Where to buy physical gold?

So you have decided to buy physical gold but don't know where to purchase it. After all there are quite a few crooks operating as gold dealers who charge egregious premiums over spot. Be careful about these dealers--they usually run fancy TV ads to sucker gullible people into paying 40-70% over spot which is a rip off. I have found that APMEX.com is the best place to buy physical gold. They seem to have the best prices and are honest dealers. I have done business with them before and will do business with them again in the future. I recently purchased a 10 oz gold bar from made by the Perth Mint (with a swan as the logo) and had no problems with APMEX.com. The only annoying issue is that they require a signature at the time of delivery (for security reasons). This is very inconvenient considering I work all day and do not have time to sign for the delivery. Other than that this difficulty, APMEX is the best gold dealer I have dealt with. Another good dealer is CMI gold and silver.

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Never trade stocks before earnings

It is an appealing trade to either buy or short a stock before earnings. You know that the stock will likely make a substantial move and if you are correct you could make a killing. But I can tell you after 10 years of trading the market that it is a really bad idea. It is almost impossible to predict which way a stock will move after an earnings announcement. I have seen situations when a company beats earnings and raise guidance but the stock either stays flat or declines slightly. Conversely I have seen situations where a company misses earnings expectations and lowers guidance and the stock goes up. You never know how the market will react to an earnings announcement so stop trying. It is a loser's game. Most professionals I know will never try to trade an earnings announcement because of this problem. However you will often see small investors try to make a directional call lose most of their money.

I am going to tell you about one of my experiences trading options ahead of an earnings announcement. This occurred in 2008 with Burlington Northern. I don't remember the exact date but it was probably in April-May. I was looking at the chart of BNI which looked very bullish with the stock crossing $100. Anyone who remembers Jesse Livermore's rules knows that this is a very positive signal which usually leads to higher prices. Anyway I was placing a trade in a front month at the money option contract right before the close of trade. By mistake I entered an order for 250 contracts at 1.70 a contract ($42,500) when I only wanted to buy 25 contracts. At the time of the trade I was not aware of the fact that BNI was releasing earnings before the market opened the next day. After I discovered my error I went into a panic because I could lose my entire investment in a matter of seconds. I did not sleep a wink that night. I nervously awaited the earnings announcement which would decide my fate. Burlington Northern announced earnings I believe 30 minutes before the bell. Lucky for me they beat expectations and the stock popped $1.40. But I did not feel any joy, just relief I did not lose everything because of an accident.

But then circumstances began to change--as we got closer to the beginning of trading I noticed that Burlington was only up $1.00--then $.40-and 1 minute before the bell up only .10 cents. Obviously by blood pressure started to boil and the sense of impending doom began to set in. Could things get any worse before I had a chance to get out of my erroneous position? When the opening bell finally sounded the first quote for BNI was up .05 cents followed by the next tick of down .01 cents. Because of the implied volatility in the option, the price of my option fell from 1.70 to 1.00 (a loss of $17,500). My heart was racing and I felt like killing myself for making such a stupid mistake.

The stock continued to fall  now down to .38 cents in the opening 5 minutes. At this point I was willing to take the terrible loss and be happy to get the rest of my money back. Then something I can only explain as divine intervention occurred--BNI began to surge higher for absolutely no reason. It eventually moved up more than $3 from the lows to my surprise. I was able to sell my option for $2.85 up $28,750. I was completely speechless and in a state of shock. I could not even speak--all I could do was make weird sounds of euphoria which my parents could not comprehend. It took me over 20 minutes before I was able to actually say anything. I could not believe what had just happened. The next surprise was that Burlington Northern started to fall back down again and closed the day up $.75.

I will never forget this day for as long as I live. I was one of the luckiest people in the world that day. I should have lost almost everything but instead enjoyed a large profit. Personally I would never want to experience the stress that trade had on me. But I survived to trade another day. It was after this experience I decided never to trade a stock before earnings.

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What ever happened to an equity risk premium?

Market participants will know that stocks are inherently more risky than government bonds. Historically investors demanded that stocks pay a higher dividend yield over risk-free government bonds to compensate for the risk. However, you will notice that over the last twenty years dividends payed by companies have declined dramatically. Right now there is no equity risk premium in the markets compared to the 10 year Treasury. Estimates put the 2010 dividend yield for the S&P 500 between 1.7-2.0%which is pretty pathetic considering the 10 year note is yielding 3.83%. The average S&P 500 dividend yield since 1935 is 3.8%.

I guess the argument is that there is no need for an equity risk premium because stocks will provide significant capital gains compared to bonds. I doubt it considering we are in a secular bear market.

Here is a chart which shows the dividend yield of the S&P 500 since 1870(courtesy Robert Shiller). You will see that we are near all time lows. Is it really a great time to be committing capital to stocks?

chart data from Robert Shiller

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Gold vs. Gold Stocks

This is a popular discussion among hard asset investors: whether it is better to own physical gold or gold stocks. You will often hear that gold stocks provide investors 3X leverage to the price of gold as a justification for owning stocks over bullion. Personally I have not seen this over the last 10 years. If you take a look at a few charts you will see that bullion has outperformed gold stocks to the upside without the dramatic declines. This was particularly evident in 2008 where gold at its worst fell 35% off its highs but then quickly rebounded and hit a new all time high in 2009. However, the stocks fell between 75-95% (juniors falling the most) in 2008 and have failed to hit a new high in 2009-2010. Many of the juniors and explorations companies are still down 50% from their all time highs reached in 2006-2007.

Here are a few charts to better visualize this situation.



You can see that gold stocks have really disappointed compared to bullion. The real question is why? The only reason I can find is that the miner's operating margins have not expanded with the rising price of gold. Instead they have remained flat to slightly down because of the dramatic increase in energy prices. As most people know, mining is an energy intensive business and rising energy prices have prevented the gold miners from delivering their expected 3X leverage to the price of gold. If this situation continues, gold miners will continue to lag gold.

