make U.S. military equipment. All 50 states have military machine production and all will accept any amount of US paper currency;
7.) war is a voracious user of metals and energy;
8.) David Walker, Comptroller of the United States, talks about the reckless borrowing from foreign countries to pay for running the US government plus the “demographic tsunami” that will arrive when the baby-boom generation is ready to retire, calling for even more inflation; and
9.) a mine is not easy to find, then there are the approvals by its neighbors, so it takes years to bring a mine into production.
If you are convinced, as I am, that the future of America’s economy will be much higher price inflation and that raw commodities will be the first to experience inflationary price increases, then you will want to explore with me the business of metals extraction, all the while looking for mining operations that pay a hefty dividend so we can reinvest our dividends while holding the stock.
Let’s begin with Southern Copper Corp (PCU). The price of a share of PCU bottomed on October 29th, 2002, at $4.475 per share and that year PCU paid about 14 cents per share in dividends, or 3 percent. On May 14, 2007, PCU closed at $85.09 per share and paid a dividend of $1.50 that day. In all of 2006, PCU paid a total of $5.12 dividends per share. At mid-June, PCU closed at $93.52 per share with a 6.42 percent annual dividend. With these kinds of earnings plus share appreciation, who cares about inflation?
Next let’s peek at Aluminum Corp. of China (ACH). In 2006, ACH closed the year at $23.50 per share and paid a total of $1.255 per share of dividends for an annual return of around 5 percent. This year ACH has paid 37.6 cents per share so far and the price is currently about $42.50. ACH has a P/E of 9 and it’s selling for about half of book value with $1 1/2 billion dollars in cash. The Chinese market has gone parabolic though, so be careful with this one. On a two-year weekly chart ACH is just catching up with PCU.
My overall favorite mining stock is Billiton Ltd. (BHP) because it is like a mutual fund of mines. BHP is a leading supplier of core steelmaking raw materials, the world’s third largest copper producer, the world’s second largest exporter of energy coal, the world’s third largest producer of nickel, the world’s fourth largest producer of uranium, the world’s sixth largest producer of primary aluminum and a significant producer of diamonds, titanium minerals, silver, oil and natural gas.
Expect the Chinese to make an offer for BHP, possibly $200 billion or more. Most of BHP’s shares are held in Australia, so the U.S. could do little to stop the takeover.
Finally, let’s learn to explore mining stocks on the Australian Securities Exchange (ASX) together. One of my favorite pure nickel plays (nickel is an ingredient along with iron to make steel) is Jubilee Mines (JBM) of Australia. First go to www.asx.com.au, then enter the symbol JBM and you will retrieve information about Jubilee Mines. You may buy the stock using the international desk of your stockbroker.
Riske Business: Since 1970, the world’s money supply has grown at a rate 20 times that of industrial production. Correspondingly, and not surprisingly, gold and oil have risen 20 fold over those 27 years. After Nixon’s 1971 elimination of convertibility, there was no longer any constraint on the number of dollars that could be printed (other than a moral one).
The U.S. economy is now so leveraged through the banking system and the use of derivatives that the ratio of debt to Gross Domestic Product is at its highest level ever, close to 350% compared to the previous record peak of 290% in 1929. -Richard Reinhard
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business August 2007
For the past 18 months, we’ve been talking about the bull market in commodities. During that time we’ve seen resource stocks exploding in a secular bull market that still has years left to run.
How do we know there are years left in this commodities bull market? Because the DOW is still getting all the headlines. The bull market in commodities will be cresting when you see a headline like this: “Gold, Tin, Oil and Cotton All Record a New Record High for the 7th Week in a Row.” Another headline might say, “Canadian and Brazilian Currencies Jump to Another Record Against the U.S. Dollar. “
Will the U.S. dollar remain the world’s reserve currency?
The Founders of these great United States did their best to maintain the value of the U.S. dollar by backing it with gold and silver as mandated by Constitutional law. Madison, Jefferson, et. al., knew that gold and silver specie would prevent lopsided trade balances and expensive protracted wars. Meanwhile, the average U.S. citizen could trust the value of the dollar enough to buy a 100-year bond at 3 percent and know that when it matured it would buy the same quantity of goods. Since the formation of the so-called Federal Reserve Bank, however, the United States government has taken to borrowing and printing excessive amounts of money until today a one-scoop ice cream cone costs as much as $3 instead of a nickel.