However there are still opportunities in the gold mining industry. I like gold royalty companies such as Royal Gold and Franco-Nevada because they pay an upfront fee to mining companies for their future production and get a nice stream of cash for years. I also like project generators who joint venture their projects to other companies which helps reduce capital expenditures and dilution. A few companies I am currently looking at are: Mirasol, Miranda Gold, Eurasian Minerals, Midland Exploration, and AuEx Ventures, and Lara Exploration.

In conclusion, if you are looking for stability and safety then gold is the better choice. However if you are a really good stock picker and market timer then gold stocks are for you. Personally I like the idea of having 10% of my portfolio in physical gold as insurance and trading gold stocks. I really can't stand the extreme volatility of the stocks to buy and hold them for the long-term.

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10% of my portfolio is in physical gold 0% in gold mining stocks

Legal Disclaimer:

I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)


Market Thoughts 3.31.2010

Markets closed the first quarter of the year fractionally lower. The big news of the day was the awful ADP jobs report which showed a decline of 23 thousand and a weaker than expected PMI report. This did not stop commodities from surging higher with oil and gold up approximately 1%. This despite the EIA's oil inventory numbers which showed crude stocks increased this week by almost 3 million barrels. If this is not proof that the markets are operating in fantasy land than I do not know what does. The oil market is being manipulated higher by speculators who are playing a sick joke on the people of the world. The more the oil inventories increase the higher the price of oil. The only commodity that still has to face weak fundamentals is natural gas which declined again. Nat gas has been down something like 40 of the past 50 days.

I do not expect much movement tomorrow because few traders make large bets ahead of the Non-Farm Payrolls which is released on Friday even though US markets are closed. So most traders will be on the sidelines, not wanting to expose themselves to large gaps up or down.

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Thoughts from Marc Faber

Marc Faber is one of the investors I actually listen to because he has an admirable track record dating back over decades. I subscribe to his Gloom Boom Doom Report and while I cannot legally publish a copy of it I can give you a general outlook from Marc Faber.

Faber is not currently bullish on stocks and believes that the odds of a correction are high over the next 12 months (10-20%). The only exception is Thailand and Japanese stocks which are still cheap.

Faber compares buying US Treasury bonds in 2010 to purchasing tech stocks in 1999--not a good idea. He believes that there is no future scenario which would benefit treasuries (particularly 30yr bonds).

When it comes to currencies Faber notes that the Yen should decline and is a good short here against the Euro. He would be a buyer of the Euro against the dollar.

He still likes gold and advises buying on a regular basis.

Faber is cautious on commodities but likes grains, especially soybeans and likes fertilizer companies (POT,MOS,AGU) as a play on this.

Overall Faber is not bearish longer term on stocks because he believes the Federal Reserve will simply print more money to prop up asset classes. But in the short term he expects a real correction which should be bought by investors.

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Regarding Morningstar investment research

About 2 years ago I began to subscribe to Morningstar's investment research. However I have now cancelled it because there were just too many problems with the quality of the research. I realize that most Wall Street investment research is next to useless but I thought morningstar would be better because it did not have any conflicts of interest like the others.

The main reasons for canceling Morningstar are the following:

1. They analyze too many stocks, which prevents them from providing in-depth research. So many stocks that all you get is a consistent boilerplate analysis, which is revived twice a year along with a few updates (earnings and other announcements). They give you a general thesis regarding the company, a simple grade regarding management and financial health, and a valuation target. My main concern is their valuation section, which I have noticed simply moves up or down based on the movement in the stock. During 2008 and 2009 they were constantly lowering their price targets on the financials to keep pace with their steep declines. Then as the market surges in March 2009 they simply raised their price targets. Another egregious example was with Potash Corp which according to morningstar was worth around $320 when the stock was at $240, but 6 months later was worth $90 when the stock fell to $70 This is not stock analysis but simply trend following on the part of Morningstar.

2. They only analyze mid to large companies and completely ignore small caps. For me this is a big issue--I do not need another research report on Microsoft, Apple, Google, etc. There are well over 100 analysts (probably more) covering these companies and I don't really need another one.

3. Constantly changing analysts--I have noticed that Morningstar seems to constantly be changing analysts. I am not sure if they simply have a high employee turnover or what but it is frustrating especially if you are lucky enough to find a good analyst.

4. No different than other Wall Street firms--This is the biggest reason I decided to cancel the service. I actually compared Morningstar's research reports with Merrill Lynch's and found little difference. Morningstar seems to be influenced by the general consensus of the street and usually offers little more than what other investment firms are saying. This is not particularly useful for investors as you make more money but trying to go against the crowd.

I have found from experience that the best investment research is the research you conduct yourself. I never trust Wall Street research because they are usually trying to sell you something or win business from companies by rating the stock a buy. This happened in the case of Enron where you could only do business with the company if you had a buy rating on it. Naturally all of the investment banks had a buy rating up until the dramatic collapse. The rule to learn is to never trust Wall Street research--ever!! Especially Goldman Sachs who has a notorious reputation for trading against its own clients (telling pension funds to buy CDO's while at the same time shorting them).

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Gold Price Fluctuations Intraday

This is an interesting chart which shows the intraday price of gold throughout the day. You will notice that the price almost always rises during the Asian session then declines sharply during the New York session. Even though this chart only shows the intraday price of gold from 1998-2005 it is still germane. You will see this pattern over and over again (try this for yourself). This is one of the better indications of manipulation that I can find. Or is there some benign reason for this odd occurrence?

Chart from Demetri Speck at seasonalcharts.com

For more information and articles relating to possible gold manipulation please click here

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Greek bond yields surge yet again

I pity the money managers who bought Greek bonds yesterday believing they were getting a good deal at 6%. Today Greek 10 year bonds are yielding 6.45% as the spread between German bonds jumps to 335bps. No doubt the talking heads will be debating the causes but this should not be a surprise to anyone paying attention to the situation. Nothing has been solved in Greece!! The "Greek bailout" by the IMF/EU solves nothing accept promising to loan Greece more money. The Greek problem is that they have too much debt and need to take drastic steps to reduce its indebtedness. I have absolutely no faith in Greece when it comes to implementing and sticking to its austerity measures. The easiest and therefore the most probable solution to Greece's woes is to inflate and devalue its currency. But until they officially withdraw from the EU that solution is not possible. I don't support the devaluation method but it is very popular politically because people do not understand inflation well.

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Investing/Trading on the Pink Sheets

I know many investment professionals who will never purchase a stock if it trades on the pink sheets or OTC, even if it represents good value. Why? Pink sheets have long been considered the waste bin of the stock market--where companies go to die or be manipulated by stock pools. It is though that no self respecting investor would want to get involved in these kind of stocks. I think this mentality is shortsighted but beneficial to enterprising investors willing to do their own due diligence.

From personal experience I can tell you that there are great companies which trade on the pink sheets for a variety of reasons. Many companies have chosen to list on the pinks sheets to escape the egregious costs of Sarbanes Oxley (especially foreign companies). What makes some of these stocks a good value is that they are under followed by hedge funds and institutions. On account of this, these stocks are often priced inefficiently proving investors an opportunity to exploit.

Below are a few hints and tips for trading these illiquid and unknown pink sheet stocks.

1. Never enter a market order--many of these stocks are illiquid and sometimes go a few days without trading. As such there is a large bid/ask spread (sometimes $15). However it is relatively easy to play around this obstacle. I did this with Limoneira(LMNR) when the spread was $130/145. I simply placed a Good till canceled limit order at $131.01 and waited for someone to finally dump their shares at the market(bid price). It did take a week for the order to be filled but I am very patient. The same strategy can be utilized when selling by placing an order at $144.99. One thing to keep in mind is that you have to trade in round lots (100,200,500,1000,etc) to beat the bid/ask spread. If you enter a limit order for 56 shares I have noticed that the market makers completely ignore your order and your order will not get filled

2. You have to do extra due diligence(DD)--I know I usually say this but when it comes to pink sheet stocks this is more important than ever. These companies do not have to provide audited financial statements like NYSE listed companies. Most provided unaudited financial statements which is better than nothing but not particularly reassuring. The best idea is to check out the company's website and look around. It also helps to talk to a representative from the company and ask for the desired information. The hardest part of DD regarding these kind of stocks is that there are no analysts covering the stock which makes it difficult to estimate future earnings.

3. Don't buy penny stocks on the Pink Sheets--This is where you will see the manipulations and criminal acts. I define any stock under $5 as a penny stock. One other tip off to illegal manipulations is the large amount of volume. You will often see these type of stock trade 40 million shares at .05 cents. These criminals will run up the stock from .01 to .10 based on a fraudulent story hyping the company.

4. Beware a lack of information--There are a few companies who provide absolutely no information for prospective investors. They only send you an annual report if you can prove you own the stock (BWEL and AVOA). I will not invest in any of these companies under any circumstances, even though I know others who have. A prospective company should at the very least provide a webiste with financial data.

Here is a list of stocks I follow which trade on the pink sheets and OTC

1. Limoneira (LMNR.PK)
2. Keweenaw Land Assoication (KEWL.PK)
3. JD Boswell (BWEL.PK)--not enough information on this company. Not even a website.
5. Biloxi Marsh Land Company (BLMC.PK)
6. Farmer's & Marehcant's Bank of Long Beach (FMBL.OB)
7. First National Bank Alaska (FBAK.PK)
8. Avoca (AVOA.PK)--not enough information on this company. No website.

One great blog that covers a few of these type companies is stocksbelowncav.blogspot.com

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Legal Disclaimer
I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)


Consumer spending rises despite lack of jobs

This is what makes analyzing the economy difficult. Today the Commerce Department announced that consumer spending rose 0.3% in February while at the same time personal incomes remained unchanged. Hats off to the brain dead American consumer who does not let recessions, depressions, 17% unemployment (U-6 number), rising energy and food prices deter them from shopping until they drop. This makes no logical sense. The only explanation I have for this is that people stop paying their mortgages and use this "extra money" to go crazy at Gucci, Saks, Tiffany's. In many cases they can spend $2000-4000 a month which would have been foolishly wasted on their underwater mortgage. I have read that you can stay in your home for up to 15 months without making a payment so it makes sense. Defaulting on your mortgage is the new economic stimulus. Only in America!!!

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Greece Needs to Raise $27 billion in the next 60 days

We will see if the IMF/EU assistance, loan guarantee, moral support, or whatever they are calling it these days (but don't call it a bailout--Greece does not need and will never need a bailout so say the EU elite) soothed market concerns regarding Greece's fiscal position. From the look at the current yield on Greece's 10year bonds, all is not well with Greece still having to pay over 6%. While most market observers would agree that 6% is a pretty good rate for a bankrupt state like Greece, the Greek government is still outraged. After all, the Greek government believes it is their god given right to borrow at the same rate as the Germans. Furthermore, the Greek government postulates that the increased interest rate it is being forced to pay is going to prevent them from achieving their budget cuts announced last month.

The real question is how will the market receive the bond issue? Some have said that Greece could face a failed auction. I doubt it. The most likely scenario is a private placement where the Greek government makes sure they will be able to borrow the required $7 in April and $20 billion in May. This could be done with the help of a few German and French banks participating. This is not a new idea and the Greek's have done it before. So don't count on a failed auction, but I would be surprised if Greece was able to borrow under 6%.

If you are looking for an interesting trade you might want to consider shorting Greek sovereign credit while going long Greek corporates (stay a way from banks though). I have heard that this is a popular trade being put on by hedge funds.

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Some humor about the illegal unconstitutional Fed

Great video.