How do we protect ourselves against this Federal onslaught upon the value of our homeland’s currency? There are several ways, none of which are “investor friendly” to our own country. And just like the patrician who refuses to shop at Wal-Mart until his house payment gets too big, we will all eventually decide to abandon the falling dollar in favor of investments that allow us to continue to meet our obligations.
Americans already sense that something is wrong. They’ve embarked on what is coming to be known as a “crack-up boom,” the flogging of a very tired bull market in the DOW to grand new heights, in spite of the fact that there has not been more than a 10 percent correction for a very long time, and that dividend payouts are at record lows. This is America running from a declining dollar value to an asset that produces something, not unlike what is happening in Zimbabwe, which has an inflation rate exceeding 1,000 percent. In spite of this horribly mismanaged economy, Zimbabwe has a stock market that is surging in nominal value but is declining in relation to gold. Same here, only our most recent inflation began in 2001 at the advent of the misnamed “War on Terror.” Look at the graph called $CCI in this article to see just how inflation has raged in the United States. If your vehicle has a 40-gallon tank, you spent $35.60 to fill it in 1999. Today, that same tank costs $127.60 to fill.
If you have been invested in the DOW since the year 2000, you have lost 16 percent of your purchasing power even though the financial press is telling you the DOW has achieved new heights. The once-mighty U.S. dollar has lost 32 percent of its purchasing power since 2000. That’s how the inflation game works; no bureaucrat wants to give up his job for a balanced budget, no Congressman wants to come home without scoring significant dollars for his district, and no President wants to preside over a recession, so the spending, borrowing and inflating will go on. In the meantime, Bernanke and Paulson will continue to assure you that they are containing inflation while they are the ones who are helping to create inflation. This is the sorrowful game we are forced to play.
So what is a patriotic investor to do? For one who is concerned with the viability and vigor of his homeland’s economy, we must protect our nest egg so that when the inflationary onslaught subsides we have savings left with which to rebuild our country. If we don’t -- and the Chinese safeguard their wealth while we don’t -- then the Chinese will be rebuilding our country’s economy. So, let’s get into the specific investments that will protect our estate at a minimum and hopefully cause our estate to build over time in real wealth. In the future, China will not want our Wal-Mart and Home Depot trinkets, they will want to be paid in Euros, renminbi or gold and silver.
First, the U.S. dollar-based bond market has entered a bear stage, so we must reluctantly sell our U.S. long-term bonds. Money held in U.S. currency should be held briefly in U.S. T-bill accounts only and deployed to inflation-protected investments as soon as opportunities arise. Dollar cost averaging will be the easiest way to make investments going forward. In other words, commit yourself to regular investing, say monthly, until you are fully invested or as you gather surplus. Natural resource mutual funds are available in pensions and 401k’s. Ours has FNARX and FSAGX, for example.
Currently, Asian markets are trouncing all other forms of investment. There are several individual stocks I like, such as Fanuc, Kurita, China Medical Technology (CMED), SunTec Realty, China Life (LFC) and Aluminum Corporation of China (ACH). Be careful though, the Asian markets have gotten very frothy on the graphs. The bull market in Asian stocks may have a long way to go, but it might be prudent to wait for a correction. Depends on how much volatility you can stand.
The base metal producers have been explosive. The easiest to buy here in the U.S. are all listed on the New York Stock Exchange: (RTP), (AAUK), (RIO), (PCU) and (BHP). All of these very fine foreign-based companies’ stocks are held in all extraction industry mutual funds and ETFs.
Throughout history, the masses have relied on precious metals during times of inflation. Free enterprise capitalism has brought us a way to hold physical gold and silver without actually taking possession, namely GLD and SLV. To play the leverage of mining stocks with the possibility of getting a dividend at the same time, consider NEM, GG, RGLD, MNG, PAAS, KGC, AEM and ABX. If you hold individual stocks, however, beware of the possibility of bad news or bad management. EGO declined 25 percent in one day in mid-July because it was announced that Turkey had demanded they close their Turkey-based gold mine. To protect yourself from individual stock vulnerability, choose an ETF holding all the great miners called GDX.