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The Curious Case of Natural Gas

Natural Gas had another miserable day on Friday to conclude a miserable week. The interesting aspect of natural gas is that it has not participated in the huge commodity rally in 2009. Market commentators postulate that poor demand due to a weak economy is the culprit. Its funny that the same could be said for copper, oil, zinc, etc. But that did not stop these commodities from rising 100-150% in 2009. However natural gas is the only commodity held back by fundamentals and large supplies.

Furthermore, I am told that natural gas supplies are high and that this will keep prices low for a long time. Lets take a look at the charts.

Source: http://www.nowandfutures.com/energy.html

You will clearly see that natural gas supplies are within the 5yr average. So why has the Federal Reserve's free money not found its way to natural gas? Why has natural gas fallen from $6 to below $4?

The only answer I can up with is that natural gas is a local commodity and cant be easily stored by traders and speculators. Oil for example can be stored anywhere--even in my garage. These easily stored commodities have been gobbled up by market participants and financed by the Fed's monopoly money. Natural gas on the other hand has to be held in specially designed storage tanks. Another problem for natural gas is that transporting natural gas is difficult and requires a pipeline.

So whats the future for Natural Gas

Because I am long natural gas I naturally expect natural gas to fall to below zero (only 4 dollars away) in the immediate future. On a serious note I would prefer to be a buyer of natural gas and a seller of crude oil. Natural gas is historically cheap and will eventually rise (no one knows when). It may take some time though.

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My Investment in Africa Oil

Postion Sold Sept. 3, 2010 at $1.34

Click Here for an Update to Africa Oil Investment--June 20, 2010

I first heard about Africa Oil after Rick Rule of Global Resource Investments presented the idea at a Casey's Research Conference. He had just taken a major stake through a recent capital raise.

About Africa Oil

Africa Oil is an oil exploration company focused in Ethiopia, Kenya, and the Puntland region (Somalia). The company has a large acreage position totaling 200,000 km in the largely unexplored regions of East Africa.

Company's Website: Click Here

Investment Analysis

Africa Oil represents a compelling opportunity to participate in the oil exploration business in geographical regions which could produce multi-billion barrel finds. The company has obtained a sufficiently large land position in under-explored regions where few wells have been drilled.

Somalia is the company's hidden gem. Because of numerous civil wars, Somalia has been largely untouched by major oil companies in the past, even though it shows excellent potential. There have been numerous oil seeps over the years indicating that there is some oil there, but it remains to be seen if any of it is commerically viable. The basins of Somalia and Yemen used to be contiguous millions of years ago before they separated. The two major areas of interest are the Dharoor and Nogal basins, which were connected to the Masila, and Shabwa basins in Yemen. These same basins in Yemen have produced large oil finds in the past.

While Somalia is a political morass, the Puntland is a self governing, stable  region in the north of the country. Africa Oil has exclusive drilling rights to the region (with their partner Range Resources) and will begin drilling in mid 2010 and early 2011. The only potential problem with this site is that the Somalian government has challenged the agreement, claiming that a self governing region cannot grant drilling concessions to a company without the approval of the central government. I am not particularly concerned about this as the President of the Puntland Region recently noted that the central government has no practical authority in Somalia outside the capital. The Puntland region has its own elected government and military. For more on Oil in Somalia Click Here

The company also has exploration licences in Ethiopia located around the Adigala and Ogaden basins. The Ogaden basin in particular looks to be the best prospect because oil and natural gas deposits have already been discovered by other companies. The only problem in this area is the Ogaden National Liberation Front, which is a separatist militia group which has committed acts of violence against companies in the past. The NLF opposes oil exploration and has threatened to attack any company who tries to drill in the area. Most of the western oil majors are unwilling to accept this type of risk.

Kenya is another place of interest for Africa Oil ,which has interests in three major blocks in the northern section of the Anza basin. This basin is thought to be a continuation of the hugely successful Muglad basin in Sudan that has produced large oil finds. While hopes are high in Kenya, it has a poor track record when it comes to actually finding commerically viable oil and natural gas deposits (drilling has found large concentrations of gas though). One of the main reasons for this could be that the majority of wells only reached a depth of 3000-3500km. Another reason is that only 37 exploratory wells have been drilled in the country. For a comparable example, it took over 90 exploratory wells to find oil in Sudan. Africa Oil and its partner CNOOC are currently in the process of drilling the deepest well ever in Kenya (5,500km) in Block 9.


One of the best aspects of Africa Oil is their timeline for drilling. Unlike other explorers who promise drilling in the future, Africa Oil is commencing all of its drilling within the next two years. Their first well in Kenya was spud on Oct. 2009 with their partner CNOOC (Chinese oil company). In May, 2010, they completed drilling and announced that they had hit natural gas in four pay zones. Testing is currently underway to test the commercial viability of the find. The Company is expected to begin drilling in the Puntland in Q4 of 2010. In 2011 they should be drilling in Ethiopia and Kenya.


The team at Africa Oil is experienced in the exploration business and has a strong record of bringing value to shareholders. CEO Keith Hill was the founder of Valkyries Petroleum which was successfully sold to Lundin Petroleum for $700 million. Management has hinted through interviews that their goal with Africa Oil is to find and prove oil resources and then sell the company rather than spending 5-7 years and hundreds of millionsof dollars to bring the resources to production.


One of the more frustrating aspects of the exploration business is the large amount of capital required. To finance exploration, companies seem to issue shares almost on a quarterly basis, which results in severe dilution to existing shareholders. While Africa Oil has has had to do this as well, they are now in a position  to  finance fully their drilling program for the next year. They will be able to accomplish this through farm out agreements that reduce their interest in the well but help pay for the large exploration costs (up to $26 million per well). So, in my opinion, shareholders do not have to worry about any more dilution for the foreseeable future. Furthermore, the company has 44 million warrants outstanding which expire in 2012. This gives the company access to more capital if the warrants are exercised without having to go the capital markets again.

Major Investors

I like to see respected resource investors invest alongside me. In the case of Africa Oil, there are two major investors who have significant stakes in the company. Rick Rule has an approximately 9% interest through common shares and warrants. Another major investor is the Lundin family of Sweden, well known for their oil company Lundin Petroleum. There are certainly smart people investors in this endeavor.


I consider Africa Oil a valuable call option on oil exploration in East Africa. It is a high-risk high-reward situation where you have to be willing to lose your entire investment. If the company hits oil in any of their blocks, the stock will do incredibly well for shareholders. Conversely, if they fail, the stock will most likely go to zero. There are no guarantees in the resource exploration business no matter how good the prospects look on paper. The company is also exposed to major political risks in Ethiopia and Somalia, which could result in the company losing their exploration licenses. Overall, I think the potential far exceeds the risk and am willing to invest in the company.

Disclosure: 3% of my portfolio is invested in Africa Oil. I may bring that number up to 5% if the opportunity presents itself. By basis in the stock is .91 cents.

Legal Disclaimer: I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset.


The only way out is to print more and more money.

This is an issue I have been looking into for a while. How can the US ever manage to to payoff its debts ($12.7 trillion and counting) and continue to run trillion dollar deficits for the foreseeable future. This year the national debt to GDP will equal 100% and could hit 150% in the next 7 years. The historical method for managing the national debt has been to debase the currency by 3-4%(official numbers) through inflation. This technique has worked very well over the years as most people lack a general understanding of inflation. However the sheer amount of debt and the rate it is piling would require double digit inflation for years. Below is a chart of the best case estimate of how the national debt will increase over the next few years.

Remember this is an optimistic projection and likely underestimates the true numbers. Marc Faber estimated that the US will run trillion dollar deficits forever. Why? Because Social Security has now fallen into deficit. This means that for the first time in history, the government is paying out more in benefits than it takes in from payroll taxes. The US government has used Social Security as a piggy bank for years in order to finance the government. It was a great racket while it lasted. But instead of being able to freely spend Social Security's surpluses, the Treasury now has to make up the deficit by borrowing billions more.

This brings us to the next problem: servicing the interest on the national debt. The US will spend north of $400 billion during 2010 to just pay the interest on the debt. And this is with historically low interest rates. At a certain point interest rates will rise and the cost of servicing the debt will skyrocket putting more pressure on federal budget.


Historically there are only four solutions to the current debt problem.

1. Grow your way out. If the US could grow at 6-7% for the next 20 years without a single recession we could theoretically grow our way out of this problem. Yes the debt would still increase but it would represent a smaller percent of GDP and thus more easily serviced. If you believe in this scenario all I can say is good luck.

2. Simply defaulting--This is not a possible outcome as it would have devastating affects for the US. It is also politically unacceptable and could spark riots and even a revolution. I highly doubt the US will ever officially default.

3. Reduce Government Spending--HA HA HA!!

4. Print Money and lots of it--This in my opinion is the most likely scenario because it is so easy. The only problem is that the US would likely have to print $1-1.5 trillion a year to achieve the desired outcome. Printing this amount of money would lead the high rates of inflation in the future. The only downside to this is the potential for a large backlash from the general public who become unable to afford their lifestyle. Imagine having to pay $10 for milk $14 for a gallon of gas while your wage stays relatively flat. This is the conundrum facing the Federal Reserve central planners. The people are oblivious to 3-4% inflation but become enraged at 10-30% because it is more easily recognizable. Another problem with high rates of inflation is that the bond market will simply refuse to purchase government bonds (except at egregiously high rates). This in turn forces the Federal Reserve to print even more money which creates a viscous cycle of ever increasing inflation.

How to protect yourself

Since inflation is the most likely scenario, you have to find a way to protect yourself from this eventuality. It is really simple--you have to get your money out of paper assets. Paper assets include bonds, stocks, money markets, etc. I know most people will tell you that stocks protect you from inflation but this is somewhat misleading. Stocks do well during periods of low inflation (around 2-5%), but do poorly during periods of high inflation(above 10%). This is especially true during hyperinflation. Take a look at the following chart which shows the nominal price of the Dow between the Great Inflation between 1966-1980.

At first glance it does not look so bad--the market was roughly flat over this period. But remember that this does not include inflation. When you adjust for inflation the market lost over 50%. Not very good it is.

The only way to protect yourself is to have hard assets which retain their value in real inflation-adjusted terms. It does not matter which hard asset you choose, be it gold, silver, oil, copper, etc. All commodities will hold up under inflation.

Good luck

Black Swan Insights


Market Thoughts 3.25.2010 Watch Out Below

If you are a bull you despise days like today. All market gapped up strongly at the open and continued to surge throughout the day. Then during the the last 2 hours the markets started to fall off a cliff. Only the Dow was able to hold on to menial gains. The S&P and Nasdaq closed slightly negative.

Commodities followed equities and closed mainly unchanged with oil still above $80. The only market where fundamentals rule is natural gas which fell another 3% closing below $4. Gold is was slightly higher at 1094 while silver closed up 10cents at $16.74.

The major news of the day was the announced Greece bailout which will now involve the IMF in cooperation with the EU. The EURO did not like the news and closed below 1.33. Weakness in the euro translated into strength for the Federal Reserve Note. Overall the dollar index remained flat.

Today could be the start of a reversal in equity markets. If you follow candlestick charting, today's action would constitue a gravestone Doji which is bearish. But these patterns are never 100% accurate. I am still short oil, fcx, x, and hold OI puts. Long natural gas, Limoneria, Dean Foods, MO, and Afrcia Oil.

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Only 53% prefer capitalism to Socialism

According to a recent poll conducted by Rasmussen only 53% of Americans believe capitalism is better than socialism. This marks a new low for America as the dumbed down masses gradually accept Socialist enslavement as long as it means the government gives them free stuff. RIP Constitution.

I am not particularly surprised by these results. Anyone who has read Capitalism, Socialism and Democracy by one of my favorite economists Joseph Schumpeter would have seen this coming. Schumpeter who was writing in 1942 (way ahead of his time) argued that capitalism will never survive in the long term. He outlines the way capitalism will end and socialism will be demanded by the masses. Just for the record Schumpeter was an ardent supporter of capitalism.