Then there’s the energy sector. The CanRoys have been paying their generous dividends without fail for years now. Stocks such as PGH, PVX, CNE and HTE are all available on the New York Stock Exchange. Oil has been surprisingly strong since February and it looks as though oil wants to go over $100 per barrel. You can buy natural gas at UNG. Or buy a collection of the top U.S. oil and gas companies at XLE. If you’d like to invest in the last oil frontiers of Kazakhstan, Venezuela, Algeria, Peru, Oman, Azerbaijan, Ecuador, Nigeria and Chad, buy shares of Chinese oil company PTR. PetroChina is a favorite Warren Buffet dividend play, paying twice a year at 2.6 percent with a P/E of 12.5. Two other big Chinese oil companies are CEO and SNP, all listed on the NYSE. SNP is an Asian refiner drilling wells off the coast of Cuba.
Some say oil plays off the price of gold. If you’d like to track this phenomenon, go to www.stockcharts.com and enter $GOLD:$WTIC. The 60-year mean is 15 barrels of oil buys one ounce of gold. At today’s price of around $70 per barrel, that same mean would put gold at $1,050 per ounce. Gold has been kicking cans around the $650 mark while it digests a sudden impulsive move last year into the $700s. Gold is a bronco so watch the charts and average in. Remember this from Richard Russell at dowtheoryletters.com: “A bear market wants to bring everyone along while a bull market wants to shake everyone off.”
Finally, there are three closed end funds that invest in currencies other than the U.S. dollar. They are FCO, GIM and FAX. They’ve all been climbing versus the dollar, but be aware that beginning in the summer of 2006, gold began climbing in value versus all currencies. People who are wise to The Wise Guys who wrote the U.S. Constitution know that all currencies are printed at will by governments. Countries like Japan, Vietnam and China are anxious to keep currency values low for export purposes. Countries like the United States, Great Britain (which lost its world reserve currency status because of excessive debts from World War I) and Zimbabwe print money to fund wars, economic sanctions and trade imbalances.
Riske Business: Last year’s defense budget for the United Kingdom was $57.8 billion, Israel $11.3 billion, Russia $24.9 billion, China $35.3 billion and the United States $560 billion. If you think U.S. military expense will continue at this gargantuan pace, take a look at an ETF called PPA.
GDP growth of the Chinese economy for the first half of ‘07 came in at an explosive 11.9 percent. That latest gain puts China ahead of Germany’s $2.9 trillion GDP... and encroaching on Japan’s $4.4 trillion economy. While still a far cry away from the USA’s $13.2 trillion, China is looking to be King of the Hill.
Riske began his entrepreneurial career with a waterbed store in Grand Forks in 1971 called The Walrus. Walrus Waterbeds was sold to HOM Furnature in 1984. Currently Riske is owner of Take Two Video, Take 2 Express, MJ Capelli Family Hair Salons, VidCycle and Sunseekers Tanning Salon. Riske is not a licensed financial advisor and those seeking investment advice should consult with a licensed financial advisor. To contact Riske, email marty@fmbizjournal.com
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
Riske Business September 2007
He nervously rested his hand on his fingertips. He didn’t want the sweat from his palms on his baby seal briefcase. He had several briefcases, but this one was special because it was made from a rare and illegal skin; it sported solid brass fittings and a big brass and leather crest with his initials. He was Mortimer S. Gage (pronounced gedj with a hard g). Everyone called him “Mort” but the t was silent. His best friend was nicknamed Mort too, but with the t pronounced. While having a drink at the clubhouse they laughed together when they found out that “mort” was the French word for death.
Mort was still trembling and sweaty after vomiting in the men’s bathroom. His mind had a fuzz to it, a deadening with a tinnitus whistling. It was unreal. It couldn’t be happening. It couldn’t be happening to him. Didn’t the universe know who he was and how important he was?
He was in his banker’s office and he was about to find out how badly things had gone. On the way over, none of his credit cards would let him pay for the $130 it would take to fill his Cadillac Escalade plus the customary deluxe $25 car wash, so he pulled a twenty from his pocket for enough gas to make it all the way downtown.