Stages of Capitalism's Decline

1. Capitalism will succeed in bringing prosperity to a country and will be embraced by the populace as living standards increase.

2. As Capitalism evolves it will change into a form of corporatism where the top financial/business oligarchs start using government for their own purposes. Sounds alot like the bankster bailout of 2008.

3. In response to corporatism and general colluding between business and the government, people will start to become hostile to this corrupt form of capitalism. They mistaken capitalism for corporatism and increasing view socialism as the only perceived alternative.

4. The intellectual class will propagate theories arguing that we need to abolish free markets and replace them with government sponsored welfare state. That way every one will be treated "fairly."

5. Gradually the people become convinced by these ideas (with the help of the media) and democratically vote for a welfare state, which will limit entrepreneurship and freedom.

Schumpeter's analysis has proved prescient. We are in the final stages when the masses who have lost their jobs thanks to outsourcing and rely on government services make the final step and demand a welfare state. They no longer want to work for themselves or take care of themselves. Instead they want the government to take care of them from cradle to grave. In fact they believe it is their "right" to free health care, housing, education,etc. That is why you will see the healthcare supporters waving signs saying healthcare is a right for all.

To see the complete results of the Rasmussen poll click here

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You can now purchase rhodium directly

Forget gold, silver, platinum, or even palladium. The new investment to be had is rhodium. Rhodium is one of the rarest elements in the world with only 25 tons produced annually. It is used in catalytic converters which help reduce car emissions. Kitco has introduced a product that can be purchased by the general public. It comes in a little bottle that has been certified by Kitco. Buying 1 oz will not be cheap as rhodium is currently trading at $2,580. Rhodium is a volatile commodity judging by its chart, but it could do well in the future thanks to Federal Reserve money printing. Anything is better than holding fiat money.

You can check out the page on kitco at

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Disclaimer: I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset.


Lessons from Legendary Trader Jesse Livermore

I have read pretty much every book on Jesse Livermore. He really was one of the great traders who correctly called the 1907 panic and 1929 crash. Not only did he predict these crises, he profited handsomely and by 1930 was worth $100 million in cash. If you want a simple bio check out wikipedia. What I am going to discuss are the lessons I have learned from him and his trading strategy.

1. Never be Bullish or Bearish--Livermore hated these terms. Instead he was interested in the line of least resistance (trend). You make money by following the trend (up or down).

2. Forget ideology--Some people will only buys stocks and some people will only sell stocks short. Livermore knew that to make money in the stock market you have to be flexible. He did not care whether he was 100% long the market or 100% short.

3. Trade for the Big Money--Livermore was not interested in scalping 2-5% on some quick trade. He had made this mistake when he was young. By the time he matured he knew that it was simply not worth trading for small wins. He wanted to make alot of money and the only way you can do this is to take a large position and ride the line of least resistance. He played big trends for 30%-200%. That is how you make a fortune in the stock market.

4. Playing the Big Trend Requires Patience--Livermore used to say that he did not make his money trading but instead sitting and waiting. This has to be one of the hardest lessons for traders who feel they have to be trading every day. Livermore would sometimes hold his positions for over a year as long as the stock acted right.

5. Cut Your losses and let your winners run--This is probably the most important lesson. When Livermore purchased a stock or commodity he would set a stop loss of 8%. This was to protect his portfolio from dramatic losses. When you have gains do not be in a hurry to book them. You will often hear investment advisers tell you that you can never go broke taking a profit. Livermore's response was that you don't make very much either. This is a hard concept for traders, especially if the stock they bought at 50 goes to 58, but then starts to fall back to 53. They fear that they will end up taking a loss. Livermore would remain firm and hold the position as long as he did not get stopped out and he still liked the stock.

6. Never establish a full position immediately--If Livermore wanted to establish a $100,000 position in a stock he would not do so all at once. He would first commit 25% or 25,000 at say $40 a share. If the stock rose to $41 he would commit another 25%. If the stock initially fell to $39 he would sit tight without adding to his position. The key here is that he would never average down which he though was suicide. If you by a stock because you think it is going up and it goes down, why would you add to a losing position. Instead Livermore would only average up. This kept him on the right side of the market.

7. Never listen to stock tips or watch CNBC--Livermore never took stock tips or listened to what he read in the media. He knew that the media was used by stock speculators to manipulate prices and he did not want to get screwed. Today that means avoiding CNBC and other media outlets who offer financial advice. Do your own homework because your are responsible for your trading performance. Livermore used to say that he did not need any help losing money because he could do that on his own.

8. You cannot beat the market all the time--Livermore only traded a few times a year. He would wait for the perfect set up either long or short. He did this because he knew that it was impossible to beat the market on a consistent basis day after day. There are only a few times a year where the odds on your side.

9. You will violate your own rules--Livermore had this problem throughout his career and it cost him dearly. He was once convinced by a expert cotton trader to go long cotton even though he was currently short cotton. Livermore for some reason broke his own rules by taking a tip and continuing to buy cotton even as it declined. He eventually sold out after losing millions. Livermore often questioned why he would consciously violate his own rules but could not explain it.

10. The Market is never wrong--Many traders blame their losses on irrational market movements. This is a puerile mental attempt to shift blame from yourself to others. It is also asinine and a waste of your time. Livermore never did this--he took responsibility for his losses.

Thanks for reading. I hope this helps.

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The Yen Carry Trade: Are you feeling lucky?

What if I told you there was a trade where you could earn 20-40% annually and had a high success rate. The only downside is that it occasionally collapses and completely wipes you out. Would you consider this trade? Welcome to the carry trade.

The carry trade is relatively straightforward--you purchase a high yield currency and short a low yielding currency. For example AUD/JPY. Australia has high interest rates compared to Japan. Currently Australia's interest rates are at 4.00% while in Japan is at 0.10% making for a 3.9% difference. Theoretically you could buy 100,000AUD/JPY and make an easy $3,900 or 3.9% annually. That is pretty good considering US interest rates are at 0-0.25%. Now what if I told you that if you use leverage say 10-1(forex dealers give away leverage like candy) you could earn $39,000 or 39% per annum. You are probably salivating at the opportunity right. The best part of this trade is that AUD/JPY does not even have to move up for you to make money (even though that would be nice). It could simply remain flat and you still get your 39%. This seems like free money doesn't it?

But what are the risks?

Because this is a leveraged position your greatest risk is that AUD/JPY could decline from say 83 to 74. When you are using 10-1 leverage you will lose your entire investment if AUD/JPY declines by 10% or more (unless you are willing to put up more margin). However carry trade supporters note that this only happens a few times a decade. On most days you will win and get to collect your interest. This is what makes the carry trade so desirable and dangerous. Statistically you will win but when the trade blows up, you expose yourself to huge tail risk.

The Yen can surge 10% very quickly during market crisis like the Asian financial crisis. In one famous week in October 1998 USD/JPY fell (yen surged) from 136 to 111. We also saw a dramatic rise in the yen in late 2008 with AUD/JPY falling from over 100 in July 2008 to 55 by December 2008. Anyone who was long the carry trade got destroyed.


Anyone contemplating the carry trade needs to be aware of the perils of such a strategy. Yes, you can make good money during normal market conditions but you always know in the back of your mind that it will eventually collapse (just ask Julian Robertson of Tiger management who lost $2 billion overnight). The only question is when and more importantly will you be able to get out. If you still think this is a great trade make sure you put on the trade during an economic expansion with low volatility. In my opinion the benefits do not outweigh the risk of 100% capital loss.

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Market Summary 3.24.2010

All of the media outlets will tell you that markets declined on "debt woes" out of Europe and Fitch's downgrade of Portugal. In reality the markets declined because there were more sellers than buyers. You never really know why the markets go up or down on any particular day but the media feels compelled to give you are reason.Anyway the S&P 500 closed down 6.38 to 1,167.75.

Economic numbers out today were mixed with new home sales falling to a new record low (actually good for the housing market) and Feb. durable goods rising 0.5%.

Anyway gold, oil, copper, and most commodities were lower with the Dollar Index climbing to 81.83. EIA oil inventories (+7.4 million barrels) confirmed our suspicion that we now have a huge oil glut yet the price of oil remains above $80. Gotta love the speculators who keep pushing the price higher thanks to Ben Bernanke's cheap money. If fundamentals meant anything, oil would be around $50. Gold was a major disappointment today as it broke through the key support level of $1100.

Tomorrow we will get initial and continuing jobless claims with consensus estimates of 450,0000 and 4,562,000. The markets will largely ignore these numbers as they seem to do every week. After all you can apparently have a V-shape recovery with millions jobless. Its called the "Goldilocks economy."

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Euro plunges on Portugal Downgrade

Well it was only a matter of time and today it occurred. Fitch downgraded the debt of Portugal from AA to AA-. Fitch cited the usual generic boilerplate reasons such as weak fiscal position blah blah blah (they could say this about every G-8 country). Apparently this took the markets by shock which sent the Euro below 1.35 against the dollar. The reason for this movement in EUR/USD is the anticipation that Moody's and S&P will also issue downgrades. Fitch is usually the first one, which then puts peer pressure on the other two. I am still surprised the ratings agencies have such power after their previous failures in the US housing market.

Right now the EURO looks like an easy short because these fiscal problems in Europe will continue for the next few years. But take a look at the most recent COT report.

You will see that the big speculators are heavily short. It has been at extreme levels for the last few weeks. This is obviously a crowded trade which could precipitate a large short squeeze on any good news out of Europe. Believe or not the idea that Greece could get assistance from the IMF (as has been reported) would actually be good for the Euro. They would be able to successfully externalize the costs to an outside party. The commericals are now long the euro. This sets up a potentially dangerous position where one side is going to be wrong and get taken to the cleaners. This will result in high volatility in the pair. While I do not know which way it is going, I am thinking about going into the FX options market and buying a straddle position to bet on the volatility.

One last thought to consider. The EU leaders love a weak currency and have a strong incentive to make sure the EURO stays low against the dollar. This will benefit their exports (mainly Germany) in world markets. Trichet will help this process along by not raising rates at least through 2010.

Be careful trading.

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Some humor from our bankster overlords



Thoughts on the oil market

Anyone who has followed oil over the last few years knows that it rarely trades on fundamentals or even technicals. The oil price is simply a proxy for the stock market. Market up oil up and market down oil down. Otherwise you would have a hard time proving that the supply/demand relationship could justify oil prices rising to $147 in July 2008 and then crashing down to around $35 by early 2009. Then levitating back up to $82. A few experts will tell you it is the dollar which is impacting oil. Go back and look at a chart--the dollar index is roughly at the same level as it was in July 2008.

I thought it would be interesting to see the true supply and demand for oil, gasoline, and heating oil. The first chart will be the level of inventories and the second will be the price. You will not believe your eyes but you better because you are paying dearly.

Crude Oil Inventories

Price of West Texas Crude

It seems that the price of crude is rising at the same time oil inventories are increasing. You will also note that inventories are above the high range of historical levels.

Gasoline inventories

Price of Gasoline

Again gasoline prices are surging along with inventories. Current gasoline stocks are at a very high historical level. But that does not seem to matter anymore.

Distillate(Heating Oil) Inventories

Distillate Prices

No comment needed even if this is the most egregious example.

So what is causing this perceived inconsistency?

I don't know for sure but I have two theories. 1. Speculators are manipulating prices by hoarding commodities and therefore disrupting normal supply/demand. 2. The Federal Reserve's money printing has had its desired effect of debasing the purchasing power of the dollar. The probable answer is a combination of the two.

Why am I short oil?