The last time Mort had been here, he was refinancing two of his 14 houses and condos. That time, his banker encouraged him to take advantage of a two year 1 per cent ARM with a 20 per cent equity “kicker” in case he needed to make any improvements on the properties. Mort didn’t tell him that he never improved properties; he just held them for a year and when he was lucky, even less than a year. He netted $175,000 on that deal. Only four of his homes were occupied, but Mort preferred it that way because renting was a hassle. Sometimes renters trashed a place and he didn’t need the cash flow anyway because he could sell them when he wanted to.
Mort had been an insurance agent who began dabbling at buying and selling homes in ‘02. By ‘03 the Fed had lowered interest rates to 1 percent, Greenspan said “take out the low interest, adjustable rate loans” and the Florida housing market began to boil. Mort was making so much money he quit selling insurance and annuities to go into real estate full time.
It was so easy. Mort began to ask his friends, “Why work for a living?”
With so little to do, Mort and his wife began to travel in earnest. Sure, there were the luxury hotels and the exotic rental cars, but the real fun was gambling and soothing breaks in fabulous spas.
In addition to the credit cards, which he would trade off every six months or so for the next 0 percent deal, Mort also borrowed Japanese yen. The yen rate of interest was zero for a long time, then slowly shuffled to 1/2 percent. With the yen loan, he bought New Zealand bonds, which were paying 8 percent for a net gain of 7.5 percent. Nice work if you can get it, and anyone could, you just had to show a substantial balance sheet. Today, though, Mort was going to have to tell his banker the yen “carry trade” was over because currency volatility since June had knocked the carry trade off its perch and the gains had been wiped out.
They say bad news travels in packs. Like his mom used to say, “When it rains it pours.” Mort used to be able to count on his stock holdings when there was a temporary dry spell. Mort had forgotten that in the ‘70s the Dow Jones Industrial Average declined 20 percent several times. There had been no downturn of more than 10 percent since ‘03. But in early August the 8 percent dip in stocks brought margin calls like he’d never seen before and it wiped him out with all the forced selling.
It all happened so fast. His friends and neighbors had struggled mightily to keep up with the Gages and now Mort and his wife were moving to a tiny apartment because their 6,000-square foot waterfront country club home was being foreclosed on.
It wouldn’t have had to be this way, he ruefully remembered. Back in ‘05 Bruce and Bob Toll began to sell shares in their residential construction company called Toll Bros. (TOL). He’d had a feeling he should be following suit. But sales were great and he wanted to squeeze in two more years of home sales so he could slide into a financial finish line that would bring daily golf at his country club and four foreign trips per year. So instead he loaded up with a few mid-million-dollar homes along with the usual $600,000 to $1,000,000 homes. It was a stretch, but things had gone really well so far.
Mort also remembered watching politicians as they campaigned for office. Those who promised the most money got his vote. Once, his friend Mort-with-a-t asked him if it didn’t bother him that Federal spending without a budget might leave too much debt for America’s young. Mort replied, “Why should I do anything for posterity? What has posterity ever done for me?”
Mort was learning the hard way that the debt-laden, inflationary U.S. government, with its floods of printed money, along with easy credit, tempts men to spend the day speculating rather than producing product. As Ludwig von Mises (www.mises.org) taught decades ago, bubble economies bust more violently than producer economies, which grow at a slow but much more solid 4-6 percent per year. Mort didn’t know that inflation was the inevitable result of President Richard Nixon’s closing the gold window at Fort Knox, thereby releasing inflation from the restraint of the tether to gold.
While Mort has suffered financial ruin in these inflationary times, he must still accept responsibility for what he has done. And even if he doesn’t accept responsibility for his decisions it won’t matter because he’s in the poorhouse now. He’s the guy who’s puking.
It’s still a world of “caveat emptor,” and the Federal government acting as nanny can only protect the greedy and reckless for so long before it falls into an ashen abyss itself.
Riske Business: My son John tells me it takes 4 years to get a patent on high tech and software technology. Value added manufacturing is the lifeblood of the American economy. The faster we analyze and approve valid patents, the better.
Charts and information are for educational purposes only and are not a solicitation to buy or sell any security as we are not licensed financial advisors. We use stops. There are NO guarantees that targets will be reached. Markets change fast and we are nimble. Before we enter a trade we have calculated a trading plan for entry and exit. At any given time we may buy, hold or sell any position.
To read other financial and business news, visit http://www.fmbizjournal.com. The Business Journal is a locally-owned newspaper serving the greater Fargo Moorhead area and the Red River Valley.