Take a look at this chart and you will see why. This chart maps the COT (commitment of traders) report which discloses what the large players in the market are doing. You will see that the large speculators (hedge funds, institutions, etc.) are massively long oil while the commercials (producers) are heavily short. The majority of the time the commercials are correct and it usually pays to follow them. We will see how this plays out over the next few weeks.


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Market Thoughts 3/23/2010 Up, Up, and Away

All major indices were higher and recording 52-week highs. Oil and gold were higher along with the dollar index. Volume was fine but not spectacular. I am really glad the Federal Reserve outlawed down days in the market (Federal Reserve Board Directive 88907621) because it was so depressing and inconvenient for an economic rebound. I always considered the question: Can the market (tail) wag the economy (dog)? It sure looks like it can. All you need to do is engineer a stock market recovery and presto--banks can issue 100's of billions in equity. Is it really that easy?

Anyways, the only fools of the day were the shorts (sign me up) and the winners anyone who is long any asset class (except treasuries). Even the dog of the energy market natural gas was up a little (good for my position). Call me ignorant but I find this type of market difficult. I do not like markets that go straight up because I always fear the downside (that line of reasoning saved me from 2008 massacre). It is almost impossible to run a balanced trade book because you want to kill yourself for shorting anything.

The only thing I will say that might show a negative divergence in the markets is the relative weakness of some key commodities (Oil,Gold,Copper) and commodity related stocks like FCX,APA,BTU,X, etc. All of these have not made new highs along with the general markets. Does this mean anything? Normally it would but we are not in normal times. That said this market is egregiously overbought I am not establishing any new long positions. Still maintaining oil short and May puts on Owens-Illinois. But will not be including any other shorts.

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Is the housing market recovering? Should you buy?

After years of declining home prices many "experts" believe the housing market is beginning to stabilize and will recover through 2010 and into 2011. Logic, reason, and economic fundamentals suggest otherwise.

A few important facts to consider about the housing market.

Between 2000-2006 the housing market experienced the largest price bubble in US history (no kidding). US home prices rose a little more than 100%, which has never happened nationwide. This bubble was fueled by low interest rates (thanks Greenspan), fraudulent loans, and the assumption that home prices could never drop. Below is a chart, which shows the mania.

Focus your attention on the inflation-adjusted data because it is more important than simply nominal prices. Between 1970 and 1998 prices remained almost flat. Then we seek the explosion higher. This problem will eventually be corrected two ways: massive inflation or nominal home price declines by 10-20%.

The US government has desperately tried to prevent home prices from falling by handing out tax credits ($8,000) to encourage people to buy homes. Won't this support the housing market and stabilize prices? In the short term it will but eventually the market always finds a way of clearing excesses in the market. The problem with home prices is that they are still overvalued. The chart below shows existing home sales and total months of supply of homes. You will notice that the number of home sales jumped because of the government-induced stimulus. The current credit expires in June 2010. You will also notice that sales have already started to fall beginning in 2010. Why? When you give an artificial incentive to buy a product it drains future demand by pulling the demand to the present. So what we are seeing is that even with the tax credit available, people who want to buy a home have already done so. This will now be a drag on future demand.

Source http://themessthatgreenspanmade.blogspot.com/2010/03/existing-home-sales-fall-further.html

You will also notice that the supply of homes is rapidly rising again after a large drop thanks to government handouts. The supply of homes will need to fall to at least 5 months of supply before you will see any type of stabilization in the housing market.

Along with government incentives the Federal Reserve has reduced interest rates to an all-time low and purchased (with electronically created money) $1.25 trillion in mortgage backed securities to keep down mortgage rates. This program expires at the end of March 2010. If you look at a chart you will see that mortgage rates are also near all-time lows. With mortgage rates this low they have only one way to go.

When rates rise (and they will) to 7-8% this will put extreme stress on the housing market and precipitate declines in home prices. Why? Pretty simple--the higher the interest rate the lower the amount you can afford. You might be thinking that now is the right time because you can lock in low interest rates. There are two schools of thought concerning this.

1. If you intend to live in your home for the next 10-15 years and can easily afford the monthly payments, PMI, property taxes, repairs, and insurance then it might make sense. You will have to be able to withstand the possibility of home prices falling a further 10-20% in value and likely moving sideways for a few years. The best deals will be found in foreclosures or distressed sellers. Under these circumstances it might make sense to purchase a house.

2. If you are the average American who changes homes every 5 years and would be negatively impacted by falling home prices-- wait until prices fall further. Even if it means you will have to pay a higher interest rate. After all you can always refinance in the future. The worst case would be to get suckered into a low rate mortgage and watch home prices fall as interest rates rise. You will be underwater and unable to sell your home (unless you have the money to pay the bank the difference).


A home is not an investment--it is a place to live. Do not expect to make money (in real inflation adjusted terms) with your home. Right now there is no reason to charge ahead and purchase a home thinking that you have to get in now before prices rise. Finally, and I cannot stress this point enough NEVER LISTEN TO THE NATIONAL ASSOCIATION OF REALTORS!! This is one of the more duplicitous, deceitful, and deceptive organizations operating in the US. They lie about everything in a desperate attempt to scare you into buying a home "before it is too late." According to their propaganda the housing market never collapsed but is always on the verge of recovering. Don’t fall for this trick. Know the facts.

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How is your portfolio doing inflation adjusted

Here is a chart which shows the performance of the Dow Jones Industrial Average in both nominal and inflation adjusted terms. CNBC and the mainstream media never show you this chart. Its hard to make out on the chart but if you invested in the DOW in 1999 you would be roughly flat in nominal terms. Not bad but not really good either. But it gets worse. In real inflation adjusted terms your portfolio is down approx. 30% thanks to inflation. Who is responsible for this? The unconstitutional Federal Reserve.

What this clearly shows is that stocks do not necessarily outpace inflation as everyone on CNBC promises you. They have to keep generating reasons for you to buy more and more stock. There are also those incompetent money managers who promise to "professionally manage your money" for only a 1-2% fee per year.

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